Part 3: In China, Experimentation Is the Norm

Chinese policies always follow the same pattern: First ideas are considered and then they are simply tried out. The government has turned the concept of the experiment into the norm. It uses small, local testing laboratories to try out a pilot project, but only once a proposed reform has been shown to be successful and applicable in multiple locations does the government venture to implement it more broadly. This stands in contrast to the Western concept of the constitutional state, in which the law comes before implementation.

The Chinese version has its advantages. For instance, it makes it easier to assess the consequences of innovations. A successful real-life test also helps convince opponents to support a reform. Flexibility is assured through the development of competing models. Sinologist Sebastian Heilmann has called China a "learning authoritarian system."

The establishment of special economic zones in the 1980s was already part of this model. There were pilot projects in healthcare, pension reform and the system of registration. Everything was tested, from road tolls to smoking bans to travel requirements for Taiwan.

Small Signs of Goodwill

The government even experiments at the local level with those elements of good governance it would normally refuse to accept: transparency and giving citizens a say. The towns of Wenling and Baimiao became famous for publishing their budgets and listing their expenditures in detail. This prompted the state-controlled newspaper China Daily to print an article under the headline: "Transparent Budget, Happy People." It concluded that publishing budgets leads to fewer people complaining about the squandering of taxpayer money and puts an end to the private abuse of public funds.

These are small signals of good will that the authoritarian regime is sending to its people. One milestone was an environmental law which requires the solicitation of public input. The people are even asked to comment, via email, on the five-year plan.

China's leaders sense that they can no longer simply govern as they see fit, and they are feeling new pressures. China now sees up to 180,000 so-called mass incidents a year. The people are becoming adept at staging sit-ins and blocking streets to champion their interests. What was once a matter for the very few now triggers nationwide solidarity activities. The Internet has become established as a marketplace for opinions and innovations. For instance, the rumors about a coup in Beijing only gained as much traction as they did because China's leaders generally act behind a cloak of secrecy, so that without freedom of the press the people can do nothing but speculate. What is happening on the web is direct participation, as short-lived as it is intense, a forced instead of tolerated participation in politics.

Officials in Lanzhou have also felt the effects of local residents' fury. When they tried to stage a run through the city on New Year's Day 2012, artist Ma Qizhi protested online. "Refuse to be a filter made of human flesh!" he wrote on Sina Weibo, a Chinese microblogging website. He meant that the people of Lanzhou shouldn't offer themselves up to be sucking the city's polluted air into their lungs.

The protest wave surged through the Internet for only a few days, but more than 10,000 discussed their opinions of Lanzhou's plans on Sina Weibo. "The decision-makers must have swallowed some kind of pill if they think that children should run under such conditions," noted one person. Another wrote: "In China, the leaders are more interested in saving face than in their underwear, which is why they will not take back their instructions."

Even the state-owned news agency reported favorably on the resistance, and the local sports agency announced that it would take the suggestions of the environmental agency into account in the future.

Ma knew that he had succeeded in teaching the people a lesson. "The sad thing is when citizens don't say what they want to say. Taxpayers support this group of people, which is why they should perform their duties well."

The People Will Hold Government Accountable

The Chinese government has to get used to the idea that its people will be holding it accountable. The country is still filled with confidence. Chinese society has been shaped by the experience that everything was improving for everyone. This combination of economic growth and patriotism lends legitimacy to the regime, turning the people into a society of consumers and patriots.

But farmers, unemployed university graduates and the people in western China also want their share of success. President Hu Jintao himself has identified corruption, the opposite of good governance, as one of the greatest threats to party dominance. In the 2011 Transparency International Corruption Perceptions Index, China was ranked 75th out of 183 countries. Beijing punishes people, even with the death penalty, but by pointing to the individual it seeks to divert attention away from the failings of the system.

Some are simply refusing to accept the deal that the Chinese government offers its citizens:

We'll stay out of your private life if you stay out of politics on a large scale.

Chinese civil rights activists are going to prison for values that most in the West take for granted. But some in the West also forget that voting rights, an independent judiciary and a democratic constitutional state are never only a means to an end, and never exist only to furnish results. Instead, they are values in their own right. Most Chinese are still satisfied with results, but they have to be good. A minority in China, however, wants more. Those are the people who are locked up for their opinions.

No government that does this can call itself a good government -- even if it delivers good results.

Translated from the German by Christopher Sultan

http://www.spiegel.de/international/world/putting-the-plan-into-action-how-china-s-leaders-steer-a-massive-nation-a-843593.html

Part 2: How Five-Year Plans Keep Power in Check

But the Lanzhou New Area is only one piece of the puzzle. There was always more at issue for Beijing in its development program for the west. Most of all, it wanted to bring the west closer to the rest of the country. This creates stability, and "stability" is the favorite buzzword of China's rulers. And so the "Go West" strategy was incorporated into the national five-year plan.

This plan is an idiosyncratic political instrument. Just writing it alone takes more than two years. First a subset of chief planners within a larger group of chief planners, that is, the Department of Development Planning of the NDRC, develops the initial proposals -- under the leadership of the Central Committee and the Politburo, of course.

Then city and provincial governments are brought into the mix with their proposals, as are ministries and experts from universities and think tanks. Countless drafts are evaluated, adjusted and reviewed by the Central Committee, until a new plan is born and a consensus is reached. A beneficial side effect is that planning alone holds the giant Chinese administrative machinery together. Besides, the same principle applies here as it does elsewhere in Chinese politics, where draft documents are constantly being circulated and conferences never end: Consensus creates obligation, and those who have agreed to something later bear some of the responsibility for it.

In the third year of a given five-year plan, there is an interim evaluation. The last time this happened, the NDRC even asked the World Bank for its opinion, which led to the bank publishing its own report on implementation of the 11th five-year plan in 2008. By the fourth year, preparations for the next plan are already underway.

Of course, China's five-year plans have changed since the first one was launched in 1953. Whereas the Chinese initially emulated the Soviet Union, today Beijing doesn't seek to supplant the market's role in guiding the economy, but rather to steer the economy according to market principles. The terminology has also changed, with officials now referring to the plan as a program. But it still involves planning.

Five-year plans have their own dynamics, because the beginning of a new plan generally does not coincide with a change in leadership. This means that a new leader will likely remain tied to an existing plan and its established goals, and thus cannot immediately implement a radical change of course. This may irritate the individual at the top, because it prevents him from boosting his profile, but the principle creates continuity in the larger political picture. The plan keeps power in check.

China Experiments with Dual Approach to Governing

Ding Wenguang dreams of being part of the central government's next five-year plan. Ding, 48, is a short, clever man who knows what participation, one of the key elements of good governance, can look like in China -- to those with patience. He also knows that Beijing has recently been trying to combine two approaches to governing: from the top down and from the bottom up.

Ding also wants to fight poverty in the west, not only with investments but with an idea. He is the director of a non-governmental organization and a lecturer at the University of Lanzhou. When he came to the village of Qingshuiling in 2003, he witnessed a vicious cycle. Farmers were cutting down trees for heating, cooking and to sell the wood. This leads to erosion and landslides. But the more frequently nature punishes people, the poorer they become.

Ding wanted to create a "cycle of good" instead. Under his plan, the farmers would raise cattle, which meant that they had to plant grass, and the cow dung could be converted into biogas. To start the cycle, an aid organization donated cows to the poorest people in the village. In return, they were required to give the calves to the second-poorest residents, with the next generation of calves going to the richest of the poor. Today, the farmers live in brick houses, they have more tractors, mopeds and mobile phones, and everyone has a color TV set.

But how could Ding convince the government to apply his model on a large scale? How was he to explain to officials that everything has to be viewed as part of a bigger plan, one that incorporates both cow dung and disaster management? Ding began his lobbying effort.

If there is one thing that someone hoping to get his idea put into practice needs in China, it's trust. But a certain social status is needed to build trust. "I am a professor," says Ding. "If I were nothing, the officials wouldn't listen to me." It's also helpful to have received awards and official positions, such as being a representative in a people's congress. When close to 1,500 people died in landslides in Gansu Province, Ding was invited to conferences held by the provincial government. He is also a permanent advisor to the Ministry of Science and Technology in Beijing, for which he provides expert reports. Finally, Ding is a party member. That, he says with a smile, is important in China.

The Politics of 'Guanxi' (關係)

At the time, however, the first thing he needed was a "partner" in the local government. Fortunately he had a contact in the provincial government, namely the father-in-law of one of his students. He ensured that local officials would show interest in Ding's project village.

Another element of the game is called "guanxi," or the relationship between a supplicant and a sponsor or protector. Guanxi is part of Chinese culture and, therefore, Chinese politics. Having things in common with others, such as having attended the same school or university or having served in the same military unit, are the prerequisite for the development of guanxi.

Ding once served in the provincial government for four years, where he worked in a poverty reduction program. His former coworkers put him in touch with their supervisors. It was also helpful that Ding had traveled through Europe with officials for the purpose of "group brainstorming." The most important thing of all, however, is that Ding will be participating in a research project at the Chinese Academy of Sciences in the future, which will involve frequent flights to the capital. "If you have guanxi," says Ding, "you have to spend less time on lobbying efforts."

Nevertheless, he still had to demonstrate that his proposed reforms were feasible and not too costly. He had learned that while it was important to have many meetings with officials, the reports had to be no longer than three pages and the restaurants had to be good. "Dinners can create an open and friendly atmosphere in which to champion your interests," says Ding. Guanxi thrives at such dinners, where participants are freed of the constraints of their respective roles. Banquets and politics are Siamese twins in China.

And because Ding kept bringing journalists to his project villages, and his ideas were even featured on a party website, he was successful. He believes that his model will become part of the provincial government's policy in 2014. He also expects 2016 to be a very big year for him, when his ideas will be incorporated into Beijing's next five-year plan.

Meanwhile, the Chinese government is asking for help in governing the country, for reasons Prime Minister Wen Jiabao has candidly admitted: "Given the complex and varied economic situation, it would be impractical to expect a few top leaders to always make the right decisions. Therefore, we need to seek advice from experts in order to make the decision-making process more scientific and democratic." Apparently Beijing also aspires to professional management, another dimension of good governance.

A Unique Think Tank Culture

One of the brains behind it all, the Chinese Academy of Social Sciences (CASS), is located in a light brown high-rise building. It is one of China's most important think tanks. However, unlike their counterparts in the West, whose credibility is enhanced by their independence from the government, influential Chinese think tanks tend to have close ties to the government.

Sometimes the State Council assigns certain tasks to the Academy. For example, professors working for CASS were asked to develop proposals for a new civil law. In another case, the Ministry of Railways wanted to know what would happen if passengers were required to provide identification when buying tickets. CASS also provides impetus for reforms that might, for example, involve the combining of government agencies. Of course, the premier also consults with CASS experts to obtain advice on economic policy. Sometimes CASS even publicly corrects elements of the administration. For instance, it has accused the National Bureau of Statistics of inaccuracies in calculating the rate of inflation.

The deference given to experts began with Deng Xiaoping, who sought to replace the emphasis on Mao and ideology with a focus on professionalism and knowledge. He wanted the intellectual to contribute to China's modernization. Today the University of Pennsylvania counts 425 think tanks in China, making it second only to the United States, where there are 1,815 think tanks.

(待續)

How China's Leaders Steer a Massive Nation: Putting the Plan into Action

There is no question that China is an authoritarian state. But Beijing's efforts to include experts and experiments in the way it governs also help to keep power in check. Once the government supports a project, it normally carries it out -- sometimes on a massive scale. Are there lessons to be taken from the Communist Party's method of governance?

Sandra Schulz, 08/31/12

Western democracies consider themselves to be efficient, farsighted and just -- in other words, prime examples of "good governance." But in recent years, the euro and debt crises, along with wars in Iraq and Afghanistan, have shattered faith in the reliability of Western institutions. Disconcerted Europeans are casting a worried eye at newly industrialized nations like China and Brazil. Can the West learn something from countries that for so long sought its advice? This is part IV in a four-part series looking at how the world is governed today. To read the introduction, click here. For part I, on Brazil , click here. For part II, on the United States , click here. For part III, on Denmark, click here.

When Duan Tingzhi dreams, he sees a future filled with fountains. He dreams of water shooting into the air throughout his new city, to the delight of its residents. According to the newspaper, one day there will be one thousand fountains in the Lanzhou New Area, a region north of the old city of Lanzhou.

For now, Duan sees only sheep, sheep with dirty coats, as gray as the skies above them. The sheep walk across Duan's wonderful, multi-lane, freshly asphalted street, and they're disruptive. They remind Duan, the man with the building authority, of just how far away the container terminals, the football stadiums, the sea and indeed the future still are from northwestern China, and how much work it will take to get there. Duan is so busy that he even sleeps in the New Area during the week, and he no longer has time for his family or for journalists.

And yet it isn't often that someone shows an interest in Gansu Province, a relatively poor province of mountains and deserts, and so Duan leans across the conference table and speaks as if he were trying to conjure up the future. The province has "great potential," he says, slicing through the air with the edge of his hand to punctuate his arguments.

First, he says, everything is already there: airports, railways and highways.

Second, there is "unlimited electricity." And

third, the province has rich mineral resources, including coal, oil and nickel. Of course, he adds, it also has plenty of workers.

Duan's voice softens. He wants to attract international companies to the Lanzhou New Area. "Perhaps," he says, his voice becoming silky smooth, "you can help us convince Siemens to come here." The party official sitting next to him nods.

Then Duan has to go. It's a gloomy day, and the wind is howling through the shells of buildings. According to the plans, there will be 300,000 people living here in 2015, 600,000 by the year 2020 and eventually as many as a million.

But Duan is merely a local chief planner. The important chief planners are in Beijing and have one of the most difficult jobs in the world: governing a nation of 1.3 billion people. China's provinces are as populous as entire countries on other continents. Hunan has as many people as France, Hubei as many as Italy and Sichuan as many as Germany. China's powerful men have achieved much. While millions were still starving under Mao Zedong, China is now the world's second-largest economy.

Europe, immersed in both a debt crisis and a crisis of meaning, is not only mesmerized by Asia's rising powers, but is also asking itself how governing works in these countries. China's economic success also raises another, more outrageous question: Is it possible for an undemocratic government to be a good government?

Beijing's Development Strategy

In China, good governance is primarily defined as the government satisfying the material needs of its people. The people along China's east coast, in particular, have been able to enjoy rapidly growing prosperity. Deng Xiaoping, the reformer, deliberately chose to develop the coastal regions first. Under Deng's policies, the losers were primarily in rural areas and in western China.

Nowadays, when Shanghai residents take a taxi they can learn about the best temperatures for wine by watching advertising clips on a screen in front of their seat. Meanwhile, some farmers in western China live in caves because they can't afford brick houses. The government's response is a policy Beijing calls the "Great Western Development Strategy."

The central government attaches great importance to the strategy, as evidenced by the fact that it has appointed a special "leadership group" headed by Premier Wen Jiabao, as well as a separate agency, to manage the program. The new strategy was adopted in 1999, under then President Jiang Zemin. Even though Jiang may have also been thinking about his legacy, China's "Go West" policy reveals a strength of Beijing's approach: Once something has been recognized as a national problem and defined as a national effort, it is addressed in a consistent and enduring way. A government that is not voted into office has no need to take voting blocs and elections into account. This is the economic advantage of an authoritarian system.

Ms. Li Yingming meets with us in a nondescript, gray concrete building in Beijing. She is the deputy director of the Department of Western Region Development, which is part of the National Development and Reform Commission (NDRC). Li is satisfied, at least to the extent that she can be today, in the second year of the 12th Chinese five-year plan.

'A Long Road'

Tens of thousands of kilometers of railways and highways have been developed, including the controversial rail line to Lhasa, built at a cost of about €3.3 billion ($4.06 billion), new hydroelectric power plants, airports, a gas pipeline and a fiber optic cable network. "The progress we have made in this area in the last 10 years is greater than the progress made in the last 50 years."

But when will the Chinese in the west and those in the east have the same standard of living?

"That's a long road," she says with a smile. It isn't the cities that she's concerned about. China also has the "Starbucks Index," which shows where the brand-conscious middle class can be found. In reality, there isn't a single Starbucks in remote Lanzhou, whereas Shanghai has almost 150. Li, however, is more interested in farmers and the illiteracy rate. In Gansu Province, for example, in 10 years, it has fallen from 14.3 percent to 8.7 percent in 2010. Nevertheless, it is still significantly higher than the 2-percent illiteracy rate in China's southern Guangdong Province.

"Talented people play the most important role in China's development," says Li. And then she talks about how schools and dormitories are being built, and how hundreds of cooperative efforts bring together the different parts of the country. Universities on the east coast support their counterparts in the west, and there are partnerships between eastern and western provinces. Besides, says Li, more than 10,000 university graduates voluntarily go to western China each year to teach subjects like English. Of course, she adds, this experience is useful to young people embarking on government careers, and some of the most sought-after positions are reserved for them. "But," says Li, "these graduates also have a very strong spirit of volunteerism. They want to make a contribution to society."

At the end of the meeting, as we are walking through the hallway, she says: "Our leaders have told us that this is a hundred-year project." And then she hurries past a tall floor vase to her next appointment. Her time is precious.

A New Quality of Life

Duan, the official in the west, is also in a hurry. Duan builds things, and he does so because he can. Lanzhou is not Stuttgart, where protests have held up a major rail development project. Chinese pragmatists don't have to worry about how their plans will affect endangered species like the hermit beetle.

The land already belongs to the state, and the migrant workers who are building this city are hardworking and happy to be earning about 2,500 Yuan, or roughly €300, a month. The people who are living there now can be relocated. A government brochure clearly outlines how they should feel about the whole thing. "The construction of the Lanzhou New Area is a splendid solution that was conceived by the city government and the party committee to implement the Great Western Development Strategy," the brochure reads. It also specifies, in tiny lettering, how much compensation the government will provide for specific items, such as 4,000 Yuan for a concrete well and 700 Yuan for a gravesite (per coffin).

There are indeed farmers in Lanzhou who support the New Area, even though they know that there will be a lake where their houses now stand. They hope that they will be able to work as drivers for business executives in the new city. And then there are people like the medical student who eventually wants to move to Beijing, because it's the best place to work. He says that his biggest dream in life is to own a Lamborghini.

They are the people for whom the government is doing all of this, so that it can offer them something, a new quality of life. It doesn't want the students to leave, because the brain drain is one of Lanzhou's biggest problems. It wants farmers to be motivated by hope instead of rage. And, of course, the mayor and the party secretary in Lanzhou are also thinking about their careers, given that economic growth is still the gauge of a local politician's success.

Meanwhile the city is growing rapidly, with a current population of 3.6 million. But Lanzhou, wedged between mountains, declared the world's most polluted city 14 years ago, has no room to expand. Officials even considered removing mountaintops, but then they opted for the flat, undeveloped land out near the airport instead.

There are also those in Lanzhou who would have preferred to invest in the old city instead. But they don't want to see their names in print. The Chinese efficiency praised by so many in the West comes at a price: the silence of critics. The government decides what is good for the people. And if something is deemed good for everyone, the individual must conform.

(待續)

China’s Growing Economic Crisis

William Pesek, 08/31/12

Policy makers around the world have long envied China’s ability to get big things done. A huge 4 trillion-yuan ($630 billion) stimulus plan as the global economy cratered in 2008? No problem. Marshaling banks to lend trillions more? Check. Enacting sweeping regulatory changes at a moment’s notice? You bet.

Ahhh, the good old days. Now, a once-in-a-decade leadership shift is getting in the way of the stimulus-happy policies to which investors became accustomed. The nimbleness that helped China steer around the worst of the global crisis is confronting political paralysis of the kind more often seen in Japan, Europeand the U.S. The upshot is that China’s 7.6 percent growth rate may fall more in the next 12 months than anyone expects.

It’s not that Wen Jiabao doesn’t get the extent to which the supposedly unstoppable China has hit a wall. Just as in 2009, the premier is visiting key industrial cities such as Guangdong and Zhejiang. Wen is facing dour looks from manufacturers surrounded by mounting piles of unsold goods, a rare experience for the main engine of China’s economic rise.

Factory warehouses are cluttered with excess stock, store shelves are filled beyond capacity, and dealerships are choked with cars that used to speed from showroom to road. And yet Wen’s team in Beijing has been eerily silent about how it plans to revive things. That may be because the short answer is, it doesn’t.

Obvious Ways

One problem is that China has run out of obvious ways to kick-start its $7.3 trillion economy. It was easy in 2008: Pump tens of billions of dollars into a sweeping stimulus project and 10 percent growth followed. China’s success gave markets the impression that its leaders could wave some magic wand and growth would be the result.

Magic is in short supply now. Local governments are cash-strapped and awash in debts that could turn bad. The euro zoneseems locked into permanent-crisis mode while the U.S. is bogged down with debt, economic stagnation and political paralysis. China proved it can live for a few years without U.S. and European customers, but not forever.

The bigger topic is politics amid this year’s leadership shift. Instead of tackling the issues of growth and economic reform, officials are punting on big decisions. As such, we are now officially living in the “G-Zero” era that Ian Bremmer, the president of Eurasia Group in New York, described in his new book “Every Nation for Itself.”

At one time the weaker links within the Group of Seven nations were supported by the others. Those days are gone and now that China is sputtering, the G-Zero reality is upon us and manifesting itself in disturbing ways.

Take Asia’s surge of nationalism. Political scientists have loads of theories about why China, Japan and South Korea are suddenly at loggerheads: bad blood over World War II, energy needs, designs on controlling the Asian seas, the power vacuum left as the U.S. focused on two intractable wars. One theory that deserves more attention is how these countries deflect the blame for troubles at home.

In Japan, Prime Minister Yoshihiko Noda is spectacularly unpopular after raising taxes and restarting nuclear reactors that were shuttered following last year’s earthquake. Playing up territorial disputes allows him to change the subject and throw a bone to Japan’s influential right-wingers. In Seoul, PresidentLee Myung Bak has been embarrassed by corruption charges against his family. Fanning popular anger about South Korea’s status in Asia has shifted the national dialog.

The same strategy prevails in China. Unwelcome headlines focus on the widening gap between rich and poor, the Bo Xilai scandal, and charges that China fudges economic and pollution statistics. Turning the public’s attention to China’s former colonizers has been a political winner.

Asia’s Loss

The loser in all this is economic cooperation in Asia. (MXAP) Also on the losing side is vital economic change in China. Over the last decade, Wen and President Hu Jintao produced rapid expansion, but few of the structural reforms China needs for balanced growth in the decades ahead. State-owned enterprises and banks are more dominant than ever, producing huge misallocations of resources and priorities. Meanwhile, no effort has been made to build a market that promotes domestic consumption.

Rather than retool the economy, China is content to rely on the old fast-growth, export-driven model. The trouble is, the Wen-Hu era lulled markets into counting on the constant injections of stimulus spending that gave China a unique, yet unsustainable, foundation. If China isn’t a gigantic bubble economy, it’s one made up of many smaller bubbles -- property, stocks, exports. These are the result of spending-induced growth and imbalances that might breed trouble down the road, including inflation and a bad-loan crisis.

Traders looking for another dose of stimulus are expressing their disappointment that none seems forthcoming. The Shanghai Composite Index (SHCOMP) is down 13 percent so far this quarter. Those declines may accelerate as China’s leadership transition distracts lame-duck officials from giving markets their fix. The same goes for a world economy more devoid of growth engines than ever.

(William Pesek is a Bloomberg View columnist. The opinions expressed are his own.)

Read more opinion online from Bloomberg View. Subscribe to receive a daily e-mail highlighting new View columns, editorials and op-ed articles.

To contact the writer of this article: William Pesek in Hong Kong at wpesek@bloomberg.net

To contact the editor responsible for this article: James Greiff at jgreiff@bloomberg.net

William Pesek is based in Tokyo and writes on economics, markets and politics throughout the Asia-Pacific region.

http://www.bloomberg.com/news/2012-08-30/don-t-look-to-china-for-economic-growth.html

China's Long History of Defying the Doomsayers

Stephen Platt/Jeffrey Wasserstrom, 08/30/12

Thirty-six years after "Great Helmsman" Mao Zedong died of a heart attack, leaving his country briefly rudderless during a time of crisis and uncertainty, the Chinese ship of state is still sailing. But is it still seaworthy? Observers are energetically debating whether the legitimacy of the Chinese Communist Party, which has endured so much, can endure. After all, the government today bases its legitimacy on economic growth, which may well be slowing. We can't predict the future, but we can examine the past, and Chinese history suggests that, even if the Communist Party does face a legitimacy crisis, it would not be out of character for it to survive this particular storm.

The China-watchers who insist the country faces a crippling legitimacy crisis include, perhaps most famously, Gordon G. Chang, author of The Coming Collapse of China, as well as political scientist Minxin Pei. As they see it, there are simply too many contradictions inherent in the Chinese model for it to survive.

Henry Kissinger and When China Rules the World author Martin Jacques, by contrast, have argued that, for better or worse, the Party is in good shape. And Beijing-based philosopher Daniel A. Bell, praising the China model in the New York Times op-ed pagesand elsewhere, is even more optimistic. He portrays the Chinese model as steady and efficient, guided by Confucian values. Such boosters typically concede that China's government could use some sprucing up -- a reform here and there -- but maintain that it's basically sound, and in better shape than many others.

So who's right? In a sense, they both are. As specialists in modern Chinese history, we see ample precedent to suggest that, despite the Communist Party's ongoing struggle to maintain legitimacy, it could remain in secure power for the foreseeable future at the least.

In the 18th century, a British diplomat named Lord George Macartney visited China. It was a time when, like now, foreigners were torn between admiring and denigrating the country's system. Macartney likened China to a first-class fighting ship -- for a country not really defined by its navy, China seems to attract an oddly high frequency of nautical metaphors -- that had seen better days. The hard work of "able and vigilant officers," he said, had managed to help the awesomely enormous vessel "keep afloat." But it was impossible that it would remain seaworthy long, he predicted, as its timbers had rotted and the channels ahead were too treacherous. "She may perhaps not sink outright; she may drift some time as a wreck, and will then be dashed to pieces on the shore; but she can never be rebuilt on the old bottom," he wrote, adding that he would hardly be surprised if that end should come during his own lifetime.

Lord Macartney, best known for his failed 1790s effort to establish full diplomatic relations between Britain and the Qing Dynasty, never saw the Chinese decline he'd anticipated. He died in 1806; the Qing dynasty, which stretched back to 1644, survived another century, until 1912.

Macartney's failed prediction offers a fascinating and illuminating perspective on today's similar predictions of doom. After all, he wasn't actually wrong about the challenges facing the ethnically Manchu emperors of the Qing Dynasty. His remarkably insightful observations anticipated the spread of political corruption and the potential for rebellion from non-Manchus, who chafed under the yoke of "Tartar" rulers. It's true that the Qing dynasty fell, but only after outliving not just Macartney but generations of his heirs.

Astoundingly, China's challenges, and those facing the Qing dynasty and threatening its legitimacy, became even graver after Macartney's prediction. The stunning succession of crises included a series of internal rebellions, ranging from small-scale insurrections to vast religious risings. The Taiping Uprising, which coincided with the American Civil War but had an exponentially higher death toll (roughly 20 million killed, compared to the Civil War's 750 thousand), cost so much to suppress that it nearly bankrupted the Qing. The dynasty also survived two crushing military defeats at the hands of foreign soldiers and gunships, first in the Opium War (1839-1842) and then the Arrow War (1856-1860). The wars devastated, among other things, a legitimacy claim that the Qing and previous Chinese empires had used for centuries: that the occupant of the Dragon Throne possessed a divine mandate to govern a polity that was, in every way that mattered, the most powerful on earth.

The Qing case is a reminder that some Chinese governments have been able to endure, for generations at a time, deepening corruption, weakened legitimacy, and major challenges at home and abroad. And yet, of course, mere endurance is not proof of legitimacy.

China struggled to maintain both legitimacy and stability during one particularly difficult stretch from the early 1930s to the late 1940s. Then, as now, China was run by a tightly disciplined authoritarian organization, the Nationalist Party of Chiang Kai-shek, that was widely viewed as corrupt and nepotistic. Then, too, outside critics complained that the party's then-leaders shared little in common with the ideology of their previous head. Today, the capitalist "communists" are contrasted with actual-communist Mao; then, Chiang looked weak and lacking in vision next to his revered revolutionary predecessor Sun Yat-sen.

Chiang's regime, hoping to counter the perception that all they cared about was holding onto power, appealed to Confucian values of order -- just as post-Mao Communist Party leaders have. They also stressed the need for a strong central government. If the Nationalists fell, the argument went, China would be cast back into the chaos of the warlord era that had preceded Chiang's rise. A divided country would also be susceptible to becoming a "lost country," the term used to describe the fate of colonized lands such as India.

This legitimizing idea, which presented the Nationalists not so much as a group to be admired as a bulwark against horrific possible futures, might look a little familiar today. Chinese leaders have repeated similar arguments, notably in their purging populist party member Bo Xilai, which they called essential to keep China from spiraling back into the madness of the Cultural Revolution. Earlier, the government cited the implosions of first Yugoslavia and later Iraq to argue that the fall of authoritarianism leads not to stability and freedom but to international bullying, a violent settling of old scores, and disunity.

Yes, Chiang's Nationalist Party fell in 1949, ousted by the Communist Party that still rules today. The foreign observers who claimed in 1937 or 1947 that the Nationalist Party was bereft of legitimacy and about to fall turned out to be correct, but they could easily have been wrong. Discredited and embattled though that government may have been, had history gone just a little bit differently, the Nationalists might well have held power longer. Counter-factual histories are impossibly speculative, of course. Yet it would not take too much stretching to imagine that, had the Nationalist Party's White Terror campaigns of the late 1920s and early 1930s succeeded in their grim mission to "exterminate" Communists, Chiang might have held on at least through the 1950s. Not because his party was popular, but because it was accepted by the country's citizenry as the only group that might bring stability after decades of civil and international warfare.

There's probably no way to know whether, in the end, history will judge China's current leaders as more like the long-enduring Qing Emperors or the doomed Nationalists of the mid-to-late 1940s. Either is possible. For now, China's Communist Party has disproven observers who have predicted its imminent demise for years. Surprisingly adaptable and self-consciously diagnostic, the regime seems keenly aware of the precedents of history, both in China and internationally.

The Qing dynasty, as the Communist Party seems to see it, was too weak in the face of foreign pressure and failed to suppress disgruntled sectarian networks, including the anti-Manchu sworn brotherhoods (or "secret societies") that participated in the 1911 Revolution. Four decades later, the Nationalists failed to quash their political opposition. As for the Leninist states of Central and Eastern Europe whose falls Beijing so assiduously studies, they never managed to raise living standards as they'd promised.

The history-minded, stability-obsessed Communist Party's hold on power thus seems less mysterious when viewed in this historical context. And some of its actions, such as the paranoid and draconian 1999 crackdown on Falun Gong, seem less surprising.

Still, not all of the CCP's efforts have been so defensive in nature. The Party has also made some positive changes, such as loosening controls on private life, helping boost living standards, and raising China's global influence, all of which have likely made it easier for Chinese citizens to tolerate or even support the Party's rule.

The Party is talented at adapting incrementally, changing course a bit at a time. This can work for a while, even a long while, but that doesn't mean it can go on indefinitely. Both of the CCP's two most recent predecessors, struggling to maintain their legitimacy, eventually attempted their own complete reinvention. In the early 1900s, the Qing dynasty, in a failed bid to outrun the forces of revolution from within, abolished the Confucian examinations that legitimized it for more than two centuries and tried to reinvent itself as a constitutional monarchy. Taiwan, under Nationalist control from the late 1940s on, began its transformation into a thriving democracy under the watch of Chiang Kai-shek's son. Today, a Party president rules Taiwan not as a dictator but as an elected official.

China's military is presently powerful enough and its diplomacy stable enough that the Communist Party faces no realistic threats from outside. Internally, its control over society is effective enough that, while unrest and discontent may be widespread, there are neither well-organized opposition parties nor rebellious armies that might seriously challenge the central government. For now, the Communist Party finds itself in a position that would be enviable to the officials of the late Qing. It could, if it wished, reinvent itself with a new legitimizing narrative, or even open the way to a new multiparty political structure as the Nationalists did in Taiwan, likely without fear of being overthrown in the process. If it does not make such changes, however, then it seems likely that the corruption and internal dissent of today will continue to mount. If that happens, then it is likely only a matter of time until that dissent and corruption reach a critical mass necessary to end the regime. But, as the world learned from the late Lord Macartney's failed prediction, those processes can take many generations longer than we might expect. Even if the Communist Party's legitimacy does weaken enough for the party to fall, it might not be in any of our lifetimes.

Stephen Platt is the author of Autumn in the Heavenly Kingdom: China, the West, and the Epic Story of the Taiping Civil War. Jeffrey Wasserstrom is the author of China in the 21st Century and co-editor of Chinese Characters: Profiles of Fast-Changing Lives in a Fast-Changing Land.

http://www.theatlantic.com/international/archive/2012/08/chinas-long-history-of-defying-the-doomsayers/261783/

The what, when and Hu of China's big changeover

John Foley, 08/28/12

Reuters Breakingviews) - China's once-in-a-decade political changeover is almost here. Unlike the U.S. presidential race, there won't be televised debates, nail-biting final counts or star-studded inaugurations. But that doesn't mean there won't be drama. Here's what to expect from the geopolitical event of the year.

When does it all kick off?

After the Communist Party's 18th Congress in a few weeks, the new members of the Politburo Standing Committee, the Party's top team, will be announced. Six months or so later, they will officially take charge.

It's almost certain that the general secretary of the Party - and thus president of China - will be Xi Jinping, the son of a military hero. Li Keqiang, the only other member of the outgoing nine-person committee young enough to keep his seat, is likely to become premier, the official head of the government.

Who else? The fog descends. Guangdong Party chief Wang Yang, a rival to the fallen party chief of the city of Chongqing, Bo Xilai, is a recurring name. Others are Li Yuanchao, who heads the Party's colossal human resources division, and Wang Qishan, the vice-premier in charge of finance.

Much is unknown, including the date of announcement and even the actual number of men (a woman would be a huge surprise). Nine could become seven. Continuity, both of personnel, and outlook, will probably prevail, though. The recent appointment of provincial party chiefs brought few surprises - almost all are men in their fifties and sixties.

So it's all pretty much scripted?

Not necessarily. The last round in 2002, when Hu Jintao took power, was relatively smooth. Hu had been groomed by Deng Xiaoping, the Party patriarch of the post-Mao years. With Deng long gone, things are more precarious.

That might explain why the Party's propaganda machine has gone all out to ensure stability. Recent flare-ups of social unrest have been stamped out with force, and web searches are being censored more heavily than ever. Harmony is being maintained at great effort.

If anything, the Congress might be too quiet. Despite a slowing economy, the central government has shied away from decisive but possibly controversial policies like fiscal stimulus. If the economy gets worse, the new leaders may have to develop a concerted economic rescue plan in a hurry.

Why the anxiety? Isn't China basically a one-party state?

Sort of. China-watchers talk of three rival groups within the Communist Party. First are the former members of the Communist Youth League, who include Hu himself as well as likely premier Li Keqiang. Then there are the "princelings", sons and daughters of Party elders, who include Xi Jinping, current finance chief Wang Qishan, and Bo Xilai. To think of them as a group may be misleading, since princelings share privilege, but not necessarily ideology.

Finally there's the Shanghai gang, who served under former president Jiang Zemin in that city, and includes figures from other cliques too. The People's Liberation Army is a fourth possible force. It has been sidelined from mainstream politics in recent years, but could make a comeback.

China's opaque system and curbs on political debate obscure who really wants what. Personality clashes are kept strictly secret - a far cry from inter-party squabbles in Japan. It's hard to see who is in and who's out until, like Bo Xilai, they are rudely purged.

So what about Bo?

The ouster of Bo Xilai disproved the theory that the new line-up had been set in stone long ago. Bo's end was reminiscent of the purges of the Mao era. His wife has been convicted of the murder of a British family friend, but Bo's alleged crimes still haven't been detailed.

While Bo's fall created excitement, it probably didn't change things much beyond freeing up a space on the standing committee. It may even have made the transition more stable. By distancing itself from Bo's supposedly "Maoist" excesses, the Party managed to appear more moderate - and even more harmonious.

Why should anyone outside care?

Because the new leaders are probably the most powerful politicians in the world. China is on track to become the world's biggest economy mid-way through their tenure. If they fail, foreign investors, who poured in $116 billion of direct investment in 2011, will suffer, and sections of the population will grow restless.

It's a big challenge. China has complex needs: a social safety net, better capital allocation, local government reform. But changes in anything from the demographically dangerous one-child policy to the controversial "hukou" ID system must overturn tradition and overcome vested interests.

The new leadership will also have to decide how to deal with the rest of the world. For one, foreign investors want in, and Chinese investors want out. Looser capital controls and fewer restrictions on cross-border investment would be good for long-term development, but might create worrying floods of money in the short term.

Politically, the hot-button issues will be China's relationship with America, and tense territorial disputes with Japan and the Philippines. How well Xi balances the jingoistic factions of his government may give a clue as to whether China can continue its famed "peaceful rise". The rest of the world should hope it can.

Could Xi take China in a new direction?

It's possible. Wen and Hu emerged from a period when China was closed to the world. Xi and his cohorts are younger, and have seen the benefits of trade and openness - though they have also seen China take the blame for global imbalances. Xi will need grit and charisma to win over Party hardliners, but those same traits might make for fractious foreign relations.

A good indication will be where Xi directs his early policies. China's leaders love grand gestures. Perhaps he will bail out the flagging export sector, or accelerate reforms that boost other sectors of the economy, like services. Where Hu and Wen were engineers, Xi and Li are lawyers, so they may focus on developing rule of law.

If all else fails, listen to the slogans. Hu brought the world "scientific development" and "harmonious society", which pretty accurately sum up his achievements, and failings. Xi has many buzzwords to choose from; "rebalancing", "equality" and "reform" are all possibilities. His choice will define the next decade, and not just for China.

http://www.reuters.com/article/2012/08/28/us-foley-breakingviews-idUSBRE87R05620120828

China's Challenge: Balancing State and Market

James A. Dorn, Asia Times, 08/24/12

The slowing of the global economy is forcing China as the world's largest exporter to confront the issue of rebalancing, which at heart is a problem of striking the right balance between state and market. State-owned banks still dominate the financial sector and are kept profitable by a positive spread between loan and deposit rates dictated by government policy.

Financial repression has penalized savers while rewarding banks. The recent decision of the People's Bank of China (PBOC) to allow greater flexibility in interest rates is a welcome sign.

In June, the PBOC announced that banks will be allowed to offer loans at interest rates up to 20% below the benchmark rate and be free to pay savers a rate up to 10% above the ceiling rate. With CPI inflation at about 2%, real rates on saving deposits are now positive. Wang Tao, chief China economist at UBS in Hong Kong, calls the deposit rate reform "unprecedented" and a "milestone for interest-rate liberalization."

The influence of the state in controlling key prices — notably interest rates, the exchange rate, and prices for refined energy products, water, and electricity — politicizes investment decisions, artificially spurs export-led growth, and favors manufacturing. China's challenge is to expand the scope of private markets and use competitive pricing to allocate resources efficiently. Once prices are right, China's growth path can be rebalanced toward greater domestic consumption.

President Hu Jintao wants to build a "harmonious society" by creating a more extensive growth model that spreads growth to less developed regions and by decreasing income inequality. Yet, as Nicholas R Lardy, one of the world's leading China scholars, notes in his new book, Sustaining China's Economic Growth after the Global Financial Crisis (Peterson Institute for International Economics), present leaders have not done much to extend liberalization in the post-Deng Xiaoping era. Modest reforms are not sufficient to free interest rates and other key prices from the hand of the state. The new leadership team that is soon to take over will need to take bolder steps if China is to end financial repression and extend prosperity.

China's 4 trillion yuan (US$586 billion) stimulus program was launched in 2008 to counter the global financial crisis. Monetary easing and infrastructure investment, financed primarily by loans from state-owned banks, helped keep real gross domestic product (GDP) growing by more than 9% in 2009 and more than 10% in 2010, while the United States, Europe, and Japan languished.

Critics of that program, such as MIT economist Huang Yasheng, argue that state intervention during the crisis has set back the reform effort and harmed the private sector. In particular, it is claimed that the bulk of bank loans went to state-owned enterprises.

Lardy does not accept that verdict. Relying on official data, he concludes that "the stimulus program did not lead to a wholesale advance of the state at the expense of either private firms or individual businesses." In particular, "state-owned firms did not increase their share of bank lending." Nevertheless, he recognizes that the state continues to retain control over the so-called pillar industries such as banking, finance, telecommunications, and petroleum. And he acknowledges the "stepped-up level of state industrial policy", although he thinks it is premature to predict the impact on "the balance between state and market".

The question about the proper balance between state and market should be at the center of any debate regarding China's future. Promoting capital freedom — that is, the right to acquire and exchange titles to capital assets — would allow private individuals a wider range of investment choices and limit the power of state officials.

Lardy and others argue that one way to increase consumption in China is to extend the social safety net to include rural residents, who now have to pay most of the costs of education, health, and retirement. What is neglected, however, is that reliance on private savings reduces one's dependence on government and thus fosters civil society. In contrast, expanding state welfare would tilt the balance between state and market toward more government power and less individual responsibility.

Private firms, many of which are foreign-funded, have been the most important contributors to growth in manufacturing, primarily in tradable goods. Exporters and import-competing industries have benefited greatly from China's opening to the outside world, beginning in 1978. The existence of widespread shadow banking serving the private sector, however, indicates that state-owned enterprises have much easier access to credit.

The recent Wenzhou experiment (based on a town in eastern China noted for its entrepreneurial activity), which officially recognizes and sanctions the informal banking sector, is an explicit admission of past discrimination. Also, the use of investment platforms (special investment vehicles) to fund local governments steers funds to SOEs involved in development projects, thereby affecting the balance between state and market.

There is also the problem of identifying recipients of loans from state-owned banks by type of ownership. No official data exists on bank credit by ownership type. Thus, Lardy looks at bank loans by firm size, assuming private firms are mostly small enterprises, and finds that their share of new loans made under the stimulus program exceeded credit going to larger enterprises. He also finds that the share of industrial output produced by SOEs has continued to decline — from more than 80% in 1978 to less than 28% today.

Nevertheless, Lardy is critical of the lack of any significant progress in reforming the state sector by liberalizing factor prices, especially interest rates, during the stimulus program. The government continues to set a ceiling on deposit rates and a floor on lending rates. The positive net interest spread enhances bank profitability and gives state-owned banks an incentive to favor financial repression.

Low or negative real interest rates on deposits, including saving accounts, provides a low-cost source of funding for state-owned banks. Households appear to have a target rate of saving in order to meet expected expenditures for housing, education, healthcare, and retirement. Thus, Lardy finds that when interest rates decline, households tend to save more. Meanwhile, relatively low lending rates encourage investment, including in residential housing.

The sources of the imbalances in China's economy are due to the distortions in the price system and the politicization of investment decisions. Unless those distortions are removed by ending financial repression and allowing a greater scope for private markets, China will face increasing disharmony.

The most fruitful reform, notes Lardy, would be to end financial repression by liberalizing interest rates, which would increase real rates on deposits, thereby decreasing saving if the income effect is strong, and increasing consumption. That process now appears to have begun.

Of course, if interest rates are to be market-determined, there must be fully competitive private capital markets, which would require privatizing state-owned banks and bringing shadow banking into the daylight not just in Wenzhou. In addition, the renminbi (also referred to as the yuan) needs to be convertible for all transactions, not only for trade in goods and services. Investors need to be free to choose both domestic and international assets for their portfolios. Using credit quotas and interest rate controls to allocate scare capital leads to corruption and inefficiency.

The essential condition to normalize China's balance of payments, shift to a more service-oriented economy, slow investment growth, and increase consumption is to get relative prices right — especially interest rates and the exchange rate. Economists at the central bank and elsewhere have called for faster liberalization and restructuring, but the pace of reform will depend on political factors in a one-party state.

The United States and others can put pressure on China for further reform, but such pressure is limited and could backfire. It would be better for Western debtor countries to get their own fiscal houses in order than to attack China for an undervalued exchange rate and threaten protectionist measures that would reduce world trade and wealth.

A capital-poor country like China should not be a net exporter of capital. By holding trillions of dollars of low-yielding foreign debt, China deprives its citizens of the wealth that could be created by relaxing capital controls and encouraging imports by allowing market-determined exchange rates and freely determined interest rates.

China's challenge is to undertake institutional reforms that protect individual rights, strengthen the private sector, get prices right, and thus tilt the balance between state and market toward more freedom and less coercion.

James A. Dorn is a China specialist at the Cato Institute in Washington, D.C., and co-editor of China's Future: Constructive Partner or Emerging Threat?

http://www.cato.org/publications/commentary/chinas-challenge-balancing-state-market

China Confronts Mounting Piles of Unsold Goods

KEITH BRADSHER, 08/23/12

GUANGZHOU, China — After three decades of torrid growth, China is encountering an unfamiliar problem with its newly struggling economy: a huge buildup of unsold goods that is cluttering shop floors, clogging car dealerships and filling factory warehouses.

The glut of everything from steel and household appliances to cars and apartments is hampering China’s efforts to emerge from a sharp economic slowdown. It has also produced a series of price wars and has led manufacturers to redouble efforts to export what they cannot sell at home.

The severity of China’s inventory overhang has been carefully masked by the blocking or adjusting of economic data by the Chinese government — all part of an effort to prop up confidence in the economy among business managers and investors.

But the main nongovernment survey of manufacturers in China showed on Thursday that inventories of finished goods rose much faster in August than in any month since the survey began in April 2004. The previous record for rising inventories, according to the HSBC/Markit survey, had been set in June. May and July also showed increases.

“Across the manufacturing industries we look at, people were expecting more sales over the summer, and it just didn’t happen,” said Anne Stevenson-Yang, the research director for J Capital Research, an economic analysis firm in Hong Kong. With inventories extremely high and factories now cutting production, she added, “Things are kind of crawling to a halt.”

Problems in China give some economists nightmares in which, in the worst case, the United States and much of the world slip back into recession as the Chinese economy sputters, the European currency zone collapses and political gridlock paralyzes the United States.

China is the world’s second-largest economy and has been the largest engine of economic growth since the global financial crisis began in 2008. Economic weakness means that China is likely to buy fewer goods and services from abroad when the sovereign debt crisis in Europe is already hurting demand, raising the prospect of a global glut of goods and falling prices and weak production around the world.

Corporate hiring has slowed, and jobs are becoming less plentiful. Chinese exports, a mainstay of the economy for the last three decades, have almost stopped growing. Imports have also stalled, particularly for raw materials like iron ore for steel making, as industrialists have lost confidence that they will be able to sell if they keep factories running. Real estate prices have slid, although there have been hints that they might have bottomed out in July, and money has been leaving the country through legal and illegal channels.

Interviews with business owners and managers across a wide range of Chinese industries presented a picture of mounting stockpiles of unsold goods.

Business owners who manufacture or distribute products as varied as dehumidifiers, plastic tubing for ventilation systems, solar panels, bedsheets and steel beams for false ceilings said that sales had fallen over the last year and showed little sign of recovering.

“Sales are down 50 percent from last year, and inventory is piled high,” said To Liangjian, the owner of a wholesale company distributing picture frames and cups, as he paused while playing online poker in his deserted storefront here in southeastern China.

Wu Weiqing, the manager of a faucet and sink wholesaler, said that his sales dropped 30 percent in the last year and he has piled up extra merchandise. Yet the factory supplying him is still cranking out shiny kitchen fixtures at a fast pace.

“My supplier’s inventory is huge because he cannot cut production — he doesn’t want to miss out on sales when the demand comes back,” he said.

Part of the issue is that the Chinese government’s leaders have decided to put quality-of-life concerns ahead of maximizing economic growth when it comes to two of the country’s largest industries: housing and autos.

Premier Wen Jiabao has imposed a strict ban on purchases of second and subsequent homes, in the hope that discouraging real estate speculation will improve the affordability of homes. The ban has resulted in a steep decline in residential real estate prices, a sharp fall in housing construction and widespread job losses among construction workers.

At the same time, the municipal government in Guangzhou, one of China’s largest cities, has sharply reduced this summer the number of new car registrations it allows so as to reduce traffic congestion and air pollution.

Municipal officials from all over China have been flocking to Guangzhou to ask for details. Xi’an, the metropolis of northwestern China, has already announced this month that it will limit car registrations, although it has not settled on the details.

The Chinese auto industry has grown tenfold in the last decade to become the world’s largest, looking like a formidable challenger to Detroit. But now, the Chinese industry is starting to look more like Detroit in its dark days in the 1980s.

Inventories of unsold cars are soaring at dealerships across the nation, and the Chinese industry’s problems show every sign of growing worse, not better. So many auto factories have opened in China in the last two years that the industry is operating at only about 65 percent of capacity — far below the 80 percent usually needed for profitability.

Yet so many new factories are being built that, according to the Chinese government’s National Development and Reform Commission, the country’s auto manufacturing capacity is on track to increase again in the next three years by an amount equal to all the auto factories in Japan, or nearly all the auto factories in the United States.

“I worry that we’re going down the same road the U.S. went down, and it takes quite some time to fix that,” said Geoff Broderick, the general manager of Asian operations at J. D. Power & Associates, the global consulting firm.

Automakers in China have reported that the number of cars they sold at wholesale to dealers rose by nearly 600,000 units, or 9 percent, in the first half of this year compared to the same period last year.

Yet dealerships’ inventories of new cars rose 900,000 units, to 2.2 million, from the end of December to the end of June. While part of the increase is seasonal, auto analysts say that the data shows that retail sales are flat at best and most likely declining — a sharp reversal for an industry accustomed to double-digit annual growth.

“Inventory levels for us now are very, very high,” said Huang Yi, the chairman of Zhongsheng Group, China’s fifth-largest dealership chain. “If I hadn’t done special offers in the first half of this year, my inventory would be even higher.”

Manufacturers have largely refused to cut production, and are putting heavy pressure on dealers to accept delivery of cars under their franchise agreements even though many dealers are struggling to find places to park them or ways to finance their swelling inventories. This prompted the government-controlled China Automobile Dealers Association to issue a rare appeal to automakers earlier this month.

“We call on manufacturers to be highly concerned about dealer inventories, and to take timely and effective measures to actively digest inventory, especially taking into account the financial strain on distributors, as manufacturers have to provide the necessary financing support to help dealers ride out the storm,” the association said.

Officially, though, most of the inventory problems are a nonissue for the government.

The Public Security Bureau, for example, has halted the release of data about slumping car registrations. Data on the steel sector has been repeatedly revised this year after a new method showed a steeper downturn than the government had acknowledged. And while rows of empty apartment buildings line highways outside major cities all over China, the government has not released information about the number of empty apartments since 2008.

Yet businesspeople in a wide range of industries have little doubt that the Chinese economy is in trouble.

“Inventory used to flow in and out,” said Mr. Wu, the faucet and sink sales manager. “Now, it just sits there, and there’s more of it.”

Hilda Wang contributed reporting.

林琮盛, 旺報, 08/01/12

跟過去二十多年的理工科專家治國不同，近期中國大陸31省市區黨委領導班子換屆完成後，這31位地方新任一把手具有比過去更明顯的特質：高學歷、出身基層及文科出身。

《大公報》昨日指稱，這次新任地方主官具有四大特點。一是梯次結構。50後成主力，共22位，約占總數70%。40後做後盾，共6位（政治局委員3位：俞正聲、張高麗、張德江。其餘為蘇榮、郭金龍、趙洪祝）。60後是希望，共3位（周強、胡春華、孫正才）。

其次是起於基層。這31位封疆大吏，大都起於基層，其中，有一半以上當過工人（如孫春蘭）和士兵（如張春賢），還有近三分之一當過知青。他們都是一級一級台階，一個一個崗位幹上來的，當省委書記前，大都在副省級崗位上已有5年甚至10年左右從政經歷。

碩博士人數 比過去多

再者，也有較高的學歷。31位書記中，有博士4人（孫政才、王、袁純清、郭聲琨），碩士17人，二者相加，共21人，點總數68%，這在過去是從未有過的。知識經濟時代，高學歷者自然占有先天優勢。

最後則是文科為重。31位書記中，念過大學文史類專業的，比念理工類專業的，整整多了兩倍。其中尤以學中文（如胡春華）和學經濟（如張寶順）為多。

有人分析，文史類學生知識面較寬，思路相對開闊，比理工類學生綜合素質更加全面，處事更為靈活，因而更具執政優勢。

多數屬異地交叉任職

除以上四個特點外，「五湖四海」也是31位書記一大特點。這31位一把手絕大多數屬於異地交叉任職。

全部31位書記中，東部沿海和中部省分達29位（其中山東有5位，河北有3位，河南有3位）。而西部省區出身的，只有兩位，一是趙洪祝（內蒙古），二是趙樂際（陝西）。雲貴川等，則付諸闕如。

報導稱，自改革開放以來，中央政治局委員和中央常委，大都從省委書記群體中產生，這已成為規律，也成為人們共識。對於起於基層、已經形成梯次結構、年富力強且善於腳踏實地辦事的新一屆省委書記群體，大陸民眾寄望頗深。

http://news.chinatimes.com/mainland/11050501/112012080100206.html

China Knows the Party Can't Last Forever

Satyajit Das, 08/01/12

If the old illusion about China was that it was growing strongly then the new illusion is that it has the resources to stimulate its economy to maintain that growth.

Almost all of China's growth since 2008 has come from government-influenced expenditure. The Chinese growth story is reminiscent of the debt-fuelled US economy after the recession of 2001-02. China's headline growth of 8-10 per cent has been driven by new lending averaging about 30-40 per cent of gross domestic product. Up to 25 per cent of these loans may prove to be non-performing, amounting to losses of 6-10 per cent of GDP. If these losses are deducted, then Chinese growth is much lower.

As growth slows, Beijing's options to re-ignite growth are increasingly constrained. The weakness of its major trading partners, the US and Europe, means China cannot rely on its traditional strategy: export demand to drive growth.

Domestically, the side-effects of debt-driven investment are now emerging, as asset bubbles in property and shares burst. Cash flows from many investments will be insufficient to cover all the debt, increasing non-performing loans in the banking system. Resolving the bad debts will absorb a significant portion of Chinese savings and income. China is also left with a legacy of low-return investment, for example in infrastructure, which will create a drag on growth.

Difficulties in rebalancing between consumption and investment also restrict China's options. The conventional view is China will be able to stimulate demand using its large foreign exchange reserves, large domestic savings and low levels of debt.

China's $3.2 trillion in foreign exchange reserves are invested predominately in US dollars, euro and yen, primarily in the form of government bonds and other high-quality securities. These assets have lost value through increasing default risk (as the issuer's ratings are downgraded) and falls in the value of the foreign currency against the renminbi.

Attempts by the Chinese to liquidate reserve assets would result in sharp falls in the value of the securities and a rise in the renminbi against the relevant currencies with large losses. The reserves force China to buy more US dollar, euro and yen securities to defend the value of the existing portfolio, increasing the size of the problem and the risks.

China will ultimately have to write off these reserves, recognising its losses. This equates to a real loss of wealth as China has issued renminbi or government bonds against the value of these investments.

China also has far greater levels of debt than commonly acknowledged, although the bulk is held domestically. The central government has a low level of debt, about $1 trillion (17 per cent of GDP). In addition, state-owned and supported entities have debt totalling $2.6 trillion (42 per cent): local governments about $1.2 trillion (19 per cent); policy banks $800 billion (13 per cent); Ministry of Railways $280bn (5 per cent); and government-backed asset management companies set up to hold non-performing bank loans $300bn (5 per cent). The total debt, about $3.6 trillion, is 59 per cent of GDP.

China's real debt level may be even higher. Victor Shih, an academic at Northwestern University in the US, calculated that local government debt may be $500bn (40 per cent) or larger than the official figure based on analysis of local government documents and ratings agency filings.

In addition, local governments have secured further lending commitments that have not been drawn down. The analysis does not take into account significant off-balance-sheet and unofficial lending activity.

The debt levels are exacerbated by what Michael Pettis in his book The Volatility Machine described as an inverted debt structure, where borrowing levels increase when the economy has problems. Irrespective of current moderate debt levels, when the economy slows, China's debt levels, both direct and contingent, will increase rapidly.

China also has limited flexibility in managing its currency. The renminbi has risen 30 per cent since Beijing adopted a policy of managed appreciation and revalued its dollar peg in July 2005. As growth and exports slow (the trade surplus has fallen to 2 per cent and foreign exchange reserves are falling), China would prefer to let the renminbi fall to cushion the adjustment.

In an US election year, the risk of trade protectionism and the prospect of being referred to the World Trade Organisation for currency manipulation limit China's policy flexibility.

The end of a cycle of debt and investment driven growth is typically disruptive. Japan's experience, which China has drawn on in shaping its economic model, is salutary. Japan grew by 10 per cent in the 1960s, 5 per cent in the 1970s, 4 per cent in the 1980s, and has remained stagnant since, adjusting to the deflation of its debt-fuelled bubble.

China's recent decision to lower its interest rates and ease lending restriction reflects increasing concern about its economic health and policy constraints.

It seems inevitable that China's growth will slow, with only the extent and speed in question. The real question is whether it can manage its transition to lower growth without social upheaval.

The ability of China to support the seriously compromised global economic and financial system is overestimated. At the Group of 20 meeting in Mexico, Chinese leaders repeatedly stressed that they were unable and unwilling to stimulate their economy to the extent being urged by developed nations because of China's own economic constraints.

As an old Chinese proverb, probably apocryphal, holds: "There is no feast that does not come to an end."

Satyajit Das is author of Extreme Money and Traders, Guns & Money.

http://www.realclearworld.com/articles/2012/08/01/china_knows_the_party_cant_last_forever_100163-2.html