Business and Technology in China

The Understanding China Today series offers students and general readers the opportunity to thoroughly examine and better understand the key contemporary issues that continue to keep China in the news and sometimes at the center of global controversy. These issues include business, technology, politics, government, civil liberties, family life, and gender concerns, among others. Narrative chapters in each volume provide an introduction and brief history of the topic, followed by comprehensive discussions of the subject area as it pertains to China’s present and future. With each volume, specialists and scholars present a solid, up-to-date foundation for learning about contemporary China, written in an accessible, engaging manner. As the world moves into the second decade of the 21st century, China’s position on the global stage is more prominent than ever. The Understanding China Today series provides vital insight into this international powerhouse for new generations of students, and others, seeking to understand a complex, ever-changing nation with a future as fascinating as its past.

Business and Technology in China


Copyright 2010 by Jing Luo All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, except for the inclusion of brief quotations in a review, without prior permission in writing from the publisher. Library of Congress Cataloging-in-Publication Data Luo, Jing. Business and technology in China / Jing Luo. p. cm.—(Understanding China today) Includes bibliographical references and index. ISBN 978-0-313-35732-9 (hard copy: alk. paper)—ISBN 978-0-313-35733-6 (ebook) 1. Business enterprises—China. 2. Technological innovations—Economic aspects—China. 3. China—Economic policy—21st century. I. Title. HD2910.L85 2010 338.0951—dc22 2010000947 ISBN: 978-0-313-35732-9 EISBN: 978-0-313-35733-6 14 13 12 11 10 1 2 3 4 5

This book is also available on the World Wide Web as an eBook. Visit for details. ABC-CLIO, LLC 130 Cremona Drive, P.O. Box 1911 Santa Barbara, California 93116-1911 This book is printed on acid-free paper Manufactured in the United States of America

2. 6. 3. 4. 5.Contents List of Figures and Tables Preface Chronology of Recent Events in the People’s Republic of China 1. Growth Handling the Global Financial Crisis Growing Pains Innovative Nation Economic Reform The China Model and Sustainability vii ix xiii 1 33 49 85 125 161 193 217 223 Notes Bibliography Index Photo essay follows page 84 .

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1: Technical School Graduates in 10.1: The U.2: Number of Students Abroad and Returned Figure 4.List of Figures and Tables Figure 1.1: Losses of Chinese Banks during the Global Financial Crisis Table 2.2: Per Capita Annual Income (Yuan) Table 1. exporters to China in 2008 Figure 1.S.3: Number of Postdoctoral Graduates (1985–2008) 2 14 15 16 39 39 113 121 123 .000s Figure 4.1: China’s GDP Growth 1978–2008 Table 1.S.2: Urban and Rural Incomes of Selected Regions Table 2.2: Losses of Chinese Firms during the Global Financial Crisis Figure 4.-China Business Council Top 15 U.

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China has grown from a povertystricken country into the third-largest economy in the world.Preface In roughly three decades. through prolonged and ruthless class struggles. But the best part of the story is not yet heard: China’s next target is to build an ‘‘innovative nation’’ with a knowledge-based and energy-efficient economy. was decisive. A less obvious but more profound answer is that Mao Zedong had created. that is exactly what the world depends on for a better future. of which the pushing force. The question is what has fundamentally changed to make all this happen? An obvious answer is the adoption of the market mechanism in 1978. The result is overwhelming: once the ordinary Chinese were allowed to get . or the internal force. Thus. In fact. not only the reversing economic momentum. China is making yet another leap: emerging from the global financial crisis. the China phenomenon is a fruit of the conjugation of push and pull. it is transforming from ‘‘world’s manufacturing center’’ into the world’s biggest buyer. As we speak. but also a mentality ready to reject ideological entanglement. Imagine that a blue sky will come back to the cities and that rural streams once again will be safe for women to wash clothes and children to swim. unintentionally.

Chapters are structured to complement typical lectures on modern China. however. but if you fail to regulate it. Ask a government official or a grassroots entrepreneur. the middle class. the West sinks into ‘‘subprime mortgage crisis’’ and the like. to a point at which the Chinese are just too cynical to let the ‘‘invisible hand’’ of market mechanism run loose.’’ Going forward China faces a strong headwind. They carefully maintain the prosperity by shrinking the gap. Growing Pains. The new generation is free-thinking and pragmatic. Economic Reform. The book was written with classroom needs in mind. the Chinese embrace it and gradually phase it in. The book will present challenges and show how the country prepares itself to win. if democracy brings social harmony. fairness. and government-monopoly-induced corruption are but a few of a long list of hurdles. the Chinese Communist Party. If.x Preface rich. In this. Rising costs of labor. and working toward justice. the Chinese are not willing to follow. so that elements that may derail the economy are under control. and so on. and The China Model and Sustainability. Instead of . developing domestic markets. The past 150 years of modern history have done much of the enlightenment. This book presents China’s challenges in six chapters: Growth. if globalization is the way of modernity. shortage of energy. building a safety net. Special terminologies are explained. and people of all strata seem strongly bonded together. equality. the Chinese charge in that direction wholeheartedly. rule of law. it grows out of control. The book is also intended for the general public. shortage of natural resources. a bibliography with abundant online resources and a chronology are included. In their mind. This is known as the ‘‘China Model. and they will tell you that the market economy is such that if you try to regulate it. Handling the Global Financial Crisis. their will cannot be thwarted and their creativity knows no limit. so too can the Chinese. you may end up killing it. if the West appropriately learned technology and got strong as a result. Innovative Nation. Successfully managing the market mechanism may be the best of challenges.

Dr. the reader will find individuals’ stories and cases that are helpful for understanding the nature of events. Mr. was an important source of inspiration on industrial development in China. and Professor Gong Liwei. Lu Bin. I am indebted to the generous supporters surrounding me.Preface xi extensive theoretical discussions. provided enormous help during my research in Beijing. . Last but not least. I am appreciative of Ms. chair of the Department of Urban and Regional Planning at Peking University. Luo Qiang. architect and senior engineer at the Design and Research Institute at Tsinghua University. Kaitlin Ciarmiello of ABC-CLIO for her careful editing work. of Golden Concord Non-Ferrous Metals Holdings Limited. I would like to thank Bloomsburg University where I work for its generous support of all academic work that I do.

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Also in this year. and Mutual Assistance is signed in Moscow by Mao Zedong and Joseph Stalin. In June. the Army of the Chinese People’s Volunteers publicly enters Korea in support of North Korea. Mao Zedong’s son. Mao denounces American aggression in Korea.’’ Mao is appointed chair of the Central People’s Government. The Trade Union Law and the Agrarian Reform Law of the PRC are also passed. Zhou Enlai is named premier. The Sino-Soviet Treaty of Friendship. In October.Chronology of Recent Events in the People’s Republic of China 1949 1950 1951 The People’s Republic of China (PRC) is founded on October 1 in Beijing. The Korean War progresses. is killed in . Mao Zedong declares the ‘‘People’s Democratic Dictatorship. with Chinese troops taking Seoul. Mao Anying. Alliance. the Marriage Law is promulgated by the central Government. The Nationalist government withdraws to Taiwan. and Zhu De becomes general commander of the People’s Liberation Army (PLA).

the Eighth Party Congress elects Mao party chairman. In February. Deng Xiaoping is elected to the Politburo. Zhou Enlai. focused on business operations. Mao Zedong calls for greater artistic and academic . Deng Xiaoping becomes deputy chair of the National Defense Council. Mao Zedong delivers his influential speech ‘‘On the 10 Major Relationships. The Three-Antis Campaign is launched in January. The Chinese Language Reform Committee releases the first batch of simplified Chinese characters for use in newspapers in Beijing and Tianjin. targeting corruption. and Chen Yun are elected deputy chairmen. Zhu De. Zhou Enlai attends the Asian-African Conference (Bandung Conference) in Bandung. The armistice ending the Korean War is signed on July 27. Domestically. the conference seeks to build a united front of Asian and African nations against colonialism and racism.xiv Chronology 1952 1953 1954 1955 1956 Korea. The First Five-Year Plan (1953–1957) starts. In May. Deng Xiaoping becomes finance minister. Liu Shaoqi. and Deng Xiaoping is elected as secretary general of the Chinese Communist Party (CCP). waste. In April. and bureaucratism. Deng Xiaoping becomes deputy premier. it is commonly viewed as the precursor to deprivatization campaigns. the Five-Antis Campaign begins.’’ In September.’’ The first National People’s Congress (NPC) convenes. Indonesia. the agreement recognizes Tibet as part of China and grants the region autonomous status. Zhou Enlai and Indian prime minister Jawaharlal Nehru sign a joint communiqu that becomes the first internae tional declaration to include the PRC’s ‘‘Five Principles of Peaceful Coexistence. the Agreement of the Central People’s Government and the Local Government of Tibet on Measures for the Liberation of Tibet is signed in Beijing.

’’ In June. the Soviets notify China of their withdrawal of technological support. Rebellion erupts in Tibet. In October.Chronology xv 1957 1958 1959 1960 1961 1962 freedom with the slogan ‘‘let a hundred flowers bloom. In July. the People’s Daily states that rightists are trying to overthrow the Communist Party and an Anti-Rightist Campaign is launched. causing tens of millions of deaths. with the Chinese winning both the men’s and women’s singles titles. the State Council appoints the Panchen Lama to chair the Preparatory Committee for the Tibetan Autonomous Region. and more economically soundly’’ as its general guiding principle.’’ Mao Zedong delivers his speech ‘‘On the Correct Handling of Contradictions among the People. better. In May. With the exception of Xinjiang and Tibet. Wu Han’s controversial play Hai Rui’s Dismissal is published in January. at the Politburo’s Beidaihe Conference. the People’s Communes plan is endorsed. Liu Shaoqi replaces Mao Zedong as president of the PRC. Chinese troops launch major offensives on the Sino-Indian border. The 26th World Table Tennis Championships take place in Beijing. and a hundred schools of thought contend. an extremely serious drought hits vast areas of China. the plan results in the organization of 26. In August. In March. . In April. affecting 30 percent of farm production. the Great Leap Forward is launched with the phrase ‘‘more. Mao Zedong steps up emphasis on class struggle. serious famine occurs across China. Lin Biao replaces Peng Dehuai as defense minister. with Song Qingling and Dong Biwu as deputies. Democratic reforms start in April in Tibet.000 communes in less than two months. faster. During July and August. A cease-fire is declared in November.

schools. government. Mao Zedong. Chairman Mao’s Quotations are first published in the form of the Little Red Book. the Wenhuibao newspaper denounces Wu Han’s drama Hai Rui’s Dismissal as an anti-Party poisonous weed. Deng Xiaoping is ousted from his offices. and Zhou Enlai preside at a Cultural Revolution rally in Tiananmen Square at which Red Guards make their first appearance. In May. Chinese and Soviet forces clash at Zhenbaodao Island in the Ussuri River. and in December. 350 million copies of Mao’s Little Red Book have been distributed. In June. The army takes control of government offices. More clashes occur in the following months. thereby signaling the coming of the Great Cultural Revolution. the United States lifts restrictions on travel to China. the United States bombs North Vietnam. In March. In August. Zhou Enlai launches an extensive tour of Africa. . In May. The Guards subsequently begin destroying historical relics. In June.xvi Chronology 1963 1964 1965 1966 1967 1968 1969 In May. and cultural world. Millions of young people are sent to the countryside to receive reeducation from peasants. the Politburo sets up the Cultural Revolution Group and calls for attacks on all representatives of the bourgeoisie who have infiltrated the party. Mao Zedong launches the socialist education movement in rural areas. In October. In July. Mao Zedong swims in the Yangzi River at Wuhan. China carries out its second nuclear test. and factories. In July. army. Lin Biao. By December 25. refuting the rumor that he is sick. In August. China tests its first hydrogen bomb. it lifts its partial trade embargo. Liu Shaoqi dies. The Tibetan Autonomous Region is formally inaugurated in September. China carries out its first nuclear test. In January.

S.S. the world’s ‘‘superpowers. Deng Xiaoping becomes vice premier in August. who comes to Beijing in July. admitting that there e is one China and that Taiwan is a part of it. The radical group called the ‘‘Gang of Four.000 people. In October. Secretary of State Henry Kissinger.’’ In January. ping-pong team visits China and is followed by U. In April. An earthquake hits the city of Tangshan. China launches its first satellite. the U. Deng’s market-oriented reforms. Deng Xiaoping is elected deputy chairman of the Chinese Communist Party Central Committee (CCPCC). Enrollment based on recommendations ends. embodied in the maxim ‘‘to . killing more than 250. In February. is arrested by Hua Guofeng.’’ led by Mao’s widow Jiang Qing. The United States and China announce their intention to establish liaison offices in each other’s capital. Mao’s handpicked successor. President Richard Nixon signs the joint Shanghai Communiqu in China. In September. Deng Xiaoping steps into the spotlight as an important leader and begins to repair the devastation caused by Mao Zedong’s rule. Deng Xiaoping addresses the United Nations and denounces the world hegemony of the United States and the Soviet Union. and Mao Zedong dies in September at age 82. China purchases 10 Boeing 707 civilian jet airliners from the United States. Mao’s death ends the Great Cultural Revolution. The ‘‘Deng era’’ begins. China is admitted to the United Nations. University admissions based on college entrance examinations start. In April. Premier Zhou Enlai dies in January.Chronology xvii 1970 1971 1972 1973 1974 1975 1976 1977 1978 In April. Deng Xiaoping is politically rehabilitated.

. the Fifth National People’s Congress (NPC) announces the Criminal Law and the Organic Law of the Local People’s Congresses and Local People’s Governments. Both Zhao Ziyang and Hua Guofeng are appointed deputy chairmen. Chinese troops invade Vietnamese territory and destroy logistics facilities. political dissident Wei Jingsheng is sentenced to 15 years in prison. Deng Xiaoping visits the United States and resumes the Sino-American diplomatic relationship.xviii Chronology 1979 1980 1981 1982 get rich is glorious. In the same month. which is also seen as the onset of the economic reforms. In October. and Xiamen. British prime minister Margaret Thatcher arrives in Beijing to start discussions about the future of Hong Kong. Deng Xiaoping is elected chairman of the Military Commission.’’ spark over 20 years of exponential growth. In February. and Hu Yaobang replaces Hua Guofeng as chairman of the Chinese Communist Party Central Committee (CCPCC). the Third Plenum of the 11th Chinese Communist Party Central Committee (CCPCC) shifts the party’s focus to modernization. Zhuhai. The trial of the Gang of Four is held. In July. the NPC Standing Committee declares regulations on issuance of academic degrees. the party criticizes Mao Zedong’s Cultural Revolution as ill judged and calamitous. In January. In December. In December. the Coca-Cola Company reaches an agreement with China to sell its soft drinks in the country and open up bottling plants. lifting the masses out of poverty. including Shenzhen. the People’s Daily declares that Mao Zedong made great mistakes during his last years and that his Great Cultural Revolution was a disaster. From January to February. Special economic zones are opened. In September. In September. Shantou.

Faced with rising democratic pressures. Deng Xiaoping remains in control of the Central Military Commission. The Bankruptcy Law is issued in December. the Shanghai Stock Market reopens for the first time since 1949. In December. In September. In October. Writer Liu Bingyan is expelled from the party. In September.Chronology xix 1983 1984 1985 1986 1987 Selected Works of Deng Xiaoping is published in July. Sino-British talks over Hong Kong’s future begin. Measures are taken to strengthen the Tibetan economy. the Chinese Communist Party (CCP) reiterates its determination to stick to the ‘‘Four Cardinal Principles. replacing Hu Yaobang. A Sino-British declaration on Hong Kong’s return is signed.’’ Hu Yaobang resigns in January. during an interview with Mike Wallace of CBS for the television show 60 Minutes. In October. Deng Xiaoping. endorses Mikhail Gorbachev’s reforms in the Soviet Union and indicates that China’s economic reforms are not in conflict with communism. 2. shifting the focus to urban enterprises. Student unrest occurs in 22 Chinese cities. Zhao Ziyang is appointed general secretary of the CCP. students in large cities stage demonstrations demanding more rapid reforms and more democracy. In May. Fourteen coastal cities and the island of Hainan are opened to foreign investment. the Third Plenum of the 12th Chinese Communist Party Central Committee (CCPCC) adopts a decision on reform of the economic structure. In May and December. Zhao Ziyang resigns as premier and is replaced by hard-liner Li Peng. In November. the Chinese Communist Party Central Committee (CCPCC) releases its Decision on the Reform of the Educational System.000 Tibetan monks demonstrate in Lhasa in favor of Tibetan .

During his tour to Hainan and coastal cities. Jiang replaces Zhao Ziyang.S. followed by several weeks of students protesting in Tiananmen Square in Beijing. President Yang Shangkun promulgates the Basic Law of the Hong Kong Special Administrative Region (SAR) adopted by the Seventh National People’s Congress (NPC). On May 16. Deng plucks Jiang Zemin. the demonstrations lead to clashes with Chinese authorities. ultimately setting the stage for future protests and prodemocracy demonstrations. Soon after. from Shanghai to be the new Communist Party chief. In January. China slides into economic chaos due to the rising inflation that peaks at more than 30 percent in the cities. Deng Xiaoping and Mikhail Gorbachev meet and announce the normalization of Sino-Soviet relations. The first exposition of nude paintings opens in Beijing in December. In April. 1997. Campaigns that aim at strengthening patriotism and discipline are launched at educational institutions. The event once again isolates China on the world stage. U. who was relatively unknown. Hainan is approved for provincial status. On December 10.xx Chronology 1988 1989 1990 1991 1992 independence. allegedly killing hundreds of protesters. On June 5. almost 500 students who participated in the demonstrations of the previous year are released from detention. The first partial direct elections are held in Hong Kong. National Security Adviser Brent Scowcroft meets Deng Xiaoping in Beijing. President George Bush suspends high-level relations with Beijing in protest against the massacre. Deng Xiaoping reiterates his determination to continue . The law is scheduled to take effect on July 1. troops arrive with tanks. On June 4.

Bush.S. An Asian-Pacific Economic Cooperation (APEC) meeting held in Shanghai in October is attended by American president George W. visits Washington. U.S. The Chinese government maintains the yuan’s value. The 9th National People’s Congress (NPC) is held in Beijing in March. NATO’s accidental bombing of the Chinese embassy in Belgrade. sparks a crisis in Sino-American relations. Jiang Zemin pledges to support the American war on . Hong Kong holds legislative elections. while Li Denghui (Lee Teng-hui) of the Kuomintang Party (KMT) resigns. The British formally hand Hong Kong back to China on July 1. the Congress stresses anticorruption efforts and economic cool down. In an act of terrorism. Washington. Dong Jianhua (Tung Cheehua) is selected chief executive of Hong Kong. Chinese president Jiang Zemin meets with U. Chen Shuibian of the Democratic Progressive Party is elected president of Taiwan. China and the United States reach an accord on the terms of China’s entry to the World Trade Organization (WTO). Beijing establishes diplomatic relations with South Korea. Deng’s successor. The Three Gorges Dam project starts. during an informal meeting of APEC leaders. president Bill Clinton in Seattle. hijacked civilian planes take down the World Trade Center in New York City on September 11. Yugoslavia. China recovers sovereignty over Macao. The Asian Financial Crisis negatively affects many of China’s coastal businesses and causes severe deflation. Jiang Zemin.Chronology xxi 1993 1994 1995 1996 1997 1997– 1998 1999 2000 2001 China’s economic reforms. Deng Xiaoping (1904–1997) dies at age 93. president Bill Clinton visits Beijing.

The growing belief that the assassination attempt was contrived sparks suspicion of Chen Shuibian’s campaign strategy. The SARS outbreak occurs in November. taking advantage of the popularity generated by an unsuccessful attempt to assassinate him. A Chinese exploration team reaches the highest peak of the South Pole. Hu Jintao and Wen Jiabao are elected president and premier.xxii Chronology 2002 2003 2004 2005 terrorism. Chen Shuibian is reelected president of Taiwan in March. . Both sides express a commitment to a stronger Sino–U. China starts floating the renminbi (RMB) based on market demand and in reference with major currencies. The Tenth National People’s Congress (NPC) is held in March. respectively.S. The 16th Congress of the Chinese Communist Party (CCP) is held in November. and attempts to cover up the spread of the SARS infection cause scandal. CCP stresses curbing corruption and strengthening education of morality and ethics. The party completes a sweeping leadership reshuffle. National People’s Congress passes the Anti-Secession Law. of the PRC. Jiang Zemin and other older leaders allow for a younger generation to take control. China joins the World Trade Organization (WTO) in December. President Bush meets with Hu Jintao at the 12th APEC meeting. Jiang Zemin steps down from his last position as chairman of the Central Military Commission. In December. In September. China wins a bid to host the 2008 Olympic Games. Jiang Zemin and Zhu Rongji step down. headed by Hu Jintao and Wen Jiabao. relationship. Hu Jintao quietly consolidates power while both he and Premier Wen Jiabao reveal populist agendas in their first year in office. Jiang Zemin remains chairman of the Central Military Commission.

is launched and returns successfully. a manned spacecraft. Shanghai Stock Market plummets to 1. National People’s Congress passes Property Rights Law. a manned spacecraft. Three volumes of Selected Works of Jiang Zemin are published. The Labor Law is promulgated to require a clearly defined contractual period. is successfully launched.Chronology xxiii 2006 2007 2008 Shenzhou 6.309 meters.600. Beijing successfully hosts the 29th Summer Olympics and the Special Olympics. The scandal of melaminetainted formula produced by Sanlu is revealed. The State Council proposes a plan to expand the service sector and issues National Rural Minimum Living Standard Guarantee System.000 early in the year to 6. The State Council makes a proposal to stress China’s innovative and competitive abilities in building a newstyle country. Lehman Brothers declares bankruptcy. Sichuan Province. emphasizing investment in low-income housing. During August 8–24 and September 6–17. The Three Gorges Dam is completed with a total length of 2. Chang-e 1. A 7. China ranks first in gold medals in both Olympics. The Qinghai-Tibetan Railway of 1. a lunar exploration satellite.9 magnitude earthquake hits Wenchuan County. China hosts the Beijing Summit of the Forum on China-Africa Cooperation.958 kilometers opens. China successfully conducts the flight of Shenzhou 7. Thousands of children are poisoned. Protection of migrant workers’ rights is urged.124 on October 16. The State Council makes energy saving and emission reduction part of the evaluation package for businesses managers. the government cuts benchmark interest rate and one-year bank deposit rate. The agricultural tax of 1958 is eliminated. on May 12 killing 69. the government deploys a stimulus package of .227 people. The Shanghai Stock Market Index rises from 3. Violent riots break out in Lhasa. Tibet.

triggering Beijing’s strong protest. reveals that hackers exploited a ‘‘back door’’ intended for government’s forensics research.1 billion arms sale to Taiwan. The China. Xinjiang Autonomous Region. makes $3. Russia. The State Council announces a plan of reform in healthcare and medicine to provide basic healthcare to all rural and urban residents. Serious ethnic riots break out in Urumqi. India. The Chinese mainland and Taiwan start direct air and sea transport and postal services. Gross domestic product of the first six months grows by 7.1 percent.S. ending a 59-year ban. U. reflecting economic recovery. . killing more than 180 people. China reports 2009 GDP of 33. Hu Jintao attends a financial summit in London and commits to joining efforts in combating the global financial crisis. Google stops censoring web searches and news services in China and plans to redirect users to its services in Hong Kong.xxiv Chronology 2009 2010 4 trillion RMB. The State Council urges preventive measures for H1N1 flu.5 trillion RMB or 8. and Brazil Summit is held in Russia to outline cooperation between the countries. President Obama meets Dalai Lama in the White House. Secretary of State Hilary Clinton gives speech on free Internet. Google threatens to pull out of China after accounts of political dissidents are hacked.7 percent increase over the 2008 figure. In defiance.

(China. Inc) . Cartography by Bookcomp.

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people’s standard of living is significantly higher.45 in U. China’s gross domestic product (GDP) was merely 364. A barber in the United States .S. In 2008.88 yuan. occasionally.S. As a result. The PPP theory says that for each identical product or service there is only one price. and rural per capita income grew by 15 percent. To get a feel of what the GDP figure means.2 trillion in U. however. the GDP reached RMB30. a fall from five years of consecutive double-digit growth due to the global financial crisis. This converts to 1.Chapter 1 Growth The economic reform launched in 1978 by Deng Xiaoping has resulted in profound changes in China. China’s GDP has risen to number three in the world. For example. Within three decades. dollars at the current exchange rate of $1 to 6.067 trillion or approximately 4.S. The most obvious change would be the country’s productivity. Urban per capita income grew by 14. back in 1978. dollars. a cup of tea. Although it is not always easy to find ‘‘identical’’ products. inflation and other adjustments considered. drying. one compares the GDP with its value of purchasing power parity (PPP). and. The 9 percent growth represents. which includes washing. According to the National Bureau of Statistics of China (NBS). the theory is a convenient tool for estimating purchasing powers across economies.4 percent.5 billion renminbi (RMB). a regular haircut costs 10 yuan in China. which was a 9 percent increase over the figure of 2007. next to Japan and the U.

44 trillion in 2008). or tea. On May 16.2 Business and Technology in China China’s GDP Growth 1978–2008 Figure 1. in his speech delivered at the opening ceremony of the Fortune Global Forum. the yuan is worth a lot more in reality than what the exchange rate tells. surpassing Japan and ranking number two in the world. Results as of 2008 show that he surpassed his goal for GDP well ahead of his prediction. improve democracy. The PPP value of a nation’s GDP is measured based on the cost of a common basket of goods and services.2 Yet.1.3 billion. might charge $10 before the tip for a 10-minute quick cut without washing. President Hu Jintao announced China’s goal of achieving the $4 trillion GDP by 2020. China’s progress is astonishing. . if measured on PPP basis. Hu had the following to say: We in China have identified the goal for the first 20 years of this century. That is to firmly seize the important window of strategic opportunities to build a moderately prosperous society of a higher standard in an all-round way for the benefits of our over one billion people. To make it simple. Source: National Bureau of Statistics. and further develop the economy.000 US dollars. Nevertheless. we will quadruple China’s GDP of 2000 to approximately 4 trillion US dollars with a per capita level of some 3. China’s GDP is estimated to be $7. advance science and education. drying. By 2020. China remains a middle-income country due to its large population of 1. second only to the United States (with a GDP of $14. Obviously. according to the World Bank.97 trillion. enrich culture. In 2005.1 The World Bank estimates that China’s ‘‘$1 per day poverty rate’’ may have increased from 10 percent in 2004 to between 13 and 17 percent in 2008. as a result of rising prices. 2005.

The Chinese Communist Party (CCP). up-to-date data compiled by the National Bureau of Statistics of China (NBS) will be used throughout the book. such as education. and a stable society. science and technology. the leading classes of the society. three seem to stand out: market mechanism. after some 12 years of economic reform. for a considerably long period of time to come. the primary and secondary sectors were home to peasants and workers who were. ceding place to the tertiary sector that provides services.Growth 3 foster greater social harmony and upgrade the texture of life for the people. forestry. Additionally. certainly would stress these economic sectors more than anything else. The tertiary sector is known as the service sector. a fundamental change has gradually taken place: China’s primary and secondary sectordominant economy is changing into a tertiary sector-dominant economy. Before 1978. The ‘‘secondary sector’’ is typically composed of heavy and light industry and construction. will remain a developing country. unless otherwise indicated. The population figure of 1. The book begins by selectively examining the GDP components in more detail and with respect to the underlying changes in the society. as they provided weaponry to the military. according to the classical communism. . approximately 90 percent of the GDP was contributed by agriculture and industry.3 Many elements have contributed to China’s economic takeoff. the Cold War was big reason why these sectors were special. This situation had a political backdrop— that is. THE RISE OF THE TERTIARY SECTOR Since the start of the economic reform. Around 1990.3 billion alone will make the fulfillment of the above goal a formidable challenge and we must be prepared for a long and uphill journey ahead. For purposes of consistency and convenience. as the leader of these elite classes. We are deeply aware that China. and mining. fishery. the primary sector started to decline dramatically. The ‘‘primary sector’’ is typically composed of agriculture. all of which will be examined throughout this book.

and so on. The economic structural change occurred for several reasons. more and more backbreaking work being done by machinery or by businesses that offer machinery farming services. during Mao’s time than in the transitional society today.7 percent. and 42.4 Business and Technology in China scientific research. The service sector suddenly becomes China’s new hub of employment opportunities. numerous reports have revealed exploitation of migrant workers. the service sector is a ‘‘gender-equal’’ sector. rapid urbanization and expansion of farming technology meant three things to rural China: (1) many farmers lost their land and became town dwellers willingly or otherwise. and (3) farmers dream of enjoying a dazzling variety of opportunities in the cities. That said. and other service-oriented businesses. such as stores. economic polarization and social discrimination are serious problems that the Chinese government monitors closely. People are more willing to solve the discrepancies that have arisen rather than give up the market mechanism.3 percent. By 2007. Third. the shares of primary. the primary. whether it is gender. But few would want to go back. the general trend seems to be that the tertiary . female migrant workers. and tertiary sectors contributed 41. 54. such as restaurants. In certain areas. This has led 150 million migrant workers to find jobs in China’s cities.3 percent of the GDP. clothing stores. In 1990.6 percent. In fact. primarily in construction projects (secondary industry) and the service area (tertiary industry). secondary. secondary. and banks. Nevertheless. 41 percent. in particular. women have better job opportunities than men. First. the reform of State-Owned Enterprises (SOE) in urban areas had led to tens of millions of workers being laid off. (2) fewer farmhands are needed to till the family plot. Many say that there was more equality.or incomerelated. airports. hotels. hotels. hospitals. Second. and 17.1 percent. Equality is certainly a relative concept in China. meaning that women have better opportunities to develop their potential there than in the primary and secondary sectors. The most practical way to rejoin the workforce is to open small businesses. and tertiary sectors were respectively 3. tourism.

A developed tertiary sector is the necessary result of economic and social progress. in 2007.7 percent of these countries’ economies. the dominance of the service sector has been the trend of all developed economies where knowledge-based industry takes the central position. and social security offices. The report indicates that most jobs are temporary or seasonal and pay hourly wages. ‘‘The Decision of the CCP Central Committee and the State Council on Ramping up Tertiary Industry.3 percent. .6 percent.86 percent higher than two years ago. These women found jobs in business sectors.Growth 5 sector is a favorable place for women to join the workforce. 70. and 68. such as retail.4 despite the fact that rural working women remain more tied to farming-related jobs (64. According to the World Bank’s data. .64 percent). For example. Many speculate that China’s social equality in general will be improved markedly due to the expansion of the tertiary sector. Canada. health care.19 percent) than men (50. Israel. .’’ issued in 1992. is a milestone policy that led to the crucial economic structural shift. For example. as a matter of tradition.3 percent. We must seize the opportunity to raise the tertiary sector to a new level. catering.27 percent of working-age women (16 and above) are employed. It reflects the developmental level of a country’s economy. Nevertheless. hotel. finance. social welfare. In 2007. pushing research and development (R&D) and education to a new height every day. Our country’s tertiary sector has lagged behind and no longer fits the broader economic development . the Statistics Bureau of Shandong reports that. Finally. reflecting characteristics of the sector. it carries the following directives: Article 1. and Germany’s tertiary sectors respectively accounted for 77 percent. education. Britain.98 percent of working women found jobs in the tertiary sector. 18. 76. it is obvious that both economic growth and social stability will benefit from an expanding tertiary sector. The Chinese government has put developing the tertiary sector on the top of the agenda since 1992. 75. This number was 3. 75. in 2005 the United States.

a large proportion of the labor force moves out of the primary and the secondary sector each year.5 CHINA’S MIDDLE CLASS The rise of the tertiary sector brought along a new social strata—the middle class. The household income of a Chinese middle-class family tends to range from $6. creating new demand for employment opportunities. broadcast and television. but more importantly. food. and spiritual life. books. The following are some of the findings. and businesspeople form the core of China’s middle class. housing.’’ In contrast with the ‘‘survival level. There are debates on how the middle class concept should be defined.000 per year. sports. communication. and political tendencies are among the most studied topics. and in particular. our people’s living condition will reach the level of ‘‘relative comfort. Economists. access to technology.000 to $25. government employees. our people not only will raise their expectations on clothing. With the expansion of the economy. Property ownership. Developing the tertiary sector is the only way to answer the increasing material and cultural demands and to fulfill the task of promoting socialist material civilization and spiritual civilization. and marketing experts already have conducted a good number of studies on China’s middle class. It is not by coincidence that the highest incomes are earned by people in this group. Accelerating the tertiary sector will be the primary means to alleviate our country’s worsening pressure of employment.6 Business and Technology in China Article 4. transportation. thanks to its diverse disciplines. its capability of hiring a great number of talents in science and technology. Moreover. The tertiary sector has a unique potential in absorbing the extra labor. housing and transportation. specialties. During the 1990s.’’ ‘‘relative comfort’’ not only represents a risen income level. Article 5. physical rehabilitation. Within the frame of these lines. hygiene. By the end of the 20th century. let us adopt the popular consensus that intellectuals. and living environment. but also they will be more demanding with respect to cultural entertainment. politicians. according to a study . the quality of life and social service must also improve. this is also the fastest expanding group. travel.

They are typically young. Travel is not only a way to celebrate a long-deprived freedom. which was more than three times the number of 2002. 34.’’ ‘‘the QualityOriented. leisure.7 Their study examined China’s tourism market and found three distinct types of Chinese tourists—business. Of the three groups.6 billion travelers (person-times) in 2007. and are focused on unique experiences.6 According to this study. well educated. tend to be cost-conscious.Growth 7 by MasterCard Worldwide. Domestically. and backpacking travelers.’’ Early Heavy Buyers consist primarily of professionals in the tertiary industries and junior managers at multinational business firms. The Monitor Group. In the area of store shopping behavior. The leisure travelers. in 2007. the Monitor Group identified six categories of Chinese middle-class consumers. for intellectuals. this population is estimated to reach 340 million or 60 percent of China’s urban population.’’ ‘‘Driven Businesspeople. the Chinese middle-class earnings currently account for 27 percent of China’s total disposable urban income. there were 1. it is also about living a traditional ideal ‘‘reading ten thousand books and traveling ten thousand miles. on the other hand. according to the study. do not mind spending heavily on technology and equipment.’’ The middle class are known as ‘‘travelers class’’ for good reasons. The business travelers are willing to spend as well due to the fact that their trips are mostly reimbursed.’’ ‘‘Trend Followers. studied purchasing behavior of the Chinese middle class with respect to their occupation and demographic features. which was approximately twice the number of 2002. the population size of China’s middle class has grown to 87 million in 2005 or 39 percent of China’s urban households. including ‘‘Early Heavy Buyers.9 million international-bound Chinese visitors (person-times) were traveling for private purposes.’’ and ‘‘Value Seekers. an international marketing research firm. By 2016. NBS data show that. Living in gated communities and driving import cars. the backpackers tend to be the most sophisticated travelers who have time.’’ ‘‘the Smarts. . This percentage will likely reach 40 percent by 2015. Asia Pacific.

In comparison with the 135. up by nearly 50 percent from the figure in 2000. That said. they tend to wait for discounts and promotions.9 million registered passenger cars in the United States in 2007 and 74. the 2009 passenger car sales figure is reported to be 45 percent above the 2008 number . Less well informed than trendsetters. but who have become good shoppers as their income rises. However. These numbers do not include private trucks that are related to business uses. The middle class is behind the wheel. The Smarts.76 million. They have a stable salary and some leisure time. there are 10. The Smarts tend to shop in specialty stores rather than outlets. In 1985.65 million cars were registered. there were 19. If private light trucks are included. They tend to buy the latest products and fashions that set them apart as trendsetters. They tend to be the most critical with respect to quality and prices. the registered vehicles in 2007 total 28. and Driven Businesspeople tend to be old timers of the middle class. In 2000.2 private cars per 10. A popular saying goes that ‘‘behind every private car there is a middle-class family. The Quality-Oriented are similar to the Smarts and the Driven Businesspeople. the Quality-Oriented.’’ Statistics provided by NBS show a dramatic change in private car ownership. but they have more leisure time and focus on family priorities when making purchasing decisions. however. Value Seekers consist of white-collar workers and government employees who are at the lower level of the middle class. 23.16 million private cars were owned. As consumers.000 private passenger cars on the streets.4 million gallons of gasoline consumed in the year.8 Business and Technology in China and generally familiar with Western lifestyles.8 China’s passenger car market has a lot of catching up to do.000 residents. In urban areas. they often shop online and spend heavily on discretionary items. they do spend handsomely to show off their status. the Driven Businesspeople possess higher purchasing power and tend to pay premiums for convenience. Trend Followers tend to be junior whitecollar employees and civil servants who are newcomers to the middle class. because most of them are wealthy and busy entrepreneurs. By 2007. 3.

Growth 9 reaching 10. that they complain loudly about lack of justice. before letting a full-fledged democratic system take over. Much of the surge. was attributed to Beijing’s economic stimulus. The Chinese middle class believes that no other political force could play the role of the CCP in leading China to economic prosperity. the Chinese middle class favors gradual democratization under the socialist system. they are appreciative of Deng Xiaoping’s strong helmsmanship in guiding China to engage in a socialist market economy. the impacts of the Opium War (1840s) and the Great Cultural Revolution (1966–1976). and rule of law. His plan was to install a strong government to teach the people their rights and procedures. In reality. Beijing will constantly keep an eye on signs of inflation for many years. and that they even braved the deadly repression during the 1989 Tiananmen Event to demonstrate against governmental corruption. Sun Zhongshan.9 As a result. Political tendencies of the Chinese middle class are certainly no less tempting an area of study to researchers than their shopping behavior. members of China’s middle class are essentially of the opinion that China’s problems can be resolved through the reforms. founder of the Republic of China in 1911. For them.3 million units. It is widely believed that the middle class is the standard bearer of democracy. the economy is number one. China’s middle class supports the current government in achieving a harmonious and relatively affluent society (xiaokang shehui). which they liken to Sun Zhongshan’s ‘‘tutelage’’ stages. They share the understanding that while . however. realized that the Chinese populace was not ready to accept democracy. the rest is of lesser importance. In that respect. Having witnessed the unsuccessful Russian reform. however. freedom. it would be a mistake to equate the Chinese middle class to radical democratic revolutionaries who would strive to replace the CCP’s one-party rule with a multiparty government. Keenly aware of China’s contemporary history. and in particular. Despite the fact that members of the middle class view corruption of government officials with the utmost disdain and anger. making China the biggest auto market in the world.

the advanced culture.10 Business and Technology in China the CCP has made mistakes. The 21st century’s CCP has emerged as a fan of the market mechanism.’’10 As such. head of the Contemporary China Center at the Australian National University. Professor Jonathan Unger. as long as they support socialism with Chinese characteristics. Is today’s CCP the same communist-leading force that works to eliminate capitalism and to bring about a society of communism in which there is no private possession whatsoever and in which people’s motivation is driven not by material gain but rather by the communist conscience? Is the CCP the same party that engaged in bloody class struggle during the 1960s and 1970s? The popular Chinese consensus is that the 21st-century CCP is no longer one man’s party but rather it embodies a broad representation within itself. The traditional view needs to be changed. it is capable of correcting mistakes too. THE RISE OF AN OUT-GOING ECONOMY One way to understand the growing scale of China’s import and export sectors is to watch the impacts of each global economic crisis. it becomes relevant. to watch a 3-D film. to reevaluate the representation of the CCP. Metaphorically. too. The traditional catch-all label of ‘‘communism’’ can no longer represent the new reality. the Chinese reality has become far more complex. The rise of China’s middle class blocks the way. and the majority of the people. President Jiang’s theory openly welcomes entrepreneurs to join the CCP. As evidence. Despite disbeliefs in the West. The image is boosted by thirty years of economic growth. . one needs to wear 3-D glasses or risks missing much of the details. describes the political stance of China’s middle class as follows: ‘‘Don’t expect regime change or democratization any time soon. the CCP is implementing former President Jiang Zemin’s theory of ‘‘Three Represents’’—representing the advanced productive force. It is no longer the leader of the proletariat marching toward the goal of wiping out capitalism. as well as a successful record in maintaining Hong Kong and Macau’s prosperity.

11 The economy was hit hard. One way to look at the growth of China’s foreign trade is to compare changes with respect to dependency ratios.9 percent. however.S. China suffered limited losses thanks to an underdeveloped financial system at the time.3 RMB to the dollar.S. and the export sector alone has grown to be close to the level of import and export combined in 1997. and RMB has dropped to below 7 to the dollar as of mid-2009. China’s foreign trade sector has almost doubled.5 billion U. Additionally.5 billion U.5 percent. which served as a protective shield against speculators. almost all of China’s foreign investment was in the form of fixed assets.6 billion U. In other words. but it also means that China is becoming more vulnerable to .95 trillion U. The year-end foreign exchange reserves of China reached 1. as well as through tough interventions by the government in timely diffusing construction bubbles. with a moderate trade surplus of 295. Wider exposure to foreign trade means more money made. largely thanks to RMB’s inconvertibility. Because of the global financial crisis. the ratio of import and export to GDP was 34. In contrast. dollars.S. both imports and exports were on the decline. dollar at the exchange rate of 8. These measures helped China stave off recession temporarily. The Chinese government was able to peg the renminbi to the U. a situation that prohibits drastic funds movements. the ratio of import and export to GDP was 60. dollars.S. at that time. dollars. dollars.4 percent. in which export to GDP ratio was 34. Eventually. and export to GDP was 19.Growth 11 China stood strong against the Asian Financial Crisis of 1997– 1998 without devaluing RMB.561. the renminbi-dollar peg was partially eliminated in 2005.S. In 2008. Countries such as the United States have pressured China to give up the peg system. during a period of 11 years.428.1 percent. in 1997. but likewise they dragged the growth when the economy should have surged. up by 27.3 percent over the previous year. NBS data show that the total volume of imports and exports for 2008 was at 2. The Chinese economy gradually has grown out of the cocoon of protectionism to open up to the world. of which the value of exports was 1.

which is likely to drag down surrounding economies. the sudden drop of orders from foreign buyers is taking its toll. On the heels of the U. government’s $700 billion bailout package. as it involves a difficult adaptation process. the concern is centered on potential consequences if China’s economic slowdown continues. job loss tends to have a psychological impact. For example. 20–25 million migrant workers had lost their jobs. thousands of factories were shut down in China’s export-driven southeast region.14 The government is doing everything possible to ease unemployment pressure. 10 million had already returned to their farmlands by January 2009. Although migrant workers have their buffer space—the family plot—to return to. The Chinese government is doing all it can to safeguard an 8 percent GDP growth in 2009.12 The latest figure from the Bureau of Agricultural Administration of China indicates that. As a consequence.13 With factories closing due to the plunge in orders.15 In the West. the Chinese government set out a budget of 850 billion RMB ($124 billion) by 2011 to improve health care. Job losses are in the tens of millions. Despite the 9 percent rise in GDP in 2008. and that has become the reality. by January 2009. the masses of jobless workers raise the specter of more social turmoil and conflicts over land and farming rights. In January 2009. particularly on construction and other infrastructure-related projects. on the other hand. to prevent unrest that may arise when laid-off migrant workers return to their hometowns that likely have insufficient accommodative services. exports fell in November and December of 2008 for the first time in seven years.S.12 Business and Technology in China global economic crisis. out of the 200 million migrant workers nationwide. analysts predict a slowdown ahead. the Chinese government announced a 4 trillion RMB ($586 billion) plan in November 2008 to boost domestic consumption through higher domestic spending. According to a Wall Street Journal report. The long-awaited reform plan for its health care system will . snapping a five-year streak of double-digit growth. China relies on fast economy growth to alleviate pressure of job demand that seems to grow even faster. The challenge has set in: on the one hand. and more important.

intervened to stop the encroachment of the financial downturn. however. no one will be allowed to force peasants to give up their land or to divert land use for nonagricultural purposes. agricultural exports also will be encouraged. The government attributes such incidents to the following causes: (1) peasants’ land rights have not been properly protected. and raise levels of subsidies for agricultural machinery. leaving rural interests insufficiently attended. and fertilizer. The government openly admits that in the past years all focus has been placed on growing the GDP. Furthermore. Meanwhile. As a result. the death toll was close to 70. animal feeds. the government will increase investment in agricultural infrastructure. according to the Bureau of Agricultural Administration. The Chinese government.16 These measures. to ensure peasants’ land rights issued in Document Number 1 of 1984. The Chinese government is fully aware of rural troubles. Under these measures. real estate. China’s trade sector continued to grow through 2008. The economy was hit again by the Sichuan earthquake that occurred in May 2008. Insurance will cover all medicines. (3) migration has not been properly handled.Growth 13 provide universal medical coverage to the entire population of China. To do so. and (4) peasant assets have not been protected. including their right to transfer land. including occasional violent protests. tend to take time to show effects. particularly in the early stage of the economic crisis. the government encourages manufacturers and vendors of home appliances to open rural markets and deliver quality products. and an agency will be established to administer the system. the government will increase public grain reserve levels as a measure to stabilize market prices. ranking third on the list of the largest export markets . and deals with them aggressively. To improve peasants’ life quality. Domestic industries have already weakened as demand for autos. once again. (2) environmental pollution has not been properly contained. and other goods drops. The government also will raise the minimum purchasing price for grains.17 Further measures will be taken.000.

20 China’s role in the world economy is becoming increasingly important.S.S. with a total of $71 billion in 2008 up from $65 billion in 2006 and $41. Top exports to China include (1) computers and electronics.1.9 billion in 2005. according to industry sources.19 In 2006.18 The U.3 Export Growth (percent). Former treasury secretary Henry Paulsen states.5 2.S. $7.1). exporters to China in 2008 State California Washington Texas Louisiana New York Illinois Oregon Georgia North Carolina Ohio Pennsylvania Massachusetts Tennessee Michigan Arizona Exports ($billion) 11. $7. (2) crop production. $13.0 1.5 2. next to Canada and Mexico. medical device exports to China totaled $870 million—a 29 percent increase over 2005 and a 71 percent increase over 2003. U.6 billion.6 1.4 1. exporters to China in 2008 (see Table 1.3 1.4 3.-China Business Council lists 15 top U.8 2. The U. (3) transportation equipment.0 9.’’21 Table 1.14 Business and Technology in China of the United States.-China Business Council Top 15 U.6 billion. pharmaceutical industry exported approximately $346 million to China—increasing by 54 percent from 2005 and by 305 percent from 2003. the U.S.S.2 billion.9 1.8 1. 2000–2008 221 422 482 230 263 371 710 512 455 522 491 211 771 509 724 .9 8. In 2007.6 1. $9.9 billion. ‘‘today more than ever the world is looking to China to be a big contributor to global economic growth. and (4) waste and scrap treatment equipment.S.5 2.

2. the first thing that catches one’s attention would be the discrepancy between rural and urban incomes. When one examines Figure 1. however. worsening income gaps were a major reason underpinning the launch of a national economic movement known as ‘‘Developing the Northwest’’ launched by former President Jiang Zemin. Source: NBS . the more money is made. On the other hand. In 1999. eastern provinces enjoy higher disposable incomes than inland western provinces.2 compares incomes of 2007 in a number of provinces. too. whether reducing income discrepancies may generate real benefits for rural people is not necessarily certain. The closer to the east coast.2. and the trend of Engel’s Coefficients (EC). some experts suspect that while income discrepancies may indeed lead to social instability. For example. Filling the gaps is seen by the government as fundamental to social harmony. Figure 1. there is concern that a drastic equalization of income gaps regardless of economic conditions may cause difficulties. One scenario is if income levels are more equalized the economy may fail to produce enough goods to meet rising expectations. Table 1.Growth THE RISE OF PEOPLE’S LIVING CONDITIONS 15 A good way to understand China’s economic changes is to follow rural and urban household income and spending. In general.

44 10012. despite the fact that the population had increased by about 300 million.33 11496.97 2328.70 12300.39 Rural 10144. Urban and Rural Incomes of Selected Regions Eastern Regions and Cities Shanghai Beijing Zhejiang Guangdong Jiangsu Tianjin Fujian Shandong Liaoning Annual Per Capita Household (RMB) Urban 23622.30 16378.29 3665.15 5624. China’s Premier Wen Jiabao considers China’s population both its strength and challenge: regardless of how small a difficulty is.82 17699.78 11564.93 Rural 3546.69 3509.11 10313. when multiplied by . essentially because of the dazzling variety of goods and services that money can buy.20 Source: NBS Yearbook 2008 Despite the eye-catching differences.01 7010. the average annual per capita incomes have risen to 15. This difference was insignificant when the market was generally short of goods and services. Bank savings have dramatically risen as well.01 16357.16 Business and Technology in China Table 1.781 RMB (urban) and 4.2. Nevertheless.34 11130.84 2634.34 4773.761 RMB (rural) in 2008. China’s per capita GDP ranks number 127 in the world as of 2010.73 21988.62 9439.28 12590. and the national average of per capita annual income was 343 RMB (urban) and 134 RMB (rural).3 billion RMB in 2007.05 14264.95 10276.04 6561.86 2683.71 20573.08 4985.35 15506. from 21 billion RMB in 1978.725.63 8266. The rough reality was when Deng Xiaoping’s economic reform was initiated a schoolteacher made a 60 RMB monthly salary on average.92 2788. In less than three decades. the rising curve represents a fundamental uplift of people’s lives across the nation.43 Western Regions and Cities Sichuan Chongqing Shanxi Qinghai Ningxia Yunnan Xinjiang Gansu Tibet Annual Per Capita Household (RMB) Urban 11098. The total rural and urban savings also rose to 1.06 10859. People’s living standard has tremendously improved.78 3180.09 3182.06 5467. a senior factory worker made 100 RMB per month on average. China’s primary challenge remains with guaranteeing people’s basic life needs.

as income levels may fail to reflect living conditions under certain circumstances.2 million who now qualify for government relief. looked into Deng Xiaoping’s plan as it was laid out from the perspective of calorie intake. per capita living areas to be 8–10 square meters or approximately 100 square feet. or 115 billion in U. the following objectives were set: the EC range to be between 45 percent and 50 percent. life expectancy to be 70 years. reinforced concrete-structured living areas to account for 80 percent or more of living areas. every three literate persons to subscribe to one newspaper. regardless of how big a problem is. life expectancy to be 70 years. dollars.3 billion people concert their efforts to deal with it. it turns into a huge problem. When Deng Xiaoping set the national standard of living to reach the ‘‘relative comfort’’ by 2000. his goal was translated into more specific objectives. the Chinese government raised the poverty line from average annual income of 785 RMB. For example.Growth 17 1. the rate of complete living suites to be 60 percent. for urban areas.22 In 2008. For rural areas. a relatively comfortable life included fulfilling the following requirements: an EC range between 45 percent and 47 percent.600 calories which may come from 80 grams of protein and 70 grams of fat. per capita daily intake from food to be 2. as long as 1. The government has promised to eradicate poverty by 2020. While income numbers reflect living conditions.S. to 1.067 RMB or 156 billion. Thus. daily protein intake to be greater than 75 grams.3 billion. This new poverty line has increased the number of poor people to 43. economists also resort to EC to gauge expenditures on basic materials. the problem will be easily solved. household television possession rate to be 75 percent. EC refers to the percentage of spending on food in the total consumption expenditure. lower EC numbers represent better living conditions. and per capita green public area to be 8 square meters. the average educational level to be eight years. a family of three to have a living space of a two-bedroom house. the rate of households .23 Such efforts have won global praise. Professor Xiao Jingjian of the University of Rhode Island and editor of the Journal of Family and Economics.

7 percent for rural residents. 95. The 15 million permanent residents of Beijing owned 1.7 personal computers (up 198 percent). and rural families seldom go to restaurants.3 percent for urban residents and 43.18 Business and Technology in China using electricity to be more than 95 percent. indicating continuous improvement in living conditions. 95 percent of the country had achieved the goal by 2000. CNN–Beijing.000 jobs . all of which had dramatically increased since 2000. up 17. up 91 percent from 2000. every 100 families in urban Beijing had 206.7 percent and 46. people in urban Beijing are on the verge of reaching a ‘‘wealthy’’ life per global standards. In 2006. and plans to add 10. and a new one is opened every day. do eat out frequently. the ECs were 57.6 percent from 2005. Does this tip the EC model? Although no conclusion has been made with regard to this question.8 percentage points in the period.24 NBS surveys show that the ECs have been on steady decline.8 percent in 2006 for Beijing’s urban families with an average spending of 1. The ECs in 2007 were 36.573 Kentucky Fried Chicken restaurants. Professor Xiao notices that Chinese consumers are paying more attention to food quality.1 percent for rural residents.1 mobile phones (up 650 percent). In 2002.81 million private cars in 2006. The EC declined from 58. and eating out results in a bigger proportion of the income spent on food.2 percent. including 100 percent in the eastern regions. non-staple foods have increased. McDonald’s has 1. and as a result. which still represents a decrease of 0. In 1978. some experts point out that many urban families.’’ Chang reveals that China has 2.9 video cameras (up 250 percent). and 56 percent in the western regions. titled ‘‘The Kings of the West Are Ruling the East Too. particularly those in big cities.7 percent in 1978 to 30. and the availability of clean water to be greater than 90 percent. According to a 2007 report by the Beijing Bureau of Statistics. In a 2009 report by Emily Chang. these numbers were respectively 37.25 A fast pace of life calls for fast food. 78 percent in the central regions.6 percent for urban residents and 67. and 18.442 RMB on clothing.065 restaurants. On the scorecard.

food expenditure makes only part of the sampling range of the EC model. and that it weathers the global financial storm quite well.5 and 2. Beijing residents do not consider Western foods the cheapest in town. convenient. Chinese urban residents spent 7 percent of their income on health care. For example. The following are a few more aspects reflecting China’s living standard. while average Americans spent 20 percent. however. as Chang indicates. Expenditures on entertainment contribute to the quality-of-life picture as well. at the time when housing reform started in 1986. According to NBS data. Rural floor space in 2007 was up further to 37.97 percent and South Korea’s 4. they generally appreciate Western fast foods as trendy. and 17 square yards in rural areas.7 square yards according to NBS. urban per capita floor space had risen to more than 32 square yards in cities and 36. The fast food has obviously attracted the modern middle class pursuing a modern lifestyle. and doubling that of many other industrial countries. the Chinese are paying more for education and health care than industrial countries. the proportion of other expenditures on life’s basic needs present an important picture too. dollars in 2009.S. In 2006. has made it possible for every family to own a home. Housing reform. The Chinese urban and rural people spent only 3.7 square yards in rural areas.Growth 19 and more than 150 more restaurants in 2009. Housing Space Changes in family housing space represent a great leap forward. the ones that provide fast food businesses with cooking equipment are thriving. Chang reports that China’s fast food business will balloon to 58. Moreover. while many factories are shutting down. higher than Japan’s 3.26 However.13 percent of their total income on entertainment and service in 2006.8 billion U. which will be further discussed later.27 These numbers are expected to improve in the next phase of economic reforms. the per capita floor space was approximately 14 square yards in cities. clean. and even healthy.37 percent. In 2005. .

providing basic insurance and pension benefits to 1. The change has given people a sense of pride and dignity. and a feel for modern life. The cost-sharing solution was tested further between 1995 and 2000 during which time several models were tested. Social Welfare Before 1978. Since the late 1980s. and providers. Strong evidence is in the booming new home decoration and repair business in which foreign companies like Home Depot are catching up with other industrial leaders that arrived earlier. SOEs gave up their benefit programs. LIP covered approximately 10 percent of the total population working for SOEs. Today. a system of medical cost-sharing and social-pooling accounts to cover retired population. From the 1950s to the early 1990s. The health care system is a good example. and GIP covered approximately 5 percent of the population working for the government. Such a program required rationing of drug coverage with a predetermined payment plan.20 Business and Technology in China The increase of home space is among one of the changes that has a profound psychological impact. From 1988 to 1994. including a three-tier program for which costs were shared among patients. These pilot measures were promoted in 57 cities. and catastrophic insurance programs were tested in a number of cities. the urban population was served by two major publicly funded insurance programs: the Labor Insurance Program (LIP) and the Government Insurance Program (GIP). Rural residents never enjoyed health care or pension benefits. Inequality and insufficiency are two main problems with these programs. the government has implemented reforms in multiple stages. After the reform started. government subsidies. due to restructuring or simply bankruptcies. the SOEs offered a ‘‘cradle-to-grave’’ benefit umbrella to employees. Beginning in .3 billion people is a new challenge that the government is still trying to find ways to meet. It reversed the humbling situation under the public housing era in which three generations sharing a small apartment was not uncommon.

3. RMB20 ($3) from provincial government. is employment based and covers only urban workers. The State Council’s ‘‘Opinions on Deepening Healthcare System Reform’’31 sets the reform framework . The goal was to reduce high drug costs that amount to as high as 50 percent of total health care expenditures. the scheme has expanded rapidly. 1. and an estimated 100 million urban residents already participate in the URBMI. established in 2003. Benefits are limited. whereas in other countries such as the United States. Various government bodies and participants finance URBMI. It is made of a collected fund for inpatient stays and individual medical savings accounts for outpatient visits. consists of a pooled fund for inpatient stays and is financed by various government bodies and participants. with total contributions per participant standing somewhere between UEBMI and NRCMI levels.29 Currently. claim-later’’ basis. Monthly contributions are on average 50 yuan ($7) in western provinces. established in 2007. This was primarily caused by the existing system that allows hospitals to run pharmacies. Urban Resident Basic Medical Insurance (URBMI). with reimbursement rates that can be as low as 30 percent for inpatient expenses. 2.Growth 21 late 2000. and an estimated 800 million out of a total of 850 million rural citizens participate in NRCMI. such as children and students.30 Two health care reform documents released in April of 2009 announced further details. split RMB10 ($1. drug costs account for less than 10 percent.28 By 2011. China has three main basic medical insurance plans. linking drug sales to profit. except in wealthy regions. About 200 million out of a total of 250 million urban employed participate in UEBMI. New Rural Cooperative Medical Insurance (NRCMI). and RMB20 from the central government. reforms were made to hospital systems. It consists of a pooled fund for inpatient stays and does not cover outpatient visits. Benefits are limited. but only 8 percent in western provinces. Urban Employed Basic Medical Insurance (UEBMI). Coverage is expected to be available in all cities by the end of 2010. established in 1998. which vary greatly.50) from participants. China plans to provide health insurance to all rural and urban populations. and operated on a ‘‘pay-first. covers the urban population not covered by the UEBMI scheme. Payroll taxes paid by employers and employees finance the UEBMI. Nevertheless. Contributions are equivalent to 14 percent of annual salary in Shanghai. and significant copayments are required.

22 Business and Technology in China through 2020. such as pensions.18 million. the documents stress training of more healthcare professionals to assure equal access.53 million people from 2007.98 million or more than one-quarter of the population participated in urban basic health insurance programs. an increase of 11. Of this figure. The government will require all health care providers and retail pharmacies to stock and retail drugs on the NEDL. To reduce drug costs.49 million participated in urban health insurance programs. and grassroots health care providers may stock and retail only those drugs listed on the NEDL. Grassroots health care providers may not levy a surcharge on drug sales. The Ministry of Health’s ‘‘Implementation Plan for Immediate Priorities in Healthcare System Reform 2009–2011’’32 provides implementation details. showing an increase of 17. A few other areas have shown significant development as well. and 52. the government will publish a National Essential Drug List (NEDL) expected to contain 400–700 items with many low-cost generics and traditional Chinese medicines. Increasing participation in unemployment . provincial governments will be responsible for procurement and distribution. in 2010. and basic medical insurance will cover prescriptions. and unemployment insurance. According to these documents. Thus. To achieve this goal.93 million were retirees. Additionally.90 million people or approximately one-sixth of the total population participated in a basic pension program. a total of 218. A total of 316. the NEDL is expected to largely define the drug market in all but the urban hospitals. The central government will guide prices. All other health care providers will be encouraged to use drugs on the NEDL as their primary choice remedy. accident insurance. Migrant workers are receiving health insurance as well—a total of 42. NBS reports that at the end of 2008. 165. hospitals will be asked to reform their fee structures as well.97 million were staff and workers. to gradually narrow the huge differences in benefits among these plans. the government will raise subsidies for health insurance premiums of the URBMI and NRCMI schemes. which together cover 900 million people.

76 million were migrant workers.8 percent.55 million. THE RISE OF ENTREPRENEURS Economically.10 million participated in work accident insurance.34 million urban residents and 42. the public also has been developing their trust in the government that is still reminiscent of political turmoil in the past and capable of making powerful interventions to the economy in the 21st century. the rate from junior high school to senior high school was 79. Moreover. an increase of 7. of which 49. the Chinese public has been increasingly aware of social benefits and has become more confident in programs that are common in the West. 40. the promotion rate from primary schools to junior secondary school was 99. and 138.91 million rural residents received the government minimum living allowance. Around 124 million participated in unemployment insurance programs. the Chinese family was a self-sufficient unit and relatively closed to the outside world.6 percent. an increase of 16. China is in a transitional state with a shrinking public sector and an expanding sector of Privately Owned .25 million. During the past three decades. China has obviously invested heavily in developing higher education. and the rate from senior high school to higher education was 71.3 percent in 1990. In 2007. Modernization brought people onto a new platform on which mutual dependence at the society level is a necessity.37 million. and 27. Education has become more accessible today than in 1990.9 percent. On the other hand. It involves public acceptance. risks and related costs far exceed what a traditional family could handle.61 million insured received reimbursement in 2008. These numbers contrast with 74. increasing by 7. About 2. which may take time.Growth 23 insurance and accident insurance programs illustrates the transition of workers’ mentality from the planning economy. One perspective to keep in mind is that improving living conditions is not the government’s responsibility alone. By tradition. A total of 23.3 percent. respectively.6 percent.

he turned the repair shop into a car parts factory. This change has been substantiated by hundreds of entrepreneurial stories. A CNBC program refers to China as the ‘‘Republic of Profits.’’ or ‘‘universal joint’’ (a device connected to the steering system). 56. Ideologically. In 1979.24 Business and Technology in China Enterprises (POEs).’’ which shows in a way that American media are gradually becoming aware of the nature of modern China’s Communism. Back in 1969. admired as ‘‘glorious’’ (Deng Xiaoping). Moreover. Lu headed the Ningwei County People’s Commune’s Farming Machinery Repair Shop and worked on the job for 10 years. . The attitude has been to get rich first and ask questions later. Not every billionaire had smooth sailing.98 billion RMB. His key to success was to be able to secure funding to develop 8 million square meters (approximately 2.000 acres) of prime land and to market real estate at the peak of the market. A few of these stories are selected and presented below. Lu Guanqiu. His personal property is worth 27. The concept of storing wealth in people’s homes rather than in the government’s warehouses was an idea of Mencius (fourth century BCE). China’s Finance Net published ‘‘10 Hundred-Millionaire CCP Members Taking the Lead in Getting Rich. is chairman of the board of the Fanhai Group. a manufacturing firm for automobile parts headquartered in the Zhejiang Province. ranking number eight in Forbes Richest Chinese 2007.’’33 ‘‘Red capitalists’’ is a new phenomenon of the transitional society.13 billion RMB and ranks number 33 in Forbes Richest Chinese 2007. the CCP encourages its members to take the lead in getting rich. This is by no means an invention of the CCP. The CCP has switched to populism since former President Jiang Zemin envisioned that a stable society is one that enables people to get rich. 62. but rather. Lu Zhigang. Many are still trying to find a compromise with the concept. some worked their way up the hard way. a real estate firm headquartered in Beijing. the pursuit of material wealth is no longer regarded as a root of evil there. is chairman of the board and party secretary of Wanxiang Group. Lu is worth 13. producing ‘‘wanxiang zhou.

In 1990. In 1983. Chen has seen profit flowing in as China’s net users jumped to number one in the world: in 2008 total Internet user-accounts in China were 300 million.35 Although most people never made it to the rankings of these leading entrepreneurs. When Chen was a student at Fudan University’s Economics Department in 1990. and 52 percent of the total number of accounts are held by 22-year-olds and under. they improved their lives by hard work .000 at the time. Chen maintained good relationships with government organizations. Lu bought out the factory by purchasing all of its shares originally owned by the county government for 15 million RMB. Lu bought out three large competing firms. equivalent to approximately $4. Lu’s Wanxiang Group was established.6 billion RMB. 555 million ‘‘netizens’’ play games on the Internet. The policy at the time. Lu had turned a rural county’s farming machinery repair shop into a modern industrial firm. By then. Chen Tianqiao. An expert in public relations. 34. chairman of the board of the popular online gaming company Shengda Net (snda. After serving on several deputy positions in a variety of companies. and contracted the factory under his leadership. Lu posted the tree seedlings grown in his family plot as collateral.34 According to China Internet Network Information Center (CNNIC). with the company’s stock listed at the Shenzhen Stock Exchange. allowed public firms to enter into a profit-sharing agreement with the local government. known as Contract Responsibility System (CRS). ranking number 52 in Forbes Richest Chinese headquartered in Shanghai. in addition to sound business decisions.Growth 25 and from which the company’s name ‘‘Wanxiang’’ (meaning ‘‘multidirection’’) was derived. Some billionaires are entertainment experts. Chen rose to the top of Shengda Net and established a most popular interactive gaming network offering among other services a multiplayer gaming platform (MMORPG). a total worth of 20.’’ Networking pays. From 2000 to 2001. In 1988. Lu was one of the first to take advantage of this opportunity.000 RMB. he was awarded ‘‘Best Student Leader. is worth more than 8.

Wang had always managed to make time in his busy schedule to study on his own. The unemployed population brought an opportunity: they urgently needed retraining.asp). In 2003. and their stories are no less exciting. His personal Web site has become a source of inspiration for many young people (http:// www. Wang invested 200. the rich in China tend to be politically active as well. Wang opened Taian’s first computer skill training school. Despite the fortune he had built up. ‘‘Oriental Computer School.’’ in 1993. Shandong Province.36 In 1988 Wang Yuancheng left his village in Ningyang County. the school trained 15. Wang has published profusely in professional journals and has been a popular speaker at people. Over the years. he had to drop out of high school. After working as a laborer on odd jobs for a few years at Taian City. Wang sponsored a number of bills to protect migrant workers. all of which were passed.000 RMB to set up the first hotline telephone service to help migrant workers find jobs. In 1999.’’ As SOEs went through restructuring. he donated to the construction of three ‘‘Hope Computer Schools. During the next 10 years. he had an uphill battle ahead—making up the lost education. fighting along the legal front requires special training. mostly migrant workers and laid-off employees. The hard work eventually paid off.wangyuancheng.’’ which provided computer skill workshops to thousands of children residing in mountainous villages. Unlike doing physical labor. When Wang left his home village.26 Business and Technology in China and creative thinking. In 2001. He received a bachelor’s degree and a master’s degree in law. Wang was elected representative to the 10th National People’s Congress (NPC). Fighting for equality for the underprivileged working people of whom he was a member had become Wang’s top agenda. to join the millions of the migrant workforce. however. Wang Yuancheng’s story is one such example. millions of employees were laid off. Like everywhere else in the world. During his term as representative. he started a printing business named ‘‘Oriental Press. Seizing this opportunity. These bills included ‘‘Bill .

’’37 As a side note. one that marks China’s era of transition. depending on the school.’’ ‘‘Bill of Establishing a Law for the Promotion of Equal Employment. If the West is ahead because Westerners were able to learn science and technology properly. ‘‘Oh. the Chinese are convinced that the country’s future lies in utilizing modern science and technology. who specialized on China issues. The most profound experience.’’ and ‘‘Bill of Establishing a Law of Business Operations under Special Permissions. Merrill Lynch was bought out by Bank of America in 2008 at the peak of the financial crisis. so too can the Chinese.’’ ‘‘Bill of Establishing a Law of Residential Relocation. worked for Merrill Lynch in New York and described herself as ‘‘a little peasant girl’’ transformed into ‘‘a capitalist on Wall Street. Her name was Litao Mai. My children’s school system does not offer foreign languages until the seventh grade.’’ Most impressive. These Chinese peasants begin English studies in either first or third grade. we do that two grades younger. a prominent journalist with the New York Times.’’ ‘‘Bill of Establishing a Law for Guild Organizations.Growth 27 of Protecting Interests of Migrant Workers in Urban Area. she was the third college student in the village. the level of mathematics taught even in the peasant schools is similar to that in my children’s own excellent schools in the New York area.’’ It is not surprising that education has been stressed in China more than ever. Ms.’’ ‘‘Bill of Establishing a Law for Promotion of Equal Access to Education. after Kristof had posted a video of his visit on the New York Times’ Web site. accompanied by two of my children. And in general. He recorded what he witnessed during a visit to a small village in Shandong where his wife grew up: I visited several elementary and middle schools. Frankly. One case was reported by Nicholas Kristof. From top leaders to the grass roots. my daughter got tired of being dragged around schools and having teachers look patronizingly at her schoolbooks and say. a reader responded that she saw in the video the house where she grew up. Mai. Tang . belongs to a small and shy country woman.

Tang Ruiren remembers her sore fingers and the fervor of the radical youngsters. One day. her MFK chain counted 202 restaurants across China.’’ since her husband’s family name is also ‘‘Mao’’ and his family was actually Chairman Mao’s neighbor. Tang Ruiren found it hard to adapt.1 billion yuan annually.452 yuan in 2008. She was so embarrassed to be a vendor at first. Because of this coincidence.000 workers. At age 14.’’ No one had ever called her ‘‘boss’’ throughout her life. Her family was so poor that she had to beg for a living in early years. When Deng Xiaoping disbanded the People’s Commune in 1980 and implemented the ‘‘Household Responsibility System (HRS). when Chairman Mao returned home for a visit. a Shanghainese tourist stopped by and yelled. I need a bowl of gruel!’’ Tang was shaken. Tang was honored to pose next to the great leader for a photo opportunity during which Mao kindly addressed her as a ‘‘relative. In 1959. This meant a great deal at the time when Mao was worshipped as a god. That number had turned into 9.9 yuan.7 yuan and started a rice gruel stand. the average personal annual income in Shaoshan was 69. Mao Zedong’s hometown. and paying 90 million yuan in annual taxes.’’ like her fellow villagers. More shock was yet to come.28 Business and Technology in China Ruiren was born in 1930 in Xiangtan County of the Hunan Province. employing more than 20. Back in the 1950s. she was married into Shaoshan. when Shaoshan County decided to turn Chairman Mao’s hometown into a tourist hotspot. and she loved it. Everybody cheered and hundreds of small tourist businesses were started overnight. Unwillingly. since Mao had said that profit was evil. she complained.’’ By 2007. When a foreign journalist . earning a respectable revenue of 1. she was struck by the word ‘‘boss. Like all hardworking women at the time. that she hid herself behind trees to attend the business. tens of thousands of Red Guards who were on pilgrimages in Shaoshan during the Great Cultural Revolution sought her autograph. she was never able to go to school. Tang took out her life’s savings of 1. Tang started her first restaurant named ‘‘Mao’s Family Kitchen. however. Not long after. She wept for days when her family was also allocated a farm plot. People were clearly trotting on the capitalist road farther and farther. ‘‘Boss.

China had already learned a hard lesson in the 19th and 20th centuries while dealing with foreign invasions and domestic political turbulence. we must adopt an objective view of things. Deng Xiaoping not only had the iron wrist to break the taboo. For example. we can’t rush anyway. the second sentence is. both of which have only come to be appreciated over time: (1) domestic stability. . but also was able to implement a gradual transformation.’’38 There are many explanations about how China has developed into one of the world’s top economies within merely three decades. provides possibly the best of answers in his recent book The New Asian Hemisphere: it is the market mechanism. I have three sentences to say. Let us be calm. Clearly. Kishore Mahbubani. countries that apply the principles of free markets experience huge increases in productivity. They are both great. and Deng Xiaoping brought us prosperity. Deng held firmly that without a stable social environment. and (2) peaceful rising on the international stage. In this regard. here is how Deng stressed his opinion with respect to China’s international stance: With respect to world situation. ‘‘Chairman Mao gave China independence. Most discussions on the virtues of free-market economics have focused on efficiency. The market system was shunned as taboo during Mao Zedong’s era. Here. a former diplomat of Singapore. Each Asian society that has applied freemarket economics has experienced spectacular economic growth. the third sentence is. we must stand our ground firm. Let us not rush things. Deng Xiaoping was determined to engage in stability and economic development without wavering. there would be no meaningful economic development. Tang smiled. Deng named the gradual economic transition the ‘‘socialist market economy’’ and prescribed two strategies to make the transition happen. avoiding turmoil such as seen in Russia’s reform.39 Another factor that has played a defining role in China’s rising was Deng Xiaoping’s helmsmanship. The first sentence is. Mahbubani states: The explosive impact of the application of free-market economics to China should not have been surprising. we must handle events calmly.Growth 29 asked her whether she liked Chairman Mao or Deng Xiaoping better.

Beijing maintained a good economic and diplomatic relationship with Islamic countries as well. the Chinese stance has been one of non-interference which was elaborated by the former premier Zhu Rongji during an interview with CNN’s Judy Woodruff in 1999. China was not able to stay clear. Beijing maintained a good relationship with the U. If international .’’ staying away from power struggles while seeking every business opportunity. and maintain an absolute tranquil mind. Let us bend our head and focus on one thing only.S. In practice. however. from Western criticisms on its business ties with countries that have a poor record of human rights. Deng wrote the following 28-character verse: Lengjing guancha (observe analytically). Chenzhuo yingfu (handle calmly). On the issue of ethnic conflicts.40 Moreover. to remind the citizens of his message. it improved relationships with neighboring countries and made inroads into Latin America and Africa. In the same period. As such.41 Zhu Rongji believes that ethnic conflicts rooted in history belong to ‘‘internal affairs’’ and must be resolved by the groups involved. that is. Yousuo zuowei (strive to make real achievements).-China air collision event in 2001 in which a Chinese fighter jet crashed killing the pilot after a collision with an American intelligence gathering aircraft over the South China Sea. at the same time.S. Taoguang yanghui (keep a low profile). our own business. China maintained its concentration on economic development while steering clear of major global conflicts. Wenzhu zhenjiao (secure battle formation). The Chinese government demanded an apology. China carries out the ‘‘equal distance diplomacy. Throughout the Bush era. One example of China’s diplomatic handling is the way it resolved the U. Juebu dang tou (never be the front-footer). without deepening the conflict further.30 Business and Technology in China be clear minded. government although.

Broad international business connections have allowed China to secure energy resources to fuel its growing number of vehicles on the road. develop vigorously the circular economy and build a sustainable eco-system. China will also step up its institutional innovation to encourage creativity and inherent dynamics for economic and social development. In the meantime. such responsibility would lie with the United Nations. (2) China will continue with its current economic reform for a socialist market economy. and Latin America. The diplomatic adeptness has been admired by many scholars in the field. Mutual Benefit. Africa. known as implementation of ‘‘Good Neighborliness’’ and ‘‘Mutual Trust.3 billion people. . Lacking fossil fuel resources.Growth 31 intervention is needed.42 The nonintervention and economic-trade-above-all principle has dominated China’s diplomacy for decades. pointed out. one of 41 contracts that Iraq put out for international bidding. China’s strategy in Asia. ‘‘It took Beijing 150 years to learn.’’43 China’s fast economic growth raises many questions with respect to its sustainability.’’ as Joshua Cooper Ramo. Equality and Coordination’’ has led to its leadership in the Association of Southeast Asian Nations (ASEAN). China must extend its quest over the border to Russia. (3) China will participate more broadly in the international market place. satisfying their growing material and cultural needs. To achieve this goal. China will improve its quality and efficiency of its economic growth. China will develop technology and a knowledge-based economy. for example. author of The Beijing Consensus. President Hu Jintao has assured the world that China will continue to stick to the following courses: (1) China will continue to improve the quality of lives of 1. In August 2008. the Middle East. China’s state-owned China National Petroleum Corp (CNPC) signed a $3 billion agreement with Iraq to develop the Al-Ahdab Oil field south of Baghdad. as well as its high energy consumption industries. To do this. and it has turned ‘‘China Threat’’ to ‘‘China Opportunity.

44 The world is keeping a critical eye on whether China will be able to live up to these promises. encouraging foreign investment. In a sense.32 Business and Technology in China (4) China will endeavor to create a win-win market place for its trade partners. . the test has been served: will China be able to survive the global financial crisis of 2008–2009 and come out a stronger economy? There is evidence that it will. and stepping up improvement of intellectual property rights protection. This includes increasing imports.

10. By the time the mortgage crisis had triggered a world financial tsunami. but the crisis did not take its toll until 2008. despite the fact that China’s GDP is less than one-third of the U. that the crisis has generated a broader and deeper devastation than the 1997–1998 Asian Financial Crisis. Ripples of the U. This reflects a significant change in the structure of China’s economy wherein the size of exports has risen to one-third of its GDP as of 2008. During the latter crisis.1 percent in 2004. stimulus package. however.4 percent in 2007. This time. subprime mortgage crisis reached China in the second quarter of 2007. the package is in close range to the $700 billion U. and 10. The momentum extended into 2008 when .Chapter 2 Handling the Global Financial Crisis The devastation of the 2008–2009 global financial crisis on China’s economy is yet to be assessed. 10. however. GDP. Moreover. One could say with certainty.S. the Chinese government defended the economy by pegging the yuan to the dollar and simply safeguarding the renminbi valuation with force.7 percent in 2006.1 In 1998.S. the government has to do more by setting up a stimulus package of 4 trillion RMB or US$586 billion.S.2 percent in 2005. China’s GDP growth rate had maintained a double-digit pace for four years in a row: 11. the export sector was less than one-fifth of the GDP.

despite the fact that the halt work order was reissued. the impact . for the first time since 2001.2 For 2009. According to a China Central Television (CCTV) report (June 20. given the advanced stage of the projects.3 Unlike the U. Analysts believe that again economic pressure has taken an advantage over environmental protection. the Chinese financial system had limited exposure to the U. Construction companies believed that. The serious effects that China suffered were primarily exports-related.S. the two hydroelectric projects—Longkaikou Dam and Ludila Dam on the Jinsha River—were asked to halt work. the Chinese government was concerned about the overheated economy reflected by the runaway stock markets and the high-rising housing market. The government therefore had initiated cooling procedures. The sudden collapse of Lehman Brothers in the United States halted the growth and resulted in loss in November. For example. the construction plan eventually would be approved. 2009).34 Business and Technology in China Western economies fell into recession. The correction efforts turned out to be unnecessary because of the world financial crisis and some preventive steps had to be undone. the export sector was on track for high growth. while experts generally expect a growth of no more than 6–8 percent. subprime market. banking sector. During the first half of 2007.S. China’s GDP growth of 2008 was a spectacular 9 percent. in 2008. The projects went forward anyway encouraged by local governments of Yunnan. and therefore it was able to operate without major corrections. before the economic downturn in the latter half of 2007. China makes all efforts to ‘‘safeguard’’ the target of 8 percent growth. as the stimulus package was set to support energy and infrastructure improvement. including tightening credit and suspending construction projects. having reached close to 30 percent of its GDP. all of which reminded it of the 1997 Asian Financial Crisis. Because of increased reliance on exports. Despite the fact that China’s exports sector was hard hit and tens of millions of jobs were lost. In fact. the Ministry of Environmental Protection had urged these projects to wait for an environmental assessment before starting construction.

000 yuan ($404–$674). which immediately led to drastic contraction in sales of automobiles and real estate. making an average monthly income of 3. health care. and those that were weak in technology were the first to bear the brunt of the crisis. or a ‘‘safety net. UBS Securities. Reports indicate that .000 more passengers passed through the station than the same time a year ago. With their luggage of all sizes.4 Observations by Chinese media seem to corroborate Wang’s predictions. shapes. affecting all other infrastructure-related industrials. Every year. Tao Wang. expected the number of unemployed to rise above the announced 20 million urban registered laid-off workers to about 40 million by the year’s end. In 2008. One phenomenon was the early return to home of migrant workers. around the end of December.’’ and also due to widespread unfair treatment to migrant workers. Many migrant workers are owed back pay and do not have proper channels to air their complaints. cities’ train and bus stations across China are crowded with homebound migrant workers. This increase accounts for migrant workers who were excluded from the registration process. According to a report in China Business News.174 million passengers from October 11 to 27. head of China Research. Sun had decided to go back to his village in Zhumadian of the Henan Province where he would start a business of raising livestock. Markets for building materials declined. Massive layoffs dampened consumer confidence. the Guangzhou Railway Station served 1.5 Bankruptcy waves hit small and medium-size enterprises (SMEs) particularly hard. under the storm of the world financial crisis.Handling the Global Financial Crisis 35 hit hard in coastal cities. told the journalist that he had worked in Guangzhou and the vicinity for 11 years. one of the migrant workers interviewed at the station. and colors. they stage a most miraculous scene of the time—migrant workers on their way home to celebrate the new year and spring festival. A total of 129. such as Shanghai and Shenzhen. many returned home earlier. however. Wang further worries about sporadic unrest due to the fact that migrant workers do not enjoy insurance benefits. Sun Guang.000–5. October of 2009 was the worst month for China’s stock markets.

companies that had upgraded technology thrived. given the state of the global economy. had purchased 500 computerized weaving machines. 68. collapsed. its failures tend to affect a wider geographic zone. On the other hand. analysts speculate that China’s deployment of the economic stimulus package may result in a slower appreciation of the yuan against the dollar. The government advanced the payment. backed by an investment from Hong Kong.36 Business and Technology in China during the first half of 2008 alone.6 The toy industry turned out to be a most vulnerable sector. These steps included raising export tax rebates on toys and textiles to 14 percent and providing policy incentives to homebuyers. the governor of the People’s Bank of China (PBOC). which the government already has done multiple times since September 2008. and an increase in infrastructure spending designed to stimulate economic growth. and both of which are among the biggest employers. both of which have dulled industrial production. For example.7 China’s State Council has announced measures to address the situation faced by exports and real estate development.9 . One thriving fabric manufacturer in Dongguan of Guangdong Province.8 As a result. more needs to be done to stimulate domestic demand. and (3) hub of massive employment. one of the world’s largest toy makers. The Xinhua News Agency reported that more than 50 percent of China’s toy exporters had closed in the first seven months of 2008. When Hejun Toy Company. Zhou Xiaochuan. quelling a potential major protest. The toy industry in China has several unfavourable characteristics: it is (1) one of the largest export-oriented businesses. (2) primarily low-tech. indicated that.000 SMEs across the country collapsed. 7. each is capable of producing more fabric than what 28 skilled workers do in a low-tech factory. amounting to 24 million yuan total. Additional measures may include further interest rate cuts. Because jobs in the toy industry typically are contracted to a wide range of town and village enterprises (TVEs).000 unemployed workers congregated for two days in front of the county government’s building requesting to be paid salaries that had been delayed for two and a half months.

Save money. They remain in disbelief that the good-paying jobs were gone overnight. Help friends get a job. don’t change work field. since job cuts hit high-salary makers first. the Bush administration had vigorously pressured the Chinese government to float the yuan in hope of reversing trade deficits. 6. Don’t resign. don’t start a new business.000 had collapsed by the end of 2007. 8. older people may have a harder time. expect the end of the financial crisis to be more difficult. buy government bonds. Psychological counseling has traditionally been a neglected area. as psychological disorder used to be attributed to ideological weaknesses. 3.Handling the Global Financial Crisis 37 Earlier.10 Most of the returnees lack appropriate guidance and opportunity for retraining. The county worked to provide counseling and retraining. The recent devaluation of the dollar and China’s domestic stimulus package seem to lead toward the same results anyway. 7. Don’t be overconfident. Send money to parents. Many unemployed migrant workers found it unrewarding to work at their home villages making less than half of the monthly income they earned in the cities. Yingshan County’s survey indicates that most migrant workers know little about what the financial crisis is except that they lost their jobs as a result. the trend alerted medical and social organizations. don’t buy stocks. To fill the gap. so they’ll help you. One example is Yingshan County’s relief project. rose. Out of the 6. Many were employed by factories that produced shoes for export. 5. 4. . freelance advice circulates on the Internet. Many migrant workers returned early to Yingshan County of the Sichuan Province from their employment cities in Guangdong. The financial crisis changed this view. Symptoms of psychological trauma.000 or so shoe factories across the Guandgong. such as depression and suicide. 2. Look for possible back-up jobs. don’t change job. 1. like the one called ‘‘10 Things to Avoid’’: 1. Don’t buy car. The hardest part is coping with the psychological barrier to re-adaptation. Don’t ask for raise.

The bad news is that China’s financial system did not completely stay clear of the U. Don’t divorce. Professor Bottelier writes: The problem of unemployed university graduates is new in China.1 million (Ming Pao.2 shows losses resulting from a slowing export market and fluctuations of the currency market. Table 2.S. In a way. Of China’s 5. Even if life is still easy.S.1 lists a number of bank losses based on data from the fourth quarter of 2008. a senior adjunct professor at Johns Hopkins University School of Advanced International Studies. Banks that held U. but the slowing economy must also have been a factor.13 . However. indicates that what may be more troublesome for China is the situation of college graduates. affected the economy more widely. don’t give birth. The projected number of university graduates for 2009 is 6. Table 2. 10. but politically and socially not less troublesome than the problem of unemployed migrants.11 The silver lining of economic recovery is in China’s restructured banking system that had shaken off much of the nonperforming loans (NPLs) during the SOE reform in the late 1990s. trim spending to 70 percent.S. banks. lost heavily. 2008).7 million are reported to have been unable to find a job (Ming Pao [Hong Kong]. China’s labor market is beginning to resemble India’s. be thrifty. derivatives market. In this respect. The main blame for this is thought to be a disconnect between some of China’s higher education programs and market needs. however.38 Business and Technology in China 9. Banks continued with lending. December 15. 1. reducing impact of the global crisis. such as Lehman Brothers. As tens of thousands of university graduates fail to find jobs. 2008). where large numbers of university graduates have been unemployed or underemployed for many years. The Chinese market typically suffered from the latter kinds of impact. December 15. the candor of these admonitions reflects the reality of a serious hardship felt by the common Chinese. the economy as well as social stability may be affected down the line. Pieter Bottelier.6 million university graduates in 2008.12 The indirect impacts. mortgage-backed securities (MBS) or derivatives through bankrupted U.

Source: Geng Zhaojun and Guo Qibang. Devalued Australian dollar. ‘‘A Report of Losses of Chinese Companies during Financial Crisis. but also expanded sharply in December 2008 and January 2009. Chinese newspapers feature pages of debates about how deep China’s recession is.Handling the Global Financial Crisis Table 2. Loss of export contracts in textile products. bank lending in China not only stabilized.08 RMB 15.836 14. It is widely speculated that China’s recession may bottom out in 2009 ahead of the rest of the world.996 $1. Losses of Chinese Banks during the Global Financial Crisis Banks Bank of China Industrial and Commercial Bank of China People’s Construction Bank of China China Life Insurance Company Ping An Securities Ltd 39 Losses (billion) $1.34 $. Country Garden Losses (RMB billion) 1.3 1. Loss of export contracts of toy products.9 2.673 RMB 1. whether a Table 2.7 Source: Geng Zhaojun and Guo Qibang.’’ What this means is that with governmental stimulus money in place.2. ‘‘A Report of Losses of Chinese Companies during Financial Crisis.9 2.1.8 . Fuel futures and currency exchange rates.’’ People in business widely believe that China’s crisis is an ‘‘economic crisis’’ rather than a ‘‘financial crisis. Analysts agree that final outcomes will depend on the efficiency of the recovery measures and transparency with which these measures will be implemented. Losses of Chinese Firms during the Global Financial Crisis Companies Air China Eastern Airlines China Railway Engineering Corporation U-Right International Holdings Ltd He Jun Toy Industry CITIC Pacific Ltd.’’ . Devalued Australian dollar affecting real estate.7 1. Losses due to derivatives in real estate.8 Causes Fuel futures and currency exchange rates.

The premier stresses that the stimulus package is deployed to offset risks. electricity grids. in his press conference held at the Great Hall of the People and attended by hundreds of Chinese and foreign journalists. 34 billion RMB for improving rural infrastructure. railways. such as new highways. and how the government will deal with social unrest if they do take place. About 1 trillion RMB will be used to complete infrastructure and energy-related projects. ecological protection. The premier guarantees that the funds’ use will be traced and monitored with the utmost care. it plans to put in place several welfare benefit plans beyond the 4 trillion RMB stimulus package. Premier Wen Jiabao revealed details of Beijing’s recovery plan. The package of 4 trillion RMB (equivalent to $586 billion) will be dispensed during a two-year period to curb the current crisis. railways. 2009. an increase of retirement payments.40 Business and Technology in China second and a third wave of financial crisis will occur. and bridges. and airports. and major infrastructure constructions.18 trillion RMB (or approximately $169 billion) will come out of the central government’s coffer. and nuclear plants from 2009 to 2010. railroads. more subsidies aimed at increasing farmers’ income. The government’s share will be invested primarily in projects concerning people’s daily life. On March 13. and 13 billion RMB for new medical and education facilities. Out of this money. These plans include a reduction of taxes and fees by more than 600 billion RMB for 2009. About 100 billion RMB had been allocated for the rest of 2008 with 25 billion RMB going into roads. . 10 billion RMB for subsidized housing. while the rest will come from banks and other financial sources. and that dedicated phone lines will be set up for people to report abuse of the stimulus funds. rather than to plug financial holes. technological transformation of existing industries. 1. a performance bonus plan in addition to pay raises for 12 million teachers. and investment of 850 billion RMB within three years to revamp the nation’s health care system. such as highways.14 Premier Wen indicates that because Beijing unfailingly places ensuring social harmony on the very top of its agenda.

sometimes. however. Moreover. the nerve-wracking fact is. says that the main goal here is to ‘‘bao-ba’’ (literally.S. trade policies. if one wants to have water to drink. which is the paucity of social security benefits. the surest way is to dig a well.15 Premier Wen is confident. Allegorically. that the government will spend on building a safety net in addition to not only achieving the 8 percent GDP growth. however. For the Chinese. following the Chinese mentality. that there is room to suspect whether the stimulus plan will produce the kind of multiplier effect expected. but also absorbing the 2008 fiscal deficit of 180 billion RMB. Wen shares the opinion that the most promising way to recover China’s economy is to explore China’s domestic market.’’ These investments play a wide range of functions. an analyst with Jamestown Foundation. that a large asset had been invested in U.Handling the Global Financial Crisis 41 Premier Wen states that offsetting risks alone is not enough and that the economy must be creative in turning crisis into opportunities. With respect to the Chinese government’s Keynesian new deal. Lam writes: [G]iven that unemployment will continue to rise until the rescue plan takes effect some time next year. ‘‘to save the 8 percent’’)—that is. urban as well as rural residents will likely remain frugal. however. to maintain an 8 percent GDP growth in 2009 and 2010 by creating enough domestic demand to balance the slowly disappearing exports to regions such as the United States and the European Union. Willy Lam. . basically leveraging China’s currency values. the preemptive rescue plan does not address a key reason why the Chinese citizens’ savings rate of 46 percent is one of the highest in the world. It was only after the Hu-Wen team had taken office in late 2002 that the central government began putting together a nation-wide health insurance and pensions program. political maneuvers. there remains ample room for deficit spending. Lam believes. treasuries and bonds as China’s ‘‘strategic investments. and. Wen indicates that since the government had issued only 30 billion RMB worth of government bonds in 2008 in comparison to 140 billion RMB worth of bonds issued in 2003. Wen said that.

Premier Wen took the opportunity to express his ‘‘deep concerns’’ and to urge President Obama to ‘‘keep his promise’’ in protecting Chinese assets.4 percent yearon-year. Textiles and automobiles continued to be profitable. International Trade Research Center of the State Council. however. National Macro Economy Research Institute. The reduced export figure. highway.S. electricity and steel production was lower than the same period last year. railway.3 percent year-on-year. caused a great concern to policymakers. I am indeed rather worried.S. deputy bureau chief. The Chinese government and the whole world are waiting to see whether China’s measures will work. believes that much of the improvement in the foreign trade area will be slow due to the international economic environment. China owned $767. people will start buying. making it the largest buyer of U. government treasury bonds. Once again. and airports went up year-on-year. a year-on-year decline of more than 20 percent as of the end of April. On the downside. whereas exports decreased by 14.’’ was clearly heard by the West. that with the global recovery that started taking place in 2009.17 Investments in real estate.42 Business and Technology in China Safeguarding these assets has remained on the mind of Chinese leaders in the economic recession during which time the dollar has devalued against other currencies amid drastic domestic interest rate cuts and during which inflation has remained a threat.16 An uneasy moment occurred during one of the premier’s press conferences when a Wall Street Journal reporter inquired about the above concerns. As of March 2009. Tang believes. the first quarter results showed a .18 For Wang Yiming. reflecting infrastructure spending as part of the stimulus plan. value added of the industrial enterprises above designated size (enterprises with an annual income more than 5 million RMB) was up by 7.4 percent drop over the same period of the previous year. although this represents an 8. debt and surpassing Japan. deputy chairman. The first quarter GDP numbers released by NBS show that from January to April 2009. Tang Guoqiang. His emphatic pitch when stating ‘‘as a matter of fact. the spotlight shines on China’s role as a heavyweight global player.9 billion worth of U.

has suffered much less damage. While former Communist countries have suffered from the global financial crisis as a group. however. which is related to a series of measures taken to stimulate domestic demand. boosting their confidence is key to bringing consumers back to the market. in effect.3 trillion. This means that our economy is at a sticky point. Chinese economists attribute the surge to a recent policy of promoting home appliance sales to rural China. believes that due to the rising consumer confidence.2 trillion in 2008 is already close to Japan’s GDP of $4.8 percent year-on-year. and Romania.7 percent. Huang assures that the government’s stimulus measures indeed have raised consumers’ confidence levels. have an advantage in defending the domestic economy against the global financial crisis? The answers by most Chinese economists are overwhelmingly positive. As he puts it.6 liters and below).Handling the Global Financial Crisis 43 mixture of warm and cold. China’s economy already may have come out of the valley and is picking up steam. Huang Yonghe. which is 3 percent higher than urban regions. says that Chinese consumers need cars and do have money in their pockets. overall sales had increased by 14. rural spending increased by 17. Does China’s ‘‘socialist market economy. than a number of former Communist countries.’’ marked by strong government intervention. For example.22 China’s GDP of $4. Sales of the first quarter surpassed the same quarter last year by 9. These . Hungary. such as the Czech Republic. some bear more losses than others because of their transitional economic structures that make them vulnerable.20 In April 2009.’’19 Car sales during the first quarter was a bright spot. thanks to the stimulus policy that cut sales tax by 50 percent for cars with small-cylinder engines (1. He believes that China’s GDP volume will surpass that of Japan by the end of 2009.21 Li Daokui. chairman of the China Automobile Research Center.4 percent. chairman of the International Economy Research Center at Tsinghua University. Chinese financial experts believe that China. ‘‘We are half happy and half worried. thanks to its current system.

Therefore. and what is seen is only the precursor of more severe economic attacks. U. to believe that Shanghai’s opportunity lies in opening new trade relationships with developing countries. Singapore. backed by a strong foreign exchange reserve. whereas China stands to enjoy opportunities. warns that because the market has little liquidity.23 Not all analysts are optimistic. Sun believes that the stimulus package of . with only ripple effects reaching the financial system. believes that those countries exposed to the subprime mortgage crisis feel the pain. and South Korea) have been on steady decline. In March 2009. valued at nearly $2 trillion. a research scientist of Shanghai Academy of Science. Treasuries and other dollar-denominated bonds make up more than half of those holdings.S. Benefits raked in from economic reforms and openness have led Wang Lengyi. vice president of the College of Economics at Fudan University. Opposite opinions hold that more financial tidal waves are on the way. one of the world’s largest. as its exports to the ‘‘Four Asian Dragons’’ (Hong Kong. Hua Sheng.44 Business and Technology in China countries had developed an overreliance on Western economies. such that their markets lack China’s kind of strong protective mechanisms. China’s financial system remains sound and. which reflects China’s increasing concerns over dollar devaluation and confidence in the country’s growing influence. In his opinion. the PBOC proposed a new international currency reserve system to replace the dollar. Sun Lijian. the successful experience of weathering both the 1997 Asian Financial Crisis and likely the 2008–2009 global financial crisis has made the Chinese more confident of the China Model—and part of that model is not relying on conservativeness but rather in seeking opportunities. the current financial crisis hurts China’s manufacturing firms more directly. Overall. each round of debts due will turn into a new session of financial crisis and result in more bankruptcies and cause more damage to consumer confidence. in particular. Taiwan. economist and president of Yanjing Overseas Chinese University.

whether the patient’s body is capable of generating its own blood will be the determining factor. this causes ‘‘triangle debt’’ to rise sharply. whereby the direct injection of Troubled Asset Relief Program (TARP) funds into larger banks or even the temporary takeover by the government of insolvent banks could save the situation. Because such attacks come from outside. The government could not possibly bail out troubled manufacturers who exist as a function of the market demand for their products. Banks will tighten credit and adopt conservative lending practices. High reliance on exports will result in high unemployment. As a result of reduced consumption. 2. secondary storms will strike manufacture-oriented developing countries like China. receivables decline and warehouses are stuffed with unsold goods.24 The multiple-wave theory is explained more systematically by Chen Jian.Handling the Global Financial Crisis 45 4 trillion RMB serves only as a blood transfusion to the patient. 4. Such practices often require borrower to pay back the dues before new loans are advanced. 5. and the impact will be greater than the current losses in foreign trade–related areas alone. Moreover. Sun projects that the recovery of China’s economy will be in a ‘‘W’’ shape for quite some time until a new economic structure emerges. who believes that. stocks and housing markets collapse which in turn seriously constrains domestic demand. particularly in coastal areas. Chen’s scenario would be a much more intensive version of what has happened already to coastal regions like the Zhujiang River Delta Region and the Yangtze River Delta Region. 3. it will be almost impossible for the government to adopt a similar strategy to save a manufacturing crisis. Chen foresees the potential secondary storms to develop in a six-step sequence: 1. unlike dealing with the financial crisis. As a result of lowered confidence. . For example. damage to these countries will be more difficult to control due to much wider and diverse areas of impact. unlike the first wave of a financial storm that attacks from within the financial systems of industrial countries. an influential economist of Shanghai. Sharp decline in exports causes rise in bad debt in international trade.

the real solution. However. and social unrest arises as a consequence. and the ability of implementation of the stimulus plan. then.26 Conversely. Most analysts believe that the worst is behind.27 . This reality has been obvious to the world and to the Chinese since early years of the reform. may indeed work. is in developing China’s domestic market. a real determination to develop the domestic market seems to finally have been put into practice only recently. which drive their economies to rely on exports. Per CCTV’s financial reporting. Increase in nonperforming loans will result in lowered trust by customers of the banking system. is a minority opinion. the ones that had rallied the Chinese people behind the government and the Communist Party during Mao’s revolution. Additionally. Chen urges the government to maintain transparency and to be highly vigilant of precursors of such a storm on the financial horizon. as both Premier Wen Jiabao and President Barack Obama believe. however. the inspiration comes from the fact that export demand has collapsed. Tao Wang. Unlike Japan. the real estate market has resumed its previous rapid pace. As a result. the phenomenon of ‘‘run on the bank’’ occurs. As a matter of prevention.46 Business and Technology in China 6. although the two seem unrelated. and other Asian countries with limited domestic markets. South Korea. Chen recommends promoting the traditional-style education with morality and patriotism as core themes. Interestingly. If confidence is key to rejuvenating spending. China has a huge domestic market yet to open. The multiple-wave scenario. the terms of fiscal policies and credit (bank lending). believes that rebound will not come from external situations improving. head of research at UBS Securities in China. but rather from the Chinese government’s stimulus package. mass ideological campaigns.25 One must not underestimate the potential power of mass ideological movement in dealing with financial crisis. as most economists agree. cool-minded economists urge that attention should be paid to economic performance in 2009 as a whole and in the few years ahead. In the long run.

Few would chant for the double-digit perspective. Many question whether China will ever be able to resume its double-digit growth. it may take a long time to depart from the high growth pattern because of employment pressure among other factors. He indicates that commercial real estate and high-end residential housing are overbuilt. On the Chinese side. a lower external surplus.’’ She believes that China’s sustainable growth will depend on it. If they (the Chinese government) do the right things. when a system is put in place to provide health insurance. Here. a higher proportion of GDP dependent on consumer spending. and that China needs to build low-cost housing with the government’s stimulus money.Handling the Global Financial Crisis 47 What then is essential to developing the domestic market? What would be the magical button to push such that spending will go up.28 The stimulus policies seem to suggest that the Chinese government shares this perspective. ‘‘safeguarding 8 percent’’ has been the open slogan. Professor Bottelier does not expect China to go back to the turbo growth rates of recent years. Thus. and lower overall investment and savings rates. However. This low-cost housing will be consumed by decades of continued urbanization ahead. the Chinese consumers will change their habit of saving 50 percent of earnings in the bank. China could come out of this crisis stronger than when it entered it. with a more balanced economy. in particular. opinions on both sides seem to converge. and other kinds of insurance that are essential to people’s livelihood. the magical button is named the ‘‘safety net. thus it . and a vibrant new production phase will arise? According to Tao Wang. China is faced with a different kind of transition—from focus on investment to focus on consumption. Professor Bottelier of Johns Hopkins University drives this opinion further by saying. as the bubbles in the property sector may take a long time to diffuse. social security.’’ When the quality of life improves. That would be good for China and the rest of the world. Wang calls this transition ‘‘forced rebalancing.

32 In fact. Whether China could quickly stimulate its domestic market will be key to its ability to sustain recovery and growth.30 Tao Wang of UBS Securities believes that China is not likely to resume double-digit growth at least before the United States and other Western economies recover from the global financial crisis. and 10. . 9. dollar have been tracking an unfavorable trend. representing an 8. Chinese exports as well as export-related jobs are faced with higher pressure.1.7 percent increase over 2008. The 2009 GDP figure. Ma urged a close watch on the Consumer Price Index (CPI) figure which rose toward December 2009. was interpreted broadly as a precursor of a credit-tightening policy and caused sharp downward swings in stock markets worldwide. In a sense.29 David Dollar. director for China and Mongolia of the World Bank.31 Ma Jiantang attributed the progress of recovery to people’s confidence in the system.9.3 billion RMB. CPI is used to gauge inflation and policy changes. a prolonged recovery in the United States and some European economies may be a direct and immediate test to the Chinese economy. Recent reports indicate that since the beginning of May 2009 exchange rates between RMB and the U. however.535.82 yuan to the dollar. it determines whether China could turn crisis into opportunities. She believes that the double-digit growth in the past was more of an exception than a trend. The preliminary 2009 GDP figure announced on January 21. As a result. 7. and that an 8–9 percent growth would be healthy. Quarterly growth rates were 6.S. by NBS bureau chief Ma Jiantang is 33.48 Business and Technology in China will provide a way to sustain economic growth.7 percent respectively.2. foresees a growth rate of 7 percent following the pattern of most mediumincome countries. However. 2010. with RMB dropping to 6.

for example. and runaway urbanization are understood as a triple threat to the harmonious development today. As a result. Beijing had invested $10 billion since 2001—when the city was named host of the Olympics—to improve air quality. becoming the ‘‘manufacturing center of the world’’ has been a costly deal. The good thing is. the growth has become a double-edged sword. POLLUTION In a sense.Chapter 3 Growing Pains For three decades China has been developing its economy without paying due attention to damages to the environment. it has pulled tens of millions of people out of poverty in short order. the issue is a more complex one. Thus. it has produced environmental consequences that nearly offset the value of growth in real terms. They are found to be closely related to corruption and to the fast-paced urbanization that often spins out of control. The ramp up in laws and regulations to protect the environment in recent years has yet to show results. However. including relocating and temporarily shutting down factories. . To prepare for the 2008 Summer Olympics. pollution. On the one hand. Environmental challenges represent only the tip of the iceberg. corruption. the government has finally come to the understanding that China’s sustainable growth depends in large part on effective control of the damages to the environment. on the other hand.

Beijing had promised to clear the air by the time of the Games’ start. with 1 being ‘‘excellent’’) for 13 out of 17 days.2 In deciding Beijing’s qualifications for hosting the Games. but also the discipline to achieve its goals. About a week before August 8. 2008. According to the 2006 survey conducted by the Bureau of State Environmental Protection (upgraded to the Ministry of Environmental Protection in 2009).3 percent belonged to ‘‘level I’’ (‘‘good air quality’’). The survey showed that out of 559 cities. and the rest within standard range. the acceptable level on a scale of 1–500. with 500 being the worst air quality.8 percent belonged . which approached the critical number 101.4 Beijing’s residents reported that for decades they had not seen a deep blue sky over the yellow-glazed palace tiles. the odd-even license plate rotation system that restricted the number of cars on the road must have worked magically during the last push. and the tens of thousands of factories within three to four hundred kilometers feeding a variety of particles to the wind were clearly incompatible with the world’s most celebrated athletic event that promotes health. only 4. at the Games’ opening ceremony. a media consultant for the Beijing Organizing Committee for the Olympic Games. the city’s freeways crowded with slow-moving traffic.50 Business and Technology in China according to Jeff Ruffolo. Beijing’s smog-covered sky.1 Other reports put the spending figure at $20 billion. the air quality reached the required standard with ‘‘Grade 1’’ air quality (on a scale of 1–50.3 During the days of the Olympics. The promise was indeed fulfilled. Implemented on July 20.5 the urban air quality was far below standard in that the air was filled with a dangerous level of particles from construction and industrial emissions. 28. August 8–24. its level of pollution was a major negative factor. they must be convinced too that the show signifies that China not only has determination. For people who watched the Olympics’ opening ceremony. air quality readings indicated 103 to 109. which were major sources of pollutants. Beijing showed to the world that it has the capability of controlling its air quality and will be able to solve other environmental problems effectively.

Progress was . Ecological habitats were destroyed because of routine use of fertilizers and poisonous pesticides. the Great Leap Forward (1958) and the Great Cultural Revolution (1966–1976) wreacked havoc on China’s resources and ecology. but only 7 percent of the world’s arable land. The country’s two longest rivers were heavily polluted: 12 percent of the water from the Yangtze River was rated ‘‘Grade V’’ or below. however. Today. During the 1990s. the population reached the 1 billion mark. As a result. uncontrolled population growth had taken its toll on the environment.’’ Problems such as these were not generated overnight. factories and workers followed production quotas and disregarded everything else.’’ Oddly enough.1 percent belonged to ‘‘moderate air quality.6 In addition to the ideological impact. awareness of environmental protection was next to nonexistent. The process left one-third of the land devastated by soil erosion. which triggered the family planning campaign launched by the government with the most stringent efforts in enforcement.’’ According to the same survey.Growing Pains 51 to ‘‘level III’’ (‘‘bad air quality’’). peasants were called on to claim land from mountains and forests. and the newly added population would consume 45 million tons of grain each year. water pollution also painted a gloomy picture: 28 percent of China’s freshwater was rated ‘‘Grade V’’ (‘‘No direct human use. Until China joined the United Nation in 1973. and 10 percent was rated as ‘‘Below Grade V’’ (‘‘Not appropriate for human use’’). the remaining 9. appropriate for use in agriculture’’). In 1980.1 percent of air was ranked ‘‘below level III. During the prereform era. the population was still growing at 125 million per year. and 58. China accounts for approximately 22 percent of the world’s population. The government had encouraged a large population as a strategy to boost its labor force and military capacity. forest coverage was fast shrinking and went as low as half of the world’s average. environmental concerns were dismissed as capitalism. To achieve higher production. As a result. Agricultural policies at the time stressed production quotas. and 25 percent of the Yellow River’s water was rated as ‘‘Grade V.

have been issued so far.52 Business and Technology in China achieved soon. in this case. Beijing began to collect pollution treatment fees according to automobile emission levels. farmers piped heavily polluted Ji-River water into 3. State 5 has been drafted and is said to be forthcoming. Admittedly. the Tianjin Chemical Plant was identified as the polluter. and 4. For example. nitrogen dioxide (NO2). although much of the improvement was prompted by disasters such as the one that happened in 1974 in Tianjin. 90 percent of taxi cabs and 97 percent of city buses qualified for State 3. one of the four provincial-level municipalities. Damage to marine ecology was never known. most of the similar events that happened in places of lesser political and economic importance were ignored.7 In the same year. which are defined in terms of levels of emission quantity and proportion of carbon dioxide (CO2). This is one of the cases in which cultural exposure and the consequences of pollution generated new concepts. In that event. In 2009. with State 4 being the highest standard.000 city transportation vehicles already used natural gas. The chemical plant was ordered to build more than 50 water treatment facilities. Beijing held the first national conference on environmental protection during which time the environmental Protection Leading Group of the State Council was established to coordinate various ministries and government organizations to promote environmental education and to implement a series of remedial measures.000 acres of farmlands. The State Council was alerted. Not a single stalk of wheat was harvested that year. 3. China has made tremendous progress in establishing a regulatory framework to address rampant environmental problems. Since the economic reform started. Such efforts have increased most obviously during the past decade. and ozone gas (O3). Four standards of automobile emission.8 As of early 2009. 2. awareness of environmental protection. Checkpoints are set up on 230 city streets to detect substandard . and 4. and the remaining water from the Ji-River canal was diverted into the sea. popularly known as State Number 1. Beijing has implemented the State Automobile Emission Standards.

vehicles with yellow stickers. vibration and electromagnetic radiation generated in the course of production. . Article 24 stipulates. China surpassed the United States in 2009 to become the world’s biggest buyer of wind turbines. waste water. the corporate average goal announced by President Obama is 35. Starting January 1. and sport utility vehicles.’’9 According to the New York Times. Environmental Protection Law. waste residues.2 miles a gallon to beat the current average of 35.Growing Pains 53 vehicles. construction or other activities.10 The following is a list of laws enacted since 1989 with a brief outline. Moreover. those below the State 2 standard. Beijing has launched a clean air campaign known as ‘‘Drive One Day Less (per week). dust. dedicated telephone numbers for reporting illegal practices are also announced on billboards. malodorous gases. the law urges individuals.8 miles a gallon for new cars. Additionally. noise. Units that cause environmental pollution and other public hazards shall incorporate the work of environmental protection into their plans and establish a responsibility system for environmental protection. Incentives are distributed in the forms of rewards and tax benefits in amounts of 500 RMB to 22. The law stresses integration of environmental planning with production planning. radioactive substances. government organizations at all levels. minivans. were not permitted to operate within the 5th Beltway (out of a total of six beltways. with the 6th Beltway being the outermost).5 miles per gallon by 2016. China’s automakers will be required to reach a corporate average of 42. For example. the Beijing Municipal Government has set aside 1 billion RMB ($145 million) in incentives to encourage upgrades to Green Sticker vehicles (State 2 and above). By comparison.000 RMB. 2009. and must adopt effective measures to prevent and control pollution and any harms caused to the environment by waste gas. 198911 In 47 articles. and production units to dutifully protect the environment by following the standards set by the State Council.

Article 18 stipulates that manufacturers and vendors must recuperate packaging materials once used. Extensive punitive measures are listed in Articles 67–87. (Article 17) In particular. store. Its framework for punitive measures became standard in newer environmental laws. utilize or treat solid waste shall take measures to prevent the scattering. Strict restrictions are placed on automobiles’ exhaust . or other measures to prevent pollution of the environment. this is one of the earlier laws. only coal with low-sulfur discharge is permitted. 1995 (amended 2005)12 The 2005 amendment includes 95 clauses. 1995 (amended 2000)13 This law particularly stresses atmospheric protection in urban areas. or discard or litter solid waste. Much stress is put on eliminating one of the most traditional and yet increasingly serious problems—the littering of packaging materials. then. and if coal must be used. the law stipulates that substandard technologies must not be used or imported. without authorization. its coverage is nevertheless comprehensive. Moreover. Articles 59 and 60 require any transfer of hazardous materials to be strictly controlled. Law on Prevention and Control of Atmospheric Pollution. with respect to levels and categories of perpetration. Law on Prevention and Control of Environmental Pollution by Solid Waste. one feature of this law is to call on every citizen to adopt a lifestyle that generates minimal solid waste. In addition to preventive and punitive measures. transport. running off and spilling of solid waste. the law is careful enough to include a clause on recyclers: Units and individuals that collect.54 Business and Technology in China Although. they shall not dump or pile up. An important dimension of this law is that it set strict measures to prevent polluting companies from transferring their operations to remote and poor regions. The law encourages use of clean fuel for home use.

there are obvious loopholes with respect to enforcement procedures. particularly those in scenic spots and cultural sites. for example. ensuring effective utilization of water resources. lead. cyanide. such as oil. However. usually above the county level. Article 14 does allow enterprises to discharge pollutants into water bodies as long as they register and report to local government. protecting and improving the environment. When decisions are left with local governments that may not have relevant technology. sewage.’’ Law on Prevention and Control of Water Pollution. and to provide protection and maintenance for these sites. chromium.Growing Pains 55 emissions. sold or imported. 199614 This law was enacted for the purposes of preventing water pollution. and yellow phosphorus into surface water. Specific measures for supervision and management shall be formulated by the State Council. some of which may be intentional. effective environmental protection becomes questionable. and applying science and technology in water treatment. For example. . Article 3 stipulates. Article 37 stipulates. and when permission of discharge is fee-based. Like many early laws there is ambiguity. Law on Prevention and Control of Pollution from Environmental Noise. 199715 This law was enacted to control noise pollution that may cause damage to people’s health. arsenic. safeguarding human health. mercury. to delineate protection zones. It carries stipulations that allow qualifying government bodies. or pay a fee (Article 15). The law forbids discharging a number of common pollutants. Construction projects may emit noises with permission or on a fee basis. ‘‘Automobiles that discharge pollutants in excess of the national discharge standards shall not be permitted to be manufactured. in favor of urban construction needs. Individuals who suffer from damages of polluted water have the right to file lawsuits against the polluting party. cadmium.

Frameworks for financial incentives.’’ Here. Additionally. China now considers energy conservation a fundamental national strategy. 1998 (amended 2008)16 To crack down on rampant waste in energy consumption. The amended law also requires governments at all levels to increase investment in public transportation infrastructure. such as funds to encourage renewable energy development. 200617 To increase the share of renewable energy. The law requires power grid operators to purchase resources from registered renewable energy producers.56 Business and Technology in China ‘‘This Law shall not apply to prevention and control of noise hazards incurred in the course of production or business operation one is engaged in. Energy Conservation Law. the law requires local governments to set up their own energy regulations based on geographic situations. NDRC will adjust the buying price as . are also offered. The government will be cutting down on energy consumption per unit of gross domestic product by 20 percent by 2010. from 3 percent in 2003 to 10 percent by 2020. Renewable Energy Law. and to raise the standards of saving wherever possible. the transportation sector. and government buildings to cut energy consumption. the Renewable Energy Law imposes a number of requirements. improve public transportation services. which includes solar. a regulatory department of the State Council. the logic of the law is questionable. and encourage people to use public transportation. The law provides pricing advantages to renewable energy companies by setting national standards through the National Development and Reform Commission (NDRC). and marine energies. The 2008 amendment shows tougher requirements on energy conservation. following the spirit of Energy Conservation Law. discounts and tax preferences for these projects. leaving loopholes for companies to avoid punishment or restrictions by getting unqualified projects underway anyhow. wind. hydraulic. It requires construction projects. geothermal.

including steel and nonferrous metal production. and some household electronic products. 200819 The Circular Economy Law was passed on August 29. Circular Economy Law. NDRC also will set a renewable energy plan for the entire country. must be closely monitored. and renewable energy fuels. construction. computer products. and processes that are safe for the environment and are in compliance with national or industrial standards for the prevention and control of pollution. 2009. NDRC will examine what would be entailed to purchase and use solar photovoltaics (PV). The law applies to both imports and domestic products. The law requires packaging materials to be nontoxic and easily recyclable. primarily by averaging the costs across the total number of buyers. including specific renewable energy targets that act as a framework for implementation of the law. power generation. whereby provincial governments and planning agencies will then develop specific implementation plans and local goals. and whether they can be recycled. by the National People’s Congress and went into effect on January 1. electronic communications equipment. Recycling. technologies. Administrative Measures on the Control of Pollution Caused by Electronic Information Products. The government will publish an annual catalog listing banned or restricted toxic and harmful substances involved in the production of electronic information products. Products must include labels that indicate the names and contents of hazardous and toxic chemicals. solar water heating. broadcast and television equipment. and printing facilities. industries and factories that may emit high-pollution emissions. According to this law. The law requires products marketed in China to use materials. . oil refineries.Growing Pains 57 necessary. 2008. The law lists penalties for companies and businesses that do not follow related regulations and policies. 200718 The products covered by this law include electronic radar equipment.

the law encourages local governments to fund methane generating projects. more than anything else. and given that at least for the time being these agencies tend to be poorly trained and prone to corruption. and install water-saving equipment in new buildings and farming projects. Because of the single-party ruling system. In general. a clean and healthy environment can be achieved only gradually. technology. corruption provokes popular discontent and threatens social stability. strengthen regulation systems. at times. from the 1989 Environmental Protection Law to the 2008 Circular Law. However.58 Business and Technology in China energy-saving. Traditional oil-fired fuel generators and boilers must be converted to clean energy consumption generators using natural gas or alternative fuels instead of petroleum-based fuel. Industrial manufacturers as well as farmers must adopt water-saving rules and water-saving technologies. local governments are bound to balance between environmental protection and job creation. Given these circumstances. New laws and regulations are more refined and more comprehensive. Additionally. law enforcement remains a weak link. Government buildings are required to maximally adopt renewable energy such as solar and geothermal energies for heating purposes. Hence. CORRUPTION Curbing corruption is of top importance to the Chinese government. draft supplemental procedures. Tax incentives are granted to enterprises that participate in these projects by providing equipment. such as those that use livestock waste and other farming by-products. or direct investment. coverage in protection of the environment through legislative means has gradually broadened. In agriculture. and waste-reutilization projects must meet strict standards. As the process of globalization . The law requires coal-using enterprises to recycle waste products. because China relies on governments above the county level to monitor and. corruption cases generate direct consequences on the ruling party’s legitimacy.

20 In the Chinese system. professor at Beijing Normal University. in fact. efforts are made by experts who are particularly concerned with morality of the society. Typically. The central theme is to help people tame materialistic urges. Yan Sun. points out that. and filial piety. such as drug use. generosity. They examine people’s behavior from the perspective of Confucian values. whether it is Bernie Madoff’s Ponzi scheme or Eliot Spitzer’s scandal. that for every type of corruption found in the West. such as respect. to interpret the traditional ConfucianDaoist ethics to address the spiritual needs of an industrial and globalized society. two factors have provided hotbeds for corruption: (1) the weak legal environment versus a strong administrative power in which law enforcement lacks effectiveness because of the absence of an independent judiciary. a professor of political science at City University of New York. and (2) the transitional economic system in which private and public sectors coexist makes power-for-money swap a typical category of economic crimes. and so on.Growing Pains 59 advances. like Yu Dan. In the latter case. responsibility. the spiritual vacuum left by the collapse of traditional communism is yet to be filled. laying any ideological groundwork is a long-term process. prostitution. pragmatism. In the meantime. and nationalism on the ideological background. the CCP is drawing from Confucianism such concepts as harmony. One could be certain. corruption is endemic in all post-communist societies. however. greed is gaining ground at all levels. ‘‘Serve the people . and China is no exception. for example. Not surprisingly. CCP members are called on to lead the communist cause without seeking self-interests. Western ideology (such as ideals of individual freedom and social democracy). serving by example. the Chinese society bears more symptoms of Western societies. Civil Service Corruption Traditionally. one witnesses a mixture of traditional ethics. In addition. and a variety of types of corruption and fraud that were unseen during the prereform time. forgiveness. one may find its Chinese match.

but rather it uses harsher punishment each time crimes have been committed and damages done. points out.’’21 Except for bonuses in SOEs and government offices. their words are final decisions that directly affect people’s lives and the economy. they serve according to democratic procedures. making it possible for higher-level officials. ‘‘those who possess administrative power possess money. farmlands are lost to real estate developers.’’ Mao used to admonish. As a result. During the past 30 years of reform. Cases such as these are not uncommon. author of Anti-Corruption—A War between Rule of Law and Rule of Man. and so on. public officials— who nonetheless harbor dreams of material wealth—do not have a venue to personal wealth. As Wang Lin. including rivers. and set up zoning codes. Despite this outcome.60 Business and Technology in China heart and soul. This gives corrupt officials convenient access. government officials who deploy these resources on behalf of the government have a unique privilege. land. This is a remarkable transitional dilemma. Article 53. In a transitional society. The law of Public Service (1984). the Chinese government of absolute power under Chairman Mao’s control has been reformed into a government under the law. the system suffers an unavoidable deficiency. and even women.’’22 Like elsewhere. and the CCP’s collective leadership. On the surface. The reality is that because people’s servants may . impose fines. Rules and regulations are set by administrative bureaus. to become local lords. The root of the problem exists in the ownership structure. probably all the more so in China. Under such circumstances. profit-seeking remains embarrassing or confusing to a good number of party leaders. stipulates that public service personnel are prohibited from ‘‘engaging or participating in profit-making activities. The party does not seem to have a particularly effective way to stop power-money trade. mostly party members. mines. Because the government owns all natural resources. the administrative power nevertheless is uniquely strong. wealth. or taking a part time position in a profit-making firm. power and money make the most dangerous mix. in reality. and polluting factories may never get shut down. forests. They are at liberty to levy fees.

or any business trying to grab a project or loan. There have been a number of cases of executives at smaller SOEs who strip their firms of substantial assets to engage in stock flipping. SOEs were forced to restructure and to compete in the market. the more campaigns are launched. dubious construction contractors. the economic loss between 1999 and 2001 due to corruption mounted to between 14. revealed that government officials were shareholders of the real estate development. corruptive forces find every opportunity to subjugate their targets to achieve their goals. In fact. non-state-owned small businesses that exist outside central plans. Favor seekers often exceed small businesses to include ambitious developers. in the postreform era was that of Chen Xitong. After 1992.4 percent and 14. On the demand side. profiteering by administrative leaders in conjunction with interest groups constantly plagues the society.24 As such. and more local power was accumulated at the local level. land speculators.Growing Pains 61 not always have sufficient inner strength to refrain from helping themselves. for example. organized smugglers.’’ seem to have only slowed down the crimes. for example. Obviously. they will do it again when the time is right. As Professor Yan Sun indicates. even losses of lives. public office buyers. such as the ‘‘Strike Hard Campaigns. weaknesses of public ownership give rise to a rampant black market. The situation is often increasingly complex. struggling SOEs.9 percent of the GDP. An investigation of a residential construction accident in Shanghai in July 2009. lack access to various material allocations and financial means. it is not uncommon for these businesses to offer inducements to party officials. this situation made the scale of corruption widen beyond government officials. The political and economic reforms in the new era are geared toward uprooting these problems by changing the rules of the game.23 Anticorruption campaigns. local agencies have also been found to hike fees. Conversely.25 One of the major and earliest exposed high-level corruption cases. changes of this kind do not happen overnight. the more sophisticated and frightening the cases become. According to Hu Angang’s estimate. As such. causing heavy economic losses. despite harsher punishment. a former .

This becomes difficult when police officers or their cronies are the perpetrators. 2. As a . were jailed for banking fraud.29 These high-level corruption cases suggest that the party is limited as to what it can do to maintain healthy government— primarily by practicing self-policing. former president of Bank of China and alternate member of the Central Committee.59 million RMB (more than $100 million) and gifts in return for favors for real estate developers. was sentenced to death for taking $5 million in bribes.000 in exchange for approving drug licenses. 2008. Liu was elected to deputy mayor of Beijing in 1999 and was dismissed from the Communist Party in 2006. and Zhu Xiaohua.26 Two years after Chen’s sentencing. a former vice chairman of the National People’s Congress. was sentenced to death after pleading guilty to accepting bribes worth $850. Liu was charged for accepting bribes totaling about 696. While Cheng’s was one of the highest-profile cases in the country’s marathon anticorruption drive. committed suicide while being investigated for illegal foreign currency trade.62 Business and Technology in China mayor of Beijing.4 million RMB were used to purchase services. Cheng Kejie. Li Fuxiang. 35 million RMB were used to build villas. During his term. vice governor of the People’s Bank of China. Chen was sentenced to prison for 16 years for bribery and embezzlement of state funds. director of China’s State Administration of Foreign Exchange. He was handed a death sentence with a two-year reprieve (equivalent to life in prison) on October 18.27 around the same time. 2007. In 1998. China’s food and drug exports were suspected to have been tainted with poisonous chemicals. former deputy mayor of Beijing. three smaller cases were no less shocking. Wang Xuebing. Zheng Xiuyu. The lighter sentence was due to Liu’s cooperation in recovering most of the bribes paid to him and his mistress. Among the spending figures.28 A more recent court sentence was handed to Liu Zhihua. and more than 1 million RMB was spent on food. On May 29. former chief of China Food and Drug Unit. The money was used to cover his extravagant lifestyle and that of his cronies between 1991 and 1994 during which time Chen headed Beijing’s municipal administration.

have been found trading farmers’ land. China’s civil service system must reform such that the power-for-money swap is no longer convenient or worthwhile to the perpetrator. and the cycle continues. local officials now enjoy discretion over quality and quantity of services they provide: They can arbitrarily decide whom to award land. shares. and services and on what terms. the Chinese government has made it routine to set up . it is popular opinion. because corrupting parties are creative in getting what they want. however.31 While this does not mean that all party officials fall when bribes escalate. Thousands of farmers have lost their land to local officials who resold to developers. democratization. a typical behavioral pattern is that the perpetrators hide behind exemplary performance until they climb to a higher position to trade power for wealth. The continued introduction of market mechanism.30 In practice. that even good officials have trouble avoiding traps. Therefore. Already. Local officials nearest the grassroots level. involving capital goods rather than manufactured goods. with deepening decentralization. unlike the central planning era. As mentioned earlier. This entails great waste and burden on the economy. for example. taking advantage of the land rights system according to which China’s land ownership is actually lease-based with the state as ultimate owner. according to Professor Yan Sun who names the phenomenon ‘‘competitive corruption’’ where. He was remembered as a dedicated hard worker and an exemplary party member.Growing Pains 63 result. The former Beijing mayor worked his way up from an ordinary coal miner. or how much in fees and levies to demand or absolve. projects. the payoffs for officials and the cost for businesses escalate as well. or contracts and at what prices. Such is the case of Liu Zhihua. and supervision by news media is likely to make this happen. more high-level corruption is followed by even harsher punishment. whom to grant loans. Because the stakes are so much larger now. provincial-level governments have acquired more control over resources and corruption has become more widespread as well.

College or equivalent education is now a standard requirement. the Chinese government is pursuing structural changes to provide a systemic immunity for government organs at all levels.’’ in President Hu Jintao’s words. In fact.500 positions and marking a 21 percent increase in test takers over 2007. and investment in scientific and technological development. To improve government transparency. as it was in the 1980s. but rather on a long list of considerations. family planning. Green GDP or ‘‘smart growth. in the 21st century. per capita income. More important. Ministry of Foreign Affairs. employment. worker safety.32 Similarly. they have become more meritocratic. it marks a significant departure from the traditional political loyaltybased evaluation. including fiscal revenue. has become an evaluation standard. environmental protection. conservation of land and natural resources. Overall. In addition to the CPS. In 2008. CCP membership is still important—as most senior-level officials. about 775. education. One such effort is seen in recruitment and promotion. whether in municipal. or experience in two posts at a level of leadership immediately lower. The ministries with the largest number of applicants include the Ministry of Commerce. are party members. These procedures used to be guanxi-based (connections). and the NDRC. social welfare. provincial. or central government. competing for roughly 13.000 people took the exam. China reinstated the civil service examination for all junior positions in 1993. One noticeable change is in the knowledge structure of officialdom: more positions are filled by collegeeducated applicants.64 Business and Technology in China report hotlines. promotion is based more on evaluations and sometimes on public opinion polls. inland . it appears that the competitive review process is different. That said. specified training programs at the Central Party School (CPS). Cadres also receive on-the-job training. Evaluation of organizations and firms is no longer based on productivity alone. Candidates for leadership posts at the county-chief level or higher must meet standardized minimum requirements—such as a bachelor’s degree.

unsatisfied with the thin profit in tailoring. however. a tailor of a small town located in the Yangtze River Delta Region. however. the government sends approximately 40.34 Ultimately. At the current stage. From 1999 to 2001. the Ministry of Commerce (MOFCOM) lost 72.Growing Pains 65 cadres are sent to coastal regions to attend workshops. The cost of pharmaceutical grade syrup was $1. more than 90 percent of cadres at the ministerial level have received some training abroad. thus. According to one report.000 officials for training each year to European countries and the United States. and society’s rising level of greed. In 2007. the reform will have to put administration essentially under the supervision of law and media. much more expensive than the industrial grade which is not for human consumption. The case of cough syrup serves as an example.815 a ton at the time. Wang Guiping.35 Grassroots-Level Corruption Grassroots-level corruption reflects weakness in law enforcement. the government finds itself in market competition in hiring. professionalization is a rather uneven process with remote and underdeveloped regions lagging far behind.8 percent of all new recruits within the first three years of employment. decided to sell chemicals—in this case. he went for something he could buy for about 60 percent less than the price of the . counterfeit glycerin of industrial grade—to pharmaceutical manufacturers. Additionally.33 These changes contribute to healthy government by raising its level of professionalism. The 2006 Civil Service Law is believed to have addressed this problem by allowing more flexibility in salary levels. to maximize profit. ranging from yearlong programs to weekly training at Harvard University’s prestigious John F. ineffective regulatory systems. Also. making administrators answer to people’s interest rather than serving themselves and their bosses. Proposals included introducing competition in the administrative system and separating the party’s role from the administration. Yet. Kennedy School of Government.

with a ninth-grade education. many more had died.000 children were poisoned after consuming tainted formula or milk. wood adhesives.S.36 The case reveals. fabric coatings. located the cheaper chemical with similar sweet taste in a chemistry book. Profit was all he cared about. which is used in antifreeze and is deadly to humans. and flame retardants. Melamine was found in a . in addition to a weak food and drug regulatory capability in China. and blood vessel disease injections. in milk to ‘‘raise’’ its protein level and fool quality checks. sales companies added their might in pushing the product. arthritis treatments. The quality control chief of the Bureau of Drug Regulation. Before Wang’s case was forgotten. and as an additive to pain relievers. According to an investigative report by the New York Times. and shipped the toxic product to Qiqihar Pharmaceutical who used it in five drug products: ampoules of Amillarisin A. Melamine is commonly used in coatings. Wang’s sales talent and forgery skills worked. also known as melamine.66 Business and Technology in China pharmaceutical grade glycerin—diethylene glycol. It was estimated that approximately 53. resigned as a result. and ignorance of some 21st-century entrepreneurs. Food and Drug Administration (FDA). Some developed kidney failure and four died. One of southern China’s most well-known hospitals in Guangzhou administered Amillarisin A in April 2006. Wang. immorality. a special enema fluid for children that was sweetened with this chemical. and some may never be identified because the deaths occurred in remote and less populated locations. a medication for gall bladder disease. some of whom were in advanced stages of these diseases. the astonishing level of money craze. laminates. ceiling tiles. fooled pharmaceutical manufacturers. Counterfeiting seems to be a major enemy faced by the Chinese law enforcement. He forged licenses and clinical test results. died within weeks. This case was known as the Scandal of Sanlu Milk Powder. a food poisoning case surfaced in September 2008. Once on the market. equivalent to the U. At least 18 people who were treated with the medicine.37 The manufacturer was found mixing tripolycyanamide. When Wang was finally caught and put in jail.

during his visit to Beijing’s hospitals. Manufacturers and owners of dairy companies should show more morality and social responsibility in these cases. the first dairy company implicated in a scandal that engulfed much of the Chinese dairy industry. Melamine was sold and bought openly as a ‘‘protein booster. so we have to create strict law and legislation.S.000 toys made in China. Two men who made and sold milk tainted with melamine were sentenced to death. former head of Sanlu. They are heartless. a rice shortage had resulted in further squeezes of feed grains production. reflecting extended damage beyond China’s border. The now-collapsed Sanlu was fined 50 million RMB. The technology is said to have been upgraded since the milk scandal. I’m sorry. Their scrutiny implicates the government’s shortfalls. Premier Wen Jiabao. nitrogen is detected as an indicator for protein levels. was quoted as saying. Meanwhile. This episode is one of a string of events of tainted food products. corn prices had risen sharply as a result of the hype of alternative energy. was sent to prison for life and fined 20 million RMB (approximately 3 million in U.40 Thus. In the qualitycheck process. for example. many pets in the United States became ill after eating melamine-tainted pet food. were recalled in the United States over concerns of excessive amounts of lead paint.38 Tian Wenhua.’’ because of its nitrogen content.39 The punishment did not bring closure for the many critics who dug deeper into the facets of a larger situation that keeps generating similar events. What we need to do now is to ensure that nothing like this happens in the future. which involves producing ethanol from corn. one costly lesson that the Chinese government learned is the . dollars). melamine had been in use for a few years. In 2007. not only in dairy products. Some 69. many believe that Chinese cow farmers had been struggling to cope with rising costs of animal feed. Since 2006.Growing Pains 67 number of overseas markets in Asia. but in all foods. however. Although the government directed its spearhead toward the milk industry.

which most Chinese conceive as a shortcut to achieve success. The way guanxi (connections) is maintained is a typical example. Businesses are maintained within the family circle and the privilege of business partnership is shared only with members of the family or connections. such as South Korea. the Sanlu case was a lesson about how to manage the infinitely complicated market economy. they customarily are classified into the category of cultural practice. it is all cultural difference.’’ says Ye Sheng. Guanxi derives from the tradition of the family-based and Confucianism-oriented society. making the Chinese guanxi closely resemble corruption. could occasionally cross the line. One encounters its various forms wherever Confucian culture reaches. the Chinese government decided to subsidize dairy farmers. This tradition is by no means unique to China.41 Gray Areas Some practices may not be straightforward to judge. ‘‘In China people make friends before they do business as interpersonal relationships are an important part of China’s traditional culture. and Singapore. Relationship-building. but Westerners believe in contracts . and therefore. rather than corruption.’’42 The line between cultural differences and violation of the law may from time to time come too close. a consultant in Guangdong Province. . cultural boundaries do not always match geographic boundaries. One case is that of Jason Chi. To reduce damages caused by the shrinking demand for milk products. Indeed. Japan.68 Business and Technology in China importance of updating its regulatory technology. In northern Hebei Province. ‘‘Chinese people believe in human relationships. for example. . Ye attributes guanxi to a complex cultural system of personal relations or moral obligations. . In a deeper sense. the government earmarked 316 million RMB in late 2008 for subsidies which translates to giving a farmer 200 RMB per cow. and geographic boundaries may not signify differences when it comes to the business negotiation table.

Thus. citing possible violation of the Foreign Corrupt Practices Act (FCPA). According to a report in The Global Times. Some of these officials apparently visited Hawaii. Guanxi is less and less appealing to China’s younger generation. who grew up as single children in an urban environment. because many attended master’s programs or worked in foreign countries. urban generations tend to put their own careers and nuclear families ahead of their extended and elderly family members. readers are looking to success stories from Warren Buffet and Donald Trump. the ends justify the means. instead. in . The backdrop is a change in accelerated industrialization. For them. The Chinese officials were allegedly identified as being capable of bringing business to Lucent. and globalization. Lucent Technologies invited more than 1. and New York City. the Grand Canyon. Fox indicates that the emphasis is now on the importance of sound business principles and credentials. approximately $10 million. mostly SOEs. those who are age 35 and under. according to Suzanne Fox. Getting ahead and making money is seen as being more important than group dynamics or saving the credentials of a colleague. Lucent fired four top executives. One influential factor may have been that many of these younger men and women were witnesses to modern Western business practices. to visit Lucent’s facilities in the United States. including Chi. She found that younger. marketization.Growing Pains 69 former president of Lucent China.43 from 2000 to 2003. Disney World. which push China’s shift toward the rule of law and which. Rather than basing their credentials on familial ties. Collected Works of Mao Zedong and Confucius’s Analects are no longer read. with all expenses paid by Lucent. founder and president of Fox Intercultural Consulting Services LLC. Las Vegas. these younger citizens focus more on individuals’ merits. making it easier to accomplish things without relying exclusively on guanxi in contemporary China. In April 2004.000 Chinese officials from telecom firms. who turned the company into the largest Code Division Multiple Access (CDMA) technology equipment provider in China.

From the angle of economic systems. due to competition. fell 64. the market mechanism seems to have a built-in immunity. Employees tend to have a strong sense of responsibility because of their accountability. Currently. weakens the need for guanxi.46 Based on this theory.’’44 WHY HIGH CORRUPTION DID NOT HAMPER HIGH GROWTH It is obvious that the Mao-style anticorruption campaigns are insufficient in curbing modern economic crimes. another large dairy producer headquartered in Inner Mongolia. China’s largest dairy producer in volume and a source of contaminated milk. demonstrated an immediate response to the tainted milk case. While this is true and China’s law enforcement has been increasingly technologyequipped. The rule of law and the use of modern technology must be relied on to guarantee maximum safety for the people.45 Although the private sector is not free from corruption. 2.6 percent to 7. Yili Group.67 percent during four trading days in a row. saw its shares tumble at the Shanghai Stock Exchange by the daily limit of 10 percent to 9. it is more mindful with production details and quality control. for example.47 . economic crimes become more sophisticated as well. Following the Sanlu scandal. despite serious shortfalls. In a similar scenario. The price of Mengniu. according to Professor Yan Sun.70 Business and Technology in China turn. One question that arises is why has China’s economy been capable of sustaining its high growth amid high corruption? Several factors have been identified that have kept corruption at bay: 1. The expanding private sector may have been a natural control over corruption. The stock market. as more SOEs are converted to POEs.93 RMB.68 Hong Kong dollars at the Hong Kong Stock Exchange. In the meantime. it is hopeful that corruption will be further reduced. good companies. ‘‘Guanxi is certainly still relevant—it is a simple fact of life that having the right connections helps anywhere—but it is no longer the golden ticket to obtaining good jobs and accomplishing business objectives in China. the private sector stands at 65 percent of the GDP and contributes up to 80 percent of the GDP’s growth. several companies with questionable products saw their stocks dive sharply. such as Beijing-based Sanyuan Dairy’s shares rose by 46. According to Fox.

particularly during sensitive times such as economic downturns. In this regard. Since then. the increasing involvement by the people in what used to be the government’s responsibilities contributed to curbing crimes. In exposing corruption. and support for the courts.48 The reality is that the CCP and the people share a common interest in eliminating corrupt officials. The CCP takes law building and raising people’s trust in the legal system more seriously than ever. donations to Sichuan earthquake recovery from ordinary people amounted to billions of dollars. The handling of the avian flu of 2003 may have represented the first leap toward transparency. They must strengthen the courts with science and technology. International engagement helps. Moreover. For example. collaborative effort in monitoring power abuses may have stopped many corruption plots in the process. the West is often wrong in applying its broad assumption that the CCP is an enemy of the people. As the ruling political party. With China becoming a more and more involved global player. the government has learned to mobilize public support. The 2008 Summer Olympic Games was a success credited to support by every Beijing citizen. transparency of its economic and political systems has been steadily improving. impacts of the 2008–2009 global financial crisis. major natural disasters such as the Sichuan Earthquake. The CCP has a true interest in throwing out bad apples and replacing them with people who are highly trained and with honorable professional records. Hence. The party sees corruption as its deadliest enemy. He urges China to build a body of judicial staff that is . the Chinese government reluctantly turned from covering up to punishing the guilty parties and aggressively tracing the sources of infection. Due to pressure from the World Health Organization (WHO).’’ Wang Shengjun. people’s participation plays an effective role. president of the Supreme People’s Court. it encourages people to report on corruption using a hotline under the ‘‘Sunshine Project.Growing Pains 71 3. Thus. the CCP as a whole is keen on staying in power. In a recent speech on the ‘‘construction of judicial human resources. and every case of the H1N1 flu in 2009. Reversing the cover-up tradition.’’ In so doing. the Chinese government has actively reported coal mine accidents. the government has won people’s support through their own involvement. 5. the Chinese government has grown more confident and more open with each major test. credibility. noted that judicial personnel must be imbued with the spirit of running the courts with seriousness. particularly since it joined the World Trade Organization (WTO). 4. because each case poses a great threat to its legitimacy. For example. major corruption cases.

To the corruptive official.72 Business and Technology in China politically reliable. law enforcement can be hampered by the administration. loopholes. In 1978 when the economic reform just started. Furthermore. in 2007.9 percent. punishment includes heavy fines and loss of pension. Without such independence. and require high levels of morality and accountability in return. the increasing professionalism with which cases are investigated and processed may also have contributed to keeping down business crimes. The Chinese economy is in a transitional phase. and creative ways of perpetration. opportunities. models from neighboring systems in Hong Kong and Singapore offer experiences that may be applicable. anticorruption will be a never-ending struggle. In that regard. The Chinese government has been acting aggressively to plug holes in the system. the government is keenly aware that an independent judiciary is critical for law enforcement.9 percent living in urban areas. devoted to the people. and ‘‘fair and uncorrupt. Urbanization . and therefore.96 billion). corruption is expected to decline. One feature of these systems is that they offer high salary and benefits packages to civil service personnel. confusion. For example. URBANIZATION: TOO MUCH TOO SOON? According to NBS. and corruption rides along. a dynamic process loaded with changes. professionally up to the job.’’49 Hence. the total population was about 1 billion (0. new laws. In reality. whichever model China adopts has to be an integral part of its own system. the total population had grown to 1. cannot effectively conduct ‘‘independent investigation’’ as defined in the constitution.50 The NPC has been trying to create a viable system for some time. and the percentage of urban population was only 17. As the system stabilizes. however. These two terms customarily refer to expansion of cities and rural population moving into urban areas or from smaller urban areas to larger ones.32 billion with 44. These numbers show that the past 30 years have witnessed an unprecedented development in urbanization and migration.

If the challenge is not properly diffused.and 21st-century China. In reality. investing in peasants. For example. From the demand side. and urban residents acquired their own homes and automobiles.S. such that even larger scale urbanization is needed to fill the gap. resulting in tens of millions of state employees being laid off. redistributing rural population. These changes cannot be accomplished without extra labor and space. Ironically.Growing Pains 73 and migration complement one another to form a unique phenomenon in 20th. the primary factor is the economic reforms that set off a rampant industrial expansion. the extra labor mostly came from rural regions. the scale of China’s migration during the past three decades has surpassed that of European migrations overseas between 1820 and 1920 and migrations in U. And. Moreover. urbanization is the real solution to the rural-urban divide. work opportunities for these people are essential. professor at Tsinghua University. urbanization itself creates not only jobs but also job losses. Cities therefore are constantly under pressure to create new employment opportunities for these workers. France (77 percent). such as England (89 percent). economic reforms restructured SOEs. New production sites were built. this often results in more landless peasants waiting for employment than jobs created. as well as a force that . According to Hu Angang. Because of high rural population density. when urbanization invades suburbs causing peasants to give up farmland and become town dwellers. new services were offered. social unrest could result. and reducing the farming population. enriching peasants. Among the goals of freeing hard physical labor. and the United States (81 percent). this has become an unstoppable cycle. Professor Hu believes that there is yet ample room ahead for further migration due to the fact that China’s urban population remains far below the urban population levels in industrialized countries. Professor Hu believes that the most important goal is reducing China’s farming population.51 Many factors led to rapid urbanization. history between 1870 and 1913 during the postwar industrialization period. In his opinion.

In warmer climates. When cities expanded into the countryside. Under such circumstances. given that the incompatibility is simply too drastic for the two types of lifestyles to coexist. however. ‘‘Village in the city’’ (VITC) is a new phenomenon born by rapid urbanization. and that is a daunting reality. VITCs provide many functions that are needed in the urbanization process. to the point that municipal governments cannot afford to purchase them. they need dining and lodging services. It has been reported that the actual average height. ‘‘villagers’’ build extensions to their housing units. because village properties are more valuable as time passes. village constructions may likely turn into city slums.’’ . before they could be absorbed into the urban structure. when migrant workers come to town. the government could not simply seize the village property by force. In Shenzhen. for example. village after village found themselves enclosed in new city boundaries. Because the land is collectively owned. but also dwellers are grouped into communities according to cultural affiliations. To reach a mutually beneficial solution. Shenzhen. however. The concept that sustainability of an upward-bound economy is key to harmonious society is certainly justified. many migrant workers reside under the cities’ bridges. For example. Not only does a large population dwell inside the communities. had 91 VITCs and had to resolve land rights issues with these villages. high rises surrounded these villages in no time. The villages eventually will be urbanized. Moreover. It is a cultural tradition that migrants from the same provinces reside in the same ‘‘home villages.74 Business and Technology in China has driven a double-digit GDP growth for more than a decade. often violating zoning regulations. proves to be a thorny issue. to serve the migrants. village life is directly threatened by urban pollution. but this becomes inconvenient in colder climates. for example. is 10 floors and many exceed 20. the zoning regulation for the villages restricts the highest residential construction to no higher than three floors. which the Chinese government strictly forbids.

Whoever can work must find work. traditionally. Oftentimes. the government retains the right to remove illegal constructions in urban villages. Unlike Western countries where land ownership is completely privatized. and people from other international origins doing business in China.’’ According to Professor Wen Tiejun. the Chinese do not tolerate community disorder.53 Cities devise their own strategies to improve their VITCs. depending on availability of resources. Arabs. Therefore. land remains in the hands of the state in China. In Shenzhen’s case. Some villages in Guangzhou are inhabited by West Africans. not even playing Mahjong together. has always been in effect. strict social control.Growing Pains 75 such as the ‘‘Hunan Village. Second. individuals may lease land only according to government terms. Cultural needs such as these seem to be better served by theses VITCs. After a day of loading and unloading. Calling it ‘‘zero tolerance’’ is not an exaggeration. and (2) the Confucian tradition. based on traditional values.’’ and so on. head of the Institute of Rural Development of the People’s University in Beijing. the government has been successful in avoiding extreme dissent. the Chinese government has always placed harmony at the top of its agenda. Additionally. In favor of control. the urban villages are not equal to ‘‘slums. First.’’ the ‘‘Henan Village. it was . the villages conduct little or no communications among them. VITCs shelter many foreigners as well. they too have a great need to enjoy ethnic communication and their own cultural traditions. two factors prevent communities from deteriorating into slums: (1) public ownership. Despite zoning code violations and other kinds of perpetrations against state or local standards. from family to society. Despite occasional riots.52 In addition to serving Chinese migrant workers. Promoting order and collective spirit rather than disorder and individualism is essential in panConfucian cultures. than by high-end hotels in Guangzhou. rather than drifting into homelessness or committing crimes. public ownership allows the government many venues of direct intervention.

76 Business and Technology in China not until 2004 that the Shenzhen municipality had reached the mutually accepted strategy of letting the VITCs develop their own real estate following the city’s standard codes. It has been proven wrong to assume that Chinese peasants are traditionally rooted in their hometown and. On the supply side. and so on. Professor Wen calls it ‘‘plague of urbanization. would more likely find jobs in local towns first. With rents going up. it is more beneficial for the farmer to work in town and pay for farming services at home rather than .’’54 However. an alternative model that Professor Wen favored—developing small towns to absorb migrant population—did not work out. the VITCs play an important role in adapting to the fast rising economic standard. and Shanghai. Instead. The early stage of cheap products and cheap labor is phasing out. Companies that cannot afford to pay higher salaries either relocate to the underdeveloped hinterland or collapse because of a labor shortage. such as Guangzhou. Multiple factors drive peasants to quit farming. approximately 150 million migrant workers come to cities to find jobs every year. He argues that China’s urbanization developed too fast (in fact.55 because they could find the jobs and lifestyles they pursue. small towns are not free from problems of large cities. the fastest in the world) and has resulted in negative impacts on ecological environment. Many jobs now can be handled by women or can be subcontracted to farmers who specialize in offering farming services. Beijing. migrant workers go directly to the largest cities. Costwise. On the other hand. and so too does the demand for higher pay. more important. seeding. natural resources. the cost of living rises as well. In this case.’’ The ‘‘push’’ factor primarily lies in the reality that better farming technology has made farming less dependent on physical labor. such as harvesting. Is modernization to be blamed for the pains of urbanization? Professor Wen Tiejun believes so. and many social problems. small towns do not have the kind of accommodative resources that large cities do. These factors can be further categorized as ‘‘pull’’ and ‘‘push oriented. therefore.

Ningxia (88. Farmers in poorer provinces simply want to be in richer provinces. also generate extra labor. health care.3 billion RMB). Shanghai in 2006. Zhejiang broke the trillion mark in 2004. and Gansu (270. and entertainment. exceeding 3 trillion RMB. Fujian. In 2007. and Zhejiang have since taken the lead. pay. Jiangsu. Guangdong. However. In 2001.4 trillion RMB (with a 10 percent rate of growth). for most migrant workers.2 billion RMB) fall far behind. Rural people dream of urban conditions. and Liaoning and Sichuan in 2007. it had reached 3. and Shandong and Jiangsu soon followed in 2002. Guangdong’s GDP was approximately 3 trillion RMB. other forces. The widening economic gap has created a powerful propensity for migration. inland provinces like Qinghai (78. and Jiangsu are the three leaders in GDP growth. which is a term the Chinese media uses to group provinces whose GDP exceed 1 trillion RMB. Shandong’s GDP grew by 13 percent in 2008 as well. Beijing. family-based agriculture is essentially unorganized. Guangdong was the first province to reach more than 1 trillion in GDP. constantly resulting in unsynchronized production. such as education. In 2008. and become urban dwellers in the largest cities. working in remote cities and leaving their families . Henan and Hebei in 2005. Shandong.9 billion RMB). the gap between the rich and poor has provided a great momentum for mobility. and Hunan became trillionaire provinces. Their will cannot be thwarted for good reason. Technology has created a superfluous labor force ready to work in town. Jiangsu’s GDP reached 2. Hubei. The lack of planning drives the farmer to seek better and more reliable income.5 trillion RMB in 2007. one finds the best explanation for a typical farmer’s motivation for coming to town. Guangdong. one of which is management. Shandong.56 In contrast. and by 2008. Since the start of the economic reform 30 years ago.Growing Pains 77 doing the farm work himself or herself. On the ‘‘pulling’’ side. Studies show that in the 1980s. Unlike urban industries that make plans based on supply and demand.

the city was not ready to manage migrant communities. Their practice is illegal and endangers women’s safety. Historically. they count for less than 10 percent of migrant workers. . To some scholars. One consequence was that 88 percent of unplanned births were in migrant families. such as Beijing and Shanghai. a headache for the government is that some migrant communities have their own midwives. migrants would save their income in local banks and spend it locally. farmers with better education and from areas of better economic conditions do better. they would eventually return to their hometowns. the rising trend is for migrant workers to settle down in cities.57 The Xinhua News Agency estimates that one-third of Shanghai’s population came from the provinces in 2006. believes that ‘‘migrant population’’ is different from ‘‘floating population’’ in that migrants have a sense of settlement while the floating population does not. While migrant workers filled Shanghai’s labor shortages. For the migrants. Migrant workers with lower education levels and from rural regions of medium economic conditions are likely to engage in labor-intensive jobs. another phenomenon is that when they are deprived of the right to settle down permanently. In large cities.78 Business and Technology in China behind was only a temporary solution.’’ Professor Ge Jianxiong.58 On the family planning front. while floating population tends to send money home. director of Fudan University Library and professor of geography and history. For these new city residents. In general. Migrants belonging to this category could easily acquire city Hukou (a city residential permit). In terms of disposition of income. they develop hostility toward local residents. conflicts between locals and foreigners are not uncommon. restaurants and hotels at all levels are operated mostly by provincial entrepreneurs. readapting to the rural lifestyle is becoming less convenient with each passing day. While this is still true in 2010. the trend now warrants differentiation between two demographic terms: ‘‘migrant population’’ and ‘‘floating population. such as construction work. as they tend to move to town with business plans in mind.

and many other social problems. It was as early as 1958 that the Chinese government started the Hukou system. such as Shanghai and Beijing. a shortage of funding and the lack of psychological preparation discourage peasants in Gansu to seek jobs in Shenzhen.60 Many suspect.5 million people are residing in rural China. marketization. China may see slums. in March 2008. the urban population stands at 44. In his speech at the 17th CCP Congress. most lived in rural areas and tended to stay home. The Hukou followed the food ration management during those years of hardship. The system was intended to tie peasants to land and prevent an influx of workers to big cities. that if China steadfastly pursues the urbanization levels of industrial countries. China’s large cities must be prepared to accommodate more than 150 million migrant workers per year. In the 21st century. Currently. and because employment opportunities are primarily born out of the service sector and the labor-intensive manufacturing sector. overwhelmed social benefit systems. President Hu Jintao set the tone for the next phase of development (through 2012) to vigorously pursue industrialization. this would put 250 million new workers in the cities in a short time.Growing Pains 79 The migrant workforce is expected to grow stronger. Problematically. Currently. urbanization. an intensified migration may indeed exhaust the cities’ accommodative resources.59 This situation is not to be underestimated when the majority of the hinterland provinces fall into this category.9 percent. which means 727. such concerns were behind past practices for decades. of the 6. and globalization. however. A significant number of potential migrants who are educated are not yet able to join the migrant labor force because they cannot afford the travel expenses. In fact. some cities. But this will change over time. The 2000 Census shows that.7 percent of the population that never went to school. or 70–80 percent urban population. because China’s industrialization level is behind its rate of urbanization. informationization. continue to use it for temporary migration management purposes although 12 out of the 23 provinces already have .

the traditional residential restriction has become increasingly intolerable. but also residents from minor urban regions were not granted permission to reside in larger cities.3 percent to the GDP in 2004. many believe that the Hukou system is now a main barrier to industrialization and market economy. and residents with provincial Hukou were not entitled to social benefits. ‘‘It locks people into different social classes entitled to different rights. the Hukou system was perceived as a social discrimination system in effect rather than a population management system. with respect to associated costs. peasants’ income rose and many started rural industries that directly served urban industries.’’62 Questions remain. not even schooling. director of the Social Development Research Center of Huadong Technical Institute. Professor Hu Angang of Tsinghua University calls for abolishing the Hukou system without delay. Professor Cao Jinqing. With the overall increase of personal wealth and an increasing awareness of social equity. which is objectionable. peasants were gradually allowed to migrate to towns. Professor Hu calls on governments at all levels to set up programs to help migrant workers. After five years of implementation of the CRS (1979–1984). migrant workers contributed 13. however. He believes that urbanization provides employment solutions to 70–80 percent of the job seekers. Hukou has become a symbol of rural-urban divide. In fact. . which does not include unregistered business activities.80 Business and Technology in China phased out Hukou completely. peasants were not permitted to seek employment in urban areas. Until 1984. however. especially with the shortage of a social welfare system to deal with unemploymentrelated problems. Not only was the rural population discouraged from moving into urban areas. Soon. However. converting the traditional ‘‘restrictive policy’’ to a ‘‘welcoming policy. the answer to the question of whether to remove the system immediately is not clear. As such.’’61 as Professor Ge Jianxiong puts it. should more migrants come to town. According to his estimate. The discriminatory function has angered many.

while the same space costs as little as 500 RMB to build in a typical rural town.63 Professor Peng Xizhe. Thus. for most farmers. Professor Peng went on to discover the education benefit of urbanization with respect to a migrant workforce. However. the positive side is. in his opinion. At least 150 million peasants are educated with the most advanced knowledge at no government costs. the land tenure system has become a form of social security that alleviates much of the pressure of dealing with unemployment and slums. they are guaranteed a home to return to. because peasants typically make more money in a month working in cities than they do in a whole year working in the countryside. Such benefits make the rural hometown a valuable buffer against contingencies outside. many farmers lost their land to public officials who traded them with real estate developers. A remarkable thing that the Chinese government did. finance. Thus. The negative side of this policy is that. Because rural households were assigned plots on a lease basis.000 and 20. Urbanization educates the rural population through migrant working . they do not have the right to resell their land. For many farmers. building a house in a large city may cost somewhere between 10. whereas cities are undergoing industrialization. agrees that urbanization is an effective way to reduce the divide.Growing Pains 81 believes that the cost of receiving migrant workers is low thanks to the rural land tenure system. and labor within the Chinese countryside in the 1980s. He believes that the 150 million annual migrant workers will change a harsh cultural reality left by the rural-urban divide: the countryside remains outmoded.000 RMB per square meter or approximately 11 square feet. was the reallocation of land. it is their dream to work in cities but settle down in their hometown. but remain residents in their village and work in factories without being long-term urban dwellers. not being real landowners. Professor Cao attributes China’s land tenure system to having a critical role in the sustained growth for decades. For example. director of the Institute of Social Development and Public Policy at Fudan University. peasants may leave their land.

highly educated and better trained labor has replaced migrant labor straight from farmlands. In such a situation. is against removing the Hukou system and setting migration completely free. Zhou Chunshan. it is about converting real estate development to the development of research and technology. director of Demographics and Labor Economics Research Center at the Academy of Social Sciences of China. In these cities. Hukou has the added benefit of keeping sufficient labor on the farmland and preventing farming from completely falling on the shoulders of women and senior men. Moreover. gradually transitioned into high-tech manufacturing.65 Cai Fang. director of Urban and Regional Research Center of Sun Zhongshan University. This is what the peasants could hardly learn even after years of schooling at home. Professor Zhou believes that the goal of a modern city is to reach high quality. because employment of rural labor will not be necessarily compatible with urban development needs in the long run. and meanwhile.82 Business and Technology in China conditions. and industrialization. a large number of migrant workers will not be able to find jobs. Demand for higher salary jobs and better living conditions will rise following declining labor-intensive production and rising product quality. unable to survive on thin margins that are derived from suppressing workers’ compensation. Cities that started earlier in the economic reform. Professor Peng calls this phenomenon ‘‘the Chinese renaissance. He believes that despite the rise in cost of production. such as those in the Zhujiang River Delta Regions (the Guangdong Province).’’64 On the opposite side. because . it likely will become difficult to hire qualified labor at the low pay levels of the past. entrepreneurship. products made in China will remain competitive. believes that abolishing the Hukou system may not provide an unfailing solution to the rural-urban divide. Firms that are not able to compete will have to relocate. introducing them to such concepts as a modern way of life. He believes that the system must be maintained as a buffer to prevent an influx until cities are capable of handling the migrant population.

China must rely on science and technology. therein lies the most important motivation behind the government’s slogan of building the country into an ‘‘innovative nation.66 China’s urbanization characterizes its economic development in the 21st century. A successful transition will lead to sustained economic growth. a better environment. most of which are generated by industrialization. and urbanization. The process presents unique challenges and growing pains. and social harmony based on the elimination of the rural-urban divide. Hence. . political system changes. all of which are of global interest as well. and the propensity for change is great.Growing Pains 83 a Chinese worker’s salary will remain below 3–4 percent of an average American worker’s salary.’’ The next chapter will look into science and technology policies with respect to reforms in industry. To achieve success. The pressure is tremendous.

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(Courtesy of Corel) In this 1979 photo. then Chinese vice premier Deng Xiaoping tries on a cowboy hat presented to him at a rodeo in Simonton. Chinese currency is known as the yuan.Three Chinese bills. the diplomatic ties established between the United States and China were meant to balance out the Soviet threat. (AP Photo/File) . Forged in absolute secrecy at the height of the Cold War 30 years ago. Texas.

(AP Photo/Vincent Yu) . in central China’s Shaanxi Province in 1995.A Chinese peasant woman carries vegetables on a shoulder pole to her village near Yanan. (AP Photo/Greg Baker) A group of Chinese children have their McDonald’s lunch in the southern Chinese city of Guangzhou in 1999. As men move to cities to find better paying jobs. women are often left to look after the farms so that their families can retain long-term leases on the land.

(AP Photo/ Greg Baker) Heavy traffic is seen along a city highway in Beijing in 2009.Cars drive on Beijing’s second ring road in murky weather in 2004. (AP Photo/Andy Wong) . Beijing vowed to clean up its often-polluted skies before the 2008 Olympic Games. Beijing traffic authorities said the city will extend by another year traffic restrictions aimed at reducing congestion and improving air quality in the capital.

Anxious parents wait for their children to emerge from national college entrance exams in Beijing in 2005.000. the number of available positions in universities rose by only 280. (AP Photo/Greg Baker) . reaching a record 8. reflecting the ever increasing competition amongst students for a space in the colleges. While the number of students taking the exams increased by 1.67 million.4 million in 2005.

a 354 percent gain from its initial public offering price of $27.Baidu.54. (AP Photo) . Li returned to Beijing after a successful initial public offering on the NASDAQ stock exchange in New York. The Chinese Internet search engine’s stock soared to $ founder Robin Li is interviewed as he arrives at Beijing airport in 2005.

5 million voters were expected to cast their ballots for People’s Congress delegates to Beijing’s 18 counties and districts.Eighteen-year-old students line up to get their ballot papers before voting for the first time in local legislature elections in Beijing in 2006. Some 8. (AP Photo/Greg Baker) . with mostly governmentapproved candidates making it to the ballot. part of the communist leadership’s tightly controlled version of democracy. and 181 townships. Voting to elect representatives for Beijing’s local legislatures began as millions of residents streamed to brightly decorated polling stations throughout the Chinese capital.

with nearly 4. (AP Photo/Color China Photo) .000 more than the previous year. According to state media young Chinese faced a severe job crunch in an increasingly competitive labor market. 750. Graduates from 28 universities attended the fair.13 million graduates entering the workforce in 2006.Students look for job opportunities at the 2007 Graduates Job Fair in Shanghai.

and other goods and a downturn at home in real estate. and other industries. (AP Photo/Greg Baker) . The government says some 20 million migrant workers lost their jobs. China’s economy is suffering from a collapse in global demand for Chinese textiles. toys. Thousands crowded the first job fair in the city since a weeklong holiday for Chinese New Year. auto sales.Job seekers crowd stalls at a job fair in Beijing in 2009.

Former President and Party Chief Jiang Zemin. right. Past and present Chinese leaders appeared together on army day Wednesday. (AP Photo/Elizabeth Dalziel) . smiles as he shakes hands with current top leader Hu Jintao. as they came together on stage at a ceremony celebrating the 80th anniversary of the founding of the People’s Liberation Army at Beijing’s Great Hall of the People in the Chinese capital in 2007. in a striking show of unity ahead of a key Communist Party congress later in the year. left.

(AP Photo/Julie Jacobson) .Performers paint on a giant scroll during the opening ceremony for the Beijing 2008 Olympics.

China’s Yao Ming carries the flag of China next to a small child during the opening ceremonies for the Beijing 2008 Olympics. (AP Photo/Itsuo Inouye/File) .

A man walks past a display showing stock prices at a brokerage firm in Hong Kong in 2008.84—the lowest close it had in more than four years.602 points. (AP Photo/ Vincent Yu) . to 11. Hong Kong’s Hang Seng Index tumbled 12.7 percent.015. or 1.

China has recently set new laws for the generation of renewable energy.A worker assembles solar power panels at the Suntech factory in Wuxi. including financial subsidies and tax incentives for the development of renewable energy sources. (Qilai Shen/EPA/ Corbis) . China.

amid tightening controls that have blocked Facebook. Sichuan Province. (AP/Wide World Photos) Customers surf the Internet at an Internet cafe in Beijing in 2009. (AP Photo/Greg Baker/File) . and other popular sites that offered many Chinese a rare taste of free expression. Twitter. Two more Web sites dedicated to social networking went offline in China in July 2009.A woman with her baby looks at powdered milk products with notice boards of ‘‘no melamine’’ displayed inside a supermarket in Chengdu.

A Starbucks staff member hands out free coffee to customers at an event to mark the 10th anniversary of Starbucks’ launch in China. (AP Photo/Greg Baker) . at the company’s original outlet in Beijing in 2009. The coffee chain Starbucks has started producing coffee grown by farmers in China and hopes to bring the blend to stores all over the world.

China surpassed the United States as the world’s biggest auto market for the first half of 2009 after June sales soared 36.5 percent from a year earlier. (AP Photo/Andy Wong) .A model poses next to Chinese automaker Geely’s new model Panda on display at the Beijing Auto Show in 2009. Geely signed a $1. In March 2010.8 billion deal for Ford’s Volvo car unit.

During nearly two decades of reform.1 S&T is said to be essential to sustaining China’s economic growth. however. is on the expenditure side of the government’s balance sheet. or an enterprise. In a speech given by Premier Wen Jiabao. so are national basic research projects. resources were invested in manufacture. valuable time was lost. developing its strength in innovation is more important than anything else. New policies demonstrate a strong commitment by the Long-term Development of Science and Technology 2006–2020 (The Guideline). Under . China’s economy was on the edge of collapse by the time Mao died. a nationality. in the 21st century the Chinese government is going all out to develop S&T. for historical and economic reasons. however. for example. the government’s role in developing the knowledge sector and in creating an environment conducive to a broadbased innovation is of critical importance. transforming the Chinese economy into a knowledge-based economy and the country into an ‘‘innovative nation’’ through an enterprise-centered national system with strong innovative capacity at the enterprise level is pronounced as the ultimate goal.Chapter 4 Innovative Nation SCIENCE AND TECHNOLOGY IS KEY China’s reality is such that education and science and technology (S&T) have been slow reforming sectors. Thanks to the historic lesson. Finally. Due to political turmoil of the Mao Zedong era (1949–1978). In The Guideline of Mid. leaving S&T behind. As a result. Consequently. he argues that to develop a country. Education.

such as creating new methods. and so on. to break out of the barriers. and the new challenges will not likely be solved with the traditional approach of mass campaigns. and it is a must to encourage S&T progress and the nation’s innovativeness with an innovative culture. the 17th Party Congress held in 2007 proposed that the CCP take the lead in building China into an ‘‘innovative nation’’. during a 2008 tour of industrial facilities in Guangdong. Hu states. The company’s innovative capacity will ultimately decide its fate. Examples include creative use of existing products and ideas to provide new solutions. it is a must to promote the progress and innovation in S&T by innovating the system. The sources of innovation are no longer government initiatives alone. For SOEs.2 the term has since become the slogan of the new era. China is facing more challenges rather than less.86 Business and Technology in China his initiative. President Hu Jintao went even further in stating that S&T is the number one productive force and that China must take a road of independent innovation with Chinese characteristics. identifying new resources. they are becoming the responsibility of each and every company in the economic network. It is more of an economic concept related to changes in productivity outcomes. [I]t is a must to give top priority to increasing the capabilities of independent innovation in the development of S&T. and it is a must to foster a large army of innovative talents in the country. Moreover.3 More recently. finding ways to break up old monopolies to build a new economic structure. relying on government’s resources is less and less a viable solution. Premier Wen stressed that only continuous innovations can enable the Chinese nation to stand up in the world and become a leader in industrialization.5 Saving energy and reducing cost is on top of China’s agenda in the 21st century. To achieve this goal.4 What all these political propaganda imply is a new reality: despite 30 years of reform. the government sets the goals. typically. the company finds its . The concept of innovation is broader than scientific invention.

Innovative Nation


ways to meet them. While POEs have diverse goals and objectives, national projects are attractive to them and often make an important part of their planning as well. Everyone has now come to the understanding that S&T is essential to innovation, and companies rely on innovation to stay ahead; therefore, Chinese companies of the 21st century must expect to raise R&D expenditures. On the other hand, the society is convinced that an S&T-friendly environment is essential. It is unimaginable that innovation could prosper in a society where intellectual property is poorly protected and bureaucratic constraints hamper exchanges of personnel and opinions. In these respects, the Chinese government has made a great deal of efforts compared to the prereform situation, but obviously has not done enough. In a sense, more innovation comes from a freer society as a whole. As shown in the first chapter, what underlies China’s economic growth is the ongoing reform of the entire economic system. The reform has changed the framework of China’s ownership structure, leading to a thriving private sector and a more efficient public sector after a series of SOE reforms. In general, because of the challenges they are faced with, the POEs are more competitive in acquiring research and development capacities than SOEs, although the latter have demonstrated achievements in national-level projects, such as space and nuclear programs. The situation is reflected in patent applications. According to NBS, in 2007, the total number of patent applications submitted by domestic firms was 27,741 or a 31 percent increase from 2006. Out of this number, private enterprises submitted 2,312 or an 18.5 percent increase from 2006. SOEs submitted 1,921 or about a 26 percent increase from the 2006 figure. The large remaining portion of patent applications was submitted by various kinds of joint ventures established with state and private funds. These data suggest that currently state funding provides the main support for S&T, although most activities happen in companies of joint ventures. SOEs’ active engagement with S&T activities is considered a significant trend. It implies


Business and Technology in China

that SOE restructuring continues to weed out weaker companies that have lost competitiveness. However, due to concerns that an expedited transformation may result in wide-scale layoffs and social consequences—and that the government intends to prevent these at all costs—SOEs’ S&T progress will likely be slower than the private sector, despite their privileged funding preference status. Also noticeable is the patent applications number of foreigninvested firms which was 5,034 in 2007, an increase of 35 percent over the number of 2006. Since 1978, foreign companies have served as channels of technology transfer. The data shows that they continue to be active in supporting China’s S&T progress. The data also implies that China’s IPR environment has been constantly improving, providing the much needed legal environment for S&T transfer to sustain. Companies with investment from Hong Kong, Taiwan, and Macau submitted 3,299 patent applications which represents a decrease of 3.8 percent from 2006. This reveals that the main operations of these firms in China are primarily manufacturing-related, such as assembly lines. Nevertheless, they maintain a high-level of R&D activities. NBS data shows that overall China’s funding for activities in S&T, which includes R&D, application of R&D results, and R&D-related services, has been rising year after year. Expenditure on R&D increased rapidly. An interesting trend in this area is that expenditure on purchases of foreign technology tapered off from 372.5 billion yuan in 2002 to 320.4 billion yuan in 2006. In the meantime, purchases of domestic technology rose from 42.9 billion yuan in 2002, more than doubling to 87.4 billion yuan in 2006. Although expenditure on imports remains dominant, the rise in domestic technology purchases may imply the beginning of a significant change, that is, China is gradually coming out of the manufacturing-intense phase of the earlyreform era and developing toward a knowledge-based economy. This transition has long been the target. The high-technology area, for the time being, continues to be dominated by foreign companies. In a few sectors, however, the situation is being turned around by China’s acquisition of foreign firms. In such cases, the

Innovative Nation


Chinese companies own or share ownership of the technology as well. China is exporting many kinds of high-tech products, but mainly in the areas of office machinery and information communication technology (ICT) equipment. In 2004, China surpassed the United States and European Union to become the biggest exporter of ICT goods.6 One example is the acquisition of IBM’s personal computer section by the China-based company Lenovo in 2004. The acquisition, which cost 1.75 billion in U.S. dollars, resulted in a joint venture with IBM holding an 18.9 percent stake. The price tag may be high; the deal, however, raised Lenovo’s sales ranking worldwide from number nine, just ahead of Apple Computer, to number three, just behind Dell and HP. The combined venture, headquartered in New York with operations in Beijing and in Raleigh, North Carolina, employs approximately 10,000 IBM employees and 9,200 Chinese employees.7

During the prereform period, the government set the goals and objectives for S&T primarily for national defense purposes. A notable achievement was the ‘‘two-bombs-and-one-star project’’ (or, the project of the atomic bomb, the hydrogen bomb, and the satellite). During the postreform era, although much of the traditional planning function has been decentralized, the government continues to manage the general direction of the economy. One difference is that the government tends to make decisions through wider consultations. Directly affecting S&T development are the policies made by the Ministry of Science and Technology (MOST). Policies of MOST represent collaborative opinions of those agencies that represent the most dynamic sectors, including the NDRC, the Chinese Academy of Science (CAS), the Chinese Academy of Engineering (CAE), the Ministry of Industry and Information Technology (MIIT), the Ministry of Agriculture (MOA), the National Science Foundation of China (NSFC), the Ministry of Finance (MOF), the


Business and Technology in China

Ministry of Commerce (MOC), the Ministry of Personnel (MOP), and the State Intellectual Property Office (SIPO). In fact, the list often extends to other institutions that are somewhat peripheral to policymaking. In addition to planning and management, these ministry-level agencies, along with their subagencies, also represent the largest government R&D resources. Chinese S&T policies are based on ministry-wide coordination conducted by the National Steering Group on Science, Technology, and Education whose responsibility it is to help MOST identify priorities, and design policies, laws, and regulations. One noticeable postreform characteristic of the State Council is its constant restructuring to retire outdated institutions and create new ones. For example, MIIT is a new ministry established in March 2008. This new powerhouse with 24 departments replaced the former Ministry of Information Industry. It integrated the NDRC’s former authorities on industry and trade management; the former functions of the Commission of Science, Technology, and Industry for National Defense, except nuclear power management; and the former functions of the Ministry of Information Industry and the State Council Informatization Office. Additionally, MIIT is responsible for managing Internet domain registrations and creating Internet policies. In general, Chinese S&T policies are developed to cover major areas pertaining to innovation activities that are of national interest. These areas include identifying and supporting core research programs that are perceived to be critical to the economy or national security, such as biotechnology, information technology, space technology, energy technology, new materials, and so on, as well as commercialization of research achievements. These policies also address peripheral issues, such as developing policies to facilitate S&T human resources, setting up reward systems, and appropriate measures to protect IPR. China’s economic progress has been in synchrony with the reforms in S&T policies. During the Mao era (1949–1978), especially during the Great Cultural Revolution (1966–1976),

Innovative Nation


the slogan was ‘‘Red and Expert,’’ meaning intellectuals would have to be proven loyal before their knowledge could be of use. S&T was labeled ‘‘capitalist,’’ and so were most of the nation’s intellectuals. S&T was conducted by the government, in government labs, and for national defense purposes in particular. Since 1978, Deng Xiaoping worked hard to remove the traditional ideological constraint and paved the way for a new era of S&T. Under his leadership, the college entrance examination system was resumed in 1978 to replace the recommendation system based on family background and political loyalty. Special Economic Zones (1980) were opened in coastal regions to experiment with Western management, and the S&T system was reformed to encourage responsibility and connection of S&T with the needs of the society (1985). As such, Deng’s profound contribution is remembered as deprogramming the traditional mentality to release people’s long hidden enthusiasm in pursuing innovation. Under Deng’s leadership, the Communist Party’s core task was shifted from class struggle to the ‘‘Four Modernizations’’—industrial modernization, agricultural modernization, defense modernization, and S&T modernization. Deng was a magician of terminologies, and was known for creating such terms as ‘‘socialist market economy,’’ ‘‘to be rich is glorious,’’ and ‘‘S&T serves not only capitalism but socialism as well.’’ With these concepts, he fenced off attacks from hardliners and assured the people that it was okay to pursue material wellbeing even under socialism. As such, Deng ignited an economic development at a pace rarely seen in history. As the reforms continued, university labs began to offer R&D services to economic demands; many faculty members took advantage of their expertise to engage in entrepreneurship. This later became popularly known as ‘‘jumping into the sea,’’ which means giving up the ivory tower and trying one’s luck with the volatile market competition. In 1986, the Provisional Bankruptcy Law was promulgated, which marked the start of SOEs’ restructuring. As more and more SOEs were privatized, the pressure of market competition led companies to seek solutions from S&T

preferably an SOE. the dominant shareholder being the government. as more Chinese securities are listed in Hong Kong and foreign stock markets. Internationally traded companies abide by international reporting standards and provide a better transparency . There are certain restrictions.8 More about the national programs will be explained in the following pages. Few investors would hold securities for the long term. Buying and selling stocks tended to be short-term operations. Traders typically relied on technical analysis as it is abundantly available through the media. From the mid-1990s to 2001 when China joined the WTO. In the meantime. the ‘‘Torch Program’’ (1988). Transparency. One consequence of this shortfall is that it gave rise to enormous volatility to a stock market. and the ‘‘Technology Spreading Program’’ (1990) aimed at applying technology to improve productivity and bring changes to people’s living conditions. the government launched dedicated S&T funding programs under the direction of MOST. including the ‘‘National Natural Science Foundation’’ (1986) to support basic research. individual applicants must be affiliated with a large company. additionally. Chinese firms went through an intensive learning and restructuring process to comply with WTO standards. and the ‘‘863 Program’’ (1986) to address targeted basic research areas in which China needed to catch up with advanced world levels. adversely impacting on a company’s ability to draw funding from the broad public. the applicant must be a Chinese national less than 55 years of age. for example. for example. was a weak area of most domestic firms due to the fact that SOEs and most semi-state-owned firms were not yet structured to be accountable to shareholders. Since joining the WTO. The ‘‘Spark Program’’ (1986).92 Business and Technology in China to stay ahead. This is part of the reason why most people preferred parking their hard-earned money in a savings account or investing in government bonds. popularly known as ‘‘flipping’’ stocks. however. To acquire funding. individuals and institutions may submit research projects to MOST. China’s capital market has been improving gradually.

such as the Guideline (2006–2020). and creating a new relaxed and harmonious cultural environment conducive to scientific research. and ramping up exports. How they will be realized remains to be seen. it appears that the Chinese government is determined to learn from Western experience and stabilize the financial market by implementing Western-style regulations. For example. encouraging exploration for new theories. Their practice set an example to other firms and inspired changes. The legacy and mentality of state monopoly must be replaced by one of diversity at the level of companies and according to their needs. Investing in building the country’s .Innovative Nation 93 than the rest. part of which is to stabilize the capital market. building assembly lines. the Guideline (2006–2020) stresses respecting personal differences. the society as a whole is adopting the concept of transparency. While a stable capital market is critical to the survival of new technology companies without shifting S&T to the enterprise-level. In personnel management. promoting academic freedom. On the other hand. These ideals were spelled out in such terms for the first time. encourage teamwork and the dareto-take-the-lead-and-dare-to-be-different spirit. Much emphasis has been put on borrowing Western technology. On the government side. new policies attract overseas scholars with critical expertise. HIGH-TECH FRAMEWORK IN TRANSITION Despite rapid economic growth for 30 years. More and more research institutions are hiring managers through open search which appeals to overseas scientists who wish to work in China. The Guideline (2006–2020) demonstrates the Chinese government’s commitment to building up indigenous innovation capabilities and to creating a suitable framework. China’s hightech framework remains at an early stage. companies will nevertheless be unable to benefit from it. New policies. being aware that a well-structured capital market means profit because it is fundamental in enabling solid enterprises and weeding out weak ones. increasing tolerance for failure.

(4) Market Integration (2003–2006).94 Business and Technology in China own high-tech infrastructure has not been seriously addressed until recently. The goal was to diversify S&T funding resources according to the nature.9 The nature of the transition was to expand funding channels and to expand the latitude of freedom to conduct S&T research. how would they do it? The following is a review of what the government has done to put together a framework. (2) Weight-trimming (1993–1998). Typically. Phase 1. The transformation in S&T framework is conventionally divided into five phases surrounding historical decisions made by the Central Party Committee (CPC): (1) Break-Ice (1985–1992). they were allowed to conduct personal S&T research in their spare time. the priority was relief from poverty. the IPR laws came into existence to protect registered products. as long as individual scientists do not violate rules and regulations concerning the public project with which they were involved. if so. the government budgets for basic research and certain applied research projects that are of national interest. Furthermore. and so on. national and local S&T projects are funded by the central government and provincial governments. according to the Decision. The Decision encouraged commercialization of research products. This having been very much achieved. Break-Ice (1985–1992) The CPC published The Decision of Reforming the S&T Framework in March 1985. and (5) Reassuming Direction (2006–2020). At the time of its issuance. (3) Localization (1999–2003). contractual funding. For the most part. and through private ventures. outside the company. scope. and urgency of projects. including private funding. economic sustainability has come to be the next challenge. Understandably. Other funding instruments are mobilized as well. Additionally. the Decision encourages cooperation between research . The question remains wide open: can the Chinese government bring about an innovative environment and.

Developing High-tech and Industrialization. The goal of this Decision was to encourage S&T organizations to put research into production. and creativeness. Although the Decision was inspiring in many aspects. Phase 3. Weight-trimming (1993–1998) Based on Deng Xiaoping’s speech given during his 1992 tour of southern cities. Localization (1999–2003) In August 1999. commercialization. local governments. or by setting up business ventures. This Decision played an essential part in breaking the traditional SOE inertia prevalent in the S&T area. mobility.Innovative Nation 95 centers and higher education institutions. and cooperation. the State Council issued The Decision of Strengthening S&T Innovations. the CPC issued The Decision of Accelerating S&T Progress. Other S&T agencies were encouraged to seek funding from enterprises. and promotes younger scientists of achievement to important management positions. supports agriculturerelated S&T research. The Decision points out that to come out a winner in the increasingly fierce competition in the world depends on integrated national . and S&T personnel remained confined to statefunded labs and universities. decentralizes governmental control over S&T research. the government guarantees funding only to a limited number of national-level S&T projects. competition.’’ Many S&T centers established during this period became pillars of the economy. According to the Decision. Phase 2. S&T remained separated from the reality of economic development. S&T personnel at state labs also were trimmed. which essentially confirmed that the economic reform would continue despite the crackdown of students’ demonstration in 1989. The SOE-style of free and unaccountable government budgetary support came to an end. and for that purpose. Suddenly. and foreign direct investment (FDI). a great number of S&T centers were formed following the Decision’ s call of ‘‘openness. it did not result in tangible changes in the direction of competition.

the Decision stresses reforming scientific. to reform education systems. education. and cultural systems to improve China’s national innovation capability. An important contribution of this Decision is that it stresses that China’s education system must be connected to the practice and that entrepreneurship must be encouraged. To make these happen. The Decision addresses the need to support private S&T enterprises and medium-size S&T organizations by providing investment and banking services. The Decision urges S&T organizations to engage in marketoriented innovative activities. . For example. and to improve related legislatures. Free flow of human resources is a prerequisite to an innovative environment.96 Business and Technology in China strength. Phase 4. and convenience of transfer of S&T results. Market Integration (2003–2006) In October 2003. The Decision encourages S&T organizations to adopt the market system that allows human resources to be distributed according to market needs. and economic security. The focus is on improving citizens’ quality by arming them with S&T knowledge. sovereignty. it encourages improvement of S&T personnel management system. the CPC issued The Decision on Issues Regarding the Improvement of the Socialist Market Economic System. to nurture. Hence. the Decision is mindful of improving logistic support. Finally. The concept is largely inherited from Deng Xiaoping’s Special Economic Zones that walled off domestic interference at the time. As a result. attract. Additionally. and S&T is essential to determining a nation’s competitiveness. and (2) further improving IPR environment. the Decision stresses (1) providing meaningful rewards to scientists with achievements. Meanwhile. and retain talents. and urges further opening to the outside world through international cooperation and exchanges. it encourages the construction of national high-tech industrial development zones. developing S&T was pushed to the level of national security once again. It encourages transferring R&D from government labs to the enterprise level. a flexible personnel system is essential.

to Long-Term Development of Science and Technology 2006–202010 by the State Council in February 2006. For example. Lack of coordination among decisionmakers results in irrational allocations of resources. evaluation systems fail to provide useful feedback to management. A major difference between this latest guideline and previous documents lies in its admirable candor in identifying areas of weaknesses. completely changing the population-burden pessimism. serious problems remain. For example. Moreover. and underdevelopment in service and high-tech sectors. irrational economic structure. the Guideline recognizes serious mismanagement during the reform that resulted in waste of energy. The Guideline sets sustainable economic growth as the primary target. The Guideline indicates that despite past success in economic reforms. . Additionally. and efficiency. creativeness. Phase 5. qualifying China as a member of the ranks of innovative nations in the world. the S&T system is not intrinsically congruent with R&D. weak agricultural foundations. the inadequate reward and advancement system fails to encourage innovative efforts. because of its lack of connection with the market. Enterprises have yet to become the main bodies of innovation. R&D organizations generally lack coordination among themselves resulting in redundancy and waste. The straightforward revelation of these weaknesses suggests that the Chinese government is determined to revolutionize the domain. It indicates a weak education system that falls short in fostering entrepreneurship. sense of competitiveness. environmental pollution.Innovative Nation 97 The Decision indicates that the greatest advantage of developing S&T is that it is capable of turning China’s huge population into a powerful resource of innovation. In addition. Reassuming Direction (2006–2020) This period is marked by the release of The Guideline of Mid. the Guideline aims to achieve a number of world-class S&T breakthroughs by 2020.

The Guideline vows to contain China’s population to within 1. preserving water resources. because any learning without integrating with China’s own system would be futile.98 Business and Technology in China The Guideline indicates that solving environmental problems. 3. adopt a model of recycling economy to preserve resources. and bring up a new generation of scientists who will lead the nation’s scientific research and push it to the most advanced world level. The Guideline recognizes S&T as the number one resource in reaching these goals. Acquire a set of information technologies and manufacturing services that are critical to the country’s competitiveness in this area.5 billion and birth defects to below 3 percent by 2020. promote renewable energy. . More effectively prevent serious diseases such as liver-related diseases and HIV. and bring China’s agriculture to an advanced level. Improve education. and clearing bottlenecks that constrain economic development will be critical to growth. Raise efficiency in energy consumption and preservation. Improve urban environment and community building. 7. In energy renovation. the Guideline pledges to increase investment in S&T to 2 percent of the GDP by 2010. particularly in weaponry systems. realize a 60 percent S&T return rate. increase the level of tolerance. and reduce reliance on foreign technology to below 30 percent. 4. 6. Promote integrated scientific farming technologies. such that China will rank among one of the five most cited countries. To achieve the above goals. and in the meantime. Ensure S&T self-reliance in national defense. guarantee food safety. Increase the rate of research citations. The Guideline identifies the following details to achieve by 2020: 1. It stresses the importance of self-reliance and integration of new learning and points out that it is insufficient to just import technology.5 percent by 2020. 5. Population growth and looming pressure of population aging are among the deepest concerns. develop nuclear energy. 2. and above 2.

However. National High-Tech Development Program (863 Program) The 863 Program was established in March 1986. primarily through national-level S&T programs. 10 programs have been established to support national priorities. for example. genetic testing chips. universities. water-saving agriculture. 12 projects were prioritized: large-scale circuit and software design. magnetic high-speed transportation. new drugs and modernization of traditional medicine. information. and private research centers may submit proposals to compete for funding or to participate in the bidding of national projects. water pollution management.11 During the 11th Five-Year Plan (2006–2010). As of now. including biotechnology. During the 10th Five-Year Plan (2001– 2005). The 10 major government programs are briefly introduced as follows: Key Technology R&D Program The program sponsors key areas of S&T. S&T labs. agricultural product processing. milk product processing. . Applications are reviewed and monitored by planning committees. hence the name. the priority was put on technologies related to energy saving and sustained economic growth. electric automobiles.Innovative Nation THE SYSTEM OF NATIONAL S&T PROGRAMS 99 S&T projects of national interests or initiatives are funded by the government. typically many research results are not publicized. particularly the ones related to national security. space. with varying focuses in each Five-Year Plan. and research on technological standards. food security. These programs are an important part of China’s innovative system in that they serve to activate a wide range of dependent research networks. laser. Application guidelines are normally posted on the programs’ Web sites. online security of banking and data management. The program was originally designed to focus on seven areas.

including developing rural industry. this program aims at implementing S&T products in production processes. energy.12 The Spark Program Founded in 1986.’’15 . and (4) build centers for basic research. agricultural technology enterprises. A few examples of research projects funded include ‘‘Basic Research on the Newgeneration of Iron & Steel Materials. and new materials. The program subsequently expanded its coverage to interdisciplinary domains and S&T education. and develop such research facilities as business incubators. university science parks.100 Business and Technology in China automation. (2) engage in explorative forefront basic researches. and technology training bases.’’ ‘‘Establishment of the Theoretical and Technological System on Disease Genome. and at commercializing technological products. the 973 Program focuses on funding basic research with four main tasks: (1) conduct multidisciplinary studies in agriculture. Molecular Design. population. energy resources environment. Training technical managerial personnel is an important part of its function. Operations include building Spark technology support centers. energy. and new materials.13 China Torch Program Founded in 1988. the Spark Program aims at helping rural China with modern farming technologies. help returning overseas scholars set up their businesses. and enterprise service centers.14 National Key Basic Research Program (973 Program) Founded in 1997. An important part of its operation is to promote international S&T cooperation. Micro-structural Design and Manufacturing Process of the Photoelectrical Functional Crystal. health. and training rural entrepreneurs.’’ and ‘‘Research on Structural Performance. (3) conduct training in S&T. information.

product publicity. electronics. including human and data resources. the program supports S&T-related peripheral projects. which was designed to recruit hundreds of scientists worldwide and to provide funding and research support to them. The program manages the Hundred-Scientists Program. energy.17 National S&T Innovative Program Founded in 1996. such as demonstration centers. . The program aims at providing services in these areas to the other research funding programs. and projects that are key to the national economy but banned by foreign embargo. and social development. the program aims at mobilizing S&T resources domestic and abroad. housing. such as the 863 and 973 Programs. the program aims to improve the quality of life through conducting S&T projects in areas of medication. new materials. biomedicine. and so on. test-drive programs.Innovative Nation Key National S&T Industrial Program 101 Founded in 1992. The program expires in coordination.16 National S&T Program for Social Development Founded in 1996. The program is particularly interested in funding the most advanced interdisciplinary.18 National Knowledge Innovation Experiment Program of Chinese Academy of Science Founded in 1998.19 The program expires in 2010. natural resources. and natural disaster prevention. transportation. the program focuses on supporting projects in agriculture. Another effort was to set up a project named ‘‘Light in the West’’ that encourages scientists to contribute to the government’s ‘‘Developing the West’’ campaign. environment. marine resources protection and exploration. communication. inter-domain projects.

102 Business and Technology in China S&T Funding for Small and Medium-Size Enterprises Founded in 1999. and environmental protection.5 percent over the decade ending in 2004. the fund supports SMEs in S&T projects. According to data from the Organisation for Economic Cooperation and Development (OECD).5 percent of government funding went to government research institutes. director of China Studies. China already ranks second in international publications on nanotechnology. Johns Hopkins University. It reflects the reality of a country with 1. indicates that the multiple facets of innovation are often ignored when assessing China’s progress. China is quickly gaining the top ranking. making it the sixth-largest worldwide.4 percent) and businesses (13 percent). the policy mix has been effective to a great extent in getting things done.6 billion RMB. China’s share in the world scientific publications rose from 2 percent to 6.3 billion people and very low per capita GDP. for a total investment of 1. the program funded 2.22 The concept of targeting a few critical areas and dedicating available resources to them has been a successful strategy since the Mao era. In 2009. 66. For example. Overall. in 2005. For example. with the remaining going to higher education (20. .725 projects in areas of electronic information. The country’s patent applications account for 3 percent of applications filed under the Patent Cooperation Treaty (PCT) of the World Intellectual Property Organization (WIPO).20 State-funding programs have supported many projects. and these patents are doubling every two years. biomedicine.21 Dr. Its total number of researchers ranks behind only the United States in world figures. In some areas. China’s R&D spending has increased nearly 19 percent since 1995 and reached $30 billion in 2005. and China has been good at that. David Lampton. packaging existing technologies for new purposes is also a kind of invention. R&D has yielded important progress. followed by Japan. China’s S&T investment has been accelerating with unprecedented speed. According to OECDcompiled data. new energy resources. Despite lagging structural reform.

However. and 248. However.813 SMEs. the Torch Program. funding scopes overlap. fairness. For example. The program sponsors young and middle-age scholars. In addition to national programs. and accountability’’ as its guiding principle.567 large and medium-size enterprises (LMEs). which may be the reason why funding allocation favors government research institutes. In 2005. and to choose projects to fund based on the priority ranking of national needs. Funds are distributed based on projects. every program vows to maintain ‘‘openness. expenditure by the top 50 universities accounted for 66 percent of total R&D expenditure in natural sciences and engineering in the higher education sector. Government programs such as the 863 Program. taking advantage of S&T personnel and funding sources. Despite the titles of the funds and their declared goals and objectives.23 In higher education. to .24 A wide alliance between higher education and businesses is forming. These reflect not only a lack of transparency. 1.792 universities and colleges. funding efficiency could be improved. more than 50 percent of S&T and R&D funding comes from the government. Direct participation by higher education in the S&T market was 8 percent in 2005. It is a fact that China is still struggling with the heritage of the planning economy.091 government research institutes.Innovative Nation 103 There were 3. Evaluation procedures and standards are vague for most programs. but more important. and the Sparks Program have lent support. an increasing number of other programs are funded by provincial governments or by universities and research centers. With respect to project selection. Business incubators and science parks are examples. which was typical with state programs in the past. official descriptions on respective Web sites are filled with political jargon that is hardly informative about the funds’ specifics. Some are co-funded between the Chinese government and private investors. the Li Ka-shing Foundation. home and abroad. a lack of responsibility. 28. the Youngtze River Scholars Program (YRSP) was founded in 1998 by the Ministry of Education (MOE) and a Hong Kong–based private foundation.

in particular. open competition.8 billion compared with $281. The sector that most directly benefits from S&T is China’s exports. According to OECD.5 million to 1 million yuan awards to ‘‘scholars of the year. From 1998 to 2006. the program gives out 0. China’s S&T has achieved remarkable progress in freeing itself from the rigidity of the planning economy and going in the direction of market orientation. Additionally.4 billion in 2006. RISING HIGH-TECH EXPORTS During the past three decades. Local programs funded by provincial governments include ‘‘Zhujiang River Scholar Program’’ (Guangdong). contributing from 4 percent in 1996 to 20 percent of the world’s total in both imports and exports. in 2007 hightech exports were $347. radio. China had become the predominant assembler of Information and Communication Technology (ICT) equipment by 2005. China has greatly increased its share in leading markets and exporting a wide variety of products. and (2) television. These exports are heavily concentrated in two categories: (1) office machinery. Products made in China are more ‘‘sophisticated’’ than those of countries with similar endowments and have expanded into many high-tech fields. enterprise-centered models. and in the founding of new and innovative companies. and communication equipment.25 Lecturers must be administrative leaders or high-achieving innovators. ‘‘Minjiang River Scholar Program’’ (Fujian). The benefit of the transformation is reflected in the rising productivity. which emerged to meet the demand.104 Business and Technology in China lecture at Chinese universities.26 According to an OECD policy review. and ‘‘Sichuan Scholar Program’’ (Sichuan).’’ Similar programs include the ‘‘Hundred Talents Program’’ of the CAS and ‘‘National Distinguished Young Scholars Program’’ of the NSFC. the program sponsored 1. in boosting exports to unprecedented levels. Exports such as pharmaceuticals are relatively weak. each year.107 scholars to lecture at 97 universities. According to NBS. In the past 10 years. and individual creativity. .

(the predecessor of the Legend Group) to engage in the PC market. and Taipei. A breakthrough both in technology and marketing in 1990 . Some 21 years later.Innovative Nation 105 however. Lenovo In 1984. notably ICT-related manufacturing. and technologies transfer is characteristic of this period. and wholly foreign-owned firms. creative entrepreneurs take advantage of the venues opened by new policies and start exciting businesses. New Oriental Education and Technology Group. At a time when IBM’s portable computer weighed 30 pounds. joint ventures. and Baidu.000 RMB (US$25. Legend Group was founded and the company rolled out the Legend Chinese-character card that later received the highest National Science-Technology Progress Award in China. tend to be the producers of exporting goods. they are the stories of Lenovo. the company took over IBM’s personal computing division. Inc. Liu Chuanzhi launched the New Technology Developer. national brand names are still rare. While many SOEs vanished. In particular. including those controlled from Hong Kong. Three stories illustrate the entrepreneurial This explains why in high-tech industries.000) funding from the CAS. foreign-owned enterprises. several among them later grew into China’s major S&T powerhouses. wholly foreign-owned enterprises have significantly increased their share in exports during the past decade. At each stage. 11 like-minded young scientists headed by Liu Chuanzhi started an importer technology firm with 200.27 SPROUTING INNOVATIVE COMPANIES The government’s efforts in leveraging S&T organizations to seek their own futures rather than survive on public sponsorship has created many types of fallouts. Their contribution accounts for 88 percent of the total exports. Inc. In 1987. Macau. These measures created both insecurity and opportunities for the scientific community. whereas that of joint ventures and especially SOEs somewhat decreased.

To take advantage of the future Internet market. This decision was finalized in 2005. Legend developed an Internet PC. and competing with IBM was the company’s strategy to grow. In 1992. Legend’s products became competitors of IBM PCs. In 1994. Legend’s competitive strategy caught the attention of the Chinese government. Legend leaped to the top PC vendor position in the Asia-Pacific region. the first notebook with a 10. IBM announced its exit from the PC retail business. the most valuable deal made for China to date. Lenovo. For example. Subsequently. As a result. which enabled millions of Chinese users to easily access the Internet. Two years later. Soon after. making Lenovo a top-tier (third-largest) global PC leader. including its global PC (desktop and notebook computer) business. . In 2004. brand names were launched. Lenovo and IBM announced that Lenovo would acquire IBM’s Personal Computing Division. Legend had become the market-share leader in China. The current company name. The opportunity to become the dominant player in the domestic market and subsequently one of the biggest PC producers in the Asia-Pacific market came in 1997 when Legend signed an Intellectual Property agreement with Microsoft. Legend PC products were accepted by the China Torch Program.106 Business and Technology in China allowed the company to leap ahead. and came out number one in the Chinese national Top 100 Electronic Enterprises. including the Legend PC. with its ‘‘one-touch-to-the-net’’ feature. China’s PC producers merely assembled computers in small workshops in response to customer needs. the company’s stock was listed on the Hong Kong Stock Exchange. to counter IBM’s ThinkPad line launched in 1992. Legend introduced its 1þ1 home PC that entered the Chinese marketplace in the same year.4-inch color Thin Film Transistor (TFT) display and a TrackPoint (red ball) pointing device. By 1996. When personal computers first appeared on the market. especially those that were competing globally. came in 2003 when Legend announced its new logo to mark the company’s new direction of expansion into the overseas market. which was looking to support domestic high-tech companies.

like most young people of his age. the enrollment for the year was more than 1 million. Later on. making it suddenly difficult for students to get visas. The New Oriental had become a business . As of 2010. New Oriental Education and Technology Group Michael Minhong Yu was a country boy who went to Peking University to earn a degree in English. Lenovo launched the ThinkPad X41 Tablet. and the rest became history. Lenovo’s ThinkPad is the most popular PC in the world. he began teaching extra hours at English training schools. the industry’s thinnest and lightest PC. To fulfill his dream of studying in the United States.28 As of 2010. the ThinkPad Z60 was equipped with a biometric fingerprint reader. in the hope that he one day could sponsor himself to study in the United States.29 Michael Yu’s company was listed on the New York Stock Exchange (NYSE) in 2006. When Yu started New Oriental in 1993. Then. and Newbridge Capital LLC. cherished the idea of studying in the United States. Studying English was seen as a ticket to a better life. Yu still hangs a photo of his family’s old farmhouse where he had lived for 18 years. the cumulative enrollment had reached 3 million. and the other side for raising domestic animals. The same year. In 1995.000. Yu realized that he might be able to start an English training school himself. Yu. General Atlantic LLC.Innovative Nation 107 Lenovo announced the closing of a $350 million strategic investment by three leading private equity firms: Texas Pacific Group. In 2007. Yu had to stay home. the number of students enrolled reached 15. however. with one side for residential use. Yu had become an English teacher at Peking University. In the 1980s. he was immediately successful. By that time. Having witnessed how English training schools operate. a company dedicated to English training. The house is a duplex. by 2005. In his office at New Oriental Education and Technology Group in Beijing. the 1989 Tiananmen Event occurred. not knowing all the opportunities that were waiting for him. the company had a market capitalization approaching $3 billion.

Inc. (BIDU) is being traded on the NASDAQ at around $600 a share. in 2000. Who could imagine that!’’ As of March 2010. China had a lot of open opportunities.30 when computer users want to find information online. In 1999. Born in an impoverished town 200 miles from Beijing. The company offers Chinese and Japanese language search platforms that enable users to find Web pages. 23 New Oriental bookstores. more than 5. if it could go up to $40. In Chinese.32 Li opened Baidu. news. When I grew up. Li says: I feel very fortunate that I was born in the right time. and approximately 4. It went to $150. just two years after Google was founded in the United States. Li was surprised at the stock market’s reaction: ‘‘I thought $27 was a very reasonable number. returned to China to start the search company. Now it also is the name of a company referred to as the ‘‘Google of China. I decided to open my own company. ‘‘Baidu’’ means crossing the river on a ferry boat.108 Business and Technology in China phenomenon: the company’s network includes 257 schools and learning centers. I would have been very happy. Baidu.31 Robin Yanhong Li. the second one was to go to the U. the stock of Baidu. and videos. images.900 teachers in 39 cities throughout China. In China. The first opportunity for me was to go to college. In a TV interview with MSNBC. surpassing Google’s share price. provides Chinese and Japanese Internet search services primarily in China and In 2009.000 third-party bookstores.’’ except that Baidu has far surpassed Google in the Chinese search space. One popular feature is Baidu’s MP3 Search that provides algorithm-generated links to songs and other multimedia files. Baidu enjoyed . Inc. Li is grateful to Deng Xiaoping’s reform. they ‘‘Baidu’’ it. trained in the United to receive education. The company’s stock went up 350 percent on the first day of trading on the NASDAQ in 2005.

With respect to Baidu’s number-one popularity in China. Robin Li vehemently denies it by indicating that Baidu does not store content files. This turned out to be particularly helpful to SMEs that are short of funding opportunities. With regard to criticisms that Baidu’s search engine facilitates illegal music downloads. one of which was the opening of the stock market. and we can make decisions quicker. The launch of the Shenzhen Stock Exchange (1990) opened up the capital market for company-based R&D. Companies may issue ‘‘H shares.’’ says Li. ‘‘We are closer to the user. while Google’s share was around 26 percent.’’ for example. Under the traditional framework. Kaifu Li. innovation was stifled. LIMITATIONS OF CHINA’S S&T FRAMEWORK Because of its planning economy background. little was left to individual creativity. to trade on the Hong Kong Stock Exchange for international investors. The liquidity of funding resources energized R&D activities at companies’ labs. The Guideline (2006–2020) identifies . are strong areas of Baidu. allowing the transformed SOE firms as well as private firms to tap into a wider range of funding resources. and ‘‘A shares’’ of the same stocks in the domestic market.34 Many factors contributed to these successful experiences.Innovative Nation 109 approximately 63 percent of the market share in China.33 Social networking and mobile search services. The government’s policy was to mobilize a concerted effort to promote S&T and let it receive financial support from the entire society. S&T reform is primarily a process of claiming freedom from the planning tradition. The founder of Baidu. for example. everything was planned by the central or local governments. believes that the primary reason for lagging behind is Google’s delayed entry into China’s marketplace. Li believes that the company’s cultural understanding and expertise in addressing the demand gives the company an is confident that users will choose his company. and university research centers. Google China’s president. both in China and abroad. as it is a search company.

education ideology needs a revolutionary change. education modernization seems to have been changing at a slower pace. Unlike the manufacturing sector that made dramatic ramp-up during the past three decades. which was higher than previous years. Traditionally. Not all barriers come from the planning legacy. on average. The new generation is breaking new ground in all aspects.9 percent.816 students (or 1. the percentages dropped to 0. In Beijing and Shanghai.8 percent) were enrolled in a four-year college. the innovator has to be the center.110 Business and Technology in China a number of remnant barriers to S&T innovation. To achieve this goal. or entrepreneurship. the percentages were 6. some of the challenges derive from China’s traditional culture which stresses the maintenance of the status quo more than breaking new ground. in Qinghai and Guizhou Provinces. Educators stress strict discipline and high examination scores. China’s education system must do two things: a) further expand the coverage of higher education. rote learning is by far a favored method. respectively. however. while 24 percent in the United States have a Bachelor’s degree or higher. When it comes to building an innovative nation. Less than 8 percent of the population currently has a college degree. and that is a reality. The annual national college entrance examination is notoriously difficult because it stresses intricate details rather . Education Building an ‘‘innovative nation’’ is a widely encompassing process. training in creative and critical thinking is suppressed. and b) stress the training of practical and creative abilities. out of every 100. 1. During the Mao era.9 percent and 4. These numbers suggest that offering higher education to more students remains a challenge. NBS data show that in 2006.000 population. when a high test score is the only thing that ensures high school admission and college entrance.2 percent. Chinese education does not foster critical and innovative thinking. making it more accessible. More important. education experienced the heaviest damage. in a sense.

these problems are also attributable to insufficient funding and lack of a high quality teaching force.35 Comparatively.07 trillion RMB. Hands-on experience is a much lesser component than found in schools in the West. and it is not conducive to training a creative workforce. and left with little time to play or engage in community activities. testing is more of a tool for selection than a learning aid that helps the student identify goals and objectives and improve. These shortfalls call for an increase in education expenditures. pressure on students is high. but rather may counter creativeness. because the latter is not included in high school or college entrance examinations. . higher tuition and fees. The old saying that ‘‘grades are what students depend on to survive’’ remains a valid description of the reality.Innovative Nation 111 than problem-solving skills. in foreign language education. For example. but little to communicative activities. in provincial colleges. strong emphasis on grammar and vocabulary often at the expense of communicative skills training may be associated with the fact that most teachers are unfamiliar with target cultures. For example.48 percent of the year’s GDP of 30. This test orientation makes China’s education incongruent with the country’s innovative goals. science lab conditions are widely insufficient. Secondary schools that send more students to top national universities tend to command higher respect and. it is difficult for them to train students in critical and creative abilities. students are loaded with afterschool lessons and assignments. Reforming the testoriented education will liberate creativeness of students and must be done rapidly. As early as kindergarten. Thus. As such. In 2008 the government’s education budget was 3. Little training is offered to prepare students for future work environments. coming from both parents and community. hence. An English class may dedicate most of the class time to spelling and grammar drills. When teachers are insufficiently equipped. Tests such as these force students to study for tests rather than foster innovativeness. The availability of hands-on opportunities in secondary schools falls short even further. On the other hand.

they were profoundly restrictive. and Canada—5. the United States—5. was 400. China’s examination tradition dates back to as early as the Tang Dynasty (681 CE–960 CE). students. Some speculate that the outcome may also have been a result of the ongoing global financial crisis. S&T had no place in traditional civil service examinations at all and was repressed during the prereform time.36 In 2009.3 percent (2005). and to the extent that they become integral to one . for example: France—5. 10. during which time the tie between education and industries will be closer. Civil service examinations had been the only venue to officialdom until the early 1900s. Here again. and parents are coming to the understanding that what the job market expects of a college graduate is problem-solving skills. however. It is a fact that only the top-tier universities are actively connected to industries and are contracted with R&D projects. When the market commands practical ability and encourages the connection between the classroom and economic development. While civil service examinations had given equal opportunities to many brilliant statesmen who would have remained unknown. Hopefully. Schools. Most of those candidates had chosen to attend vocational schools.37 The total number of candidates. a positive cycle will prevail sooner rather than later. NBS data show that more and more students are enrolled in technical schools instead of 4-year colleges (see Figure 4. Successful reform of education largely depends on support from the society. among them 62 percent were enrolled.112 Business and Technology in China developed countries’ education expenditures proportional to GDP are higher.2 million candidates took the annual college entrance examination.2 percent (2002). primarily serving the state philosophy—Confucianism. this is already happening.7 percent (2005). In fact. changes in education will likely follow. the market mechanism will be a driving force. and some scholars push the date back to the Han Dynasty (206 BCE–220 CE).1).000 fewer than 2008. rather than a Peking University or a Tsinghua University diploma alone.

Source: NBS. another. A favorable system would be one in which distortive factors are kept so low that they do not hamper competition. it is also a viable education funding solution. such a relationship is not only fundamental to an innovative culture. competition did not exist. Never has there been a time in China’s history during which successful entrepreneurs have grown in such a great number. Further improvement is critical to making this growth sustainable. Competition During the period of the planning economy. The success stories listed in this book show that the market mechanism is achieving effects. government intervention and protectionism at local levels . moreover. but also ensure that competition achieves its original purpose—that is.Innovative Nation 113 Figure 4.1. In the postreform era. One such condition would be rule of law rather than rule of guanxi. Market competition provides stimulus as well as guidance for innovation. As Western experience proves. China struggles to set up a framework to not only encourage competition. rewarding the innovator.

affect foreign trade. particularly of copyrights and trademarks. In these aspects.38 Other reports indicate that legal training for law enforcement officers and legal personnel is insufficient. More patent applications have been filed as a result. Another condition includes the availability of financial resources that support SMEs. however. and lead to production of poor-quality and even dangerous products. The lack of effective IPR protection could have direct consequences in the economy: it may offset motivation in R&D development both domestic and abroad. The Chinese government and state media are putting a greater emphasis on IPR education. A great deal of progress has been made.114 Business and Technology in China need to be further reduced. The transition to more innovation-driven growth needs the protection of strong IPR. China has room for improvement. real solutions will lie in establishing an effective legal environment. the legislation has been passing tougher laws that would make IPR infringement increasingly costly to the perpetrator. continues to cause concerns. Both judicial and law enforcement are inadequate and need substantial improvement. which includes powerful antitrust laws and reliable law enforcement. the Chinese patent system has been reforming to align with international standards. which tend to be the most innovative entities and the least funded. IPR Protection IPR protection is key to stimulating innovative activities. In 2006. but much needs to be done to meet the needs of both domestic and foreign-owned innovative enterprises operating in China. Since China joined the WTO and signed the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement). OECD’s study indicates in its annual review of China’s IPR condition that infringement of IPR. China’s National IPR Protection Working Group released the 2006 Action Plan on IPR Protection targeting four . In the meantime. ‘‘Strike-hard’’ campaigns may achieve temporary results.

In 2004. while the cost of production is only 1 RMB. does not constitute trademark infringement. IPR protection laws are constantly updated to add new protective features. however.Innovative Nation 115 areas: trademarks. In a December 2006 ruling. the patent granted the exclusive right to Pfizer for using sildenafil citrate in treating ED. Essentially.42 According to the patent. many international benchmarks have been met successfully according to OECD. The company has taken several trademark cases to Chinese courts. In 2001. and imports and exports.39 An immediate beneficiary of the improved IPR protection environment is the U. For example.S. In January 2007. the same court reversed its ruling on the ground that several Chinese drug makers’ use of Weige. The ruling was appealed by 12 Chinese drug producers on the ground that Pfizer’s description of its product lacks specificity. The company’s drug Viagra has become a profitable product in China with a price of 99 RMB or approximately $14 a pill.41 Pfizer eventually brought the case to Beijing’s High Court.-based Pfizer Inc. patents. which overruled FIPC’s ruling on September 7. BNIPR revoked the patent. any Chinese company producing ED drugs using sildenafil citrate .40 It follows that China’s domestic companies started to produce the drug under the trade name Weige and Pfizer filed for rights under that name. the Bureau of National Intellectual Property Rights (BNIPR) granted Pfizer the patent for its erectile dysfunction (ED) drug Viagra under Pfizer’s registered Chinese drug name Wan Ai Ke. which prompted Pfizer to bring its case to the People’s Court. To date. the First Intermediate People’s Court of Beijing (FIPC) rejected BNIPR’s decision and ordered two Chinese companies to stop producing counterfeit Viagra. copyrights. the Chinese name for Viagra. The market was estimated to be worth 10 billion yuan. and reaffirmed that Pfizer holds the patent on Weige effective until the patent expires in 2014. 2007. the Trademark Law issued in 1993 and revised in 2001 was again revised in 2008 to guarantee that inventions outside the country are appropriately recognized.

the company collects only a nominal charge . and for that reason. One example is the recent lawsuit brought by 482 graduate students against Wanfang Data Co. The case concerns whether students owned copyrights of their theses.45 in September 2008 at the People’s Court of the Chaoyang District of Beijing.981 counterfeiters in 2005.43 In the area of copyright protection. II.116 Business and Technology in China would constitute patent violation. as the economic reform progresses. the Chinese government has intensified its campaigns against piracy. which was followed by Operation Mountain Eagle in 2006 that aimed at utilizing technology to raise effectiveness in law enforcement. the awareness of copyrights and the pursuit of IPR protection are now embedded in people’s consciousness. Despite these efforts.. the government issued a regulation that imposes a 100. Pfizer China was pleased with the ruling and posted the following statement: We view today’s decision as a confirmation of China’s commitment to effective patent protection in China and will enhance the confidence of the broader business community interested in investing in China. a national crackdown Hawk Action netted 5. and III through early 2007. Ltd. Pfizer will continue to vigorously defend its IP rights in China. For example.000 yuan fine per copyright infringement of works disseminated over the Internet. Students alleged that Wanfang included their theses in the company’s database ‘‘Dissertations of China’’ without their authorization..istic. Wanfang’s second argument is that the database is designed to serve public benefit. Nevertheless. such as the universities and the hosting network of China Science and Technology Information Research Center (http://www. Meanwhile. They demanded an apology and compensation for economic losses and emotional distress. and another series of campaigns dubbed Operation Sunshine China’s copyright protection remains in its developing stage and inconsistencies are not uncommon.44 IPR laws are interpreted differently at times resulting in inconsistent rulings. Wanfang defended that the company’s practice does not constitute a violation of copyright on the ground that the company had signed agreements with related

300 yuan to 3. or 350 million RMB in total. given that China’s financial system is state-owned.S. ordering Wanfang Data to pay 364 graduate students economic damages and court expenses. although the per-copy charge is low.Innovative Nation 117 of 2 yuan. They also tend to have difficulties in securing loans for two reasons: (1) they are volatile. the plaintiffs disagree in that. and (2) their success threatens the very existence of SOEs. however. the National Library in recent years has paid more than 700. or approximately 30 cents in U.200 yuan per dissertation theses. essentially. Hence.000 yuan to Wanfang for using its database. On October 15. and most of them do not qualify for the investment grade for domestic or foreign banks. For example. They belong to the private sector that is producing more than half of China’s GDP. but not for transferring the usage rights. which puts the company’s revenue well above 100 million RMB. With respect to the public benefit argument.46 The 482 graduate students sued for a compensation of 40 yuan per thousand words in addition to 7. the court discovered that Wanfang also sold the access rights through mobile telephone services and other instruments such as access cards. SMEs are active in launching new ventures that are essential to innovation and in fostering an innovative atmosphere. dollars. 2008. They believe that. per dissertation copy when sold to the National Library. Moreover. the People’s Court of the Chaoyang District of Beijing decided in favor of the graduate students.47 SME FINANCING SMEs are leaders of homegrown innovative forces. it traditionally .000 yuan of compensation for emotional distress. ranging from 2. their clientele includes 50 percent of all higher education institutions of China. according to Wanfang’s own claim. Additionally. that the signed agreement was to allow the schools to publish their dissertations in different media. any form of publication without the author’s authorization constitutes violation of copyright. the quantity is large. The plaintiffs argued. The judgment was hailed as a major victory in IPR protection.

Conversely. One way for the government to support SMEs’ innovative ventures is through public procurement. large governmentsponsored S&T projects are funded by state appropriation. It is a traditional practice for the banking system to favor SOEs. and as a result. the Chinese government typically does its procurement primarily with SOEs. the state system does not have the legal and regulatory settings for operating any adequately functioning venture capital system. on the other hand. whereby the government instructs state banks to invest in SMEs’ R&D projects (known as ‘‘policy-lending’’) without sufficient regulatory oversight yet in place. The top-down approach. The Guideline (2006–2020) proposes to introduce new funding mechanisms for policy banks and commercial banks to increase exposure to high-technology SMEs and startups. The same shortfall exists with foreign banks as well. how to fund innovations is a great challenge. While this is not uncommon in the West. is unlikely to produce desirable outcomes. Now. in which case they trade a significant portion of patent rights. privately owned firms largely depend on self-funding. it has become important for the government to expand procurement to SME sources. this may result in new bad loans. This is particularly important for SMEs that by nature have higher risk-return levels. SMEs are left with few funding opportunities. To conduct fair . Succinctly put. A typical way for small firms to acquire funding is to partner with large firms. It takes time for state banks to acquire experience so that they can identify and invest in high-risk ventures. As the economy becomes more market-based. Instead. The Guideline (2006–2020) treats public demand as a key factor in invigorating economic development and innovation. large-size private firms have access to both state funded programs and foreign venture capital. as most of them lack the expertise needed to manage risks with China’s SMEs. As a result. in part because SOEs are the largest employers and must be supported at all costs. This represents a policy shift from the traditional entirely supply-side policies and indeed favors technology development. venture capital that can address market failures when they occur is needed.118 Business and Technology in China does not serve SMEs as a priority.

public procurement has the potential to become a significant financial source for innovative activities. For example. despite the fact that the volume of government procurement has been expanding rapidly.Innovative Nation 119 government purchasing. which is still far below the levels in most industrial countries. it accounts for only about 2 to 2. From OECD countries’ standpoint China’s government procurement must not be a domestic operation only. OECD countries are watching China’s government procurement practices with the highest interest. it must be based on the demand for innovative and competitive products or services and through an apparent bidding process.49 It is a fact that China’s domestic credit market may remain small for a long period and thus China will continue to attract foreign investment. China being ahead on many products. regardless of the provider’s status. because whether China’s new procurement policies conflict with the WTO’s Government Procurement Agreement (GPA) carries a tremendous impact. S&T Human Resource Management In S&T development. Chinese companies also may enter public procurement markets abroad. Following the principle of reciprocity. China has much room to grow in this area. China’s public opinion with respect to entrance into the WTO’s GPA is positive: it opens up China’s public procurement market and will not likely affect Chinese producers. which average 10–15 percent of the GDP. The Guideline (2006–2020) clearly states that public procurement in technology products cannot be ‘‘ordered’’. successfully managing highly trained personnel is just as important as locating capital resources. Given the size of the Chinese market and the importance of the government in the national economy.5 percent of the GDP. now that China is a member of the WTO. As of early 2010.48 Joining GPA will likely broaden funding opportunities to Chinese SMEs as well. China’s entry into WTO’s GPA was under preparation. and . the government must first maintain transparency through coordination of agencies.

more and more overseas intellectuals are returning to serve the country as the government’s attitude toward knowledge and intellectuals has changed. mostly in large and medium-size companies.51 OECD and U.989 students abroad 23. data indicate that the European Union has become a more attractive destination for Chinese students. for which out of 38. and later became a professor at Indiana State .3 percent returned (see Figure 4.’’ The history of persecution of intellectuals takes a long time to fade. For example. 44. while 30 percent work in joint venture companies. out of the 144. overtaking the United States in 2004. some are driven by patriotism. a private undergraduate college affiliated with Sichuan University.120 Business and Technology in China higher education is the main source of talent. followed at a distance by Canada (18 percent).S. At early stages of the economic reform. This compares favorably with the data of 2000.52 Although most overseas students return to take advantage of the favorable domestic opportunities. Japan (9 percent). Chen Aimin is now president of Jinjiang College.50 university enrollments in China have increased quickly to the same level as in the United States and the European Union. However. the 1989 Tiananmen Event was a setback to an improving situation. According to OECD.000 (30 percent) have returned. Australia (7 percent). the repatriation rate of overseas students was low. Favorable policies have been created to attract overseas students to return and establish businesses or research facilities. Dr. the record of the past eight years indicates that the returning rate has been increasing. Some 70 percent of S&T personnel work in domestic firms. The number of graduates has increased to comparable levels.2). Nevertheless. She left the country to study economics at Pennsylvania State University in 1983. One of the challenges in S&T human resources that China is faced with is known as ‘‘brain drain.000 students who were studying abroad in 2007. As the economic reform sustains. The United States is by far the largest recipient of the highly skilled Chinese (57 percent). The second-ranking host country is Japan. and the United Kingdom (3 percent).

What remained ahead for me was to fulfill teaching duties. In the West. Without a competitive mechanism put in place. Source: NBS.’’ Dr. She returned to China for a more rewarding cause. Chen states that having worked and lived for 22 years in the United States. before becoming president of Jinjiang College in 2006.2. which is to help China become a nation of educational excellence. collaboration between universities and industries and other economic aspects is routine.’’ says Dr. ‘‘I had achieved everything a professor could hope for in the United States. Dr. Chen. and the award of outstanding professor.53 Reform in human resource management could be a critical part of higher education reform. Chen’s goal is to build a first-class junior Ivy League school in China. Chen returned to Suchian University and assumed the position of vice president. promotion to full professor. and to build a bridge of cultural understanding that includes introducing China to the world. In 2005. Dr. she finally finds an opportunity to fulfill her wish to serve her motherland with her expertise in education.Innovative Nation 121 Figure 4. I expect to return a service to my country. to introduce new Western concepts. University where she won top honors for teaching. Chen says. In a televised interview. A great number of the faculty . Dr. such as tenure. healthy changes could hardly happen. Number of Students Abroad and Returned. ‘‘In that way.

55 Tsinghua now hires research scientists uniquely on a contractual basis starting in 2009. however. several universities have taken the lead to reform the system by installing a contractual system in the real sense.’’ to invigorate research and teaching through competition. the goal is to ‘‘break the iron bowl (stable job). representing a 19. Personnel exchange between universities and industries.122 Business and Technology in China rely on such relationships for grant opportunities and for identifying research projects. but only nominally. Reform in the tenure system is believed to be an important step toward energizing innovativeness. and offer a prestigious salary and the best research facilities.56 As of October 2009. The Chinese postdoctoral system was founded in 1985 at the recommendation of Nobel Prize laureate Tsung-Dao Lee with support from Deng Xiaoping. a network that coordinates research and employment opportunities. there were 7.903 postdoctoral researchers in research centers nationwide. an event that stirred much debate. In addition to overseas returnees. and among universities are not uncommon. universities typically inherit the SOE legacy of lifeterm employment. an evaluation-based hiring was applied.2 percent increase from 2006.57 According to China Postdoctor.670 postdoctoral centers are located throughout the country. After 1986. In China. postdoctoral research centers in China are quickly becoming a main domestic source of S&T personnel. Some 2. In recent years. a total of 1.54 Shanghai University did not renew contracts with 19 percent of its faculty including 40 associate professors and 5 full professors in 2001. Contracts are renewed with few exceptions. The postdoctoral centers recruit the most advanced scientists from among young doctoral degree recipients whose work represents state-of-the-art advancements. Reform in personnel management in higher education has been a slow process.640 researchers . given that the tenure system is a competitive process. Higher education’s funding primarily came from the appropriation of the Ministry of Higher Education before 1986. Peking University and Tsinghua University started contract-based hiring as early as 2000.

Innovative Nation


(33.41 percent) were enrolled in research centers in Beijing. Financially, the majority (59.64 percent) was self-sponsored and about one-fifth received government financial support. With respect to areas of studies, 40.35 percent of the postdoctors worked in the area of engineering, followed by science (20.09 percent), medicine (10.11 percent), economics (7.41 percent), and management (6.82 percent). The remaining 15 percent were distributed among areas of agriculture, literature, law, philosophy, history, education, and military science.58 From 1985 to 2008, the postdoctoral centers have produced a total of 35,124 graduates (see Figure 4.3). According to China Postdoctor, the Chinese postdoctoral system is different from the American system in at least three aspects.
1. The Chinese postdoctoral centers are funded and managed by the government through the Postdoctoral Commission involving representatives from a variety of government agencies. Daily management work is done by the office of human resources at the research-center level. Postdoctoral candidates must be reviewed and approved by the Postdoctoral Experts Review Committee at the government level. Much of the

Figure 4.3. Number of Postdoctoral Graduates (1985–2008). Source: China Postdoctor.


Business and Technology in China

research projects are under scrutiny of related managing agencies. Bureaucracy and rigidity of rules and procedures are often eminent hindrances. In contrast, the American system features government support and local management. Researchers have a greater flexibility in research and in selecting ways to take advantage of the market mechanism. 2. In the American system, postdoctoral students are normally paid onethird to one-half of the salary of professionals in the field. The Chinese system treats postdoctors with utmost respect, paying them higher salaries than those received by professionals, devising special incentive policies, offering the best working and living conditions, and making sure that their achievements are protected. 3. As a result of differences in social systems, with the Chinese being a semi-market economy, employment flexibility is more limited compared to that of the U.S. Employers and job seekers do not always have the right to their own hiring decisions. Forced retention is an existing residual of the planning economy that is being phased out.59

With regard to the last point, the Chinese government is fully aware of the personnel management deficiency and has made it a target of the current reform. A government newspaper, The Guangming Daily, had the following comments:
With the development of the socialist market economy, competition is intensifying among regions, government organizations, and enterprises. As a result, free floating of talented personnel is unstoppable. It is absolutely normal for any talented person to join or leave a locality, an organization or a firm. What keeps people is a fair and just work environment. . . . However, some organizations set every barrier possible, including not releasing personnel documents and retaining the Hukou from being transferred to block talented people from leaving. They ignore the fact that the ‘‘jailed’’ talents are not able to deploy their expertise. The bureaucratic practice results in waste for both private and public interests.60

The situation of China’s postdoctoral system adds to the picture at the starting point of China’s innovation race. Many challenges are not unique to the domain of S&T, and some of the challenges have a greater impact on S&T than elsewhere. Deficiencies in personnel management belong to this category. The bright side, however, is that the Chinese are aware of their problems and are determined to make changes.

Chapter 5

Economic Reform
Many questions about China’s changes can be answered by looking into the country’s past. In fact, the onset of industrialization dates back to the mid-19th century with the forced opening of treaty ports followed by China’s division into foreign concessions. The French opened a railway line connecting Yunnan to Indo-China, while the British and the Germans gained ground along the east coast. After the warships came the ‘‘soft power’’— U.S. and French missionaries—preaching from the coast to the hinterland, challenging the Confucian dominance. The Opium War opened a window to a heart-wrenching reality—China was a dysfunctional, corruption- and crisis-stricken medieval feudal empire managed under the most intricate bureaucracy one could find that had little chance to defend itself against invasion by Western industrial powers. It was thus agreed, from the emperor down to the farmer, and not without reluctance, that China must learn from the West and start to reform itself. Braids were cut, new schools opened, American-style republicanism was experimented. Then, came Mao Zedong who implemented a powerful European ideology—Communism. By 1949, the Communist movement had shifted property ownership from landowners to poor peasants in the vast rural areas through the Land Reform. The First Five-Year Plan that started in 1953 further converted private property into state-owned property. Urban capitalists were forced to surrender their enterprises, and


Business and Technology in China

farmers were organized into the People’s Communes. By the end of the 1950s, deprivatization was completed, the People’s Communes and SOEs became new homes to rural and urban populations, and the planning economy was in full swing. While the new Communist regime was prone to economic mismanagement, it was efficient in many aspects. Political movements suppressed dissent and mobilized the nation to build the country primarily through selfless contribution. Household spending was reduced to the survival level; savings went to the boosting of national defense. The successful detonation of the first atomic bomb (1964) and the launch of the first satellite (1969) happened during the years in which the nation was recovering from a deadly famine (1958–1961) that had killed more than 25 million. In addition to the heavy toll on the economy, subsequent waves of political purification campaigns eventually put the Communist regime in doubt. The last revolutionary upheaval, the Great Cultural Revolution (1966–1976), lasted for a decade and caused the heaviest devastation ever on China’s economy. Perhaps as devastating as the Mao era was the Communist failure that provided guidance and momentum—do the opposite and wait no longer. Deng Xiaoping’s economic and political reforms led to a volcanic eruption of economic ventures that have improved people’s lives by many folds. The current reforms are in greater depth than at any time in Chinese history. Market mechanism seeps into every corner, and SOEs are being transformed into private or semiprivate enterprises. Yet, China remains under the rule of one single political party, the system is officially still communist, and the economy is divided into two sectors—the state-owned and the private sector. Despite the prolonged period of growth in GDP in double digits or high single digits, questions point to the nature of the system that underlies perspectives of sustainability. To get a better understanding on this issue, it serves to look into details of economic reforms in areas that have been essential to founding 21st-century development.



In the 1950s, following the Soviet model, the Chinese economy was divided into the primary sector (agriculture), the secondary sector (manufacture and construction industries), and the tertiary sector (service industries). The shares of GDP produced by these three sectors were 50.5 percent, 20.9 percent, and 28.6 percent, respectively, in 1952. In urban areas, SOEs and POEs coexisted. By 1957, through the movement of Socialist Transformation, the private sector vanished, yielding to the dominance of public enterprises. The private sector was reduced to collectively owned enterprises from mergers of former private businesses and a small number of sole proprietors. The modern economy has evolved from reforms to this base structure. The process is known as building socialism with Chinese characteristics or market economy with Chinese characteristics in Deng Xiaoping’s terms. ‘‘Chinese characteristics’’ refers primarily to CCP’s leadership. The prereform system was composed of two core mechanisms— central planning and SOEs. Typically, the Chinese government carried out the central planning through the State Planning Commission of the State Council, which prioritized the production for a period of five years at a time. Pricing and distribution of goods were decided by the state rather than by the market. Information of supply and demand was gathered by the Planning Commission as an important basis for decisionmaking. Political agendas, however, often had the upper hand. This explains why China was able to carry out nuclear weapon research in the 1960s, even while the nation was struggling with an unprecedented famine. Typically, while central planning can be stunningly effective in allocating resources to critical programs and achieving results, it is ineffective elsewhere. Poor planning was routine, because efficiency is not as important in a central planning economy as it is in a market economy. One example is the Shenyang Smelter and the Shenyang Cable Factory case.1 Shenyang Smelter was a copper producer located next to the Shenyang Cable Factory, which used copper as


Business and Technology in China

raw material. Both are located in the northeastern province of Liaoning. Despite their proximity, the Shenyang Cable Factory had to receive its copper supply from the remote province of Yunnan, thousands of miles away. Meanwhile, the copper produced at the Shenyang Smelter was shipped to the Heilongjiang Province and other more distant provinces. The Chinese central planning economy was different from the Soviet’s economy in several ways, one of which was its lack of the Soviet-style uniformity, which was due to China’s extensive agricultural tradition and an extremely weak industrial background. Hence, the Chinese central planning economy focused on programs that were of national concern, leaving provinces with more freedom to make local economic plans, resulting in a stronger extraplan economy, or the portion beyond the national plan. Because of the lack of the Soviet uniformity, the Chinese government had its own way to ramp up production—through political and economic campaigns, such as the Great Leap Forward (1957), a widely impacting movement that was implemented in a variety of local ways. This background had its impact on the current economic reform. Professor Yi Feng of Claremont Graduate University, California, points out that the stronger extraplanning economy (versus the Soviet’s economy) resulted in an eminent feature of the Chinese reforms: they are more gradual and experimental than their Russian counterpart in the early 1990s.2 This turned out to be an advantage in the sense that it allowed urban industries to gradually absorb labor demand rather than having to face drastic pressures all at once. The right and left arms of central planning were the SOEs. Theoretically, SOEs are all directed by the central government. In reality, however, differences exist. Enterprises immediately under the central government rank higher in privilege than those under the provincial and county-level governments. Therefore, state control often yields to local control at lower levels. Because of this feature, SOEs are also known as ‘‘people-owned enterprises’’ (quan min suo you zhi) run by managers who serve as agents of the government. In the early 1950s, the Gross Value of

These measures gradually relaxed the government’s position in planning. may have boosted production.S. On the other hand. or play cards on the shift. By the time the Great Cultural Revolution ended in 1976. A two-hour lunch break was universal. Material reward was labeled capitalist style and hence excluded. at an earlier stage. smoke. Political campaigns. and pricing . the government instituted a ‘‘two-track system’’ to combine government quota with enterprise profit margin. child care. in 30 years. which was known as the ‘‘Contract and Responsibility System (CRS). including hospitals.’’ or the election of model workers and so on. Because planning was centrally conducted. the private sector had been replaced by the public sector. the year of announcement of economic reforms. A similar system was adopted in rural areas. ownership. primary and middle schools. Larger SOEs operated a full-service system.Economic Reform 129 Industrial Output (GVIO) produced by SOEs was 77.6 percent.’’ that allowed farmers to keep their beyond-quota agricultural products and market them to earn cash. free medical care. and the remainder was contributed by the private sector. employees were guaranteed lifetime employment.’’ Deng Xiaoping’s economic reforms changed the whole picture. and then they were allowed to sell the beyond-quota products on the market at their own prices. the Chinese economy was on the brink of collapse. As such. And. such as ‘‘catching up with the U. housing. child care centers. State enterprises had to first submit the state quota at government-set prices. in the workplace it was not unusual to see workers chat. and retirement benefits. because it did not exist. By 1978. but they never had a long-term effect. the enterprises did not worry about market pressure. and benefit packages that covered ‘‘from cradle to grave. For example. Competition was nonexistent within and without the firms. including planning and distribution to a high level. State enterprises were given autonomy in many areas. Quality control and work motivation were notoriously weak. state enterprises typically were assigned production quota and took no part in distribution and pricing.

1 percent. mergers.7 percent. More than 80 percent of small and medium-size SOEs had to undergo restructuring. secondary.6 percent. with the state having the majority share. however. the ownership structure of SOEs had changed from 100 percent state owned to a plurality of ownership. Finally. such as provision of housing. The debt-equity-swap scheme lessened banks’ burden by getting rid of 1. Shares of primary.4 percent in 2007. the remaining SOEs freed themselves from their social responsibilities. contracting. the government retreated to maintaining control of large enterprises. and 17. Structurally. day care. will be a prolonged process because of ideological constraints and because of the ongoing establishment of a social security system is not yet ready to fully take care of unemployed workers. letting smaller and medium-size companies go through the privatization process. and hospitals for employees. Most important. The tertiary sector will be the source of new jobs. 40. The economic impact was significant. To clear bad loans made by state banks. schools.000 in 1995 to 20. the government opened up a credit market and traded these loans as initial public offerings of stocks in 2002. and tertiary sectors now stand at 3.3 percent in 1990. compared with 41. 54.400 billion RMB of NPLs. joint-stock companies.3 percent in 2007. and bankruptcies by the new millennium.4 The GDP structure has also changed.680 in 2007. and 42. leases.130 Business and Technology in China control. and production and motivation were boosted to a level higher than ever.1 percent. becoming a hotbed for private industries. Deng Xiaoping’s Open-Door Policy as well as China’s entry into the WTO created valuable opportunities for private firms to gain access to a wide range of economic fields previously . As SOE restructuring deepened.6 percent in 1978 to merely 33. the reform had changed the state sector’s proportion in the economy: the GVIO produced by state enterprises decreased from 77. and led to a market-based supply and demand. The full exit of SOEs.3 It turns out that this process remotely prepared China’s banking system for dealing with the 2008–2009 global financial crisis. The number of SOEs also came down from 118.

unrest in Xinjiang that led to more than 180 innocent citizens being killed. and Chongqing. more FDI. a worsening situation of the economy was feared to be a factor behind the July 5. as well as in large cities located in the eastern plains.64 billion. In 1978.8 percent in 1978 to 66 percent in 2007. In the case of a semi-market-based economy. Sichuan. and 70 to 80 percent of the GDP growth.14 billion. SOEs went into a series of restructuring processes. However. Guangxi. total imports and exports were valued at $20. higher numbers of educational institutions. with a trade deficit of $1. 2009. is a widening disparity between China’s east and west regions. however. such as banking. Gansu.7 billion. the value increased to $2. private industries produced 65 percent of China’s GDP. mostly breaking up into privately owned or semi-privately owned entities. the government has created a number of incentive policies since 1999 under the slogan of ‘‘Opening the Great West. Compared with inland provinces. The government blamed it primarily on Uygur . telecommunications.5 The contribution is particularly eye-catching in import and export businesses. Guizhou. Twelve western provinces and autonomous regions are particularly hit by harsh economic conditions.’’ This effort gained more urgency during the 2008–2009 global economic recession. the Chinese government has an advantage over its Western counterparts in setting up and implementing stimulus plans. as stimulating domestic demand becomes the only venue that can stimulate China’s economy when the global economy is shrinking quickly. Inner Mongolia.Economic Reform 131 held by the SOEs. Tibet. Yunnan. including Xinjiang. The fastest economic growth first took place in geographically advantageous coastal cities with convenient transportation systems. Ningxia. Qinghai. To channel investment into underdeveloped regions. In 2007. these regions enjoyed lower rural-urban income disparities.173. and the auto industry. By 2006. Resulting from these advantages. insurance. with a surplus of $288 billion. and better-suited infrastructure for modern industries. Shaanxi. The ratio of foreign trade to GDP increased from 9.

China’s POEs are admired for their aggressiveness in risk-taking. Thus. by convention. This is primarily because POEs have an advantage over their SOE counterparts—that is.S. POEs gained ground at a faster pace. This is obvious in loan access. POEs constantly complain about discrimination. While the SOEs are reformed into more effective work units. in March 2003. By 2002.132 Business and Technology in China separatism and sabotaging forces beyond the border. Nevertheless. the term POE refers to private enterprises in urban areas. however. government intervention has shortfalls. the development of POEs has not been smooth. When SOEs and POEs coexist. The reality is widely perceived as more complicated. In urban regions. a POE representative from Guangdong showed up at the door. one-third of the GDP was produced by the private sector. The chairman and chief executive officer (CEO) of the privately owned New Hope Corporation. air force’s stockpile of smart bombs. the joke reflects a reality—the Chinese POEs are informed. unequal distribution of resources is expected to favor SOEs. Obviously. because they are not employers. competitive. Thus. However. carrying a case of the company’s ammunition samples. producing weaponry is nowhere close to any POE’s capacity. they are free from employment of surplus labor. there is a growing number of sole proprietors. This allows POEs to effectively compete and dynamically upgrade their S&T advantages. As generals at the Pentagon were busy trying to locate a supply line. Additionally. Rural China predominantly has operated on family-based farming since 1978 when People’s Communes were disbanded and land was allotted to families. A POE is defined as an enterprise owned by domestic entrepreneurs with at least eight employees. These two categories are not listed as POEs. and ready to turn every crisis into a business opportunity. As of 2010. and the situation is exacerbated when large banks are themselves SOEs. the private sector as a whole contributed more to GDP growth than the public sector. A popular joke goes. the air-bombing campaign over Baghdad quickly drained the U. a fodder producer based in .

8 billion deal for Ford’s Volvo car unit. Private-capital-controlled banks have been increasing rapidly. Geely now specializes in affordable. telecommunication. the auto industry. POEs have become major employment sources. As a result. In 2007. 2009. when considering the total employment of the private sector.8 million employed by SOEs. the company ranked number nine in sales reaching 221. including rural China. reached 30. Geely Corporation was founded in 1997 by an engineering graduate student who first went into business to produce Geely refrigerators. Geely inked a $1. once described the disadvantage of being a POE as having to give SOEs a head start of 100 steps in a short-run race. By the end of 2002. and so on were out of their reach. . By January 1. The three decades of reform are marked by the victorious march of POEs. primarily to African and Latin American countries. With the deepening of economic reforms and China’s entry into the WTO. Private enterprises are beginning to enter these areas. POEs employed 127.4 million workers versus 614. And. the CCP 16th Party Congress held in 2002 denounced discrimination against private enterprises and vowed to offer equal opportunities. POEs had employed 30 million workers. according to NBS data. the employment capacity reached 88. Targeting the vast majority of lowincome Chinese households.7 In March 2010. such as retail sales and agricultural products.000 units.8 percent of the workforce. barriers are being cleared one after another. and energy-saving minicars. Banking. The economic reforms have profoundly changed China’s economic landscape of which a few sectors are reviewed below.800 units per year.6 Complaints such as these persist. POEs were allowed to operate only in sectors that were not of national importance. Geely (good fortune). POEs have entered such sectors as the auto industry and gold mining.Economic Reform 133 Sichuan. The CCP revised its Constitution to welcome private entrepreneurs to become members. compact. In the 1980s. Geely’s international sales. insurance. despite the fact that they remain small in size. The first Chinese brand automobile. serves as an example.

mining and manufacturing became areas of the biggest investment. service and light industries that produced items needed for people’s daily needs were suppressed. however. The trend continued after China broke away from the ‘‘big brother’’ in the early 1960s. Two distinct features of the Soviet model are notable. a great famine. such as textile mills and small factories of daily utensils. the proportion of light industries dropped from 64. Second. These enterprises were located predominantly in urban areas and in the light industry sector. Thus. the political situation of the 1950s also contributed to the shift. The Socialist Transformation Campaign in the early 1950s caused this sector to drastically decline in production output. A popular understanding of this disaster is that strong labor was mobilized to the front of mining and steel producing. First. and many capitalists were suspected as being West– friendly. From 1953 to 1978. which was enough reason at the time for their property to be confiscated. In addition to central planning policies that favored heavy industries. heavy industry became the top agenda of central planning. In the 1950s. which was aimed at catching up with the West in short order. China must strengthen weaponry production. the consequence of which was. Additionally. By the late 1950s. the Korean War (1951–1953) created further opportunities to assault the private sector. industrialization paralleled transformation of private enterprises into SOEs or collectively owned entities. to save resources for heavy industry. China’s industrial development was modeled after the Soviets. leaving . out of the yearly industrial output. During the three decades from 1949 to 1979.5 percent to 43 percent.134 Business and Technology in China INDUSTRIAL REFORM Reforms in industrial sectors represent the most remarkable changes. This emphasis was justified ideologically and strategically— because there is no compromise with capitalism. ramping up industry production had turned into a production campaign known as the Great Leap Forward.

Moreover. Acquiring more energy resources is a pressing task. REVAMPING THE ENERGY INDUSTRY The fast economic development has put a heavy toll on the nation’s energy resources. ordinary machinery manufacturing. the energy industry is probably the area in which reforms have gone in greater depth. such as tax incentives and various kinds of subsidies. such as transportation. Heavy industry has gradually yielded to light industry. environmental products.Economic Reform 135 farmlands in the hands of women and senior men. mining. office machinery. nuclear energy. and the textile industry sank into the category of ‘‘sunset industry. As the government economic policies purport. a variety of modern industries emerged and quickly took the spotlight. despite its emphasis hydraulic and wind-power projects. Meanwhile. Natural disasters and poor farming policies also were blamed for the disaster. China’s economy eventually will head for a knowledge-based economy in which S&T and the market mechanism ultimately will replace the traditional industrial gridlock.8 Within the industrial sector. telecommunication. both the political agenda and economic planning have been revised to favor the rule of market mechanisms. . the government is leaning toward market-friendly strategies to steer the economy. In reality. bioengineering. and so on.’’ In lieu of uniform central planning. The most noticeable consequence is that it has caused widespread inflation in China during the past 10 years. causing fuel prices to rise. The quasi-wartime industrial strategy was abandoned and replaced by export-led growth. pharmaceutical. only 16 percent of the nation’s electricity is currently generated by renewable energy and 75 percent is generated by burning coal. Coastal cities were among the first to thrive. and the tertiary industry (the service industry) has grown the most rapidly. Since 1978. and thus an up-close view benefits an understanding of these industrial reforms. computer.

After the economic reforms started in 1978. China has stepped up its diplomatic and economic outreach in Africa. and transportation. after the United States and Japan. In recent years. As heavy industry has been shifting gradually away from old machinery that was . driven primarily by urbanization and booming commercialism. utility fuel represents the largest category of energy consumption. after the United States and surpassing Japan. industrial. By 2002. it has become the world’s largest source of carbon dioxide emission. its petroleum consumption ranked third.9 To modernize its industry and save its environment. this development easily burned up the domestic supply of fuel. After 1993. This fragile self-sufficiency could support only the survival economic needs during the Mao era. representing only 1 percent of total electrical power in 2003. China’s energy consumption structure is divided into four categories—utility. The discovery of the Daqing Oil Field in the 1960s freed China from insufficiency in military and basic nonmilitary transportation. Latin America. The second-largest category is the residential and commercial areas. residential and commercial. China’s transportation ran on natural gas that was stored in a bus’s set-top gasbag.136 Business and Technology in China China has a long history of coal reliance. and other possible directions as well in search for oil—these efforts have been labeled ‘‘oil diplomacy. Because it is fundamental to every economic sector and to people’s daily life. and buses no longer carried gasbags. China could no longer maintain its fuel self-sufficiency and became a net fuel importer. the Middle East. Nuclear power in China remains underdeveloped. The third category is the industrial sector.’’ In the 1950s. China must transform its reliance on coal to other energy resources. This sector represents about one-third of the nation’s total energy consumption. In recent years. surpassing the United States. Coal is expected to be responsible for three-quarters of that carbon dioxide. China ranked number two in the world in energy consumption. In 2003. Utility fuel is used to generate heat and electricity.

Nazi Germany relied heavily on liquefaction technology to fuel its mechanized armies. The Chinese picked the Bergius approach.10 China’s energy consumption is anticipated to double between 2010 and 2020. Indeed. one technology aims to extract liquefied products out of coal. the reliance on coal has been yielding to the use of electricity. however. is more complicated and costly. the country would rake in top profit. Since 2008. China’s coal reserve accounts for 13 percent of the total world reserve. and natural gas. yielding 55 to 56 percent of energy in coal. both reduce coal’s long hydrocarbon chain into shorter hydrocarbon chains that form gasoline. Coal-liquefaction technology was developed in Germany in the 1920s. To deal with this problem. enough to sustain the country’s economic growth needs for a century or more. if it could be converted to cleanburning fuel. This sector is expected to rise faster than other sectors because of the increasing number of personal cars. The two popular methods. The Bergius approach. Despite the increase of imports and the utilization of other energy resources. one strategy is to examine China’s strength—its abundant coal reserve. During World War II. energy supply nevertheless may fall short. liquefied petroleum gas. The Bergius approach is more productive.Economic Reform 137 inefficient in energy consumption. requiring separate plants being built to process liquefaction under different conditions. diesel. known as Fischer-Tropsch and the Bergius approaches. Finally. If China could successfully transform coal into synthetic oil. whereas the FischerTropsch approach results in a lower yield of around 45 percent.11 The project of transforming coal’s complex mix of hydrocarbons into gasoline and diesel fuel (liquefaction) began in 2001 and has been given prime support by the government as an 863 Project. such as hydro and nuclear power. transportation represents the fourthlargest area of energy consumption. the Chinese government has been forcing small to medium energy-inefficient companies to shut down. particularly in an era of . and aviation fuels.

Shenhua had invested 10 billion RMB to build a liquefaction plant. however. the NDRC called for a suspension of all liquefaction ventures.13 There are. which fluctuated in 2008 alone from $147 per barrel down to $33. Earlier in 2002.87 per barrel. a trial run of 300 hours was conducted successfully. A report indicates that the first phase of a project of 5-million-ton annual capacity went into production in May 2009. Shenhua’s solution is to pump groundwater from 100 kilometers away. and Germany to study liquefaction in the Inner Mongolia Autonomous Region.12 In 2007. Heilongjiang Province. started mining the Erdos Coal Mine in Inner Mongolia with an initial investment of 25 billion RMB. As a result.138 Business and Technology in China energy crisis. China joined with the United States. In December 2008. The Shenhua Group believes that if more liquefaction plants are built. Feasibility studies indicate that the per-barrel price must be above $40 for Shenhua’s liquefaction project to be free from financial risks. two major dragging factors. the Shenhua Group. and if successful. Shenhua remains optimistic that coal liquefaction will have a bright future. the largest in the world. The other dragging factor is environmental concerns. China’s crude import was about 178 million tons.5 tons of water is used to produce 1 ton of fuel). the production capacity would increase three times. excluding the two run by Shenhua. Japan. and Yunnan Province. one in Inner Mongolia and the other in Ningxia Hui Autonomous Region. China’s largest coal producer. given the reality of China’s energy demand. Oil prices have been declining since the mid1980s. The liquefaction process involves using large quantities of water (6. China’s dependency on foreign oil will be reduced. and interest in coal liquefaction has seen an international decline. The result proved that China was capable of producing 1 million tons of fuel annually. next to the Erdos coalmines. which would take a heavy toll on the desert region. representing 50 percent of dependency on foreign oil. In 2003. Despite this. A second and a third trial run were conducted in 2009. Shenhua believes that the industrial . one of which is the world’s oil prices.

fiscal revenue totaled 5. From relying on raw coal to liquefaction. In other words. improving financial regulatory agencies. an increase of 30. the function of PBOC is equivalent to the U. and carefully monitoring spillover of the U. this development shows a profound transition from the traditional framework.3 percent to 4. that the consumer price index (CPI) number rose by a large margin of 4.Economic Reform 139 water could be reused to water trees.3 percent over the 2006 figure to $1. SMEs need a supportive banking environment. and primarily it operated as a . and fiscal expenditure grew 23.13 trillion RMB. Most of these battles. During this transition. according to PBOC. Shenhua’s story is only one of many.96 trillion RMB. Additionally.68 percent over the previous year to $373. Before 1979.8 percent.S. subprime mortgage crisis. BANKING REFORM According to the Financial Stability Report issued in May 2008 by the PBOC. both in ideology and in technology. Federal Reserve System. indicating inflation. the company plans to develop a sequestration project to prevent CO2 from being released into the atmosphere. thus reducing sandstorms blowing in the direction of Beijing. urges strengthening the investment risk management system. PBOC recommends increasing supply. These figures. In general. however.S. and meanwhile. not solely GDP figures.5 percent year over year. indicate a strong balance sheet. however.14 by the end of 2007 China’s official exchange reserves grew by 43.53 trillion. Its administrative ranking is equivalent to ministries and to the China Banking Regulatory Commission (CBRC). With respect to the treatment of CO2 released from the production process. PBOC was the only financial system serving all banking purposes.15 Total external debt outstanding increased 16.618 billion. are fought by SMEs whose primary challenges are of another order: obtaining credit. the modern Chinese industry pursues efficient and environment-friendly ways and means. PBOC noticed.

the Agricultural Bank of China (ABC). both ABC and ADBC also operate in urban areas. after a series of significant reforms. and large-scale agricultural production bases engaged in primary agricultural production. complete with the ability to separate policy-related finance and commercial finance. and (3) development of rural social service systems. Founded in March 1955. namely. it was not the central bank in a true sense or a commercial entity conforming to the law of the market economy.140 Business and Technology in China clearinghouse for SOEs. ABC is a state-owned commercial bank serving (1) enterprises. It also has the cooperation of other financial institutions with complementary services and functions. But since 1979. however. As an example. In 1998. is officially a policy bank. ABC retains some policy-lending activity in rural areas. enterprise groups. In reality. PBOC has become a true central bank. Three policy-related banks were created. in contrast. and private businesses or individuals. In 1984. the Agricultural Development Bank of China (ADBC). On a secondary front. It has the power to create regulations and supervise its state banks. . cotton. or 28 percent of the year’s total loans (some 553. such as agricultural development and poverty relief lending. and the China Import and Export Bank (CIEB). the Bank of China (BOC). and oil. and the China Construction Bank (CCB) became state-owned commercial banks. supply-and-distribution cooperative commercial organizations. Although defined primarily as a commercial bank. ABC’s clients are primarily TVEs. Founded in December 1993.8 billion RMB). ABC’s function is to support both rural development and rural disaster relief. PBOC stopped handling credit and savings to focus on its central bank functions by conducting macrocontrol and supervision over the national banking system. the Industrial and Commercial Bank of China (ICBC). (2) profit-earning enterprises engaged in primary agricultural production. In 1994. the National Development Bank of China (NDBC). the ADBC. ABC’s policy lending amounted to 156 billion RMB. engaging primarily in lending to enterprises for purchasing and storing of grains.

chair of the Department of Economics at Claremont McKenna College. Fixed assets primarily came from fiscal appropriations at the time.16 Once loss-making SOEs were disbanded.Economic Reform 141 To serve a fast-developing economy. they are not immune to their own inefficiency. Before the reform. fundraising gradually became the primary source of funding. Second. On the banking side. which prohibits the government from borrowing from PBOC to finance underperforming SOEs. because Chinese banks are SOEs. the Chinese banking system had to first free itself from servicing toxic loans to SOEs. and this dependence is a primary hindrance to performance. banks are prohibited from directly investing in enterprises. the financial system lightened its burden. Nevertheless. SOEs were allowed to be restructured or go bankrupt. the Chinese government was distancing itself from the SOEs. Stocks and bonds markets have since opened up the credit market. economist and president of Jinjiang College. SOEs typically rely on state budget appropriations and bank loans more than other types of firms. despite the fact . loanmaking decisions can be independent from loan performance. more than 25 million jobs in SOEs had been lost. The government issued bonds to bail out more than 500 billion RMB of bad loans. According to Dr. This was done through the Budget Law of 1994. No mechanism generates appropriate incentives for the banks to diligently seek performance. Third. raising efficiency and fighting off bad loans is no easy task. banks served as recordkeepers for SOEs instead of being commercial entities. Chen Aimin. Economic reforms changed the role of fixed investment in enterprises. First. between 1998 and 2002. Chinese banks continue to generate bad loans. three major factors limit Chinese banks from effectively exercising their supervising function. and state budget appropriations dwindled over time. According to Professor Richard Burdkin. not by the banks. In 1997. As a result. because loans continue to be issued following administrative instructions. As a result. The function of supervising loan performance is assumed by the creditor.

6 percent of China’s banking sector. Their main borrowing clients are farmers and TVEs. such as production and consumption.17 The Commercial Bank Law was put into effect in 1995. In Beijing. rural credit cooperatives have been transformed into rural commercial banks. RCCs are the primary source of finance in the countryside. their outstanding loans and total deposits account for approximately 9. reportedly handling 75 percent of all agricultural loans. and BOC) started to withdraw from rural areas to focus on big cities. about 32. RCCs are closer to the daily production operations and local people’s lives than these other banks. Chen Aimin and Professor Junqi Liu have conducted extensive studies to reveal a treacherous path that RCC reform has taken. Shanghai. In this area. most banks left rural areas behind to serve large cities. however. and privately owned businesses. . and the BOC also have branches in rural county towns. Dr. the ICBC. when the four state-owned commercial banks (that is. In more developed rural areas. the township and county enterprises are the majority borrowers. CBOC.18 In rural China.19 RCCs are part of three official financial institutions in rural China (the other two are ABC and ADBC). setting up the parameters for changing the specialized state banks to state-owned commercial banks. and Guangdong. While other state-owned commercial banks (SOCBs). ABC. as well as for all purposes. the ICBC. During the economic boom. RCCs can lend to all kinds of patrons. the financial organizational system with wholly state-owned commercial banks has been transformed into modern financial enterprises handling public banking within the scope defined by PBOC. the Construction Bank of China (CBC).142 Business and Technology in China that improvements indeed are being made as more specialty commercial banks with more autonomy are being created. Since 1996. resulting in a shortage of resources for RCCs.20 The burden of financial support in the countryside has been borne increasingly by RCCs since 1998.869 rural credit cooperatives operate across China. TVEs. including individuals. the reform to Rural Credit Cooperatives (RCC) has been an essential part of rural agricultural as well as industrial development. As of 2008.

RCCs were spun off from ABC and went directly under the regulatory framework of PBOC. however. being SOE institutions. Compared with ABC. In February 1979. In operation. RCCs . RCCs again were restructured to become real cooperatives.Economic Reform 143 RCCs differ from the ABC and other SOCBs in ownership and management. as a result. the People’s Communes were dissolved. they are plagued with bad loans. As a result. therefore. They are stand-alone financial organizations. instead of banks within a banking network that can transfer liquidity and perform cross-subsidization. they are less equipped with management networking. Moreover. Moreover. professional advisory services. they have a larger share of time deposit that tends to make the costs of funds higher. In 1996. and other modern managerial and governance structures. the assets of RCCs have grown large because of government support and patronage. Some apex institutions also handle financial business directly. RCCs came under the management of ABC. They provide services that the state commercial banks are reluctant to provide because of higher transaction costs. Although they are named ‘‘cooperatives. PBOC appoints the RCC staff and imposes reserve requirements and interest rate restrictions. Following the government’s initiatives of rural reform. They first developed as a part of the government’s collectivization effort in the 1950s and were made part of the People’s Communes and their production brigades. resulting from either small-scale transactions or remote locations. de facto state-owned financial institutions and are cooperatives in name only. RCCs bear all symptoms of SOEs. As such. RCCs are nominally cooperative banks with a certain share of capital coming from households and supposedly they are managed by shareholders. RCCs are required to set up county-level apex institutions to provide a clearinghouse service for local affiliates and collect fees for such service. A Law on Credit Cooperatives has not yet been drafted. in particular. China’s RCCs became.’’ the RCCs did not start as member-driven institutions. the share capital contribution from households was almost completely replaced by the central bank’s funds.

. RCCs are required to increase their share capital. Most RCC NPLs date to 1996–1997. and sound management will be essential to future RCCs. governments must not use public funds to purchase banking shares. including the central bank. As a result. the bad loan ratio could be as high as 99 percent. the CBRC. and many are policy loans provided in compliance with county and township government agendas. This document stipulates that a wide range of financial resources should be explored on the basis of a joint-stock structure. a commission set up in April 2003 to take over some regulatory functions of the PBOC.21 As part of the reform. while regular banks can charge only up to 1. the government. the problem seems more severe with the RCCs. As a part of restructuring debt-laden rural credit cooperatives. a staggering 37 percent of their total outstanding loans compared with less than 25 percent for the four SOCBs. Many borrowers would rather turn to friends for financial solutions. is considering drafting a bankruptcy law for small and mediumsize financial institutions.7 times the official rate. within a range of the regulated rates. In 2003. Announcement of the Pilot RCC Reform Plan. While NPLs are endemic throughout China’s banking system. In poor provinces. the NPLs of the RCCs stood at 515 billion RMB (US$62 billion). Loans to TVEs have had a high delinquency rate as well. Developing RCCs into rural cooperative banks is an important step of the reform. PBOC recently announced that RCCs are allowed to charge a maximum interest rate of twice the central bank rate. the State Council approved a pilot reform of RCCs.144 Business and Technology in China have certain flexibility in setting interest rates for lending. which would allow the RCCs to have a combination of a joint-stock structure and cooperative mechanisms and thus would lift many geographic and business-related restrictions previously imposed on them. To encourage competition and creativity. At the end of 2002. The bad loan problems and generally poor management have led to lowered confidence of the rural population in these RCCs. has stepped up RCC reform.

In 2007. China boasts the second-largest emerging stock market in the world. Many believe that RCC reform is likely to achieve good results. but also to implement transparent regulations and policies.Economic Reform 145 The amount of loans provided to shareholding farmers must account for at least 50 percent of each RCC’s loan portfolio.7 billion (at the same year’s exchange rate). To relieve poverty and promote small businesses in the rural sector.5 billion. reducing government intervention.4 billion RMB or $1. the new joint-stock structure provides both monitoring and incentives for good operation. Other reform actions include hardening budget constraint. meanwhile. By 2009. the new pension system is expected to send out paychecks to . must devise tax and industrial policies that encourage deposits into the RCCs and improve microfinancing directly to lenders. improving performance is the only way to survive.5 trillion to improve infrastructure alone. close to 2. the RCCs are making efforts not only to restructure their NPLs. and training personnel. At the same time. and (2) an efficient capital market in which people can secure their savings. since RCCs are faced with competition from more financial resources. the stock market raised capital worth 9. Analysts predict that overall China will need to invest more than $1. facilitating professional service and advisory networks. market capitalization reached 868 billion RMB or $137. Moreover. two things are in need: (1) an enormous supply of capital. TRANSITION OF THE SECURITIES MARKET Investment in stock markets officially started in 1992. both domestic and abroad. According to NBS. Finally. RCCs must improve service and attract funds scattered in the hands of rural households. The government and the central bank. As a result.000 firms have become publicly listed companies. To restore the trust of the rural clientele. behind only South Korea. given their stringent regulations with respect to management and some ability in avoidance of government intervention. Despite losses in recent years.

Chinese T-bonds have not reached the level of influencing interest benchmarks. market. Currently. dollars. Government bodies have been the major underwriter for shares issued by the MOF in the form of T-bonds. however. and H shares (A and B shares are traded domestically. such as ‘‘patriotic bonds. sustain the economy. hence. both in terms of participants and financial functions. and legal persons who are primarily industrial SOEs). Domestic bond issues have been medium to long term (3 to 20 years) for the purpose of financing government deficits. 7.23 China began selling Treasury bonds (T-bonds) in 1981. China must build a reliable securities market. The domestic bond market has since expanded significantly. B. The quota of bond issuance is set each year by the State Council. the latter is primarily under the control of central government. Because of that. China’s securities markets have been in transition like other sectors.S. projected to hit approximately 14 percent by the year 2025. H shares include shares listed abroad and nontradable shares held by central and local governments. the government may exercise a strong influence behind the scenes.22 To address these needs successfully and. government bonds often were promoted under political themes. the Japanese yen. In the early 1980s. The Chinese government has issued bonds in overseas markets denominated in U. investment companies. ensuring strong control. .6 percent of China’s population was over the age of 65. Chinese securities are composed of tradable shares—A.’’ Contributions were deducted from individuals’ monthly pay on a per capita basis.S. In 2005.146 Business and Technology in China the fast-aging population. state asset management companies. the significance of market signals is dampened and the relationship between the securities market and firms’ incentive structures is weakened as well. Compared with the U. Lack of transparency has been identified as a major drawback that generates irregular trading patterns. Nontradable shares could account for as much as two-thirds of an SOE’s total stock. Professor Chen Aimin points out that by way of controlling the majority of the shares.

In recent years. they have increased issuance of bonds to finance capital needs. However. while each has its own responsibilities. This cooperation was necessary to manage the additional funding resources that were made available to private firms. which led to a fast expansion of the bond market. In the same year. SOEs remain more accessible to loans. because . These organizations work in coordination. Chinese bonds are traded on a secondary bond market as part of the Shanghai and Shenzhen stock exchanges. China’s corporate bond market continued its race to raise one trillion yuan in 2009. the State Council published Provisional Rules on Management of Corporate Bonds. the government issued 30 billion RMB worth of bonds. followed by the founding of China Securities Regulatory Commission (CSRC) and the China Insurance Regulatory Commission (CIRC). whose share had risen to 30 percent of the GDP by 2002.Economic Reform 147 and euros.8 billion RMB deficit. China issued billions RMB worth of government bonds in 2003 to finance the 319. most in the short to medium term. PBOC’s chief Guo Xiaochan raised alert on irregular fund-raising that risked tipping the market balance. In the early 2000s.26 In April 2003. the CBRC was established. This restriction was soon left out when the Three Gorgeous Project Corporation issued bonds without bank guarantee in 2007. however.25 Corporate bonds make up about 5 percent of public offerings. or 2. Premier Wen Jiabao indicated in a press conference that there is room to issue more bonds to deal with the 950 billion RMB central government budget deficit and the 200 billion RMB local government budget deficit in 2009. the Chinese government issued more T-bonds to finance recovery programs than in the past. the government required corporate bonds to be guaranteed by banks. Some interbank trading also occurs.6 percent of the GDP. The Chinese government first allowed companies to issue bonds in 1983.24 Large SOEs tapped into the bonds market in early years of reform. however. later amended in 1993. In 1987. During the 2008–2009 financial crisis. however. In 2008.

The Chinese government viewed its banking system as a forbidden zone to foreign investors. the economic reform has made the CBRC the principal regulatory authority over the entire Chinese banking system. Since its WTO entry in 2001. the PBOC. CSRC. thus. and the State Administration of Foreign Exchange (SAFE) have overlapping responsibilities. Many foreign banks applied to fully register in China to conduct RMB business with domestic clients. In December 2006. Redundancy then becomes a haunting problem that arises to offset effectiveness. it permitted foreign banks to set up operations across China to offer services to domestic consumers. CBRC requires these banks to incorporate in China rather than operate through branch offices. . foreign banks are fully bound by Chinese regulatory policies. Hong Kong and Shanghai Banking Corporation (HSBC).27 Since 2006. the Chinese government made an important change—per its fifth-year WTO commitments. including devising a system for deposit insurance and reviewing more than 100 city commercial banks. Several have been approved. The Chinese government has lately floated the idea of establishing a super-coordinating agency.148 Business and Technology in China of the nature of the socialist system and the fact that SOEs are still the largest employers. Bureaucracy and language barriers have made the situation even worse. Whether this would be a viable solution remains to be seen. For foreign investors. the CBRC has made several reforms. in particular. Hang Seng. JPMorgan Chase. Although CBRC is the leading authority in implementing banking reform. With respect to foreign banks. Standard Chartered PLC. Policy discrepancies are often a major source of confusion. including Citigroup. Strict regulations may not always be the answer to loopholes. China has gradually granted foreign banks market access. rendering it far more independent. Tokyo-Mitsubishi. CIRC. On the surface. Foreign banks are required to pay higher insurance deposits to operate. Bank of East Asia. This view has changed gradually as reform has deepened. Mizuho. and United Overseas. Wing Hang. interpreting rules has become a daunting and routine challenge.

and some had debt higher than 12 million RMB. but the figure is estimated to be significant.3 billion RMB in 2001. a hidden deficit problem is incurred by local governments.30 While the government is unquestionably sovereign. the government started to finance budget deficit by issuing bonds. 46 percent had debt higher than 1 million RMB. sales would have been about 800 billion RMB in 2007. the total government debt had reached 350 billion RMB. A survey of 100 townships in Sichuan in 2000 indicated that 82 percent had debt outstanding.31 The total local government debt is unknown. The deficit of 1989 was 15. Excluding the special issue. and so too has been its budget deficit. the Chinese government typically issues government bonds. China’s T-bond sales were an average of about 760 billion RMB each year from 2004 to 2006. which was issued to counterbalance excessive bank liquidity. Some government townships had used up the budget revenue of 2015. or the difference between government expenditure and revenue.35 trillion RMB in 2007. and governments at local levels are not permitted to issue bonds to service their debt. As a result. During the 1980s. Deficits rose markedly after the 1994 tax reform. deficits were relatively small.28 By 2006. After the 1997 Asian Financial Crisis.55 trillion RMB special bond. China’s government spending has been on the rise.3 billion RMB in 1997 to 247. the government adopted an expansionary fiscal policy whereby the deficit increased from 58. The country still looked to pursue other more conservative monetary policies to contend with the economy. According to Dr.29 To finance budget deficit.9 billion RMB. A tax law prohibiting the MOF from overdrawing money from the PBOC was passed in 1993. . One obvious solution is to raise taxes. the debt owed by township governments has widened severely. Lin Shuanglin. which represents approximately 3 percent of the year’s GDP of about 25 trillion RMB. but this was due to a 1. T-bond issues jumped to 2.Economic Reform TAXATION REFORM 149 Since the start of the economic reform. professor of economics at the University of Nebraska.

and permitted enterprises to give out bonuses. Additionally. By 2006. whereby the SOE remits a contractual share to the state and keeps the excess. tax revenue has increased dramatically along with economic boom.150 Business and Technology in China Before the economic reform. further reform was done in 1983 known as ‘‘substituting tax for profits. tax policy had to be changed to give private enterprises incentives and reduce SOEs’ dependence on government budget. To reduce reliance of SOEs on government support. SOEs paid 55 percent in taxes and shared the after-tax profit with the state. The incentives lie in the fact that profit and tax are separated. the figure jumped to about 3. lowered enterprise taxes. tax structure had to be reinvented. Despite the resulting rise in government deficit. Hence. The catch is that the enterprise has to make up the remittance even if it suffers a loss. After 1978. The government soon found its revenue reduced. In 1984. In 1986.32 Tax reform went through multiple stages.5 trillion RMB. this system was modified to eliminate the sharing of the after-tax profit. the national tax was roughly 52 billion RMB. the economy experienced a boost. Overall. whereby the government raised prices of agricultural products by 20 percent. enterprises that suffer losses may negotiate with the state for a lower tax rate. which is taxed at a low rate. however.’’ Under this rule. because of regional differences and inaccuracies in setting remittance levels. . the CRS was implemented. so they would be shifted around more easily. the centralized economy followed the budgetary principle of uniformity—that is. the central government is behind tax planning and spending. The previous uniform tax of 55 percent was replaced by 11 kinds of taxes. In 1978. The remittance level is normally set by the state based on the previous year’s record plus an estimate of growth.33 The first change in tax structure was made around 1979. The reality seems to have been that the taxes were repackaged. raised government and SOE employees’ wages. the goal of which was to let people keep more so they would produce more. such that enterprises keep the entire after-tax profit.

joint tax (shared between local governments and the central government). where taxes are divided into local. Thus. the city government. and federal taxes. In general. Tax distribution is based on expenditure coverage. 2. for example. and local taxes. its expenditures cover education. upgrading collection and distribution training. and (2) local business is managed more effectively by local governments with their own budget. and adopting better technology in this area. Under such circumstances. Costs of tax collection are high. In 2006. the corresponding proportion of tax revenue goes to the central government. such as the United States.34 . Many loopholes have been identified over the years. whereas the costs are less than 1 percent in Western countries. approximately 6 percent. and the subcounty regional government. there is a strong barrier to effective supervision. The Tax-sharing System is modeled after tax systems of Western countries. state. For the central government. Future reforms are expected to involve reducing governments that have taxing authority. The Chinese system has three taxes: state tax. major weaknesses include the following: 1. railway and highway construction. Additionally.5 trillion RMB compared with 512 billion RMB in 1994. the tax income was approximately 3. known as ‘‘Tax-sharing System. Multiple levels of taxing governments result in competition among governments. and the central government could no longer manage local economic development to achieve maximum incentives and responsibilities.’’ was first implemented in 1994 based on the reality that (1) decentralization had resulted in stronger local management. it provided a solution to let local governments take more responsibility for their spending. The Chinese system has five levels: the central government. the provincial government. however. and telecommunication. in addition to sales tax. Distribution of tax remittance remains a complicated procedure that is often unreliable.Economic Reform 151 The current tax system. the Tax-sharing System has been an improvement over previous tax policies. the county government. 3.

Without the SOE reform. subsidized flats. According to NBS data. and private housing. views China’s housing reform as a a beneficiary and powerful stimulus source: Without banking reform.36 In retrospect. which let the SOEs take the primary responsibility for housing investment. From 1949 to 1979. together with other benefits. was assigned to workers as an in-kind benefit. Song Shunfeng. Without the tax reform (especially property tax). Additionally. According to a document published by Hangseng Bank. throughout China’s housing reform. a housing market was launched. including encouraging developers to invest in lowincome housing. Private housing takes the largest portion of the residential property market in China. and primarily was a result of a government push. Public housing. professor of economics at the University of Nevada-Reno. China implemented a socialist system of urban housing provision. apartments were constructed by SOEs and assigned to employees based on years of service.152 Business and Technology in China HOUSING REFORM Before 1978. China must treat housing reform as an integral part of its overall economic reform. no foreign funds would have entered the housing market to provide capital resources or to construct housing directly. With the restructuring of SOEs. the housing market benefited from reforms in other areas. real estate enterprises would not have development loans.35 The current housing situation contrasts drastically with both the prereform era and the early postreform era. Therefore. Without the Open-Door Policy. and allocation. urban . China would not have had much room to lower the high housing prices. Housing quality was poor as it was viewed as a ‘‘nonproductive’’ investment by Chinese planners and thus received declining investment. The government provides subsidies to low-income families. China’s housing boom came a long way. separating housing provision from SOEs would have been impossible. construction. the government has provided the ultimate driving force. Dr. and individuals could not purchase houses with mortgages. there are three types of housing: public rentals.

The group immediately recommended a program that aimed to convert hidden in-kind subsidies into open monetary subsidies and to change urban housing from a welfare giveaway to a market commodity. and Zhengzhou) and reform strategy became a ‘‘three-three’’ scheme wherein the state. In 1979. and the individual each pay one-third of the sale price. Later in 1982. the value of housing vouchers equaled the rise in rent. Hidden in-kind subsidies were provided for low-rent public housing. and work units did not want to share the costs. This effort took the form of increasing rents and promoting house sales. The program was shut down. Liuzhou. China started to reform the urban housing sector by selling newly built public housing to individuals at full construction cost in four designated cities: Xi’an. The onset was generated by the SOE reforms that made the previous housing system no longer sustainable. The goal of this reform was to establish a new system in which production. distribution. Shashi. This program ultimately did little to relieve the government’s financial problems. In February 1986. To stimulate the stagnant housing market. and Nanning. housing sales were extended to more than 60 cities in 23 provinces. China started its urban housing reform.Economic Reform 153 per capita living space was only 6. the State Council formed the first official agency to promote urban housing reform. and Yantai) for the new comprehensive reform program. and consumption of urban housing would be driven by the market.7 square meters or about 72 square feet in 1978. On average. and increasing . This experiment did not last long because few urban families could afford to buy homes at full-cost rates. Then. By the end of 1981. the Leading Group for Housing Reform. Tangshan. China tried another housing commercialization experiment in four mediumsize cities (Changzhou. the State Council designated three cities (Bengbu. in 1979. The reform went through several stages and involved a variety of programs. Siping. the government came up with a new initiative. Wuzhou. In 1987. open monetary subsidies were provided as housing vouchers to pay higher rents. the work units.

the reform would continue. during which ‘‘The Proposal to Implement Nationwide Urban Housing Reform by Groups and Stages’’ was adopted. In 2006. all Chinese cities discontinued the practice of employers providing housing for their employees. The late 1980s was also an important period in terms of lawmaking for the urban housing sector. for example. after a brief decline due to the 2008–2009 . The State Council also issued ‘‘The Opinion on Encouragement to the Staff and Workers to Purchase Old Public Housing Units. As of now.7 square meters or about 330 square feet in rural regions. despite the 1989 incident. China began housing reform in all urban areas. Urban housing started to grow rapidly only after Deng Xiaoping’s south tour in February 1992 where he affirmed that. Unlike the scheme in the early 1980s that involved only sales of new housing. with the focus of reform shifting from increasing rent to promoting homeownership. promoting mortgage financing. and liberalizing rental rates. NBS survey shows that the per capita living space has increased to 27. Investment in real estate reached 73 billion RMB in 1992.’’ In the same year.1 square meters or about 291 square feet in cities such as Beijing and Shanghai. the Chinese government ended the welfare urban housing system. the Congress amended the Land Law.000 families bought homes in Yantai. In mid-1998. scoring a moderate progress. increasing 117 percent from the level in 1991. the new strategy was to sell existing public housing at subsidized rates. Reform measures included ending the allocation of welfare housing for employees. By the end of 1988. By the end of 1999. housing prices in big cities are rising again. Thus. Housing reform entered a new stage in 1988. providing better legal protection for urban real estate and thus promoting housing development. and 30. With these changes and the increase in rent.154 Business and Technology in China rents and issuing housing vouchers. urban housing in China has been transformed from a redistributive welfare good to a marketized commodity. The State Council held the First National Housing Reform Conference in January 1988. developing the secondary housing market. With these changes. many households were interested in buying a home. more than 5.

often violent due to its nature of redistributing the property of the few to the masses. Yang Yao. it was also about eliminating private ownership once and for all.Economic Reform 155 global recession. A thorough Land Reform that started in the mid-1940s and ended in the early 1950s achieved the promised egalitarian system. farmers began to think of restoring family farming. The Land Reform. because enriched farmers and successful provincial entrepreneurs are looking for a space in the capital city and other larger municipalities. Dr. Chinese farmers are liberals. professor of economics at Peking University and a senior researcher at Peking University’s China Center for Economics Research. in that they are strong supporters of a market economy.75 square feet) hovers at the 15. The subsequent collectivization amid the Great Leap Forward in 1958 resulted in the People’s Commune system for the next 20 years. It is their turn to live a little. as some say. The average purchasing price per square meter (11. very much like American farmers. that the price hikes are likely to continue. and in conjunction with Communist education. however. After decades of communal farming. land ownership is the core of their pursuit. RURAL REFORM Land rights have been at the heart of China’s struggles throughout its history. lifted people’s morale and hence agricultural productivity in the 1950s. It seriously deprived people of many basic economic and political rights. points out that although China’s agriculture in this period did not fall below the international average.37 For farmers. the commune system failed to improve the living standard of China’s rural population. However. it was not a surprise that the economic reform first started in rural areas. . Communism was not just about shifting property ownership. Therefore.000 RMB level in east coast cities including Beijing and Shanghai despite the government’s repeated warning of an overheated housing market. The Communist victory was a solution by the majority of the people to land rights inequality. Many believe. It was nevertheless a profound reform. but the shortfall was obvious.

A number of southern villages had started to dismantle communes in the late 1970s. HRS provided a kind of social security to the rural population. The 1984 Constitution also granted ownership of farmland to village collectives. China had found for the first time in its history that it had a large grain surplus. When babies are born or wives are married in. as it still is today. given that land sales were prohibited. farmers cannot invest in their land for the long term. Thirdly. HRS had its shortfalls. Households could keep extra-quota grains and sell the products on the market. land reallocation became a constant process due to household changes. Land rentals were also banned in the early years but have been permitted since the early 1990s. More important. First. Local governments often impose their planned crop-mix on farmers. and that was the family plot. As a result of the constant readjustments. From 1979 to 1984. farmers’ use rights were encumbered. inheritance was seriously limited by periodic land reallocations. frequent reallocations open up opportunities for corrupt village cadres to seek personal gains. the People’s Communes had been disbanded. Professor Yang Yao believes that by raising the income of the farmers and solving China’s food problem. and the Household Responsibility System (HRS) was instituted. Professor Yang Yao indicated three weaknesses in particular. the gross value of agricultural output reached a real annual growth rate of 7. HRS led to a mixture of collective ownership and individual farming. HRS worked to lift morale.6 percent. each new member of the community has a right to a piece of the village’s land. By 1984. However. because instead of falling on urban welfare. the rural reform perhaps was the only reform that succeeded without any losers. Some scholars speculate that the family land was actually the base for China’s cheap migrant labor. migrant workers always have a home to return to. Additionally. By 1984.9 percent. Secondly. Thus. whereby land was allocated to households based on headcount. with the increase in rural . and grain output increased by an annual rate of 4.38 However.156 Business and Technology in China The dynamism of the post-Mao era rejuvenated long-faded dreams.

is called fanzu daobao or ‘‘reverse lease. For example. or in terms of the percentage of the .’’ whereby households may rent their land to the village. According to research by Yang Yao and Justin Lin. Another innovation.Economic Reform 157 economic activities. the number of rural enterprises increased from 1.08 million. The Agricultural Lease Law. it was obvious that land tenure would be more beneficial if it were more flexible. the National People’s Congress passed a law in 2002. which in turn rents it to tenants who tend to be migrant farmers from less developed regions. and the number of workers increased from 28. The government’s move is widely seen as heading in the right direction in filling the deep gap in social protection received by the urban versus rural residents. To avoid corrupt leaders from trading people’s land for private gains. to limit power of village cadres. from 1978 to 1996. allowing inheritance of land rights.52 million to 23. villagers pool family land and delegate the management to a village committee that directs land use for industrial development or for farming. In regions with fast industrial growth or where there is a significant supply of migrant labor. in Guangdong Province. the law nevertheless transformed land tenure into a permanent lease system that grants farmers de facto private ownership of land. it put a stop to land reallocations. originated in central China.36 million. villages find ways to consolidate land use. and take advantage of the market mechanism. Certain approaches resemble the past communal system. The management committee is formed by representatives elected by groups of families as shareholders. 2003. Although farmers’ right to the land is one defined via the contract between them and the village collective. Rural industrialization has been an indispensable part of China’s economic development in the last quarter-century. promulgated on March 1. which had indeed occurred at a significant level of severity. brought fundamental changes to land tenure. In particular. Both kinds of operations effectively combined individuals’ land usage rights with the benefit of joined efforts. including the right to transfer land use rights. The law.27 million to 135.

increased from 9. Industrialization is a new kind of reform.6 percent in 1978. periodic peasant rebellions started with land ownership discrepancies and ended with bloody land redistribution. Compared with SOEs. Several factors have contributed to the fast growth of rural industry. this figure became 57. the most important factor is the rural reform itself. rural enterprises became an important contributor to China’s export market. The output value of the rural industrial sector accounted for only 9. per worker net capital stock of rural enterprises never passed 20 percent of that of the SOEs in the period from 1978 to 1997. With this light capitallabor structure. Many companies in the Greater China Region moved their factories to the Pearl River and Yangtze River deltas seeking cheap land and labor. According to Professor Yang Yao. nonfarm income accounted for 34.2 percent of all rural income as compared with only 7. rural enterprises use more labor and less capital. Each reform. The planning era left a large unfilled market for consumer goods.158 Business and Technology in China total rural labor force. after 20 years. The significance of industrialization of rural China cannot be underestimated.9 percent in 1997. As a result. but after that year.2 percent in 1986. If the traditional Chinese civilization was created in feudalism (a land-based social system). an influx of FDI boosted TVEs. In coastal regions. which rural enterprises filled effectively. however.1 percent of the national total in 1978.40 The arrival of those companies instantly transformed traditionally rural villages into booming industrial towns. Their share of export was only 9. the gross rural industrial output went from 21.5 percent to 29. According to Yang Yao’s research. In 1996.2 percent of the total gross rural output in 1978 to 77. its very basis finally has been shaken. and its impact on China’s culture and society is just beginning to pan out. only led to more of the same. as a pattern. Throughout Chinese history. which freed a large portion of the rural labor and enabled capital accumulation as well to run industry.2 percent in 1995.8 percent.39 NBS data show that the number of workers hired by TVEs had reached 150 million in 2007.6 percent over the next 10 years and reached . they kept an average annual growth rate of 20.

Provinces with a larger rural industrial sector tend to have narrower income gap or smaller Gini coefficients. is that as polluting factories relocate to rural regions. rural industrialization is mainly in the coastal areas and the suburban areas in inland provinces. markets. Rural industry has served as an equalizer. where work is more abundant relative to natural resources than in inland provinces. The most successful areas of rural industrialization are in provinces located in coastal areas. pollution has taken a toll on the rural environment. however. Rural industry has not always lagged behind its urban counterpart.9 percent of the country’s total export by 1996. The role of ‘‘think tanks’’ is rising to a higher status. Quite the contrary. the rural industrialization process has been largely uneven. environment. and the rural society. the ‘‘Five-Year Plans’’ have been replaced with ‘‘Five-Year Projections’’ (wu nian guihua).’’ Lately. with the intention of leaving more space for micromanaging to local governments. This trend has profound implications for urbanization. The planning style has also changed. policymaking was a matter of political decision by a small group of politicians who served at the pleasure of Chairman Mao.41 An immediate positive effect of the labor-intensive approach has been the enhanced income distribution at the local level. over the years. because of more stringent environmental regulations in cities. and information. central planning is becoming increasingly ‘‘macro. Things got much more complex during the postreform era. reducing the rural-urban divide to a large extent. POLICYMAKING IN REFORM Before 1978. The flipside. Essential government organs have their . to the level of pushing SOEs to reform and underperforming private sectors to improve. Many enterprises have moved from villages to towns and small cities to get access to better infrastructure.Economic Reform 159 47. For the time being. The share of industrial output in total rural output varies from 86 percent in Shanghai to 4 percent in Tibet. rural industry has become increasingly competitive. One kind of complexity lies in the growing local power. As of 2010. As a result.

Nationallevel universities and large SOE and POE firms also serve as think tanks to government agencies.42 China’s economic reform has been a chain reaction wherein the application of market mechanism has resulted in abundant productivity in every economic corner. Some scholars expect that think tanks will proliferate and gain influence as China’s policymaking becomes more sophisticated. the CAS and the China Academy of Social Sciences (CASS) are government-funded think tanks. established in 2009 and headed by former China Deputy Premier Zeng Peiyan. CPS. founded in 2000 and headed by former WTO negotiator Wang Xingkui. S&T has come to the foreground amid challenges of in-depth economic development. some of which are government funded. for example. . These institutions provide consultations with respect to ideological matters. and Ministerial Policy Institutes. while others are independent private firms. political. crafts policies related to global economic crises. The China Center for International Economic Exchange (CCIEE). provides consultations with WTO-related matters. housing approximately 3. Key government policy research centers include the Central Party School (CPS). On the ideological front. In the process. from economic. The Shanghai World Trade Organization Affairs Consultation Center.160 Business and Technology in China own group of advisors. democratization is no longer a political mercy. State Council Development Research Center (DRC). and military issues to social disturbance handling. offers workshops to CCP officials and conducts research on such issues as how to define socialism with Chinese characteristics. The interdependence of sectors has contributed to easing the rough competition at the beginning stage and has constantly pushed the Chinese economy toward a more balanced development. These think tanks cover a wide range of specialty areas. One may say with confidence that the economic reform has brought about the most profound change ever in China’s history. At a more practical level.000 researchers each and both reporting directly to the State Council. but a growing part of the infrastructure to the modern Chinese society.

With this in mind. They are (1) Washington Consensus. systemic integration is essential to the function of an element. The ‘‘China Model’’ has been a much debated issue. at least. The structuralist concept reminds us of two things—in making judgment one must consider the context.1 Thus. Putting a Go (a game played with black and white stones on a 19x19 line board) stone on a chessboard makes no sense.Chapter 6 The China Model and Sustainability That things do not have meaning in and of themselves but rather acquire meaning from the system they are in is an enlightening view of the 19th-century Swiss linguist Ferdinand De Saussure. as the game progresses. on the chessboard of 64 squares. . rather than by the material of which it is made. the market economy with Chinese characteristics is a legitimate concept.2 (2) Beijing Consensus. Moreover. the value of the remaining pieces change. three schools of opinions have attracted more attention. These views are briefly introduced as follows. Assessing China’s economic sustainability involves identifying China’s economic model first. the final checkmate may be the glory of a humble pawn. not unless the rules of the game change. chess players know well that.3 and (3) views of the CPS. the value of the knight is defined by the other pieces on the board. and. Overall.

and thus must be avoided.162 Business and Technology in China THE CHINA MODEL IN LIGHT OF THE WASHINGTON CONSENSUS John Williamson coined the term in 1989 in a paper describing a set of 10 economic policies considered by many in the West as principles of the free-market economy. the rates should be fundamentally competitive. privatization. and goods. and public investment. Thus. which eventually promotes export. These policies have been bundled with reform packages for developing economies and serve as criteria for policy evaluations by Western governments and financial organizations. because it brings in the needed capital. Thus. tax reform. import and export must be a way of economic development and a solution to imbalance. exchange rates. especially to the poor and disadvantaged. for these ideals of .’’ Williamson’s fiscal policy stresses adoption of a fiscal discipline that maintains a balanced budget. public expenditure priorities. opening up the domestic market to foreign goods and services is recommended. With respect to interest rate and exchange rate policies. although adjustments are done to control capital flight and promote growth in trade. Williamson recommends that in the areas of subsidies. and property rights. deregulation. Misallocation of expenditures in these areas results in waste and corruption. Williamson recommends a broad tax base with a moderate tax margin. The principle of market orientation underpins Williamson’s outward-oriented trade policies in which he advocates liberalized import policies rather than resorting to protectionism to offset export weakness. government expenditures must bring people real benefits. Williamson supports the market orientation—that is. the recommended policies would be best taken as a ‘‘moral admonition to purity. Therefore. education. In tax policies. In the Washington model. FDI (foreign direct investment). and practicing what it preaches does not guarantee prevention of corruption and fraud. trade policy. Williamson indicates that Washington does not always practice what it preaches. health. interest rates. technology. The 10 principles include fiscal deficits.

Chinese media generally approve of the opinion that the 1997 Asian Financial Crisis and the . accountability and effective management are hardly achievable. the Chinese are struggling with ‘‘the economic impossibility of the halfway house. Moreover. For them. the Washingtonian principles are worshipped as they are ‘‘generally judged to have been successful within the United States. Without private ownership. Moreover. deregulation is key to free competition. China owns $681. and Robert Allen Standford’s investment scam. To the Chinese. Williamson is quick to point out that Washington does not typically score well in some aspects. Out of this debt.9 billion or more than 20 percent of the foreign-owned portion of $3 trillion. national debt climbed up to $11 trillion by the end of 2008. GDP after a brief budget surplus in 1998.’’4 In summary.7 The lack of oversight resulted in Wall Street scandals. Williamson stresses the power of personal property rights that are well entrenched in the West and to which he attributes a ‘‘fundamental importance for the satisfactory operation of the capitalist system.The China Model and Sustainability 163 open competition to function. the Washington Consensus depicts an ideal capitalist system whereby free-market competition and guaranteed personal rights to property motivate efficiency and responsibility and lift the overall well-being as a result. The subprime mortgage crisis in 2008 revealed some of the drawbacks of an excessive deregulation.S. the U.8 and the disastrous mortgagelending irregularities. Scholars who stick to Washingtonian principles tend to be doubtful about the sustainability of the Chinese economy. such as budget discipline and balanced budget. due to lack of regulation. a lesson learned is that the pro-regulation socialist market economy does have an advantage. or more than 70 percent of the U.’’6 Notwithstanding. In the West.’’5 Hence. a thoroughly privatized system is a prerequisite. and it is generally assumed that it could bring similar benefits to other countries. This view is backed by the fact that. Above all. the International Monetary Fund (IMF) and the World Bank stick to these principles as conditional to lending. such as Bernie Madoff’s Ponzi scheme.S.

but also. because what China does is far apart from the Washingtonian ideals. structural defects. China demonstrated strengths in preventing encroachment of the world financial crisis thanks to its currency valuation control. One article points out that the Chinese have learned that there is actually an advantage in the state-controlled currency valuation system. it is only of a makeshift nature. In both crises. Hutton has little confidence in the current system that relies on ‘‘sage-emperor’’ President Hu Jintao and his party-state to save the country from corruption and to straighten out inequalities for the grassroots folks. rallied confidence in China’s own system. given that the ‘‘American model is vanishing. If a market mechanism is adopted in China. Hutton’s skepticism is first derived from his perception of China’s structural differences from the Washingtonian logic. class war. and more important. An influential critic of China’s economic and political policies and a strong defender of the Washington Consensus. hence. He predicts that economic contradictions. He argues that the current system only works as long as the economy works. one opinion holds that Western economic Darwinism pays little attention to the well-being of other countries. and authoritarianism’’ that is not in line with the fundamental values of the market economy. which has been profusely criticized by the West. economic troubles are doomed to happen . Will Hutton offers his view on China’s dilemma in his book The Writing on the Wall—Why We Must Embrace China as a Partner or Face It as an Enemy. For example. In his view.’’9 Hutton’s ‘‘Halfway House’’ The Washington Consensus constitutes a powerful theoretical base for those who believe that China’s economic development is unsustainable.164 Business and Technology in China 2008–2009 global financial crisis have not only dampened China’s enthusiasm in modeling the West. However. ‘‘communism is a doctrine of revolution. and sheer economic waste will lead to worsening decline in China’s economic and political structures. China must learn to take care of itself.

The China Model and Sustainability


because of the ‘‘halfway house’’ nature of the economy in which the market mechanism is overshadowed by state control, and this control is only for a matter of time.10 Nevertheless, the Chinese economy has grown to become the third largest in the world, and the boom is unparalleled. So, ‘‘if it’s so bad, how come it’s so good?’’11 Hutton’s explanation is that the growth was generated primarily by assembly industries. Cheap labor and the Open-Door Policy led to gigantic growth in exports channeled by Hong Kong and its subcontractors in Taiwan who have the first-world infrastructure. On the other hand, state-controlled banks drove capital accumulation in the cities, and rural China provided the much needed cheap labor from migration. Hutton’s view is that, short of self-sustaining entrepreneurial maturity, a sharp deceleration lies ahead. He believes that reform, liberalization, and modernization are virtually puppets under the control of the grand puppeteer—the party-state—just as China’s banking system bids according to communist hierarchies with the SOEs enjoying the priority. Moreover, a spider web–like control system stifles competition, constantly putting a chokehold around the neck of the private sector, while one-third of the SOE workforce sits idle.12 Despite Deng Xiaoping’s reformism and Jiang Zemin’s populism, Hutton believes that China’s ideological system lacks an infrastructure that propels genuine economic progress and appreciation for capitalist moral facets. More specifically, China is not a society based on such elements as liberty, pluralism, diversity, equality, transparency, justification, free press, rule of law, and so on. Hutton refers to these as enlightenment legacy and attributes America’s economic success to these spiritual values. Therefore, the China Model is not really a valid economic structure in Hutton’s eyes. The system lacks elegance compared with that of the Washington Consensus. China has grown tremendously in the post-Mao era; however, this growth would be a short-lived coincidence rather than a prolonged elation, because there is no logic in it. Sound market capitalism involves the fuller


Business and Technology in China

participation of a knowledge economy, a rigorous institutional structure, a welfare system, and property rights; but these elements contradict China’s one-party communist rule. Hutton states,
My argument is that China is caught in a dilemma. It is beset by mountainous contradictions and which sooner or later will fail, because of a banking crisis or simply a crisis of overinvestment and excess supply, or some combination of both. The consequent social reaction will provoke a political crisis, with the risk that the party will resort to nationalism, and perhaps a military adventure in Taiwan, to keep the genie of protest bottled up.13

Hutton describes communism and nationalism as an ‘‘uneasy coalition’’14 that may propel China to behave according to its own terms, thus, jeopardizing the interests of the United States. Thus, while the United States should use leverage to promote capitalism and democracy in China, it had better be prepared for an unhappy ending. The dichotomist view of either Washingtonian ideals or an impasse is manifested with a lesser degree of pessimism in at least two other voices, those of Callick and Shambaugh.
Callick’s ‘‘Controlled Freedom’’

Rowan Callick, a Beijing-based China correspondent for The Australian newspaper, does not understand why many Asian, Latin American, and African countries are admiring to the point of emulating the China Model, which he suspects will not be sustainable. Callick describes China’s economic model as follows:
On the one hand, China copies successful elements of liberal economic policy by opening up much of the economy to foreign and domestic investment, allowing labor flexibility, keeping the tax and regulatory burden low, and creating a first-class infrastructure through a combination of private sector and state spending. The second part is to permit the ruling party to retain a firm grip on government, the courts, the army, the

The China Model and Sustainability


internal security apparatus, and the free flow of information. A shorthand way to describe the model is: economic freedom plus political repression.15

Callick’s view is similar to Hutton’s in several aspects. Callick categorizes the Chinese regime as a variation of the classical totalitarian communism. The difference lies in its implementation of free-market economics. There is no doubt, as Callick puts it, that the mix has worked in getting its citizens richer. In fact, people are encouraged to do everything possibly imaginable to lift their standard of living. The government puts a firm hand, however, on critical economic sectors such as utilities, transportation, telecommunications, finance, and media. PBOC, for example, implements the government’s policies on exchange rates, keeps the rates in line with its political agenda, and deploys a foreign reserve of $1.3 trillion ($2.2 trillion in 2009). The government uses a large pool of cheap labor from rural areas and from restructured SOEs to control inflation. Moreover, in the international front, China has found that its domestic economic growth has produced a favorable spillover effect—the Chinese market has provided space for neighboring countries to grow, and in the process, to become enmeshed in the China-centered economic network. Callick quotes Kevin Hassett, director of economic policy studies at the American Enterprise Institute:
Being unfree may be an economic advantage. Dictatorships are not hamstrung by the preference of voters for, say, a pervasive welfare state. So the future may look something like the 20th century in the reverse. The unfree nations will grow so quickly that they will overwhelm free nations with their economic might.16

Callick admits that although transparent governance, independent courts, enforceable property rights, and free information are not present in the Chinese system, the absence of these pillars of the Western democracy has not triggered crisis. China, however, does have a convertible currency, a one-country-two-system structure, a much better living standard than in the past, and in fact, a more


Business and Technology in China

tolerant political environment. China has an impressive adaptability that is substantiated in part by the Open-Door Policy of the Communist Party that is now willing to enroll entrepreneurs. Callick notes that the party’s policy has attracted, for example, many overseas scholars; some are U.S. Ivy League trained. Not all returnees are ready to apply Western-style democracy, however. An example Callick believes to be striking is the story of Li Qun. After studying in the United States, and serving as an assistant to the mayor in New Haven, Connecticut, Li became mayor of Linyi City of Shandong Province. Once in power, Li reversed his position to guarding the Chinese system as his peers had. Despite the economic boom, as Callick points out, China is unfree for a number of reasons. Chinese citizens cannot form a political party; they cannot choose their leaders; phone calls and text messages are screened; many Web sites are blocked or filtered; media are owned by the government; films and books are reviewed by agencies and sometimes by retired revolutionary cadres; sex and politics are sensitive topics; people do not trust the courts; ordinary people have to report when a friend or family member comes to stay with them; files are kept on all citizens, who cannot review their records; church schools are not permitted; the only two legal churches that the Chinese can join are the Catholic and the Three Selfs (Protestant) organizations; and the leaders of churches are ultimately responsible to the party. Callick questions, ‘‘This is the China Model: half liberal and international, half authoritarian and insular. Can it last?’’17 Callick approves of Will Hutton’s opinion that China must accede to Enlightenment values or it will fall back again; and that the party-state control, if it continues to build, will sooner or later accumulate enough contradictions to force itself out of control. ‘‘The clock is ticking,’’ Callick quotes Hutton’s words.18 However, he seems to be more cautious in recognizing the risk in attempting to offer a judgment call. Gordan Chang, Callick noted, in his book The Coming Collapse of China (2001), gave Beijing five years to correct mistakes. Instead of a doomed state,

The China Model and Sustainability


what Chang witnessed was a China chugging along, becoming more prosperous year by year. Moreover, leaders from the developing world gathered in Beijing to learn about the China Model. In 2007, 41 state heads of Africa arrived in Beijing, with Asian and Latin American leaders implementing the China Model at home. Callick’s opinion is that, in the long run, China will show its real face as that of a dictator. He quotes Kurlantzick, the author of Charm Offensive: How China’s Soft Power Is Transforming the World: ‘‘As China becomes more powerful, other nations will begin to see beyond its benign face to a more complicated reality. They will realize that despite China’s promises of non-interference, when it comes to core interests, China—like any great power—will think of itself first.’’19 In summary, Hutton’s and Callick’s views both portray the China Model as a planning economy with the implementation of a free-market mechanism under strict control. Such a mix is more likely to result in economic chaos sooner or later than in a sustainable economy.

David Shambaugh, professor and director of the China Policy Program at George Washington University in Washington, D.C., nonresident senior fellow at the Brookings Institution, and currently a visiting scholar at the CASS in Beijing, defines the China Model not as traditional authoritarianism, not as democracy, and not as capitalism, but rather as something in between—that is a ‘‘hybrid.’’ The following observations are behind Shambaugh’s definition:
Instead of being a totalitarian party dominated by a single leader, the CCP today is an authoritarian party with a collective leadership. The leaders themselves—at least those I have witnessed—are now remarkably selfassured and relatively sophisticated. Marxist-Leninist ideology plays little, if any, role in their decision-making. The policy process is more consultative, although still lacking in transparency. Much emphasis is put on

20 Shambaugh remarks that the CCP is remarkably open in learning from different countries and political systems. that ‘‘China is the first major economy to recover from the global recession and. which includes advancements in biotechnology and electronics. is leading the world out of it. indeed. Additionally.’’ Shambaugh writes. provision of most of the world’s cell phones. this regime was capable of quelling the Tiananmen Event in 1989.’’24 . China consumes 16 percent of the world’s energy. He believes that because the country’s strengths have been tested during the past 60 years. and 75 percent of the world’s toys. Latin American corporatism and European social democracy all grafted to Confucianist-Leninist roots. Unlike some critics in the West who are troubled by China’s hybridism.’’23 He has reservations about whether the CCP will continue to be adaptable and whether people’s lives will continue to improve. ‘‘One thing is certain.’’21 The China Model certainly does work.’’22 Will the CCP’s ability to adapt and the nation’s continuing economic growth be enough to sustain the party in power indefinitely? Shambaugh’s answer is ‘‘perhaps. 37 Chinese multinational firms figure in the Fortune 500 list. the China Model should be given the benefit of the doubt. Shambaugh points out that it is a fact. and DVDs. and 450 firms on that list are doing business in China. ‘‘China will remain a country of complexity and contradictions—which will keep China watchers and Chinese alike guessing about its future indefinitely. and clearly reluctant to approve. On the other hand. Shambaugh’s attitude is one of an observer. photocopiers.170 Business and Technology in China governance and officials at all levels undergo required training in public administration. ‘‘As a result. and have allowed China to emerge stronger every time.’’ Shambaugh writes. Shambaugh is impressed with China’s economic achievement. although less visible. have survived all sorts of isolations and conflicts. ‘‘it is becoming a hybrid party with elements of East Asian neo-authoritarianism.

it will be because predictors wear tainted glasses. might it be that it is valid? Countering the Washington Consensus and its derivative theories is the Beijing Consensus coined by Joshua Cooper Ramo. the prolonged rise of GDP in double-digit figures and the low per capita GDP do not accurately reflect the essence of the . but with changes in quality of life and the country’s role in the global balance of power. Rather than a jumbled mess or a doomed failure that Hutton perceives. and the Chinese are not willing to follow those experiences. asymmetrical. as Ramo indicates.25 who speaks Mandarin Chinese and works as a managing director and partner at the Beijing office of Kissinger Associates.26 The Chinese are not making forced moves in response to outsiders’ pushes and pokes. The whole process appears to be too fast to follow not only by foreigners but by domestic thinkers as well. Although not everything is working and there is a pile of contradictions. Jiang Zeming. but they simply feel more comfortable cherry-picking according to what fits. Ramo sees a rapid transition and adaptations that are creative. if predictions fail. His theory interprets China’s economic phenomena as part of a dynamic process.The China Model and Sustainability The ‘‘Beijing Consensus’’ 171 If China’s sustainability has defied Washingtonian predictions time and again. and ideologically adventurous. Ramo believes that. used the word ‘‘new’’ 90 times in a 90minute speech. To repeat the economic failures of Argentina and Indonesia would be na€ ve. The Chinese are aware of the Washington’s prescriptions for the world. To understand China. pragmatic. in his farewell to the 16th Party Congress in the fall of 2002. because theories shape the way we observe. What Ramo observes is that China’s changes must not be measured simply with GDP figures. Thus. the essence of which would be best described by Deng Xiaoping’s concept of crossing the river by groping the stones under the feet. the Chinese definitely are turning every rock and following every path to find the right solution. as Ramo quotes Einstein’s words. it is best to abandon theories. then. they are enthusiastically following internal dynamics.

innovation. The Chinese are fast and determined in absorbing state-of-the-art S&T and in abandoning traditional clunkers. as Ramo sees it. and China’s telecommunication has skipped the copper-wire infrastructure to leap into wireless. this number was 98 percent in 2002. the Chinese farmers have stepped to the frontline in adopting scientific farming. Leaders with revolutionary backgrounds have been replaced largely by those who have educational backgrounds.28 Moreover.3 billion people are living a ‘‘relatively comfortable life. While only 20 percent of China’s provincial leaders had attended college in 1982. Ramo argues that the Chinese now rely on innovation and technology to cure their growing pains. The fact that 1.’’ a goal set by Deng Xiaoping and achieved in 2003 featuring the annual national per capita income of $1.172 Business and Technology in China progress being made. (2) focus on sustainability and equality. once chastised managers with a Jack Welch–like warning: ‘‘If you cannot be one of the top three in your sector. modern Chinese leaders are more adapted to Western-style management than ever. Li Rongrong. China’s computing market is opting for the latest chips. TFP was identified by Nobel Prize winner Robert Solow in 1957 who defines the concept as ‘‘output growth not accounted for by the growth in inputs. because it has the advantage of yielding abundant Total Factor Productivity (TFP) growth. because sustainability . The first component. that the challenge to the system is whether more equality could be guaranteed. Ramo’s Beijing Consensus has three theorems: (1) focus on innovation.000. and two-thirds of the leaders under age 54 hold master’s or doctoral degrees. and (3) focus on leveraging world hegemonic powers with relatively low-cost strategies. however. chairman of the powerful State Asset Commission.’’27 As such. be ready to be acquired by some other firm.’’29 Ramo believes. The number with postgraduate degrees grew from 12. is the real scorecard. The Chinese have developed a liking for a knowledge-led economy.9 percent in 2001 to 29 percent in 2003. Innovation is reflected in the government’s leadership structure. is most easily observed by outsiders.

according to Ramo. Hence. Ramo describes this change as: ‘‘Once practicing ‘Communism with Chinese characteristics. China has been progressing in the direction of unequal distribution too fast and too soon. was an important shield that prevented the Chinese economy from sinking into the quicksand of the 1997 Asian Financial Crisis. Ramo indicates.’ China is now practicing globalization with Chinese characteristics. Achievements in economic transition have made China a model for developing countries. This principle was first put forward during the post–Opium War era when Chinese intellectuals ventured into Western learning. and the advanced culture.’’31 . The principle of controlling the national destiny proves to be an economically sound strategy.The China Model and Sustainability 173 and equality are intertwined.’’30 On the other hand. maintaining the collective spirit is an integral part of the Beijing Model. for example. as Ramo sees: the control of exchange rates. people. An exemplary implementation was the Special Economic Zones (SEZ) set up in 1979 in coastal cities to experiment with Western management. This is reflected in Jiang Zemin’s ‘‘Three Represents’’: the party must represent the people. the advanced productive force. China has firmly adopted a trade-based strategy. On the one hand. and in Hu Jintao’s ‘‘Three Closeness’’: to be close to reality. ‘‘Chinese development has a certain kind of prideful. With only three decades of reform. Chinese leaders are sober with the various dangers in growing GDP in double digits. and life. Ramo is particularly appreciative of the Chinese view that any foreign experience must be localized before it can be useful. while broadly encouraging individualism and risk-taking. which is reflected in its export orientation and FDI policy. However. it is the widening gap of incomes and regional discrepancy that are of central concern. internal energy that helps the nation’s confidence. China maintains a tough stand in sticking to self-determination based on its culture and market dynamics rather than following Western prescriptions such as the 10 principles of the Washington Consensus. ‘‘Balanced development’’ has since become the economic moniker.

equality. sees freedom growing in China where many in the West fail to pick it up. and targeting weak spots of the Western military systems by developing a set of asymmetric weaponry may likely be cost-effective. but the concept is important. a former ambassador of Singapore to the United Nations. Ramo believes that a new framework should be built beyond the ‘‘threat-opportunity binary paradigm and instead begin to build a more environmental approach to improve relations. China is seeking good neighborliness in the name of mutual trust. And here lies the economic validity.’’ The postreform China is not the same as China of 150 years ago.’’32 DEVELOPMENTAL PERSPECTIVE Kishore Mahbubani. As Ramo puts it.174 Business and Technology in China Self-determination is reflected in China’s diplomacy as well. Deng’s ‘‘peaceful rising’’ and Jiang Zemin and Hu Jintao’s ‘‘seeking friends and avoiding troubles’’ are diplomatic policies showing a consistent strategy of seizing the moment to develop the country’s economy. as Ramo discovers. China has become the center of East Asia. Mahbubani writes. How should the United States and other industrial nations deal with China? Ramo argues that the ‘‘China threat’’ theory is outdated and must be replaced by ‘‘China opportunity. currency reserve could be used to do more harm than aircraft carriers that cost that much money to buy. and cooperation. It has cultivated multilateral ties and endeavors to bring about free trade areas in Asia by 2010. mutual benefit. An imploded Chinese economy will not be in anyone’s interest. Working with China will open up a treasure trove of opportunities. Ramo estimates that China’s hundreds of billions of dollars in U.S. To contain or constrain China could only harm its ability to improve. of China’s defense strategy: developing an asymmetric defense system. Such strategies may have only limited use in the actual warfare. . Going asymmetric instead of mirroring the costly weaponry production of the West.

The freedom of choosing one’s occupation has been one of the most powerful factors that has raised productivity. In terms of their daily lives. When President Carter finished.33 Mahbubani adds that along with freedom from want. To tell people who are struggling to stay alive that they are ‘‘free’’ because a distant despotic ruler has been removed will appear meaningless to them.34 Indeed. Chinese citizens also have acquired freedom of security and freedom of choosing one’s job. and the citizens of Beijing have never enjoyed as much personal security as they do now. Congress had passed this legislation in an effort to put pressure on the Soviet Union to allow free emigration of Jews. Famine is more damaging to human freedom than a politically closed society. Deng Xiaoping paid an official visit to the United States.The China Model and Sustainability 175 The fundamental layer of human freedom is freedom from want.S. who told him that the Congress had passed the Jackson-Vanik Amendment in 1974. the Chinese people have never enjoyed greater human freedom. Deng asked him. due to financial means and residential restrictions. Before the reform. They are finding their way to a better life in cities. The 150 million annual migrants are but one example: the Chinese no longer feel tied to the harsh working conditions of farm work. ample evidence supports this view that the Chinese enjoy an increasing freedom to choose their jobs. Even traveling for sightseeing was uncommon. ‘‘How many Chinese would you like me to allow to emigrate to the U. Mahbubani relates an interesting story: In January 1979. Reform has changed it all. He was received by President Jimmy Carter. ‘‘freedom’’ will come with liberation from the fight for survival.? One million? Ten million? A hundred million? You can have as many . Deng listened impassively as President Carter made his passionate case for the right of free emigration. which allowed normal trade relations only with countries that allowed free emigration. the Chinese were tied to their birthplaces by the Hukou system. In this sense. A human being who cannot feed himself or his family cannot possibly be free. Mahbubani points out that the freedom of travel is an important right that the West tends to ignore.

Indonesia. China actively extends its influence to surrounding countries of the Association of South East Asian Nations (ASEAN). Can the West say the same?37 On the global stage.36 Mahbubani points out that China lags behind in ideological freedom and rule of law. they are confident and optimistic that things will improve. vegetables. written in 1776. Thailand. including meat. the Philippines. they are the freest people China has ever had. Declaration of Independence. As they look ahead to their future. Progress in these areas. Vietnam. The document declares an FTA with Brunei. 10 million tourists traveled abroad spending $10 billion. which shows its openness and confidence. typically takes a long time to achieve. the final FTA was signed by the Chinese and ASEAN leaders at the 8th ASEAN Summit in Phnom Penh.’’ President Carter did not push his point any further. . To demonstrate concretely that its offer was serious. At the ASEAN-China Summit in November 2001. and it took another century for the United States to recognize that its black population should have the full set of civil rights promised in the Constitution. dairy products. China even presented unilateral concessions to the ASEAN countries. according to Xie Guozhong.S. fruits. Singapore. live trees.35 NBS data show that in 2006. He writes: The Chinese people have never been freer. Relative to their ancestors.176 Business and Technology in China as you want. fish. senior economist of Morgan Stanley. and nuts. . Cambodia. Chinese Premier Zhu Rongji stunned the ASEAN leaders by offering a free trade agreement (FTA). Malaysia. Laos. Cambodia. and Myanmar . China is likely to become the country with the largest number of people traveling abroad. spoke eloquently of the equal rights of ‘‘men. such as duty-free access to the Chinese market on 600 agricultural products. Americans justifiably can take pride in having the longest surviving democracy. as he indicates. By 2020. The U. They are much freer than they have ever been.’’ Yet it took Americans almost a century after it declared independence to free those it had enslaved. A year after the proposal. .

According to Mahbubani. China’s maneuver has a further goal to secure its borders. China National Offshore Oil Corporation (CNOOC).5 to $2 trillion. helping to preserve political and economic stability at its borders by strengthening the ASEAN economies is a far-reaching strategic plan. In 2003.’’39 Mahbubani believes that the United States remains on high alert when dealing with China. in that both are driven by a cold calculation. causing it to attempt containment by forming an alliance with ASEAN countries to encircle China. that ASEAN countries would not be disposed to help U. Chevron. and Cambodia.7 billion people. ‘‘China’s soft power in Southeast Asia is now so potent.S.The China Model and Sustainability 177 by 2015. decision to offer Mexico trade access through the North American Free Trade Agreement (NAFTA). Hence. with a combined GDP of $1. the state-owned Chinese oil company.S. This is similar to the U. . In the case of the United States. instead of trusting China as a regular trade partner.S. tried to purchase Union Oil Company of California (UNOCAL). In the case of China. encirclement. Laos. Mexico possibly could send more illegal immigrants across the border if America did not strengthen the Mexican economy. . in competition with a U.S. China has implemented a preemptive strategy against any possible U. which the United States in particular should have welcomed because it championed the right of major U. contain China. the China-ASEAN FTA. this should have been seen as a purely commercial transaction.38 In Mahbubani’s view.drafted rules on investment. will constitute a common market of 1. Mahbubani believes that China is acutely aware that its steady rise could one day wake up the United States.S. Vietnam. Under U. ‘‘that for the first time since 1945. . even if it involved outsourcing jobs to Mexico. oil company.S. China also accorded the three non-WTO ASEAN members. when fully implemented. most-favored-nation status. oil companies to purchase oil companies . so that it builds a safe neighborhood that will be necessary for a prolonged domestic economic growth. according to Mahbubani.’’ Mahbubani states.

Instead. While private ownership is expanding. China’s success in weathering two financial storms while leading Western economies sank into recession has convinced many that China’s experience must be studied.S. China does not implement multiparty parliamentary democracy.40 CHINA MODEL VIEWED BY THE CENTRAL PARTY SCHOOL Probably no one puts more emphasis on studying the China Model than the CCP. or ‘‘one banner. rivers. com.’’ ‘‘One road’’ refers to ‘‘the socialist road with Chinese characteristics.’’ ‘‘One banner’’ refers to the ideological principle of ‘‘upholding the banner of socialism with Chinese characteristics. The government typically exercises more influence over the economy than Western systems. the government owns natural resources. and ideology. The 17th CCP Congress held in October 2007 characterizes the China Model as ‘‘three one’s’’ (san ge yi). With respect to the political with an archive of related articles.’’ ‘‘one road. political system.’’41 Yu Keping. the People’s Daily hosts a dedicated Web forum at http://theory. On the one hand.’’ and ‘‘one system. explains that the China Model clearly differentiates from the Russian Model and Western models with respect to ownership.people. This left a deep impression on Chinese leadership.178 Business and Technology in China all around the world. Conversely. the U. with most of the opinions coming from the CPS. and it does not practice ‘‘responsible government’’ in the form of the . government intervened to block the sale of UNOCAL to CNOOC. there is an increasing domestic demand to examine China’s admirable modernization progress during the past three decades. China adopts a mixed-ownership system. To facilitate research and exchange of views. such as forests. and mines. deputy chief of the CCP Bureau of Translation. Additionally. as the leading political party the CCP is under pressure to elucidate the neo-communist cause and the party’s role with respect to the market economy.’’ and ‘‘one system’’ refers to ‘‘the Communist ideological system with Chinese characteristics. in a dramatic reversal.

that neutral government is a key feature to the China Model. The first evidence. probably most people would be reluctant to describe it as a government of ‘‘neutrality. thus rallying people . in that the system allows the government to exercise a strong influence on social stability. but it remains accessible to other ideological systems in the meantime.The China Model and Sustainability 179 nominal division of state power. according to Yu. The 17th CCP Congress associates the ideological framework of ‘‘three ones’’ with a guiding principle for the practice named ‘‘four determinations. and curb extreme polarization. the economic reform never would have taken off. is the government’s flexibility or pragmatism. without favoring any particular section of the society and without bending to short-term interests of social groups. China adopts Marxism as guiding principles. (3) promote S&T and develop a harmonious society. In the early 1980s. As such. Professor Yang Yao of Peking University amended Yu’s description of the China Model by adding that the Chinese government has been a ‘‘neutral government’’ in reality.’’ Professor Yang Yao believes. contributed greatly to world peace. according to Yu Keping.43 When it comes to assessing the role of the Chinese government. however.42 This theoretical framework is coherent.’’ China is determined to (1) engage in ideological liberalization. Additionally. All this is much needed at the start of a new market economy. ‘‘Neutrality’’ means that the government puts national interests above all. capitalism or socialism. Deng Xiaoping avoided such classical and nonsensical debates by calling on the CCP to simply focus on the economy. all of this is managed based on the ‘‘country’s special reality’’ (juti guoqing). distribute resources. had China continued to entangle itself in ideological debates on picking which way to go. Ideologically. increased its international influence. the system has led to China’s booming economy. and (4) improve people’s material well-being by building in a comprehensive manner a ‘‘relatively comfortable life’’ (xiao kang). (2) reform and open up. according to Professor Yang. and thus.

and then.9 percent of allocation of production resources. such that China has turned into ‘‘a new world market where market competition reaches the highest intensity. Tens of thousands of people lost jobs as a result. ‘‘How do you . fearing the consequences of disturbed job security. SOE employees as well as many cadres were scared of reform. He explains that the new companies were more productive and competitive. market mechanisms currently control 95. Many experts believe that it is the gradual but steady pace that has guaranteed continuity. At the beginning of the economic reform when the planning economy was still on many people’s mind. including going bankrupt. In the early 1980s.162 participants the question. According to The Guangming Daily. Had the government failed to maintain neutrality. and 97. However. It allowed SOEs to first satisfy the state quota by selling products to the state at state-fixed prices. and thus they needed more workers. The Chinese government allowed unproductive companies to restructure. This policy eventually led to the booming village and township industries in the 1990s. it would not have given up its privilege in the old centralized system and forced the SOE buddies to reform or die. this makeshift policy was an inspiring deviation.’’44 A December 2008 survey conducted by the official government newspaper The People’s Daily and its affiliate People’s Tribune asked 5. according to Professor Yang’s research. restructured companies eventually hired more employees than those that refused to restructure.’’ The second evidence is the temporary dual-pricing system installed in 1984 to facilitate urban reform. The third evidence is the in-depth SOE reform. And. to sell beyond-quota products on the market at market prices. 91.7 percent of government purchase of agricultural and related products. ‘‘reform or die’’ was what the government handed to SOEs. The gradual economic reform has deeply transformed the traditional planning economy.180 Business and Technology in China of all backgrounds to support one practical target—achieving the ‘‘relative comfort.6 percent of retail sales.

self-reliant. Participants picked ‘‘reform-focused. 56. Furthermore. gradual economic reforms. and the government’s pragmatic approach. (3) making the government more effective in areas such as public finance and public service.’’ ‘‘open.28 percent believe that China’s economic achievement is primarily due to a prolonged period of social stability. gradual reform.56 percent of the participants believe that the current world financial crisis will be a test to the China Model. These descriptors are as follows: creative. (2) accelerating health care.’’ and ‘‘stable’’ as the most descriptive of the China Model. these priorities suggest that with the improvement of material life people are becoming more aware of individuals’ rights. as most participants in the survey wish. Despite the fact that ‘‘economic growth’’ is ranked second to ‘‘reform’’ as one of the most characteristic features of the China . open. and common-sharing. reform-focused.55 percent believed that. 74. Obviously.7 percent of the participants perceive the China Model as essentially referring to the Chinese-style market economy characterized with government guidance. When asked ‘‘How should the China Model improve?’’ 81. Results showed that 74. and may further lead to its refinement. with ‘‘reform’’ and ‘‘growth’’ taking the highest scores. growth-focused.’’ ‘‘experimental. stable. while the China Model is indeed a valid concept. Some 63.’’ ‘‘growth-focused. and openness to the outside world. tolerant. efficient. experimental.34 percent listed the following as the first to be improved: (1) reforming the social distribution system and narrowing the gap. gradual. improving individual rights and social justice will be critical. Additionally.The China Model and Sustainability 181 understand the China Model?’’45 The survey listed 12 descriptors for participants to rank with respect to their representation of the nature of the China Model. and housing reforms. For the China Model to be an inspiring path for other developing countries.’’ ‘‘gradual. fair and just. education. the model is in transition and has many imperfections. and (4) reducing the current urban-rural divide and working toward urban-rural integration.

we have been following the traditional model left by the Industrial Revolution. Eventually. criticizes China’s fast growth as irrational and unscientific. a professor of the CPS. Qiu Gengtian. a professor at Tsinghua University.46 Contrary to many Chinese theoreticians who embrace the nationalist view and who insist on China’s specificities. but also reflect damage caused by . it must urgently reduce costs and implement the principle of balanced growth. there has been no shortage of damages to morality and to the ecological environment. Professor Qiu argues that refusing to follow the road that other nations are pursuing by invoking the excuse that China has special conditions will mean in effect that China denies its citizens the civilization that other nations already have achieved. one of high investment. high costs must not have a place in the China Model. high production. these high costs will eat away much of the growth. the human nature has suffered distortion and alienation. in Professor Qiu’s view. Behind the fast economic growth. Hu Angang. Hence. our high growth bears high costs. because it generates high damage to the environment as well as to the wellbeing of people’s lives.47 Professor Qiu points out that if China wants a sustainable economic growth. and high pollution. Professor Qiu recognizes global commonality both in human rights and in economic principles. At any rate. and this is part of the reason why China’s economic boom has been considered by environmentalists as ‘‘threatening. due to the fact that China’s production ramped up at a stunning speed within a brief period and for a rather narrow purpose. As such. believes that the GDP accounting method must not only record growth in terms of wealth increase. Meanwhile.’’ Professor Qiu writes: Our economy is exemplary in both high investment and high side-effects. critics have pointed out that the fast economic growth during the past three decades is actually seriously deficient in several aspects. the economy is entangled in a vicious cycle in which higher growth parallels higher costs. Overall.182 Business and Technology in China Model.

Professor Hu urges the following: We must conduct a green Industrial Revolution in which China is not only for a participant. Therefore. in itself. A green environment is on everyone’s .50 Those who have visited China on multiple occasions may have witnessed changes in people’s environmental awareness. polluting and wasteful behaviors are openly criticized by the media. this figure could climb to 27 percent by 2030. the Kyoto Protocol features in student debates. not by the ‘‘Black GDP’’ (‘‘black’’ for carbon emission). schoolchildren routinely engage in cleaning up the community. but the initiator. which may turn China into a ‘‘public enemy of the world. In large cities. China not only will benefit from producing the green GDP. the green way is China’s way of peaceful rising. Thus. We believe that the Green Development is China’s way to stronger economy. Professor Hu writes.’’ Professor Hu believes that the real GDP growth is accounted for by the Green GDP. but also will become a leader in the future green economy. If not well managed. China will become a new ground breaker. and fewer chimneys gush dark smoke. creating green-technology. will be a big contribution of China to the mankind. China must stick to green development. making green contributions. putting in place green development models.48 In an interview with Phoenix TV. this. Professor Hu states that if China is not committed to reducing CO2 emissions. recycling has been integrated into daily life. and bringing about a green peace.The China Model and Sustainability 183 economic activities.’’49 On the other hand. the world’s efforts will fail. and most important of all. if China actively reduces carbon emission. growth minus damage equals the ‘‘Green GDP. Professor Hu recommends that by 2050 China reduce its CO2 emission by half from its 1990 level. the leader. producing green products. China’s current CO2 emission levels account for 17 to 18 percent of the world’s total. By constantly making green consumptions.

184 Business and Technology in China mind. if this does not happen in the next 10 years. Housing space sold went up by 31 percent. says that China must reform its current industrial structure from simple value-added processing to a knowledge-based and high-tech-based economy. Luo Qiang. These interpretations of the China Model reflect the reality in a certain way. Indeed. Plentiful hurdles lie ahead. pragmatic. the economy will collapse. a GDP growth below 8 percent results in unemployment pressure and other adversary effects. China’s environment will be seriously damaged and its resources exhausted. putting pressure on economic growth.1 percent. PERSPECTIVES OF SUSTAINABILITY Since the start of the 2008–2009 global economic crisis. the stock markets in Shanghai and Shenzhen regained 75 percent and 95 percent. Because China is experiencing the peak of its employment. which led a moderate recovery in the sale of furniture and automobiles. a high-level manager of Golden Concord Non-Ferrous Metals Holdings Limited. Based on these opinions. Investment in fixed assets increased by 33. respectively. The rise in the . and as a result. and capable of strong interventions. But he is hopeful of significant changes sooner rather than later. Will China’s economy survive the impact of the current global crisis? Economic data thus far point to a positive future. Production continues to exceed demand. The GDP grew only by 7. and (4) a strong focus on improving people’s material well-being and reducing economic gaps. the lowest rate since 1992. The Consumer Confidence Index shows improvement from the same months in 2008. the Chinese economy has demonstrated a great resilience. (2) a stable and relatively tolerant social environment that provides increasing latitude for business opportunities. the China Model could be defined as the union of the following components: (1) a government that is reform-minded.5 percent. (3) a gradual economic reform that keeps problems within manageable limit. there have been a few bright spots: during the first half of 2009. In his opinion.

causing great damages to Chinese goods.52 Trade with Europe. In 2005. the NBS chief expects the economy to maintain a steady to relatively fast pace. The CPI number turned positive in December. Urban income increased by 9.31 in 2008. Some speculate that the stimulus package may have been diverted to the stock market. Looking forward. he pointed out a number of concerns. according to Mr. respectively. China relies on imports for more than 50 percent of its need. both measures. .54 While NBS chief Ma Jiantang expressed guarded optimism with the future of recovery.22 times as large as rural income. Another is caused by the continued overheating in the housing market. and 16. China’s cost of import has risen to $95 per metric ton as of July 2009.6 percent. may have an inflationary effect. that figure rose to 3. A third concern is income discrepancy maintaining its upward trend. lowering profits for the iron industry. The situation is devastating for China’s iron industry. however. In the meantime. one of which is signs of inflation. Because 70 percent of the world’s iron mines are controlled by Western countries. which has a critical role in China’s economic recovery. negative growth continues to accrue in double digits. The solution he proposed is to raise migrant workers’ salaries and raise the purchasing prices of agricultural products. Japan.53 The preliminary year-end figures released on January 21.7 percent over 2008.1 percent. indicate that the 2009 GDP grew by 8.8 percent in 2009 while rural income’s rate of increase was 8. urban income was 3. A similar situation exists in the housing market in which sales oddly rose even though incomes did not change. which is now understood as a side effect of the stimulus package. 2010. One example is iron ore. Ma. demand for iron has been decreasing because of the world recession.5 percent. 23. raising alert on rising prices.The China Model and Sustainability 185 stock market therefore may reflect bubbles in the market. and the United States went down by 29.9 percent. compared with $60 per metric ton just four months earlier. Trade protectionism has been constantly on the rise in Western economies.51 In foreign trade.

and implement solutions that are beyond the capacity of the current market system. The global recession has tested the legitimacy and popularity of the government. In foreign trade. the Chinese government has been channeling funding into both high-tech and labor-intensive products. the Chinese government has worked simultaneously on two fronts: (1) accelerating support to rural regions by providing subsidies for agricultural products. The strong intervention of the government has played an important role in trade recovery. Additionally. the government seems to enjoy more support in the 21st century. Given its record of quelling the 1997 Asian Financial Crisis. to effectively develop remote regions. Both measures have achieved results. In the reform of product mix. maintains an upper hand on financial . reducing the urban-rural gap becomes a critical matter. In times of economic downturn. Only government efforts could leverage investments to needy provinces. the government has retired many outdated and polluting production facilities and has supported new strategic industries to rise. allocate resources. and integrating these measures with the grand plan of stimulating domestic demand. The government achieves this through law enforcement and through ideological campaigns hinting at patriotism and nationalism. It is a fact that the market mechanism works the best in affluent regions. providing health coverage to farmers. the government has renewed export tax refunds multiple times since January 2009.186 Business and Technology in China The advantage of the China Model is manifested in its capacity to mobilize national resources. no better economic structure comparable to the China Model enjoys popular support. despite its many imperfections. To eliminate redundancy. helping farmers find jobs in urban areas. but less so in poor regions. with an emphasis on products that are patented with national brand names. and (2) reducing corruption. Because of low income levels. for example. For example. Here. the government has to step in with incentive policies. the high demand for socioeconomic improvement in poor regions would hardly attract significant attention from the market.

its ability to succeed ultimately will depend on whether China will continue with its economic and political reforms. not being able to qualify for . Notwithstanding. The mining industry is a good example. As time passes. such a trend has always lacked popular support. more developing countries find in the China Model an answer to their sufferance from the failure of a Western financial system that had allowed greed to take its toll on the global economy. an adversary force exists historically. signs of ‘‘turning inward’’ have raised concerns among Western political analysts.3 billion people. simply because they possess the technology. Foreign companies typically leave Chinese firms with a thin profit margin. Chinese industrialists have a strong commitment to making this change. such as hardliner nationalism that may take the opportunity to seek expansion.’’ coined by Adam Smith in describing capitalism as the pursuit of profit with public benefit in mind. and demonstrates an admirable capability of raising the living standard of 1. social control. Luo Qiang of Golden Concord is particularly concerned about the disadvantage that many Chinese metal firms face. support is rising for more control. However. with its government intervention. gradual economic reform. the key to sustainable growth lies in whether China could successfully convert its current industrial model from one of high production and high waste to one of a knowledge-based. Instead. In essence. More particularly. In some cases. The sustainability of the China Model in the long run is widely believed to be optimistic. and environment-friendly industry. the China Model. have lost much of its glare in China. is likely the only way to sustain the Chinese economy through the global recession. foreign firms transfer technologies that are banned in their own countries.The China Model and Sustainability 187 and social disturbance. energy-efficient. In the short term. and social welfare programs. ‘‘Enlightened self-interest.55 While there is no apparent benefit for the Chinese government and the CCP to slow down economic reform and open-up.

because these . The legal system must be strengthened to better protect individual rights. From this perspective of unity and under the umbrella of the China Model. and the process generates large quantities of waste debris that eventually is trucked away and dumped on farmlands. Assuming that progress in these areas is achievable. one cannot afford to ignore history.56 Projection of long-term economic sustainability is a broadly encompassing effort. and could account for about one-quarter of the world GDP by 2030. In assessing the sustainability of an economic model. the chemical detergent then seeps into local surface water. hillsides. On this issue of reforming China’s industrial model.188 Business and Technology in China environment standards there. and other ‘‘empty’’ spaces. As a result. that China must have its own technology and hopefully a better one. long-term sustained growth is highly likely and the chance of economic collapse is unlikely. ethnic tensions are high as suggested by the Xinjiang riot in July 2009. the government and the people are united. China likely could surpasses the United States to become the biggest economy in the world in terms of GDP by 2015. In addition to encouraging environmentally friendly industries. De Saussure’s structuralist view argues that the value of a component is endowed by the system. according to OECD researchers. then. cultural traditions. and current development. Judgment based on misunderstanding or lack of understanding of the background system leads to partiality. in this case). foreign technologies are not pollution free. He believes that China must stop making bad deals such as these. Property rights need to be further reformed such that farmers’ land will not be conveniently seized by corrupt officials in their money-for-power swaps. One example Luo Qiang provided was the treatment of raw mining materials (iron ore. China must urgently build a safety net of social security and social welfare for its residents in rural areas and hinterland provinces. The ground mineral rocks are chemical-washed. socioeconomic equality must be addressed. For example. and determination is strong.

the China Model may differ from Washingtonian ideals at least in some aspects. It is there to stay. Thus. foreign learning may take a longer time to be an integral part of the system. 4.’’57 Learning from one another may be a better way to generate a sustainable model for . despite traditional implications. who founded Daoism. On the global stage. For one thing. As such. It is a dynamic process searching for optimum solutions. it is a risky matter to apply the same standard to all systems. understanding is prerequisite to making sound decisions. Here. localization is a prerequisite to appropriate function. 3. in-party diversity has the potential to give rise to political forces that eventually would lead to a democratic plurality. Ideological control exists and at times is shown in the traditional forms of brainwashing. It is not in the name. 2. and may differ for a long time to come. radical nationalism. knowing the self is enlightenment. The Chinese system is no longer deadlocked in any ideological or economic structure. The fact that the CCP has opened up its membership to entrepreneurs proves that the communist movement is geared toward diversity. It fails on these grounds at the least: 1. it is a reality that the diversification of the CCP has generated growing representation. and separatism. Moreover. He said. such as the levels of deregulation and private property ownership. the opinion that the China Model is unsustainable because it departs from the Washington Consensus is likely biased. stressed the importance of keeping one’s mind open. However. including hard-line communism. It fails to perceive that the modern Chinese economy is one of gradual transition. China’s ideological control has taken up a new orientation—the control of extremism. Lao-zi (sixth century BCE). and whether the new political entities are named ‘‘Communist Party A’’ and ‘‘Communist Party B’’ is not important. all of which could derail the economic progress. ‘‘Knowing others is wisdom. the 21st-century CCP will not forego the market mechanism. In fact. Understanding may even save lives. Therefore. Rooted in the Chinese tradition in which profit-seeking historically despised and social control the norm.The China Model and Sustainability 189 form the components of the system.

China failed to encourage its own consumer spending. characterized by prolonged low savings and high consumption. Premier Wen Jiabao blamed the United States for an ‘‘excessive expansion of financial institutions in blind pursuit of profit. . ‘‘Nobody is going to pass a legislation to outlaw that (greed). The following two examples support this view. It doesn’t work. because the flaws in human nature are such that we can’t change them.’’ a ‘‘failure of government supervision of the financial sector. during the annual gathering of political and economic leaders in Davos. I firmly believe in it (power of the free market).190 Business and Technology in China everybody.S. whereas a closed mind seldom helps. former Chairman Alan Greenspan sees human greed as uncontrollable except by the market mechanism itself. As a result. but it will occur (again). because I know of nothing in the evidence of alternatives. Try it. Chairman Greenspan states during a CNBC interview. . The first example is related to China’s attitude. while criticizing the U. leaders in China and the United States tend to adopt a defensive attitude. In defending the Federal Reserve’s lack of intervention. Yet.’’ and an ‘‘unsustainable model of development. He would strongly disagree with the level of state intervention that China applies to its economy. It will not be for quite a period of time.’’58 For decades. the government is now using the stimulus package to ramp up social benefits and provide all kinds of incentives to stimulate consumer spending. one of the worst recessions broke out and wiped out much of the gains earned in decades and had a worldwide impact. but takes the cycle of boom and bust as the deal of a great economy. Dwelling on the triumph of market economy and overreliance on market mechanism is a lesson that the United States has learned. 2009. as he sees little merit in raising regulation at all. . Switzerland. In his speech given on January 29. model. The second example deals with American attitude. such that its underdeveloped domestic market suddenly turned into the center of concerns when exports collapsed in the global recession.’’59 The consequence is that because of regulatory failure. The recession has led people in the United States to .

This is a huge huge story. Any responsible government has a duty to install effective measures of regulatory control to prevent human flaws from taking their toll on the economy. ‘‘the shoes must be made to fit the feet. The world may have developed too fast and too soon for many policymakers to catch up. and capitalism for three decades. It continues to astonish me how few people in the West realize that this is starting. is China’s unpredictability. None of these models are free from costly deficiencies. is to set a goal.000 years. the old framework will produce more of the same. What has happened in China calls for a revision of the theories. financial ally. communism for more than 50 years.S.’’61 The Chinese learned this truth after following Confucianism for more than 2. those of market economy and communism. for example. had the following to say on China’s role in the world economy: ‘‘The story of the global recovery here. and that China has become the biggest U. It is unthinkable. for example. carefully work toward it. Even more unthinkable. that within merely three decades China has turned from a poverty-stricken country into the third-biggest economy in the world. the story into the next decade. Sticking to a set path will only result in falling behind or even failure. global head of research at Goldman Sachs. Jim O’Neil.’’60 Observations are often shaped by theories. then.’’ as an old Chinese saying goes. China is transitioning further from an export country into an import country. is the story of the emergence of the Chinese consumer. rather than the feet be shaped to fit the shoes. . however. New observations may lead to effective policies and new opportunities.The China Model and Sustainability 191 reassess its economic model. It is unthinkable that communist China and the United States are helping one another as they sail the waters of recession. as they did in the 2008–2009 recession. For the Chinese. and not worry about the model. Deng Xiaoping phrased this in a formal way: ‘‘There are no fixed models. the model belongs to the past. and there can’t be any. Even ‘‘insiders’’ of the CPS are constantly guessing. What is to be done. and it is aggressively pursuing a green economy through technology and innovation.

192 Business and Technology in China The process of the economic transition has reflected this mentality all along. as Premier Wen Jiabao expressed in his 2010 New Year’s wishes. a stable. looking ahead. and versatile China benefits the whole world. The waves are high. . crossing the river of challenges will not be an easy task. Letting the citizens live a better life and live with more dignity will be the country’s priority in the years to come. Yet. In fact. peaceful prosperous. the world will be watching China’s every step with the utmost interest.

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31. 2007. 19. 169–72 Beijing Consensus (Ramo). 174–75. 130. 173 bank losses. 42 B share. and migrant workers. 143 Agricultural Development Bank of China (ADBC). 109. 137 ‘‘brain drain. 16t. 39t.’’ 53.Index *Note: t represents tables and f represents figures in index entries A share. 23 Administrative Measures on the Control of Pollution Caused by Electronic Information Products. 142 agricultural modernization. 142. 148 basic medical insurance schemes. 150 building socialism. 52–53. 142 banking reform.S.. 105. on pollution control. 18. 7 bad loans. 176. 30. relationship with U. 89. 140. 127 . Inc. 141–42 Baidu. 142. 146 backpacking travelers. education in. 140. ‘‘Drive One Day Less (per week). farmers’ migration. as host of Olympics. 39t Bank of China (BOC). 142 143. 57 Agricultural Bank of China (ABC). 76. 144. 77 Beijing Consensus. 160. 31 Bergius approach. 21 Beijing: annual per capita household. with Chinese characteristics. 161. 146 accident insurance. spending of residents. per capita living space in. 49– 78. security in.’’ 120 budgetary principles. Chinese banks limitation of. 110. 30. 154. and technology venture. 140. 108–9 Balanced development. 22. 91 Association of Southeast Asian Nations (ASEAN). 139–48 banking systems: policy discrepancies of. as trillionaire province. 118. 38. uniformity in. relationship with neighboring countries. 177 automobiles export. banking reform in..

135 Bush era: relationship with China. 71. See also Torch Program China’s economic model: Callick’s views on. 140 China Import and Export Bank (CIEB). against corruption.’’ 166–69 capital market. 64. 161. improvements of. 177 China National Petroleum Corp (CNPC). 92. 191. Beijing Consensus.’’ 164–66. 191 car sales. 45–46 Chen Xitong. and regulation of PBOC. director of Demographics and Labor Economics Research Center at the Academy of Social Sciences of China: in removing Hukou system. 12. 109–10. 160. 8. limitations of.S. 91. 100. six step sequence. 134. 178–84 Chen Jian. 160. 93. 148. 119 China’s S&T framework. 89 Chinese Academy of Science (CAS). in economic prosperity. 123–24 China Securities Regulatory Commission (CSRC). Callick’s ‘‘Controlled Freedom. 171–74. 160. 43 carbon dioxide (CO2) emission. China Model. 62 China-ASEAN FTA. 89. education. 160. 82 Callick’s ‘‘Controlled Freedom. Shambaugh’s Model. components of. sustainability perspective. in corruption case. GDP. 31 ‘‘China opportunity’’ theory. 147 China Model. 189. former vice chairman of the National People’s Congress. 61–62 Cheng Kejie. in bribery case. Hutton’s ‘‘Halfway House. 169.’’ 104.224 Index 174–78. 182. 109. 147 China Torch Program. energy. 166–69 China’s GDP. 52. mayor of Beijing. competition. 30 business travelers. ‘‘Hundred Talents Program. 145 capitalism. 140 China Insurance Regulatory Commission (CIRC). 24 Bureau of Agricultural Administration. 106. economist: explanation of multiple-wave theory. 113–14. and Washington Consensus. and Confucianism. viewed by Central Policy School. developmental perspective. National Knowledge Innovation Experiment Program of. 13 burning coal. 179. 189. 170. 178. 144 China Center for International Economic Exchange (CCIEE). 110–13. 184. 187. 161. 176–77 China Banking Regulatory Commission (CBRC). 165. 160 China Construction Bank (CCB). 161.’’ 166–69. 169 Chinese Communist Party (CCP). 122–123. 45. 105. comparison with American system. 184–92. 10. 147. failure of. 7 Cai Fang. 162–64 China National Offshore Oil Corporation (CNOOC): and UNOCAL (Union Oil Company of California). versus U. 51. 3. IPC protection. 33 China’s new procurement policies: with the WTO’s Government Procurement Agreement (GPA). 169–70. 9. 101 Chinese Academy of Social Sciences (CASS). 181. 136 Central Party School (CPS). 178–84. 139. . 114–17 Chinese Academy of Engineering (CAE). 10. 174 China Postdoctor. toward diversity. 166.

189. 29 double-digit growth. Chinese banks limitation of. 190–91. 16. 58–59 civil service corruption. 188–89 current development. 3 Commercial Bank Law. 59–65. for economic growth. gray areas. 68–70. 80. 129. 52. country’s productivity. 166. on urban housing. 95–96 The Decision of the CCP Central Committee and the State Council 225 on Ramping up Tertiary Industry: Article 1. 125. 13. and S&T. 17. 129. 1. 191 Consumer Confidence Index. in rising economy.’’ economic movement. 10. Article 5. 9. 127–33. and inflation. 59 Confucianism. 91 defensive attitude: American attitude. 20–21 cultural traditions. 190 Deng Xiaoping: and economic reform. 95 The Decision of Reforming the S&T Framework. on living conditions. 48 ‘‘Drive One Day Less (per week). 65–68. Developing High-tech and Industrialization. for economic sustainability. 74. housing reform. economic structural reforms. 131 Circular Economy Law. 186 economic polarization. attitude. 25. and China’s plan. new era for. economic structural reform in. 39. and Open Door Policy. 188–89 Daoism. 139 Contract and Responsibility System (CRS). 167.’’ 28. 47. revamping of. 7. 154 ‘‘Developing the Northwest. 143–45. and growth. 95–96. and ‘‘Household Responsibility System. 58–59. 59. 141 domestic stability. Article 4. grassroots-level corruption. 7. 2008. 59–65 Cold War: territory sector. 112. energy industry.Index Chinese leaders: attitude during recession. 42. and socialist market economy. 4–5 economic reform. 6 The Decision on Issues Regarding the Improvement of the Socialist Market Economic System. 3. 8 economic crisis. 130–31. and Western economies’ reliance on. 5. 12. 8 ‘‘Early Heavy Buyers. 155. 31 direct investments. 29. 191–92.’’ in middle class. 142 Communism. 43–44 competitive corruption. 12. 10–11. by Deng Xiaoping. levels of. 15 diplomatic adeptness. industrial . for economic sustainability. 135–39. 184 Consumer Price Index (CPI). on employment opportunities. 6. 125–26. 152–55. 16t. 172 ‘‘Chinese renaissance. 63 Confucian-Daoist ethics. 1. territory sector development of. education of. civil service corruption. socialist market economy. 151 Chongqing: annual per capita household. 96–97 defense modernization. factors for. 173. 48. 1. 59. 70–71 cost-sharing solution. China’s. 189 Daqing Oil Field. rise of.’’ in middle class. 91. 126. and relative comfort. 59. 24. 136 The Decision of Accelerating S&T Progress.’’ 82 Chinese system. 150 corruption.’’ 53 ‘‘Driven Businesspeople. 94 The Decision of Strengthening S&T Innovations. banking reform.

34–35 fanzu daobao (reverse lease). natural gas. 158. policymaking in reform. 56. 100. 23–32. consumption categories. on living conditions. coal into synthetic oil. 99. Hutton’s view on. 27. 91–92. 113–14. 57–58. 11 Fortune Global Forum. for transportation. 185. 135–39 energy saving. 131. 1989. 52 Environmental Protection Law. 157 farming technology.226 Index entrepreneurs: rise of. 136. 159–60 flipping stocks. in POE definition. energy supply. increasing creative thinking. 133. 15. as innovative system. SOEs versus POEs. 138 Engel’s Coefficients (EC). 186 foreign trade sector: growth of. 103. 86–87 energy source: annual fuel production. in Beijing Consensus. 39 export sector. 53 equal distance diplomacy. and Circular Economy Law (2008). in reformation. 53–54. 85 863 Program (1986). 136. 114. 99–100. losses. 4 economic structural reforms. 96–97. transition of. communicative skill. 2–3 Four Asian Dragons: and Shanghai’s export. 101. coal reliance of. 137. 4 first atomic bomb (1964).’’ 179 reform. 136–37. 127–33 economic structural shift. encouraging of. See also National High-Tech Development Program Einstein’s words. on pollution control. 17–18 ‘‘enlightened self-interest. 172. 149–51 economic structural change: reasons for. government’s role. and competition. 105. 44 ‘‘four determinations. 159–60. exposure to U. 30 equality. 155–59. fighting for. shortage of. 19. securities market. 126 Fischer-Tropsch approach. and oil price. 137–38. 26. 42. 92 floating population: and migrant population. 98. 49. 56 energy consumption. and urbanization. industrial water reuse of.S. and international economic development. negative growth. expansion of: on rural China. structure of. 57–58. revamping of. 92. and CCP. 11th Five-Year Plan (2006–2010). improving problem-solving skill. rural reform. 110–11.’’ 187 . 61. 137. aptness for Beijing Consensus. 137 Five-Year Projections. 165. 133. and Circular Economy Law (2008).’’ 47 foreign trade: to GDP. 1998 (amended 2008). 111. 111. 1998 (amended 2008). 81–82 environmental consequences. 112 education: and economic growth. taxation reform. on food expenditures. 188 erectile dysfunction (ED). 115–16 export market: contributors to. 138. and Spark Program. Article 24. 138–39. 78 ‘‘forced rebalancing. growth of. 11. and Energy Conservation Law. 134–35. 4–5. 185. 23. 5–6 education modernization. 126 first satellite (1969). through education. 171 Energy Conservation Law. and R&D. and trade recovery. sildenafil citrate. 110. 132. understanding cultures. submarine market. 145–48. 136 energy industry. consumption demand.

61–63 high-tech exports. 153–54. 77 Geely Corporation. priority fields. industrial modernization. education in. 90–91. See also Baidu. 89 history. 164. and natural calamity. professor at Tsinghua University: on abolishing Hukou System. 126. 51. 1998 (amended 2008). 68–69. 69–70 The Guideline of Mid. 112 health care system. and import 227 and export ratio. shortfalls of. 163–64. 128. 56. 157. on urban housing. 20. 32. export of. defense modernization. 73 . 20 government projects. government’s role in. 80. 16t. 64–65. 184. See also agricultural modernization. on education. 104–5 high-tech products. S&T modernization free-market economics. 183 gross domestic product (GDP): under Energy Conservation Law. 1. 154. 16t. views on urbanization. 102–4 Gansu: annual per capita household. 43 hosing space. 11. urban housing reform. home ownership. 153.’’ 104. in younger generation. 16t. rural reform in. 130. 76. 182–83. and Asian financial crisis. economic structural reform in. and railway passengers. 40 grassroots-level Long-Term Development of Science and Technology 2006–2020. 19. 146 halfway house. 113– and migrant workers. ‘‘Minjiang River Scholar Program. on economy of. as trillionaire province. banking reform in. 9. 75. for economic sustainability. and banking system. rising of. 29. in market competition. views on China’s GDP. 169 Fujian: annual per capita household. 134.’’ 108. Inc. 110 H share. 131. 188–89 home appliance sales. 142.Index ‘‘Four Modernizations. 186–87 ‘‘Google of China. and trillion mark. 152–55. ‘‘Zhujiang River Scholar Program.’’ 104 Guangzhou: invasion. 156–57 housing reform. coal-liquefaction technology. 131. goals of. 65–66 Great Cultural Revolution (1966–1976). 77 Funding for S&T Small and MediumSize Enterprises. 44. for retired population. and purchasing power parity (PPP). 156. 77. 10–11 global financial crisis. 20 high-level corruption cases. 28. 11. 19–20 Household Responsibility System (HRS). 73–74. from other countries. 35 guanxi (connection): and corruption.’’ 91. 165 Han Dynasty (206 BCE–220 CE). 71. new initiative of. 51. and China’s manufacturing firms. 109. 97–98. transitional economic structures. 153 Hu Angang. 48. 98 Guizhou: economic condition in. 129 Great Leap Forward. leader in GDP growth. 155 Green GDP. 163. 33. 43 global recession. 133 ‘‘gender-equal’’ sector. 1 Guangdong: annual per capita household. Government Insurance Program (GIP). 4 Germany. 167. 137 global economic crisis.

135. Article 14. 77 joint tax. 1. economic policy: Callick’s views on. 105–7. 105–7. 77 ‘‘Hundred Talents Program’’ of the CAS. 139. 55. 7 Lenovo. 68–69 Jiangsu: annual per capita household. 1995 (amended 2005). 94 international business connections.. 18–19 Industrial and Commercial Bank of China (ICBC). Article 37. 55. and fast food business. in eastern and western regions. 105–6. 189–90 Law on Prevention and Control of Atmospheric Pollution. 172. in recycling. 42. improving of. mortgagebacked securities (MBS). comparison of. 20 Lao-zi (sixth century BCE). 101 Korean War (1951–1953). 134 Labor Insurance Program (LIP). 9. 79 Hubei: as trillionaire province. 87. Premier Wen Jiabao’s views on. 140 industrial modernization. 134–35 inflation. signs of. 1997. 16t. Article 3. Article 15. 54. 167. 185 innovation: and government’s leadership structure. 1996. 19. 151 ‘‘jumping into the sea. 90. 113–14 innovative companies. to protect registered products. 31 International Monetary Fund (IMF). education modernization. 32. on control measures. 104 Hutton’s ‘‘Halfway House. 54–55. 114–17. Inc. Article 17. 83. 55–56.228 Hu Jintao. sprouting of. 91 industrial reform. protection of. See also Lenovo Lehman’s Brothers: U. 55 Law on Prevention and Control of Environmental Pollution by Solid Waste. 38 leisure travelers. New Oriental Education and Technology Group. 105. President Hu Jintao. 82. 56 Law on Prevention and Control of Water Pollution. market competition. 79–80. 15. 136 Jason Chi. 167 Key National S&T Industrial Program. 107–8 intellectual property rights (IPR). former president of Lucent China. 85–86. 48. and intellectual property. 163 interpersonal relationships. 60 Legend Group. 88. 169–70 Index Jackson-Vanik Amendment (1974).S. on preventing pollutant discharge. and consumer price index (CPI). 175 Hunan: as trillionaire province. 175 Japan. 108–9. and SOEs. President: next phase of development. 1995 (amended 2000). 68 . 54 Law on Prevention and Control of Pollution from Environmental’’ 164–66 Hybrid Model of Quasi-State Capitalism and Semi-Democratic Authoritarianism. 55 Law on Public Service: Article 53. 110–13. See also Legend Group income gaps. prohibition from profit-sharing scheme. 77 Hukou System. 86 innovation nation.’’ 91 Kevin Hassett. rural and urban life. 96. on fee paying. leader in GDP growth. 159. Baidu. 16t. energy consumption. ambiguous. in corruption case. Lenovo.

34 Mao Zedong. 22 National High-Tech Development Program. 78 migrant workers. 90. 4. 94. 89. 6–10: political tendencies on. 90–91. 145. director of China’s State Administration of Foreign Exchange. 2f.Index Li Fuxiang. on Jinsha River. 6–7 middle class. 16t. on tourists. 176. 187 Ministerial Policy Institutes. 16t. 92 National S&T Innovative Program. 100. on Jinsha River. on studying abroad. 151 Longkaikou Dam project. about technical school graduates. 85. 160 Ministry of Agriculture (MOA). 101–2 ‘‘National Natural Science Foundation’’ (1986). 100. 99–100. 146. 141 local taxes. 56–57. 89. 113f. on stock market. 156. on private car ownership. and Communism. 9 migrant population: and floating population. 72 National Development and Reform Commission (NDRC). 28. era (1949–1978). 3 MasterCard Worldwide. See also 973 Program National Knowledge Innovation Experiment Program. turmoil for S&T. 138 National Development Bank of China (NDBC). 62 loan-making decisions. 89 Ministry of Commerce (MOC). hero worship of. 89. and China’s economy. 65. sustainability of. Asia Pacific: on middle class income. per capita annual household. 165 market economy. 140 ‘‘National Distinguished Young Scholars Program. 104. 46 National Bureau of Statistics (NBS). on gross domestic product (GDP). 90 Ministry of Science and Technology (MOST). 3. 110. 127–28 Liu Zhihua. 8.’’ 104 National Essential Drug List (NEDL). in illegal trade. China Torch Program. Funding for S&T Small and Medium-Size . See also 863 Program National Key Basic Research Program. economic structural reforms in. on urban areas. 92 ‘‘Minjiang River Scholar Program. 90. 62 Liaoning: annual per capita household. 99. on import and export. 15f. 89. Chinese banks limitation of. 87. 149 Ministry of Industry and Information Technology (MIIT). 125–26. in creating Internet policies. 90 229 Ministry of Personnel (MOP).’’ 104 modernization and urbanization. with Chinese characteristics. 45. and education. 88. 101 national S&T program. 85. 1. system of. 76 Monitor Group. per capita annual income. former deputy mayor of Beijing. data on S&T. 11. 127 market mechanism: in economic take-off. in bribery case. on patent application. 90 Ministry of Finance (MOF). 64. 7 multiple-wave theory. 121f. 47–48 Ludila Dam project. 34 low-cost housing. on high-tech export. post-Mao era. 35 mining industry.

72. 163 Pfizer Inc. 186 1997–1998 Asian Financial Crisis. Barack: mass ideological campaigns. Federal System. in-depth SOE reform. 159–60 political reforms: by Deng Xiaoping. 180. 179–80. on wind turbines. National Key Basic Research Program (973 Program). 34. 42. 100. 10–14 ‘‘patriotic bonds.’’ 136 oil price. social welfare.’’ 21 Opium War. 21 973 Program. 22. 145 People’s Bank of China (PBOC): comparison with U. National S&T Innovative Program.’’ 179. 38. National Knowledge Innovation Experiment Program.230 Index Obama. 29 Peng Xizhe. Key National S&T Industrial Program. 16t. 130. 104.’’ See stateowned enterprises (SOEs) personal property rights. economic structural reform in. 128 Enterprises. 120 1997 Asian Financial Crisis. 139–40 people’s living conditions.’’ 178 ‘‘one system. 44. 19–20. key technology R&D program. 29 New Oriental Education and Technology Group. 15–19. 53 ‘‘oil diplomacy.’’ 165 Open-Door Policy: by Deng Xiaoping. 101 National Science Foundation of China (NSFC).’’ 146 peaceful rising: Deng’s view. 167–68 one-party Communist rule: and ‘‘halfway house. 125 out-going economy. See also National Key Basic Research Program 1989 Tiananmen Event. National S&T Program for Social Development. 101. 131. 174.: and trademark cases. National High-Tech Development Program (863 Program). 99–100. 100 National S&T Program for Social Development. socialist market economy. 102–4. Spark Program. and trillion mark. 107–8 New Rural Cooperative Medical Insurance (NRCMI). 77 nonperforming loans (NPLs). 180 The New Asian Hemisphere (Mahbubani). rise of. 89. 46. 144. government’s flexibility. 81 pension. 100. 101–2. 145 nontradable shares. 101. 20–23 ‘‘people-owned enterprises. 20.’’ 91 ‘‘one road. 189–90 ‘‘Opening the Great West. power of.S. in saving China’s asset. 101. 9.’’ 104 ‘‘neutral government.’’ 131 ‘‘Opinions on Deepening Healthcare System Reform. director of the Institute of Social Development and Public Policy at Fudan University: views on urbanization.’’ 178 ‘‘one country two systems. 33 Ningxia: annual per capita household. 101. 138 ‘‘one banner. 99. 46.’’ 178 one-country-two-system structure. 173. rise of. 146 . 149. 118 policymaking in reform. ‘‘National Distinguished Young Scholars Program. 11. 115 policy-lending. 130–31 open mind. housing space. 163–64. 107. temporary dual-pricing system. 9.

55–56. Circular Economy Law. 56–57 population growth: on economic growth. and high-level corruption cases. 56.’’ in middle class. 127 property rights. 57. 16–17. and unemployment. 152 purchasing. 46 ‘‘Red capitalists. 2008. 2 Robert Solow: Total Factor Productivity (TFP). 20 rising price. 49–53.Index pollution. reform of. 40. 130 private housing. 11 ‘‘Republic of Profits. 171. 158 . 51–52 postdoctoral research centers. for farmers. 2006. 77 Qiu Gengtian. 23–24. 143. views on China’s growth. 2006. 182 ‘‘Quality-Oriented. 31–32. and Korean War (1951–1953). 110. 36. 132–33. a professor of the CPS. 122–23 poverty-stricken country. 1997. 86 primary sector (agriculture). views on economic growth. 53–54. theorems of Beijing Consensus. 27–29. Law on Prevention and Control of Pollution from Environmental Noise. 147 psychological trauma. 134. 7. Law on Prevention and Control of Atmospheric Pollution. 188 Provisional Rules on Management of Corporate Bonds. and national projects. 55. education in. and SOEs. 142. to rural cooperative banks. Law on Prevention and Control of Environmental Pollution by Solid Waste. 85–86 President Hu Jintao: on country’s goal. of Lu Zhigang. 2. of Chen Tianqiao. 191 power-money trade. 54. 8 Ramo. 37–38 public rentals. 1989. 56–57 renminbi-dollar peg. and SOCBs. 157–58. 1 Qinghai: annual per capita household. Joshua Cooper. 3. 4 real estate development. impact on economy. of Tang Ruiren. 1998 (amended 2008). 54–55. 143 rural industrialization. 143–44. 25.’’ 24 retired population: health care system for. 24. 134. of Wang Yuancheng. 41. 152 private owned companies (POEs). 25–27 Renewable Energy Law. 58–59. in urban areas. Environmental Protection Law. Energy Conservation Law. 1995 (amended 2000). power. 24. 127. 144. definition of. Administrative Measures on the Control of Pollution Caused by Electronic Information Products. 2007.’’ success stories. views on innovation. factors of. 1995 (amended 2005). of Lu Guanqiu. 231 discrimination of. definition of. Renewable Energy Law. and SOEs. parity (PPP) theory. 131. views on innovation. 61–64. on domestic market. 1996. economic structural reform in. the. 64 Premier Wen Jiabao: about Beijing’s recovery plan. 172 rapid urbanization: on rural China. Law on Prevention and Control of Water Pollution. 160. and trillion mark. improving transparency. 16t. 87. 60–61. and environment. 172 Rural Credit Cooperatives (RCC): history of. 24–25. operation of.

transition of. 76. 5 Shambaugh’s Model. 16t. 148 S&T framework transition. 138 Shenyang Smelter and the Shenyang Cable Factory case. stock market in. 130 securities market. 13 rural-urban divide. 100 Special Economic Zones (SEZ). 127–28 Sichuan: annual per capita household.’’ 104. 95–96. 184 Shaanxi: annual per capita household. 118. 91 Socialist Transformation Campaign. Market Integration (2003–2006). 64. ‘‘Sichuan Scholar Program. 85–89. and corruption. 4–5. 173. See also Green GDP ‘‘Smarts. 26 Shanghai. education in. 99–104. Weighttrimming (1993–1998). 155 rural troubles. 169–70 Shandong: annual per capita household. 20–21. 43–44. 16t. 92. 134 socioeconomic equality. 145–48 ‘‘seeking friends and avoiding troubles. in China’s diplomacy. in human resource management. and trillion mark.’’ 187 social discrimination. 164–65 Scandal of Sanlu Milk Powder. for banks. in securing loans. per capita living space in. ‘‘enlightened selfinterest. 188 ‘‘sage-emperor. 16t. . 3. taxation reform in. 96–97. 78. 8 Smith. Adam.’’ 174 self-determination. 97–98. national programs. 80 social welfare. 77. 3. 91 ‘‘safeguarding 8 percent. 71. leader in GDP growth. 16t. 93–94.’’ 64–65. farmers’ migration. 66–67 science and technology (S&T): for economic growth. 155–59. Break-Ice (1985–1992). 5. 77 sildenafil citrate. new funding mechanisms. 115–16 single-party ruling system. 110. 173 State Administration of Foreign Exchange (SAFE).’’ 47 safety net. economic structural reform in. 87. 154. Reassuming Direction (2006–2020). 82 Index 79. 119–24. land rights inequality. and migrant workers. policies and innovative system. 41. 147. 77. 117–18 ‘‘smart growth. economic structural reform in. banking reform in. in economic take-off. 35. 95 S&T modernization. 134 Spark Program (1986). 188 Soviet model: and China’s industrial development. 78. and Hukou System. 7. 13. earthquake hit on. as productive force. 89–93. S&T human resource management. 29. 159. 78. annual per capita household. shortfalls of.’’ President Hu Jintao. 149. 131 Shenhua Group. the. 9.’’ in middle class. 35–36. 156–57. 58–59 small and medium-size enterprises (SMEs): and bankruptcy. 94–95. causes of.232 rural reform. 174 service sector dominance: in developed economies. migrant workforce in. 142. 80. 47. 188 socialist market economy. 86 secondary sector (manufacture and construction industries). and rural reform. 133. Localization (1999–2003). 127. HRS. 119–24.

government’s role. 67–68 Tianjin: annual per capita household. 114 traditional planning economy. and POEs. 149. 44–45 Sun Zhongshan: founder of Republic of China. 112 Tang Guoqiang. 172 town and village enterprises (TVEs). restructuring of. 151 Technology Spreading Program (1990). 178 ‘‘Three Represents. 159 ‘‘to be rich is glorious. 149–51. 13–14 Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement). 3–6 textiles export. 158. 133–34. Green Sticker vehicles. 147 ‘‘three one’s’’ (san ge yi). 36 trade recovery. 140. See also middle class Treasury bonds (T-bonds). 8 trillionaire provinces. reform of. 146. 36 toy industry. 42 ‘‘think tanks. on safety net. 142. 92 233 10 Things to Avoid.’’ in middle class. ICBC. industrial output in. 52. 7.Index State Automobile Emission Standards. first step changes in. 42 Tao Wang predictions: and economic growth. 150. 142. to finance budget deficits. 46 taxation reform. former head of Sanlu. 127 state tax. 144. discrimination of. 35. in adulteration case. 92. rise of. Tax-sharing System. substituting tax for profits. International Trade Research Center of the State Council: on international and national economic environment. 48. anticorruption campaign. 9 ‘‘sunset industry. 61. 127. view on economic crisis. middle class. economic structural reform in. 77 Troubled Asset Relief Program (TARP). Nobel Prize laureate. transforming of. 186 trade sector. 6–10. 41–42 Strike Hard Campaigns. growth of. loans to. 150. 142 state-owned enterprises (SOEs). 45 Tsung-Dao Lee. 5 strategic investments. and media observations. in urban areas. 90 State Planning Commission. 128–29.’’ 159–60 Three Gorgeous Project Corporation. 160. loans to. 37–38 tertiary sector (service industries). 141. 114 subsidized flats. 47. Jiang Zemin’s theory of.’’ 135 Tang Dynasty (681 CE–960 CE). 53 State Council Development Research Center (DRC). 52 Tibet: annual per capita household. on education. 10 Tian Wenhua. 130. 151 state-owned commercial banks (SOCBs): Construction Bank of China (CBC). 160 State Intellectual Property Office (SIPO). 128. and finance recovery programs. and toy industry contract. on stimulus plan of work. 131. 122 .’’ 91 Torch Program (1988). and pollution. 61 Statistics Bureau of Shandong: on gender equality. 16t. Gross Value of Industrial Output (GVIO). 4. 7. 147 ‘‘Trend Followers. 127. 16t Tianjin Chemical Plant. 152 Sun Lijian.’’ 173. See also China Torch Program Total Factor Productivity (TFP). and POEs. 180 travelers class.

21. 22. 72–73. on slum deterioration. 10 unpredictability. reasons for. 76–77. 169–70 Wen Tiejun. 191 Xinjiang: annual per capita household. 8 Viagra. 163 world economy. Jonathan. views on: middles class political stance. 131. 10 principles of. Hutton’s ‘‘Halfway House. 12–13 Unger. in fraudulence case. 50–51 Urban Employed Basic Medical Insurance (UEBMI). 7. Wen Tiejun’s view on. 138 zero tolerance. 16t.’’ 89 2006 Action Plan on IPR Protection. economic structural reform in. and China Model. fiscal policies. Declaration of Independence. ‘‘Village in the city’’ (VITC). 161. John. 188 Yan Sun. view on internal affair. views on corruption. 162. 83. vice governor of the People’s Bank of China. government’s role in. 75 Zhejiang: annual per capita household. 59 Youngtze River Scholars Program (YRSP). revamping energy industry in. Callick’s . list of. and migration. 16t. 62 Zhou Chunshan.S. director of Urban and Regional Research Center of Sun Zhongshan University: in removing Hukou system. 186 U. 104 uneasy coalition. 116–17 Wang Guiping. 76 urban-rural gap. 115 Wanfang Data Co. 162–63 World Bank. 162–64.’’ 164–66. 131. in fraudulence case. 22 urban water pollution. and industrialization. 51 urbanization. 114–15 Index ‘‘Controlled Freedom. 191 urban air quality.: Dissertations of China. former president of Bank of China. 14t Value Seekers. against rural industry. economic structural reform in. cough syrup. 75. China’s role in. growth of. 82 Zhu Rongji. head of the Institute of Rural Development of the People’s University in Beijing. 73.-China Business Council: exporters’ to China. in bribery case. 173. ethnic tensions in. 74–75. 16t. Ltd. 21 urban industry. 76 Williamson. and economic development.S.’’ 166–69. 62 Washington Consensus. in middle class. Shambaugh’s Model. 159 Urban Resident Basic Medical Insurance (URBMI). quitting farming. 103–4 Yunnan: annual per capita household. on urbanization and ecological environment. 77 Zheng Xiuyu.. 72–83. 65–66 Wang Xuebing. 23 unemployment pressure: ease of. of China. former chief of China Food and Drug Unit. 176 U. 30–31 Zhu Xiaohua. in trillion business.234 ‘‘two-bombs-and-one-star project. 62 Zhujiang River Scholar Program. 166 unemployment insurance.

Luo was chief editor and contributor of China Today—An Encyclopedia of Life in the People’s Republic. . and author of Over a Cup of Tea—An Introduction to Chinese Life and Culture.About the Author Jing Luo is a professor in the Department of Languages and Cultures at Bloomsburg University of Pennsylvania. He received BA and MA degrees from Peking University and a PhD from The Pennsylvania State University.

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