Please note that this is BBC copyright and may not be reproduced or copied for any other purpose. RADIO 4 CURRENT AFFAIRS ANALYSIS CHINA’S CHALLENGE TRANSCRIPT OF A RECORDED DOCUMENTARY Presenter: Diane Coyle Producer: Chris Bowlby Editor: Nicola Meyrick BBC White City 201 Wood Lane London W12 7TS 020 8752 7279 Broadcast Date: 09.03.06 20:30 – 21:00 Repeat Date: 12.03.06 21:30 - 22:00 Tape Number: PLN609/06VT1010 Duration: Taking part in order of appearance: Dr Steve Tsang Political Scientist, St. Anthony’s College, Oxford Ted Fishman Author of ‘China Inc’ Dr. Linda Yueh Economist, London School of Economics Professor Elisabeth Croll Professor of Chinese Anthropology, School of Oriental and African Studies Professor Chris Berry Professor of Film and Television Studies, Goldsmith’s College Jim O’Neill Head of Global Economic Research, Goldman Sachs COYLE: The hype’s been as big as the skyscrapers in Shanghai. But is China’s long march from Mao to economic superpower status, and membership of the top global club, likely to run smoothly? Or could it all end in disarray? TSANG: The situation of China now is a very brittle situation. It’s on the one hand very, very strong; but if it gets into some serious problems, the situation can disintegrate very quickly. COYLE: This warning from Steve Tsang, a political scientist at St Anthony’s College, Oxford, may come as a bit of a surprise. But recent events like Google’s agreement to block access to certain websites on behalf of the Chinese authorities, have reminded us that China is still very different. And yet the sheer scale of the developments there means that whatever happens, it will affect us all. FISHMAN: The one thing that takes you by surprise, even if you’re think you’re aware of, is the scale of everything in China. It’s just so massive in every aspect. You know the city of Shanghai has built more skyscrapers than exist in New York City in the last ten years. When you come back home from China, of course, it’s the scale that hits you again because everything seems so small potatoes. COYLE: Ted Fishman is the author of a recent bestseller, China Inc, alerting us all to the dramatic growth of the most populous nation on earth. America’s status as the world’s leading economic power may be under serious threat for the first time in a century. FISHMAN: One of the things that people don’t realise about the Chinese economy is there are 85 million private businesses, and that’s an astonishing number when you consider that you know ten or twelve years ago none of these were around. You know all of the United States, which has been at the free enterprise game for 350 years, only has 26 million private enterprises and China already has three times the number. So these are human beings doing everything and anything in an economy, and if we think that there’s anything out of the reach of these 85 million companies, then we’re deluding ourselves. COYLE: Chairman Mao ensured that China was a political and military power, but communism was a disaster for the Chinese people, whose standard of living hadn’t improved for centuries. It’s only since the reforms introduced by Deng Xiao Ping in 1979 that the economy has started to grow. But it has grown ever since, the achievement symbolised by that new skyline in Shanghai’s Pudong district. Exports have played a large part in the success story, and many western companies are all too well aware of the low-cost Chinese competition. Others have decided to try their luck at investing and selling their own goods in China. So the Chinese economy is now bigger than Britain’s. Of course, with 1.3 billion people, incomes there are low; although it’s huge, it’s still a developing country. Can its unprecedented growth possibly continue, at any rate without the risk of social and political upheaval? And if that happens, what does a turbulent China mean for the rest of the world? Linda Yueh, now an economist at the London School of Economics, gained first-hand experience of the transformation working as a lawyer in China. YUEH: I think there’s every potential for China’s growth rates to be sustained. It’s grown at nearly ten percent for the past twenty- seven years, which is a tremendous rate of growth. That essentially means that GDP doubles approximately every seven years, so it is phenomenal. However, China is also growing from a very low level; its per capita GDP only recently exceeded one thousand US dollars. So that suggests that so long as China can continue its reforms to dismantle the centrally planned system, it’s growing from such a low level it does have the potential to continue a rather high rate of growth in the coming years. COYLE: The scope of central planning should remind us that despite all the hype about its economy, China still faces a long haul towards capitalism. There are some cautionary lessons in the experience of other formerly communist countries. In Russia, the transition to a market-based, capitalist economy was sudden and traumatic, so many Russians are worse off than they used to be. China’s leaders certainly intend to avoid that kind of economic and social instability, and in contrast to Russia, the Communist Party has reformed gradually and kept a firm grip on power. FISHMAN: The Communist party in China is in name communist certainly, but only in name. You know it is one of the great capitalist forces in the world today. SEGUE TSANG: I think a primary concern for the Communist party these days is really survival of the Communist party and the continuation in power of the Communist party. COYLE: So while Ted Fishman sees the transformation in the Party, Steve Tsang sees the continuity. He thinks China’s current leaders hope to buck the trend we’ve seen in the collapse of the rest of the communist world. TSANG: To do that, the Communist party will have to ensure social stability, economic growth and general improvements in people’s living conditions. In return, they will expect people to accept the continued leadership of the Communist party and perhaps monopoly of power. COYLE: Do you think they will achieve that ambition? Doesn’t the rapid economic change make political change in some way inevitable? TSANG: At the moment, the Communist party has done very well. If anything, I would say President Hu Jintao is more capable and effective in maintaining that particular formula than his predecessor Jiang Zemin. The reason is that Hu Jintao is a very, very astute politician. He can see where the problems are, he reacts very, very swiftly to put those problems down – using force if necessary. But if one takes a rather longer-term perspective, the Chinese are no different from any other people. When you have a majority of the people in a country as a whole being able to enjoy the equivalent of middle class living, they will have middle class aspirations, they will want to be running their own affairs. If you don’t have the best case scenario, if the Chinese economy cannot maintain that very high rate of growth, people will then ask why should we keep to our side of the bargain that we will simply let you have the monopoly of power? COYLE: The fragility of this implicit deal, power in return for ever-rising standards of living, means the Chinese leadership is well aware of the potential tensions. Professor Elisabeth Croll, an anthropologist at the School of Oriental and African Studies, has watched these challenges emerge during her many years of fieldwork inside the country. CROLL: I think what’s very interesting at the present moment is there’s a lot of talk about the rise of China outside, but inside I would say there’s much more concern with the issues and problems which China faces, particularly those that are social and demographic. I think the government very much sees that economic growth is not going to continue in the same way that it has unless they can solve some of the social tensions, some of the social problems. COYLE: It’s easy to see that China has a headache in meeting the demand for energy and materials to fuel its boom. There’s a growing awareness, too, of the environmental impact of rapid growth. About half the world’s most polluted cities are inside China, and cleaning up the air in Beijing before the 2008 Olympics will be difficult. The social tensions are less visible from the outside, where they’re cloaked by the fivefold increase in income per head since 1980, and the biggest reduction in poverty the world has ever seen. But this very success has created some fundamental challenges. Elisabeth Croll. CROLL: Probably the greatest social problem which China faces at the present time is the disparity between the urban and the rural, the city and the countryside. We have seen the sort of rise in incomes, rise in employment opportunities, rise in standards of living in the cities. The countryside has shared less in the fruits of reform. I think that at the moment the government is not sure how to increase rural development. It’s certainly a factor in thinking about China’s future and the amount of confidence one can have in the economic growth, is this enormous imbalance between the rural and the urban. COYLE: How does it manifest itself? CROLL: It depends which part because we have a range of income levels in the countryside right from the very, very poor and the western regions where you know very little food, very little furniture, very poor housing stock, very little in the way of a cash income, right through to your suburbs, your river deltas, your eastern region, southern regions where there’s been quite a lot of industry, quite a lot of opportunities for farmers to increase their incomes. We do know that roughly about 400 million are living on less than two dollars a day. COYLE: So I suppose one of the results of the growth is the contrast between the two dollar a day rural poverty and the delights of the consumer city are enormous now? CROLL: They are and you do have much greater knowledge in the countryside now of what life could be like, what life is like elsewhere through migration, through television. So that I think the poor are much, much more aware of the disparities. COYLE: The chasm between urban rich and rural poor has led not only to a huge migration of two million people every month into the cities to look for work, but also growing unrest in the countryside. On official government figures there were about 90,000 protests last year. China’s urban middle class is said to number about a quarter of a billion people, but that leaves more than one billion others lagging behind. The Government recently announced new farm subsidies and a programme of investment, under the revealing heading of the New Socialist Countryside. LSE economist Linda Yueh. YUEH: The reform in the state owned enterprises is one of the biggest challenges facing China today, and if you include the reform of the state owned banks (because they’re also state owned enterprises but they’re banks), then that probably poses the most significant structural challenge to China’s economy. So how do you dismantle a system of lifetime employment where the work unit was essentially the provider of not just your job for life but also a job for your offspring, and your housing, your health benefits, your pension, your unemployment benefits? Everything’s provided by a state owned enterprise, your work unit. That gives you the context as to why it’s been so difficult to reform them because it essentially causes the state to have to create an alternative social safety net. And that is a challenging process for any country and China has made in-roads on some of these, such as effectively privatising housing, but other things like pension and health still have a long ways to go. COYLE: To make matters worse, the burden of health and pensions is growing in China, and for just the same reason as it is here: an ageing population. We still tend to think of China’s problem as being too many babies. But the very success of the government’s notorious one-child policy to control population growth means that soon the problem will be instead too many pensioners. Elisabeth Croll is an expert on the demographic trends. CROLL: The single child family policy was implemented twenty or so years ago and that has had a dramatic effect on lowering the birth rate in China. So if you ask me what was the most important demographic problem at the moment, I’d probably say the ageing – the ageing of China’s population, the proportions who will be over sixty years of age in the coming years, particularly 2020. There’s a lot of talk that China’s going to become the first country to get old before it gets rich. COYLE: Chinese parents have aspirations for their one or two children that their own parents, struggling through Mao’s cultural revolution, couldn’t have dreamt of: education, a professional career, the chance to travel, a home of their own. The demographic shift described by Elisabeth Croll makes even more acute the contrast between the attitudes and experiences of the old and young. Professor Chris Berry of Goldsmiths College has lived in China and now teaches Chinese students in London. BERRY: Look at Chinese people who are in their twenties and thirties today. They have no memory of the cultural revolution at all, they have no memory of Mao. Their only memory is of a marketised economy – as they call it – and their only memory is of a society in which there is increasing flows of culture from overseas, increasing possibilities for personal travel overseas and, as a result, enquiring minds if you will and increasing questioning. What is different among the younger generation and the older generation is that the younger generation do not perceive the state as being as important in their lives as the older generation did in general. The older generation expected the state to make all the major decisions in their lives, but also to look after them cradle to grave. Now I think that that has changed and that younger people perceive themselves to be economically responsible for their own fates to a degree that they weren’t before. But they also don’t believe that the state should have such a say in their everyday lives in other ways – the cultural field and political field of everyday politics as well. COYLE: This is perhaps the most intriguing question for outsiders. Will economic freedom in the end lead to political freedom too, as a prosperous new generation starts to take its independence from the state for granted? Can economic reform even proceed much further without more democracy? And if the answer’s no, will political change be disruptive? For the time being there’s every sign the government’s determined to inhibit political demands, the latest evidence being that controversial deal it struck with Google. Steve Tsang sees authoritarianism in the ascendancy. TSANG: Well, if anything, I would say that under Hu Jintao freedom in the non-economic sphere has gone backwards. The media is a good example and Hu Jintao clearly has in the last year or so made media an issue that he will focus on in terms of control. COYLE: But surely that’s not sustainable to be giving people much greater freedom to run businesses and make money and so on, and at the same time to reduce their freedoms to access information and so on? TSANG: Well in the long-term I would say that it probably is not sustainable, but when you have major media for dissemination of information like all your Internet search engines companies cooperating with the Chinese government to enable the Chinese government to have what in effect is not an Internet for China but a gigantic Intranet of China, then that control is possible. That technology at the moment is a double-edged sword: on the one hand it enables people to access information; and, on the other hand, with co-operations with those companies, it also enables the Chinese government to track people down in terms of those people who originate dissident views. COYLE: Professor Chris Berry, who’s a specialist on the Chinese media, argues that there’s greater access to information now, despite these controls. There’s an appetite for exposing the cronyism and corruption of officials who’ve been using the boom to line their own pockets. Citizens are also exchanging information where they suspect an official cover-up, for example about environmental disasters such as the recent poisoning of the river in the industrial city of Harbin. BERRY: Ordinary Chinese people have been aware of air quality issues for a long time, but the disaster in the river in North East China that led to Harbin losing its water supply for a number of days became a real national story and became a real concern. And it has also led to much greater pressure for freedom of information - while people may not be quite so up in arms about an individual activist being arrested or something, the idea that without greater press freedom they wouldn’t know the water was poisonous. Among the stereotypes that people have about China is the idea of a closed society with the Great Wall and of course now today also the much- vaunted Great Firewall of China protecting the Chinese citizens from what is not good for them on the Internet, allegedly. However, I think that what we forget is that as there are 30,000 Chinese Online police who are trying to check what people are doing on the Internet, if 30,000 are needed that probably means there are an awful lot of people doing the sorts of things that Chinese government doesn’t want them to do. COYLE: One sign of a pent-up desire for political participation is the staggering success last year of Super Girl, a version of Pop Idol whose final was watched by 400 million people. Even official news sources noted the popularity of this rare chance to vote in an open election, and the authorities rushed to cash in on the enthusiasm by issuing a new stamp showing the face of the winner, Li Yuchun. Democracy’s certainly desirable, but does the possibility of a bitter struggle for freedom by the increasingly prosperous Chinese people matter in any practical sense to the rest of the world? Ted Fishman worries about the possibility that the government will use nationalism, over its tense relations with Taiwan or Japan say, to distract popular attention from its domestic troubles. FISHMAN: There is a common line of argument which says that China has so many internal problems that it’s not really going to focus on the rest of the world and is not a threat to the rest of the world. But there’s another way to see that, which is that countries with deep internal problems do find enemies. The one substitute it has for the communist ideology right now is nationalism. It’s virulent, it’s mean, it comes from the highest level of the Chinese leadership and it has found a very welcome home in the hearts and minds of the Chinese. There’s this deep tension in China. The country has prospered so much because of the globalisation of its economy, but as the country globalises more, it becomes more confident of its own history, of its own values and more willing to wrap those in the Chinese flag and Chinese history. So as China becomes more global, it will also become more nationalistic and that’s one of the most deeply troubling things about China’s development. COYLE: Support for these fears comes from the fact that China is spending so much of its new wealth on a military build up. But perhaps a good measure of how seriously we should take the risk of instability is the attitude of hard-nosed investors in the Chinese economy. They have a lot of money at stake. China has overtaken the US as the most popular destination for foreign investment by western companies, which has passed a total of more than $250 billion since the economic reforms began. The pace of this investment has been accelerating, even though foreign ventures are often made unprofitable by tangles of red tape and legal problems. Does that mean foreign capitalists think it’s still a good bet? Jim O’Neill is head of global economic research at the investment bank Goldman Sachs. O’NEILL: There is a significant group that wouldn’t want to go anywhere near China, have always been that way and still remain that way despite the increasing focus of it. The lack of profitability, at least in terms of publicly quoted markets on top of all the other well-known issues scare off many people. Then there is another large group – I’m not sure which one’s biggest, to be honest – but there’s another group which has exactly the opposite views; that even though there isn’t profitability yet, you just can’t ignore it and you have to be there. COYLE: His team of economists has devoted years of effort to analysing the relative merits of all the major developing economies, India, Brazil and Russia as well as China. What does he conclude? O’NEILL: In the past year or so, partly because investors typically get excited about markets that have performed, because Indian stocks have done so well, possibly aided by the use of the English language, many people superficially seem to think India is the better place to do business. It’s not that obvious to me. They’ve both got enormous attributes and I think they’re both great places to do business, but, if anything, I think for the big picture I’d probably side slightly better with China. COYLE: Do you think a formerly communist dictatorship is a better place politically? Is it somehow more stable and less chaotic than a democracy like India? O’NEILL: I would side with that. I think it’s no coincidence that over the past decade China’s ability to deliver stronger growth, for what stronger growth may be worth, has almost definitely been easier because they’re not a full blown democracy. One of the most interesting things to me globally in the past two years was despite the apparent strength of Indian growth, the previous government was kicked out, and I think democracy in a country which is developing with the diversity that India has offers all sorts of challenges which China, because of its system so far, hasn’t had to deal with. Ultimately for China to become the world’s biggest economy, then that will almost definitely have to change, but in the relatively early stages of getting where they’re going, I think I would side with a somewhat unpopular view amongst investors that the absence of democracy probably helps. COYLE: This is either shockingly cynical or refreshingly honest, depending on your view of investment bankers. But if he’s right, and the economic growth continues for now without political instability thanks to the tight grip of the Communist Party, what will the impact be on companies and jobs here in the west? We’ve grown accustomed to the cheap imports of clothes and consumer goods, which have boosted our own living standards. But are western companies finding it increasingly hard to compete with Chinese exports? LSE economist Linda Yueh. YUEH: It’s always very hard to imagine where a country could fit when you have a country like China, which clearly has a low cost advantage because of its status as a developing country but also produces two million engineers and scientists as graduates every year. COYLE: But do you think people here should be concerned about Chinese growth threatening their jobs in future? YUEH: The question for economists and policymakers when looking at the effects of trade is how to help workers adjust to the effects of globalisation, how to smooth the transition to other sectors. The good thing about trade is that it does make companies, people, countries feel competitive pressure and, therefore, become more efficient. It should be the case that the benefits of globalisation, which we’ve already seen in terms of low prices and low inflation, has every potential of making us even better off in the future. SEGUE: O’ NEILL: It is probably greatly helping consumers in the developed countries too and, therefore, low inflation and strong growth is a sort of nice combination that quite often people don’t think about. COYLE: Jim O’Neill of Goldman Sachs also sees the bright side. O’NEILL: People often explore the sort of worrying and more scary aspects – in particular the strength of energy prices – but it seems to me there’s some pretty positive dynamics going on related to this. COYLE: We’re getting these benefits because countries like China are joining global capitalism at last? O’NEILL: I think that’s right. What’s happening is on their own standards of course, because they’re not embracing everything about the way we do things, but they have bought into the idea that the right way to do better is to engage in the world’s trading system. And, as international economic theory would have, if everybody trades more and more with each other, then actually we all benefit and I think there’s quite a lot of evidence of that at the moment happening to come through. COYLE: Others in business and policy circles are more concerned about the implications of China’s economic miracle. Parliamentary committees have debated its growing power, and it’s one of the hottest topics on the think tank circuit. Some Chinese investments in America have been particularly controversial. And there seem to be constant rows about the surge of cheap imports of items like shoes and clothes into Europe and the United States. There’s some reason to be anxious, for as Linda Yueh points out, the Chinese government has been nationalistic about how it’s opened up the economy to foreign trade and investment. YUEH: They’ve allowed foreign direct investment to come in, but into specific designated areas – special economic zones, export processing zones – and they’ve actually opened up in a very controlled way. They’ve done this in such a way that they can foster domestic industries at the same time - national champions which they’re now trying to make into global champions. In a sense they’re doing this to make sure that they have a strong set of domestic companies with which to compete in the global economy. COYLE: Now, with a protectionist backlash from America and Europe looking ominously likely, the Chinese authorities have grown sensitive to outside fears about their economic muscle, according to Steve Tsang of St Antony’s College. Tsang: They are now even talking about the peaceful development of China, which is specifically designed to pacify the rest of the world that they have nothing to worry about China’s rise. In the long-term, I would say that the rise of any country is potentially problematic, there will always be competition, but China hasn’t really risen quite that much. I mean what we have seen in the last ten years is a very large but under-developed economy catching up very fast, but they are still at a very low level of development. Perhaps give it another twenty years time, then the Chinese economy can be posing a much more serious challenge in a way that is very different. COYLE: How should we in the west weigh up the short-term potential of China’s development against the long-term challenge we might face as a result? China’s historic move away from communism to global capitalism is disruptive, both inside and outside the country. The communist party has embraced trade and foreign investment to advance economic reform, but this seems to have triggered some deep-rooted western fears. After all, every generation seems to have a panic about a threat from the east, the latest tiger or dragon economies. Professor Chris Berry thinks China has changed more than most westerners, clinging to old stereotypes about the peasant masses, actually realise. BERRY: It’s really, really difficult to get people beyond one image or idea of China, so then they have the image of China as sort of a mass of impoverished people willing to do any kind of job available or whatever and they forget about the fact that China has probably now at least 200, maybe 250 million very middle class consumers going to Ikea every Sunday – literally, I mean there are Ikeas now all over China as well. COYLE: But even though they’re flocking to buy Ikea’s Billy bookcases and Ektorp sofas to furnish their newly-owned homes, Chinese people haven’t become uncritical admirers of the west. BERRY: Even though you do have more and more connections with the rest of the world, I think Chinese value systems are very, very different from those of the West. A certain phenomenal surface similarity in say fashions shouldn’t be taken to indicate that China is westernising. China may be changing, but there are some very, very deep differences that I suspect means China will make those changes in its own particular way. COYLE: But it’s unlikely that China will be able to embrace globalisation entirely on its own terms. The very scale of its spectacular growth, and the stark contrast between metropolitan glitz and grinding rural poverty, make its achievements brittle. China is clearly going to become more important on the global stage, but the contradictions of communist-led capitalism mean we shouldn’t expect its path to be smooth. 14