China After Mao: The Rise of a Superpower

by Frank Dikötter

Contrary to what one might reasonably expect after forty years of ‘Reform and Opening Up’, the situation is not so very different today. A few years ago Li Keqiang, China’s current premier, referred to the country’s figures for domestic output as ‘man-made and therefore unreliable’. Experts, of course, know this, and find ways around it. There is, for instance, a ‘Li Keqiang index’, one the premier used himself to monitor economic performance by scrutinising total electricity consumption. But the fact remains that we know very little. As the China observer James Palmer put it recently, ‘Nobody Knows anything About China: Including the Chinese Government’.1 Every piece of information is unreliable, partial or distorted. We do not know the true size of the economy, since no local government will report accurate numbers, and we do not know the extent of bad loans, since the banks conceal these.

I spent a decade examining thousands of party records, travelling the length and breadth of the country from subtropical Guangdong to poor and arid Gansu, a province near the deserts of Mongolia. Inside yellowing folders, scribbled in longhand or neatly typed, were secret minutes of top party meetings, investigations into cases of mass murder, confessions of leaders responsible for the starvation of millions of villagers, reports on resistance in the countryside, confidential opinion surveys, letters of complaint written by ordinary people and much more besides. I wrote three books known as the ‘People’s Trilogy,’ on the fate of ordinary people under Mao. The timing was fortunate. After Xi Jinping’s ascent to power in November 2012, the archives began closing down again. Large batches of documents on Mao’s Great Famine and the Cultural Revolution have since been reclassified. But, paradoxically, the last couple of years have been a good time to explore the decades of ‘Reform and Opening Up’. For years the Chinese people, including every archivist, have been told that nothing short of an economic miracle took place after 1978, one that has left foreign capitalists gasping for breath. A dark cloud hangs over the Mao era, but it dissipates the moment the term ‘economic reform’ is invoked. Now, for the first time, we can actually use the evidence produced by the Communist Party to examine the history of the Communist Party since 1976.

95 of the top 100 private firms belong to current or former party members. Capitalism is about capital: money is an economic good subject to rules on rates of return and profit margins. But in China capital has remained a political good, distributed by state banks to enterprises controlled directly or indirectly by the state in pursuit of political goals. A market, moreover, is based predominantly on the exchange of goods between individuals. How can ownership of these goods be protected without an independent judicial system based on the separation of powers? For years, critics have decried while admirers have applauded the supposed ‘transition’ towards ‘capitalism’ in the People’s Republic. But if this book proves anything, it is that without political reform market reform cannot exist. The argument over whether trade can or should be ‘free’ misses the key point, namely that a market without the rule of law, backed up by an independent judicial system and a free and open press, is not much of a market at all. There is no economic freedom without political freedom. Politics determines the nature of economics, not the other way around.

Instead of an orderly handover of power, what we see in the People’s Republic is bitter back-stabbing and fighting for power among endlessly changing factions. Most of the country’s leaders do not understand even basic economics, focusing almost obsessively on one single figure, growth, often at the expense of development. The result is waste on a staggering scale. It is not uncommon, for instance, for state enterprises to subtract value, meaning that the raw materials they use are worth more than the finished goods they produce. Most of all, somewhat paradoxically, a one-party state does not have the instruments to control the economy. Decisions are made by local governments, often in disregard of the greater good, never mind the writ from Beijing.

Has the country opened up during the era of ‘Reform and Opening Up’? Compared to the Cultural Revolution, definitely. But barely, relative to the rest of the world. What the regime has built over the past four decades is a fairly insulated system capable of fencing off the country from the rest of the world. Openness means that there is movement of people, ideas, goods and capital. But the state controls all these flows, which are often permitted in just one direction. Millions of people can move out, living and working in the rest of the world, but very few foreigners move in. After forty years of ‘Reform and Opening Up’ China had fewer than a million resident foreigners, or roughly 0.07 per cent of its total population, the lowest proportion in any country, less than half that of North Korea. (Japan, often decried as a ‘xenophobic’ country, has 2.8 per cent.) Finished products can move out of China in phenomenal quantities, but relatively few can actually move in. Today, each year one-fifth of humanity can view 36 foreign films sanctioned by the state.

The Chairman believed that the population adulated him and would rally to his side. Instead, the Hundred Flowers resulted in an outpouring of popular anger against the Communist Party, forcing Mao to reverse course and order a clampdown in May 1957. Deng Xiaoping, who like most of his colleagues had bristled at the prospect of allowing ordinary people to speak their minds, demanded sweeping measures, and was placed in charge of a campaign that targeted hundreds of thousands of individuals. Deng acquitted himself admirably, sending countless victims to labour camps in the Great Northern Wilderness, a vast mosquito-infested swamp.

The state bank responsible for agriculture was effectively bankrupt. As one bank inspector said, ‘right now capital is like a funnel, it is poured in from above and seeps through the bottom.’ He explained how easy it was for a local official to obtain a loan: ‘Some cadres walk into a bank to get cash because it is more convenient for them to do so than to go back home and fetch their wallet. They take as much as they want.’ In Jingzhou, Hubei province, some 40,000 cadres owed an average of 1,000 yuan each, the equivalent of two years’ pay for an average worker. ‘And what do they do with the money? They do business, they build a house, they buy luxury goods, they pay for a wedding, some even use it to gamble,’ the bank representative clarified. To bypass the lack of funds, farmers were issued IOUs.

The state-run media blacked out the leader’s trip, since he was supposed to live in retirement, but his pronouncements, judiciously leaked to journalists in Hong Kong, were beamed back across the border. The patriarch’s message was straightforward: there was nothing to fear from increased foreign investment and continued economic reform, since the ‘publicly owned sector is the mainstay of the economy.’ ‘More importantly,’ he added, ‘political power is in our hands,’ meaning that the party exercised political control over all foreign-owned companies, which would be made to serve the nation’s interests. This, rather than the balance between central planning and market forces, constituted the true difference between socialism and capitalism. The best defence against peaceful evolution, he maintained, was economic development and enhanced living standards, which would demonstrate the superiority of the socialist system. ‘We must experiment, blaze a trail and press ahead boldly,’ he opined, an invitation that few were prepared to decline.

Deng Xiaoping, on his southern tour, had proposed that capitalist tools would be safe in socialist hands. But there was a contradiction in his vision of reform, one that betrayed his ignorance of basic economic laws. A central bank in a political system based on the separation of powers had major financial tools at its disposal, namely interest rates and bank deposit ratios, whereas in a socialist system the banks belonged to the state. Following successive waves of decentralisation after 1979, local banks responded to neither the market nor the plan: they followed orders from the local party secretary. Despite incessant injunctions from the central authorities, neither market discipline nor party discipline existed. Since the regime had no intention of abandoning its hold upon the means of production, including capital, there was only one solution, namely to wrench power back from local fiefdoms and impose discipline from above. A strongman willing to purge, slash, burn and punish on a scale vast enough to bring every local leader to heel was required. As one local banker put it, ‘What this country needs is an enlightened Mao.’41 But such a figure was still decades away.

Among the pre-conditions for joining GATT was a similar trade regime among all members, including currency convertibility, market access, a transparent legal system, protection of intellectual property and removal of non-trade barriers. Since the People’s Republic was committed to a socialist system of public ownership over the means of production and a monopoly over power – capitalist tools in socialist hands, as Deng Xiaoping had phrased it – such a level playing field was never on the table. But Zhu Rongji’s fiscal and currency reforms had the desired effect, creating the impression that the regime was systematically dismantling the plan and moving towards the market. The term ‘transition’, almost never used before 1993, became popular among foreign experts.

At the turn of the millennium, after several years of frantic mergers and liquidations, the central bank conducted a survey to discover what had happened to the credit given to state enterprises, including the new national champions. The result showed that for every three yuan lent by the banks, the enterprises increased their output by two yuan. After a quarter of a century of reform, they simply destroyed one-third of the capital they received. State enterprises continued to account for almost half of gross domestic product in 2000, although their share of tax revenue tumbled from 12 to less than 8 per cent.

As party officials were at pains to explain, under no circumstances would the private sector be allowed to grow and overtake the public sector. ‘Now we are allowing the private sector to develop a little bit, because for the time being it is good for the state economy. But that does not mean we are moving towards becoming a capitalist society,’ one People’s Liberation Army delegate explained. ‘China is a communist country because it is led by the Communist Party, and that will never change.’62 Time and again, every major leader made similar statements, but many foreigners thought they knew better. In 1993 they had stumbled upon the word ‘transition’ to convey their vision of a country moving from the plan to the market.

In 1976, according to the World Bank, the country’s gross domestic product, when calculated per capita, ranked 123rd in the world. By 2001, after a quarter of a century of relentless emphasis on economic growth, it had dropped to 130th. The International Monetary Fund gave slightly different figures, but likewise highlighted how overall per capita output had barely kept pace with the rest of the world. The figures may have been dubious, given the lack of transparency, and the absence of properly trained accountants operating independently of the government, but they indicated the glacial pace of what some foreigners acclaimed as an economic miracle. The numbers also hid a structural issue: the household share of gross domestic production was among the lowest of any major economy in modern history. Ordinary people, especially in the countryside, worked very hard, but received a disproportionally small share of growth. They had to save as much as possible in order to make ends meet, besides paying inflated charges for basic services such as schools and hospitals. Despite falling prices, they would not or could not spend. They could deposit their savings in state-controlled banks, buy shares from state-controlled companies or buy bonds issued by the state. They could also buy shares in private companies, but fraud and corruption were so rife that few villagers were willing to take the risk.

The massive investments came without significant change to the economic system. The property bubble that had followed Deng Xiaoping’s southern tour in 1992 had fuelled double-digit inflation, eventually leading to a massive increase in bad loans when speculative investments in real estate turned sour. Combined with the losses sustained by state enterprises, the amount of bad debt was so great that Zhu Rongji had been compelled to overhaul the banking system by setting up four companies to take it over. A new tranche of bad loans was now emerging, as between $500 billion and $750 billion of the country’s nearly $2 trillion in outstanding loans could not be repaid. The official debt, together with bad loans at state banks and unfinanced pensions of state workers, amounted to 140 per cent of economic output, equivalent to the burden that had crippled Japan.

Lax environmental controls were crucial to selling a trillion dollars of goods to the rest of the world, as the companies that dominated the market were also the most polluting, whether they made steel, aluminium, cement, chemicals, plastics, leather or paper. The horizon was blurred, from clouds of brownish smoke spewed into the air by natural gas refineries and coal plants in Xinjiang, all the way to Beijing, buffeted every summer by hazardous sandstorms that turned the sky yellow. According to a government report, 300 million people in the countryside had no alternative but to drink water tainted by chemicals and other contaminants. Entire rivers were dangerous to the touch. Some ran dry before reaching the sea. About 90 per cent of all cities had contaminated underground water. In Shanghai canals bubbled with pollution, even in cold weather. Tap water smelled foul. Roughly one-third of the country was exposed to acid rain.

As its polluting factories closed down, with some literally dismantled, shipped to China and reassembled there, Germany emerged as a leader of the green movement. Chancellor Angela Merkel was nicknamed the ‘climate chancellor’, pushing international agreements to reduce carbon emissions. In the Ruhr Valley, once dominated by coal mines and steel mills, rivers were nursed back to health, contaminated soil cleaned up and turned into parkland. Other countries, too, appeared to benefit from lower carbon emissions as steel production was moved to China. Yet according to the European Parliament, the less efficient mills in China emitted three times as much carbon dioxide for every ton of steel produced as did their counterparts in Germany. Moreover, since China had a socialist economy, once the steel mills were up and running, they rarely shut down, regardless of markets and demand.

By 2012, as a decade of leadership under Hu Jintao and Wen Jiabao was ending, the country was a thoroughly entrenched dictatorship with a sprawling security apparatus and the world’s most sophisticated surveillance system, one that their predecessors would have thought the stuff of dreams. Yet throughout, a medley of foreign pundits, ranging from university professors to respected politicians, had announced the imminent arrival of political reform. The mechanism was fairly simple: every once in a while a leader would contrive a smile and use the term ‘reform’, sending experts into a frenzy of speculation that the true transition towards democracy was about to begin, as carefully hidden forces within the party machine were finally gaining the long-deferred upper hand.

The international backlash came even as the country was reaching an impasse in its economy. Growth, for decades, had depended on debt, which had risen slowly from a very low level between 1980 and 2010. Between 2010 and 2020, however, growth doubled while debt trebled, standing at 280 per cent of output. The country’s dependence on debt should have been reduced by shifting demand from investment in infrastructure projects towards more domestic consumption. Yet household consumption could not be increased much further, for one very simple reason: most of the wealth flowed to the state, not to the people. As Li Keqiang pointed out in May 2020, more than 600 million people survived on a mere $140 a month, which was insufficient to rent a room in a city. A massive redistribution of income away from party members towards ordinary people would be necessary to spur more consumption, but this was unlikely to happen.

With a growing population, for several decades labour had been cheap, but this trend reversed around 2010, as the working population began to decline thanks to the one-child policy. A shrinking workforce required greater growth in productivity, but this, too, was falling steadily.23 For decades, the countryside had been neglected, used as a reservoir for cheap, unskilled labour. Local governments had invested vast amounts of money in urban infrastructure, but put very little into their own people, least of all those in rural areas. Across the country as a whole, a mere one in three children attended high school, while only a fraction of the nearsighted rural population could afford a pair of glasses. Thanks to decades of wilful neglect, the labour force had one of the lowest levels of education of any comparable country.

The easy options – accept foreign capital, exploit unprotected labour, sell land to raise funds, produce subsidised export goods, list state enterprises abroad, borrow to build and repay tomorrow – were no longer available. The challenge lying ahead for the Communist Party was how to address an entire range of longstanding structural issues of its own making without giving up its monopoly over power and its control over the means of production. It seemed very much like a dead end.