By Tom Evans, CNN, November 3, 2009 2:38 p.m. EST

1. China today, say many analysts, is in a comparable position to U.S. at the beginning of the 20th century… an emerging power that the dominant global power of the time is trying to downplay. Then it was Great Britain vs. the United States. Now it is the United States vs. China.
2. China’s rapid economic expansion continues to outpace growth in the United States, 8.9 percent in the last quarter versus 3.5 percent in the United States giving Beijing huge economic leverage.
3. China is on the brink of overtaking Japan as the world’s second biggest economy and could overtake by some estimates (PricewaterhouseCoopers) the U.S. economy in overall size (though not GDP a head) by 2025 and be 130 percent bigger than the U.S. economy by 2050
4. China is the world’s biggest exporter, recording a trade surplus in the last 12 months of $250B. The United States is the world’s biggest importer, with a trade deficit of $575B over the last year. By one reckoning, one in every eight dollars of the U.S. trade deficit is due to just one company, Wal-Mart, which is the biggest single importer of Chinese goods into the U.S.
5. China is the world’s largest creditor nation, holding as much as $2 trillion in U.S. dollar denominated assets. The United States is the world’s largest debtor nation. Some say that gives Beijing huge leverage over the U.S. economy. either by giving it the ability to abruptly sell its U.S. assets which could cause the dollar to plunge on the global foreign exchanges (note the U.S. did this to Britain during the Suez crisis in 1956 forcing Anglo-French forces to withdraw from Egypt) or by enabling Chinese companies to buy huge swathes of the U.S. economy (witness Chinese efforts to profit from the wreckage of the U.S. auto industry).
6. China’s breathtaking economic expansion has led to a voracious demand for raw materials around the world and the rapid expansion of China’s presence in countries as far apart as Venezuela.. Sudan.. Guinea.. and Myanmar. Human rights groups say China is propping up repressive regimes in order to secure its access to critically important raw materials, including much sought after “rare earth” minerals which are a key component in consumer electronics such as cell phones.
7. China is also a strong influence in the economies of some solidly Western countries that have huge mineral resources, such as Australia which is a big exporter of iron ore (and which is growing rapidly on the back of China’s economic expansion) and to some extent even Canada which has valuable oil shale and other raw materials.
8. A huge flood of cheap Chinese manufactured goods and textiles is swamping the global economy, destroying traditional manufacturing jobs in Europe and North America, leading to increasing demands for protectionism in Western economies amid charges the Beijing government is subsidizing its own industries, protecting businesses with trade barriers, and keeping the Chinese currency artificially low, which depresses the price of Chinese exports in the global market place and makes them even more competitive. Cheap Chinese goods are also swamping Beijing’s trading partners among emerging nations, snuffing out local efforts to grow their own manufacturing industries and break away from resource dependent economies.
9. Critics say China is reinforcing its offensive to achieve global economic dominance by establishing large industrial (and military) spy networks in Western countries (the U.S. regularly arrests and convicts Chinese spies) and using hackers to break into Western companies’ computer networks to steal sensitive information. Even the Russians are reportedly accusing the Chinese of stealing technology and using reverse engineering techniques to build a new generation of fighter planes.
10. China is already the dominant economic and political player in the economies of South East and North East Asia, in a way that reminds some of Japan’s efforts to create a Greater East Asia Co-Prosperity Sphere before the Second World War to shut out U.S. influence. Beijing is a strong supporter of a proposed Asian “European Union” that critics say would cement Chinese dominance in Asia.
11. China has already become a key global power, directly involved in major international disputes such as the showdowns with North Korea and Iran, and using its position on the U.N. Security Council and its economic leverage to influence events in countries regarded as areas of vital Chinese importance. It is also now the dominant regional player in north east Asia, recently hosting a summit in Beijing with the Japanese and South Korean leaders.
12. China is growing more confident about using its rising power in border disputes with countries in its immediate vicinity… from the fight over an ill-defined border with India in the Himalayas.. to territorial disputes over island chains in the Pacific with Asian neighbors such as Vietnam, Japan, and the Philippines.. to being more aggressive at challenging U.S. warships sailing in international waters off the Chinese coast (China says its suzerainty extends 200 miles to the edge of its exclusive economic zone, not 12 miles as recognized by other countries). China in the past has never backed away from border wars.. note the war in Korea in 1950-53, the war with India in 1962, and the war with Vietnam in 1979.
13. Beijing is engaging in a massive military modernization program, designed to reduce the number of soldiers in its army while expanding its ability to project power by air and by sea. China is reportedly building its first aircraft carrier and is developing ballistic missiles that are designed to target the decks of U.S. aircraft carriers, the principal means by which the United States exerts military influence in the Asia — Pacific region (as witnessed by past American efforts to influence Chinese behavior in the Taiwan Strait). Taiwan says China now has 1,500 missiles targeting its territory, an increase from 800 two years ago.
14. China is building port facilities in countries such as Myanmar, Sri Lanka, and Pakistan all of which to its rivals look like an attempt to pave the way for a major growth in Chinese naval capabilities in the Western Pacific and the Indian Ocean in a way that not only challenges U.S. naval power but also the national security of India which has now embarked on its own naval buildup. Australia is also paying attention to China’s military modernization, announcing plans to double the size of its submarine force from 6 boats to 12 with much longer ranges.
15. China remains a totalitarian one party state, dedicated to preserving the Communist Party’s grip on power while allowing no alternative political centers of power, suppressing political dissent (think back to Tiananmen Square 20 years ago when China smashed pro-democracy protests even as the Soviet Union collapsed), and crushing separatist movements on its own territory in such places as Tibet and Xinjiang.

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On the other hand, Beijing is loath to forgo opportunities to expand economic and political cooperation with Tehran. Iran is one of the world’s largest oil exporters, has large untapped reserves of oil and gas, and is a reliable supplier of energy for China. Moreover, China’s energy security policies attempt to encapsulate foreign energy supply relations in a warm, political insulation. Iran also has a large demand for infrastructure of all sorts: industrial and transportation machinery and equipment, cheap consumer goods – all of which China is happy to supply. Iran’s conflicts with the West have allowed China to establish itself as Iran’s leading trading partner. (Before Iran’s 1979 revolution, China supplied less than one percent of Iran’s imports.) Beijing also recognizes Iran as a major regional power with no conflicts of interest with China (unlike India, Japan, Russia, or Turkey). Beijing’s political objective is to expand China’s influence with Iran into an all-weather partnership similar to the one China enjoys with Pakistan. This objective would be undercut by China ganging up with the United States and Europe against Iran over the nuclear issue.

China balances between these conflicting but weighty sets of interests. In the International Atomic Energy Agency Board of Governors and U.N. Security Council debates over Iran’s nuclear programs, Beijing has endorsed efforts to negotiate a solution with both sides showing flexibility in order to reach an agreement that upholds the Nuclear Nonproliferation Treaty. This formulation implicitly criticizes both Washington and Tehran – Washington for trying to abridge Iran’s “right” as a signatory of the NPT to the “peaceful use of nuclear energy,” and Tehran for not adequately demonstrating to the “international community” that Iran is not attempting to make nuclear weapons. China is unlikely to thwart a new push by Washington, Paris, and London (Germany is unlikely to go along) to have the Security Council endorse a new and broader- “punishing” is the word used by U.S. representatives-set of sanctions. But China’s words suggest that at the end of the day, it will not permit the Security Council to endorse, or itself participate in, tough economic sanctions against Iran. Rather, Beijing is likely to water down any sanctions to allow China’s rapidly expanding economic relations with Iran to continue unimpeded growth.

Chinese analysts were deeply skeptical about the newly inaugurated (January 2009) Obama Administration’s policies toward Iran. Efforts by the Obama Administration to improve relations with Iran had some effect, according to an August article in China Daily by the director of Jiangsu’s Institute of International Relations. Yet despite a few moderate words and gestures by the Obama administration, Washington was likely to revert soon to a hard-line approach, which would fail, according to the article. “The long strained Iranian-U.S. ties have improved to some extent after Barack Obama assumed the office of the U.S. President,” the article noted. But once “the world’s largest economy bottoms out the Obama administration will [resume] its attack on Iran’s nuclear program once again, increasing the pressure on Tehran.” U.S. policies toward Iran continued to be “prejudiced.” “An improvement in U.S.-Iranian ties depends more on the length Washington is ready to go to engage Tehran in a dialogue.”¹

Another China Daily article reviewing the demonstrations in Tehran protesting irregularities in the June 2009 Iranian presidential election was implicitly critical of U.S. “interference in Iranian internal affairs.” The “international community” should not “add fuel to an already burning issue” by interfering in Iran’s internal affairs, the article warned. An “attempt to push the so-called color revolution toward change will prove very dangerous” because “a destabilized Iran is in nobody’s interest if we want to maintain peace and stability in the Middle East and the world beyond.” President Obama had indicated, the article said, in his speech at Cairo University and in comments made while meeting South Korean President Lee Myung-bak, that the U.S. would not intervene in Iran’s current post-election turmoil. The crux of the issue, the article implied, was whether the United States would adhere to these promises.²

China’s opposition to efforts to accomplish regime change in Iran dovetails with China’s own interests – or actually, with the interests of the Chinese Communist Party that has ruled China since 1949. CCP leaders well understand that the United States and other Western democratic countries believe that values of individual freedom are universal and give unique legitimacy to institutions of liberal democracy. Marxist-Leninist, Communist values and political systems are fundamentally illegitimate, according to this Western perspective, and Western governments are often tempted to apply these ethnocentric prejudices (in the CCP’s view) to China. These Western prejudices, “Cold War mentality” in the CCP’s preferred nomenclature, were directed against China during 1989-1994, culminating in U.S. threats to withdraw China’s Most Favored Nation status (and thus severely restrict China’s exports to the U.S.) unless China implemented major improvements in China’s “human rights.”³ China’s tough stance defeated that earlier U.S. effort, but events in Tibet, Xinjiang, or elsewhere in China pose perennial opportunities for renewed U.S. and Western “interference in China’s internal affairs.” CCP rule of China will be safer and more secure if Western countries abandon universalistic ethnocentrism and accept the reality of diverse political systems around the world, according to the Chinese view.

Beijing has consistently opposed imposition of sanctions against Iran – over the nuclear issue or any other issue, for that matter. It eventually voted in the Security Council for sanctions resolutions: No. 1696 in July 2006, No. 1737 in December 2006, No. 1747 in March 2007, and No. 1835 in September 2008. The sanctions authorized under these resolutions were limited to 28 or so individuals and entities involved in Iran’s nuclear or ballistic missile activities. China, together with Russia and Germany, worked to ensure that those sanctions did not have much bite. Agreeing to vote for sanctions placated Washington, but watering them down ensured that Washington’s quarrels with Tehran would not too adversely affect Sino-Iranian ties.

As the Obama Administration began to lay the groundwork for tough Security Council-sponsored sanctions should the 1 October negotiations with Tehran fail, Beijing made clear it thought such sanctions were a bad idea. A Xinhua article written by an international observer made clear that sanctions were a Western idea. “Western countries led by the U.S. have asserted that the real intent of Iran’s nuclear program is to possess nuclear weapons,” and “the Western countries have applied pressure on Iran in all forms in an attempt to force Iran to stop its nuclear programs.” Iran had rejected all such pressure. Once again, in 2009, it was likely that “the United States and the EU” would press for a new round of sanctions against Iran. “However, because every country proceeds from its own interests, it will not be easy [to secure] the adoption by the U.N. Security Council of a resolution on imposing substantive sanctions on Iran.” ⁴

A Ministry of Foreign Affairs spokesman speaking on 24 September said that imposing sanctions and exerting pressure would not be “conducive to diplomatic efforts” to resolve the Iranian nuclear issue. “We hope that all relevant parties seize the current favorable period, step up diplomatic efforts and push forward the achievement of positive results,” the spokesman said.5 The proper paths were talks, dialogue, and negotiations, without a background of threatened force or sanctions.

As Western companies pulled back from Iran because of greater political risk in servicing that market, Chinese companies seized the opportunities to expand. In July 2009, the Iranian embassy in Beijing announced that China had become Iran’s number one trading partner.⁵ By seizing the opportunities created by Western problems with Iran, China pushed its way into a very large, lucrative, and growing market.

An embargo of gasoline was one “tough sanction” widely discussed in Western media. Perhaps in response, British Petroleum and Reliance of India stopped selling refined petroleum products to Iran in mid-2009. Total of France indicated a willingness to follow suit, should the Security Council so mandate. Chinese firms stepped in to meet Iran’s shortfall. Chinese officials denied that China sold gasoline to Iran, but foreign analysts concluded that between 30,000 and 40,000 barrels a day of Chinese refined petrol was reaching Iran via third parties. ⁶

Iran supplies large amounts of oil to China-typically ranking among the top three suppliers to China. China’s energy security strategy stresses involvement in upstream foreign oil production, and Western sanctions against involvement in Iranian oil-development projects make Chinese participation attractive to Tehran. Iran also produces lots of mineral ores that China needs: copper, sulphur, zinc, chromium, iron, lead, and aluminum. Iran also offers excellent opportunities for Chinese exporters of transportation, construction, mining, manufacturing, and power-generation equipment and machinery. Iran has ambitious development objectives and adequate financial resources to pursue those objectives. Chinese machinery is not as technologically sophisticated as Western or East Asian (Japanese or South Korean) varieties, but Chinese goods are typically substantially cheaper, and quite good enough for Iran. Iranian engineers and manufacturers might, ceteris paribus, prefer Western or Japanese goods. But low political risk associated with Chinese goods in contrast to the risk of interruption or interference associated with Western goods (along with low Chinese prices) often trumps those Western advantages. Iran is a very big market, and Western sanctions offer Chinese firms an opportunity to expand into that market.

Iran’s abrupt admission in late September 2009 of the existence of a second uranium enrichment facility inside a Revolutionary Guard military base at Qom will not significantly alter China’s calculus. Beijing will want to stay in step with Russia in dealing with the Iran nuclear issue. Russia’s calculations regarding Iran seem to have more to do with humbling the United States than do China’s, and it seems unlikely that Russia will go along with a U.S.-led Western effort to enforce strict sanctions against Iran. Should this assertion prove to be wrong and Russia decides to go along with Western sanctions against Iran, China would probably follow suit. Without its Russian partner China would be uncomfortably positioned as the sole, major opponent of U.S. policies. At the same time, however, Beijing would insert as many loopholes as possible into the Security Council-mandated sanctions regime, and would find occasion for words and actions supporting Iran in the face of what Chinese media would certainly style “U.S.-led Western sanctions.”

China’s balancing act in the Security Council reflects two important but contradictory sets of Chinese interests that Beijing must accommodate. Economic interests weigh heavily in China’s calculus, but strategic calculations are important too. China’s interests would not be injured if U.S. efforts to lock Iran into a militarily inferior position (i.e., without nuclear weapons) collapses. U.S. prestige would thereby be substantially diminished. China’s security against a possible hostile cutoff of China’s sea-borne oil imports (either by the United States or India) would also be enhanced by having a friendly, militarily powerful and confident Iran willing to work with China to counter such hostile moves. China’s leverage with Washington would also benefit from Washington finding itself in a long term political-military confrontation with Iran. The United States – and for that matter, Iran – would need China’s assistance on various matters, while the U.S. would be less inclined to focus on East Asian issues closer to China’s own vital interests. One Chinese analyst may have alluded to the primacy of such Chinese interests when he noted that, “Because every country proceeds from its own interests, it will not be easy for the United States to press for the adoption by the U.N. Security Council of a resolution on imposing substantive sanctions on Iran.”⁷

In the dominant view among China’s Middle East specialists, the root cause of the clash between Iran and the West has been the arrogant, bullying, and ethnocentric policies of Washington over the administrations of half-a-dozen presidents. It is American policies of sanctions, military strikes (during the “tanker war” of the 1980s) and threats, subversion, and no diplomatic relations that have, in Beijing’s view, created the current morass and possibly pushed Iran toward nuclear weapons to defend itself. The United States is now stewing in the mess it has itself made – in Beijing’s view. Why should China ignore its own interests by aligning with the United States against Iran? Even if Iran acquires nuclear weapons, China has no allies or military forces in the region that would be threatened by those weapons. Nor has China undertaken (unlike the United States) to guarantee the flow of oil through the Strait of Hormuz. China’s general, and genuine, interest in limiting the number of nuclear weapons states is balanced against these multiple and major strategic interests.

But China must pursue these strategic and economic interests without injuring an even more important interest in maintaining cordial relations with the United States. Since 1978 China’s drive for economic development has been underpinned by the imperative of maintaining friendly ties with the United States and, thus, a generally supportive American attitude toward China’s development. This imperative continues to operate. It has been paralleled since 1997 by a U.S. push for increased strategic partnership with China in managing the affairs of the post-Cold War world. This U.S. policy creates a very favorable environment for the growth of Chinese influence, and Chinese leaders recognize many advantages from accepting U.S. invitations for strategic partnership and cooperation. This means that Beijing will not block U.S. moves regarding Iran in the Security Council and will cooperate with Washington at least to the degree judged necessary to keep Washington from viewing Beijing as a rival or competitor – much less a hostile power. Exactly what that degree entails will be determined by the estimates of Beijing’s diplomats and analysts about the intensity of U.S. demands and the correlation of forces balanced behind and against Washington’s moves. Beijing will probably cooperate with Germany and Russia to water down further sanctions. But Beijing will be loath to take the lead in opposing U.S. policy thrusts.

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But will the stimulus bring lasting change?

China unveiled its 4 trillion RMB (US$586 billion) stimulus package at the end of 2008. The centerpiece of this plan is fiscal spending on public infrastructure development and social welfare. Some of the key areas include housing, rural infrastructure, transportation, health and education, environment, industry, disaster rebuilding, income-building, and tax cuts. The massive scale of government spending was visible everywhere on the authors’ visit in 2009 to China, such as major redevelopment work on the Bund in Shanghai.

The essence of the stimulus package is government-led spending. Government-led behavior often generates growth spurts (as confirmed by recent consumer spending figures mentioned above). This stimulus package will no doubt increase China’s GDP. It is also a smart strategy to adjust an economy that relies too much on exports and too little on domestic demand. Investing in public infrastructure and the social welfare system will further strengthen domestic demand and serve the economy well in the long-run.

However, what China needs is to stimulate the more sustainable force of domestic demand – household consumption – and make sure that this new increase in consumer spending is not just a temporary growth spurt. China’s households have always had a low consumption rate compared not only with advanced economies like Japan and the U.S. but also with other large developing economies such as India and Brazil.². household consumption expenditures were 60.8% of GDP in Brazil and 55.0% in India but only 35.9% in China.³ Moreover, our recent field interviews with households in Beijing, Shanghai and Xian indicate that Chinese consumers are still not buying or planning to buy more goods in the future. For example, one of our survey questions asked households: if they suddenly earn 50,000 Yuan, how they would spend the money? There were five possible options: savings or investment; pay debt; give to children or relatives or donate to social causes; buy a house, car, furniture, or electronic appliances; and spend on travel and other leisure activities. The average response was to save nearly 60 per cent of the 50,000 Yuan, instead of spending it on durable goods or vacations.

Li Qi The low consumption rate to GDP poses challenges to China’s new balanced growth strategy, which is focused on shifting the source of growth from export revenues to domestic demand. This low consumption rate also demonstrates that the current allocation of economic resources (a core issue to economics) is not largely determined by Chinese households. As an economy moves from a planned to a market mode, one expects resource allocation decisions to shift from the state to households or private hands. In that regard, China has a long way to go. The state still has a high command on China’s economy after decades of market reforms.

Nevertheless, the stimulus package is sensible and should help increase household spending. Studies have shown that low social security and health care benefits do contribute to a low consumption ratio (Qi and Prime 2009). Households may not have to save as much for the future once a more effective and generous social welfare system is built. Moreover, this package also introduces creative ways to stimulate consumer spending. The recent 7 billion Yuan subsidy for households to trade-in outdated cars and color TVs is working to increase domestic sales.

Yet once again, what happens after the sales spurt powered by this one-time subsidy? Taking care of the future (social welfare) alleviates households’ burden for retirement, but increasing current household incomes is necessary and urgent. Unfortunately the stimulus package is silent on this.

Chinese people have enjoyed unprecedented income growth by virtue of the success of market reforms. Millions have been lifted out of poverty. Compared to the past, household incomes have been growing tremendously. However, investigating the composition of China’s growth in income from 1997 to 2007 (the last year for which the data is available), we see that in 27 of the 31 regions identified in the China Statistical Yearbook,⁴ compensation of laborers experienced the lowest average annual growth rate compared with that of depreciation of fixed assets, net taxes on production and operating surplus. In all 31 regions, the average annual growth in operating surplus is higher than the increase in compensation of laborers. On average, the growth in operating surplus exceeded the growth in compensation by 9.7 percentage points each year.

The large differential between the growth in operating surplus and compensation of laborers may also be adding to the income inequality among regions in China. The differential growth in compensation compared with the growth in operating surplus appears to be inversely related to the region’s gross domestic product per capita. For example, in Guizhou, which had the lowest income per capita in both 1997 and 2007, the annual average growth in operating surplus was 18.25 percentage points higher for the 1997 to 2007 period than the average annual growth in compensation; whereas, in Shanghai, the wealthiest of the regions in both 1997 and 2007, the difference was only 0.21 percentage points. The correlation coefficient for GDP per capita by region in 1997 and the difference between operating surplus growth and compensation growth is -0.49.

Indeed, many scholars have voiced concerns over the low growth rate of laborer compensation and the small share of individual income out of overall GDP income. Wei Jie stresses that “individual income as a share of GDP has continuously been too small. Meanwhile, government tax revenue has grown faster than national GDP. The most unfair issue of income distribution is that the state has taken too much, and individuals have received too little.”⁵ Zheng Xi, another economist, emphasizes that to increase household consumption, ways must be found to raise household income, especially for farmers and those in the lower and middle income brackets.⁶

The Chinese government, in fact, has started to consider new policy initiatives targeted to improve overall GDP, income distribution, and household income, especially for farmers, who generally have much lower income than urban residents. One of the boldest moves is to consider land privatization in rural areas. Under a draft law set to be enacted in 2020, China’s more than 800 million farmers would be able to trade, purchase or sell their land rights under a new land policy, which addresses the most serious grievance for Chinese farmers – violation of their land rights by corrupt local officials who often seize their land and get rich through rapid industrialization schemes.

Policies to put economic decision-making into farmers’ hands are efforts to reach the government’s goal to “double the per capita disposable income of rural residents by 2020.”⁷ Theoretically, privatization could lead to much more efficient use of China’s arable land and bring economies of scale that would lower agriculture production costs. But details about how land transactions would be regulated are still being debated, and many are doubtful that farmers will truly benefit in the end. Further, this potential change years from now will not have any immediate effect on improving the very low consumption rates of poor households. Fortunately, there are some other policies in effect now that can help improve the living standards and incomes of the poor. Among them: increasing unemployment and social welfare benefits for low-income households, and training programs for unskilled labor in rural areas.

Chinese officials and scholars view the global recession as more of a golden opportunity than a threat. They see it as a chance to adjust China’s economic structure domestically and their relationship to the world market. Further, the current situation confirms that their recent move to a balanced-growth strategy is not only necessary but also strategically beneficial for China’s long-term development. However, determining that the source of future growth lies within domestic demand is only the first step. Stimulating and sustaining of domestic demand, which relies on increasing household consumption, is a more challenging task, which cannot be fixed by simply building more roads or bridges. In addition to establishing social welfare, China needs to balance its income distribution to channel more income to its households.

References:

China Statistical Yearbook (Zhongguo Tongji Nianjian), various years. China Statistics Press, Beijing.

Qi, Li, and Penelope B. Prime, “Market Reforms and Consumption Puzzles in China,” China Economic Review 20.3 (2009):388-401.

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Houses and lands (H&L) are the most important potential assets to farmers. Zhang and Liu (2007) estimated that the value of H&L accounted for approximately 74% of an average rural household’s total asset value. However, current Chinese law prohibits the sale, exchange, transfer, or collateralization of rural H&L, which greatly impedes the growth of income to farmers. Ke (2007) found that in 2005 farmers’ asset income only made up 2.7% of their total income. The prohibitions also constrain the development of rural finance since H&L cannot be used as collateral for loans. By June 2005, agriculture loans were just 5% of total loans issued by financial institutions (Hu, 2006).

Not only does the current law block the development of rural finance and the increase of farmers’ income, but also it promotes even more inefficient use and unequal distribution of scarce land resources. All rural Chinese households can apply for free land sites from their villages and build houses on those sites, but the lack of a market mechanism makes for inefficient land use. From 1997 to 2005, 97 million rural people migrated to urban areas, but they still retained ownership of their rural H&L even if it became vacant. Numerous studies (e.g., Zhang & Lu, 2006; Han, 2008) show that vacant H&L and even vacant villages have become more and more common. In addition, the system fosters excessively large H&L holdings by some farmers and insufficient ones by others. Needless to say, vacant and excessively large H&L causes tremendous waste of land resources, something that should be corrected to foster sustainable economic growth.

Reforming the current land law can bring enormous benefits to farmers as well as society. Should farmers be allowed to sell H&L, migrants would be able to collect large sums of money by selling their vacant H&L and using the proceeds for consumption and savings, generating new sources of economic growth. Should farmers be allowed to exchange or transfer H&L, they would be able to trade old houses for new ones provided by real estate developers and receive monetary compensation, which could improve farmers’ living conditions and attract capital to rural areas. Should the collateralization of H&L be allowed, farmers would be able to receive more agriculture loans and invest in profitable businesses, and that could lead to booming rural markets.

Some of this already is happening beneath the surface. Despite the official prohibition on the sale, exchange, transfer, or collateralization of rural H&L, underground markets have sprung up for rural H&L. In developed regions such as the Yangtze River Delta, the Pearl River Delta, and the vicinities of Beijing, rural H&L have entered the market through rents, transfer, partnerships, collateralization, and other means (Jiang & Liu, 2003; Wang 2003; Huang, 2006). However, the lack of guaranteed H&L ownership in underground markets serves as a drag on further investments and a disincentive to improving the quality of buildings.

To mitigate the serious problems in the current rural H&L law, some local governments have piloted gradual reforms under the acquiescence of the central government. Chengdu began issuing official certificates confirming property rights of farmers in 2008, providing a basis for the transfer and social utilization of H&L. Tianjin, Guangzhou, Fusan, and Jiaxing enacted a policy of exchanging rural H&L for city dwellings in the hopes of bestowing benefits on both the local governments and farmers. Zhejiang Province allowed for the transfer of H&L collateralization. Together, these policy experiments in different regions, although their impacts cannot yet be fully evaluated, provide valuable experience for future reforms in rural H&L law nationwide.

Land-law reform is not immune to risks, so it is vital to anticipate and control those potential problems. The risk that policy makers are most concerned with is the emergence of homeless farmers. For example, most farmers have no health insurance. If they become seriously ill, they might sell their H&L to pay for expensive medical services if they were able to do so. Therefore land law reform should not stand alone; rather, it needs to be coordinated with reforms in other areas such as health care. The recent health care reform, which aims to provide basic medical services to all farmers and make medical services affordable, is a beneficial foundation for land-law reform.

Another risk of land-law reform involves corruption. Policy makers need to safeguard against self-interested officials making decisions during the reform process that benefit themselves and other special-interest groups at the expense of farmers. If this is allowed to happen and becomes rampant, land-law reform could actually threaten social stability.

To conclude, there is a growing interest in reforming the current land law, which constrains rural finance and income growth for farmers. Land-law reform can benefit farmers, city dwellers, and government units, as evidenced by the experimental reforms in some regions. Every reform carries risks; however, the risks are manageable as long as governments prioritize people’s interests and build in safeguards against self-interest and corruption. The recent health care and social security reforms in rural areas provide a good environment for the land-law reform.

Disclaimer

The findings and conclusions in this article are those of the authors and do not necessarily represent the official position of Zhejiang University or the U.S. Centers for Disease Control and Prevention.

References

Han, K. (2008). ???????????????. Starting the Market Reform of China’s Rural Houses and Lands. «????????», 2008(4):4-7.

Hu, S. (2006). ????????????????????. Socioeconomic Analysis of Industry Subsidizing Agriculture and Cities Supporting Rural Areas. «?????????????????????????????».2006.

Huang, X. (2006). ??????????????????. Personal Views on the Land Procurement Reform and the Transfer of Collective Construction Lands. «??????», 2006(11):40-41.

Jiang, X. & Liu, S. (2003). ???????????–??????????????. Capitalization of Rural Lands and Industrialization of Rural Areas – Investigation of Economic Development of Guangdong Province, Fushan Nanhai. «????», 2003(11): 87-97.

Ke, B. (2007). ???????????????. Some Thoughts on Accelerating Modern Agriculture. «??????», 2007(2):5-7.

National Bureau of Statistics of China. China Statistical Yearbook, 2008.

Wang, X. (2003). ?????????????. Protect Farmers’ Interest on Land Property Assets. «??????», 2003(10):9-16.

Xinhua News Agency. Farmers Benefit from Agriculture Tax Cut. March 6, 2004.

Zhang, D. & Liu, Q. (2007). ???????????????????. The Survey and Analysis by the Farmer Loan Guarantee Association of Henan Province, Wuzhi Village. «??????», 2007(5).

Zhang, Z. & Lu, X. (2006). ???????????. The Regulation and Development of Rural Houses and Lands. «????», 2006(1):19-22,26.

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When a country with a large population such as China’s joins the world economy, the effects are going to be more significant than with a small country. Some of the hyperbole in the statements stem from this characteristic. For example, of course China needs a lot of resources, and once they obtained the money to acquire more, they started to shop. And they can produce a lot of exports, so when they begin to trade it will cause dislocations elsewhere, as happens when any country trades. (Remember, trade is a two way street—companies in a country can only sell abroad if they find willing customers. But they also consume a lot of stuff at home. And they have welcomed many companies to invest in China, which has been profitable for those companies.

One idea to consider is that the reason the U.S . and other countries are very involved with China today is due to historical accident. China’s leaders began to reform at the moment that East Asian economies were looking for cheaper land and labor to help their manufacturing stay competitive. If China had remained closed, these companies might have gone to Indonesia, or India, or elsewhere. The benefits of the “neighborhood” effects for China as a result of being available for East Asian development were an amazing piece of luck for China. India missed this boat and will take a lot longer to catch up as a result. Once the East Asian companies began to produce in China, it set into motion a cluster effect so that now the supply chain is very sophisticated, especiallyin southern China, and the costs are low.

Meanwhile China’s opening is a process that cannot be complete immediately. For example, even though China is a member of the WTO, implementing and enforcing all the aspects of the agreement is currently beyond the capabilities of the various pieces of the central government, but it is a work in progress. This frustrates foreign companies and sometimes makes it look like China does not want to play by the rules. And in fact, some in China may not want to play by the rules. So there is also a domestic interest factor that is working to determine how things stand as well. Intellectual property rights protection is a good example. While China has on the books some very good laws, enforcement will be difficult until there is pressure from enough Chinese domestic companies to also have IPR protection.

Another example is the safety of products produced in China. The establishment of institutions that can check for safety and enforce laws is underway but far from complete–as in the U.S. probably up until the 1970s. So safety is an issue for Chinese exports to the U.S. and elsewhere, but it is also an even bigger issue for the citizens of China. They are subject to unsafe products all the time, and are beginning to exert pressure to have this fixed.

In terms of international relations and national defense, China acts no differently than other countries that behave to protect and promote their interests. The bigger question implied by some of the statements in the CNN.com piece is whether there is some sinister long term plan to become the most powerful country in the world and then make decisions that hurt the U.S. and others. A couple of thoughts here: 1) Since participating in the global economy with good relations with the U.S. and most other countries has served China well, why would they want to throw that away? 2) Again, there will be groups within China that have different interests. If the military (or some part of the military) feels that they need China to dominate for them to be powerful, they may push for this. However, there are many other interests that would counter them. 3) On certain issues such as Taiwan, we understand quite well there would be a meeting of the minds within China if Taiwan declared independence, with most of China opposing it even at great cost. 4) Given thoughts 1-3, we should take precautions with China just as we do with most countries, stay informed, stay ahead technologically, but keep the communication open and build trust with mutually beneficial cooperation to minimize antagonism and misunderstanding.

Finally, with respect to the points in #15, China is certainly a one-party political system but there is much more personal freedom now than under Mao’s leadership. I believe most political scientists would not say China is a totalitarian state. In addition, the party is very aware of its fragility, and often overreacts to contain stability “just in case.” They are trying to figure out how to allow–actually promote–economic and personal freedom but keep their political power. Although China has done very well in terms of growth, it faces very serious problems in many areas (e.g, environment, education, job creation, transitioning the rural population to urban jobs and lifestyles). The scale and diversity of the country, and the complexities of the problems given the former system, mean that there are no obvious solutions.

In conclusion, I and my colleagues worry more about rogue elements getting access to nuclear weapons than China taking over the world. Nonetheless, we spend a lot of time thinking about China, as it will be one of, if not the, most important new player in the decades to come.

The article referred to in this commentary is “Is China a global partner or strategic rival of U.S.?” By Tom Evans, CNN, November 3, 2009 2:38 p.m. EST;

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A Life Away from Home: Family Benefits and Burdens

The Plant Lady left her home in southern China at sixteen to wash dishes at a restaurant in the city. From there, she made it to one of the many factories in Guangzhou where she met her husband, also from the same county, and also working in a factory. From the ties formed through this marriage, she arrived in the neighborhood where I now live.

There are eight independent plant sellers in this market: three are siblings, and all are from the same county in China. The Plant Lady’s Husband is one of the siblings. Each sibling has gotten established in the market with the help of a family member. The eldest brother (Dage) was the first to start selling, taking over the business of the older brother of his wife, who was successful enough to move up to wholesale plant selling. In March of 2007, Dage brought the Plant Lady’s Husband with him to help. Within one month, the Plant Lady’s Husband called home to his wife asking whether she thought they could sell plants. A few weeks later, the Plant Lady arrived carrying her three-and-one-half-month-old daughter. The elder sister (Dajie) is the most recent arrival. She took a loan from Dage to help start her business last year.

In China, many small economies develop around family units or people from the same hometown. One day I was sitting with the Plant Lady when a couple drove by in their three-wheel motorized cart overloaded with gardening tools. The Plant Lady told me that they were very successful because they had a brother who renovated houses and then introduced their gardening services to his clients. The Plant Lady’s Husband often provides free labor to Dage, and the Plant Lady this year brought her younger brother with her because he was too “slow” and “lazy” to hold a job back home.

People from every country feel a certain affinity to those from the same area where they grew up. But, in China, these geographic antecedents carry much more weight. One of the first questions Chinese may ask each other is, “What place are you from?” This is not a question of simple curiosity. In China, cities within provinces, not to mention separate provinces, can have their own language (some refer to the differences in spoken Chinese as dialects, but, in some cases, local variations in pronunciations and word use are so great that they may be better classified as independent languages). I speak only Mandarin, the official spoken Chinese of mainland China, and the Plant Lady has to remind her daughter not to use her local language so that I can understand her. More than this, geographic origin carries with it a strong preconception of the type of person you are – whether you have a good sense of humor, whether you are trustworthy, whether you are a good businessperson, whether you are pretty. And these stereotypes, for lack of a better word, remain lodged in the back of people’s minds despite long business relationships or friendships (and even among my Chinese friends who have spent many years living abroad). A common geographic origin creates an immediate bond and feeling that you know a person and what she is about. At the same time, there is a pressure to help those from your home region who are less fortunate than you. There is one seller in this plant market who comes from the same county as the Plant Lady. She was widowed at a very young age and has never remarried. She cannot do much of the manual labor required in this business, nor does she have a car with which to make deliveries or purchase stock. Because of this, the other sellers in the market help her out. Her geographic ties allowed her to begin selling, knowing she would be backed by some measure of support. I have seen the effects of this dynamic in clothing markets where the vendors are all from the same region, and in a supermarket chain where the owner hires her workers only from her home province. I have also personally experienced it in my previous business where we sought workers from the hometown of my partner’s family because their accountability to the small village back home ensured trust and responsibility.

Of course, these familial and geographic ties are not without limits. I don’t think I have ever seen Dage provide free labor to his younger brother, and the Plant Lady eventually sent her younger brother home because he was too slow and lazy even to work for her. This year the Plant Lady has purchased a lawn mower. I asked her why it was not sitting there on her corner so that people would know she could mow their lawns. She patiently explained to me that she keeps it in another place. She worried that if the lawnmower were not obviously being used, other people on the strip would accuse her of wasting it and depriving them of money-making opportunities. They would use it for free and either break it or not return it. This she knows from experience: at the beginning of the season she loaned some tools to a fellow seller and hasn’t seen them since.

The Small Enterprise Economy

The plant corner in my neighborhood is in some ways a microcosm of the market structure that continues to dominate China’s domestic market. In a strip less than a quarter mile long, you have eight entrepreneurs selling the same or slightly varied commodities. This extreme product concentration is not limited to the least expensive items – if you want to purchase fur or leather coats, you go to the street where every shop is selling fur and leather coats; if you want computers, disk drives or memory chips, you go to the four-story building crammed with hundreds of stalls selling computers, disk drives and memory chips. The same with musical instruments, art supplies, lead pipes and plastic. Almost all the people I know who have visited China have asked the same questions I repeatedly ask myself: Why do so many individual sellers of essentially the same commodity choose to locate right next to their competitor, and how do they survive?

I am not an economist and this is not intended to be an economic article. However, I understand from friends who are professional economists that agglomeration and clusters historically occur in certain sectors in every country. Various theories have been proposed to explain this tendency, including facilitation of knowledge transfer, concentration of appropriately educated workforce, and savings from proximity to suppliers. To some extent, these theories apply in China – for instance, the higher-technology consumer goods center is located near the high-tech business and university area of the city. But even my economist friends who are old China hands tell me that current research does not adequately address the peculiarity in China of the extreme physical concentration of very small individual enterprises operated by people with the same geographic origins. From what I learned and observed through my friendship with the Plant Lady and her husband, I suggest a few additional explanations specific to China.

Word of mouth remains an important communication form. A large portion of the population still lives in small villages and towns, and this population generally has low levels of education and limited means of learning what is happening on the “outside.” Concurrently, economic conditions in these areas may require that people leave in order to support themselves and their families. It is common, therefore, for people to learn of new opportunities when one person leaves and finds success, just as happened in the plant market in my neighborhood. For migrants with low levels of education (the Plant Lady finished only six years of school) and limited job prospects, it is relatively easy to step into an existing market to which they have some exposure and basic knowledge, and in which they have seen others already succeed. (Another example of word-of-mouth communication comes from my questions to the Plant Lady about where she keeps her money. She tells me that from listening to other people, she changed from hiding her money under her pillow to putting it in a bank account.)

A logical next question is why the newcomers chose to open their own small business, rather than partner with an existing business? The experiences of the Plant Lady and her husband suggest potential reasons. They spent approximately ten years working in Guangzhou, each arriving there following others from their home county. During that time, in their respective factories, each progressed quickly from ordinary factory worker to management and earned comparatively good compensation of approximately US$400 a month. Housing and food was provided, and they were able to save several thousand dollars. The factory owners liked both the Plant Lady and her husband and probably each was on the way to even more responsible and higher-paying positions. Why, then, I have asked the Plant Lady, did they leave these well-paying jobs for a business with uncertain, and potentially much lower, earning potential? She provides some concrete reasons: she and her husband saw each other only once a week; the housing was one dorm room where everyone slept on bunk beds. But the reason that seems to have made the most difference was their feeling that it was better to be their own bosses. This is a sentiment that I have heard expressed in almost every conversation I have had with Chinese people in China regardless of economic, educational, or geographic background, and regardless of age. Obviously, this is not possible for every person, but, of the people I know, a disproportionately large number either own their own business, however small, or have tried it even if they failed and had to go back to working for someone else.

The dream of being your own boss is common to many cultures. However, in China, people may be more inclined to bear the risks of entrepreneurship for more practical reasons. Although the situation is improving, workers still lack basic rights. There is no minimum, much less living, wage, and employers take full advantage by paying their workers as little as possible. An owner can be a millionaire many times over, while his workers are each taking home US$5 a day, or, at times, nothing if the owner refuses to pay. Even in larger businesses, owners exercise significant control over their workers – having full access to all e-mail and other correspondence, requiring overtime work, and managing almost every aspect of a worker’s day. These realities create a level of distrust of owners and bosses and many Chinese seem to prefer to shoulder the risks that come with starting a business just to maintain control over this part of their lives.

Markets for plants and other things tend to cater to people in the immediate area. One reason is the sheer concentration of people. The plant market near my neighborhood services several complexes, but just a mile down the road is another plant market whose customers come from a different set of complexes. There are enough people living in these complexes and in the surrounding neighborhoods to support scores of sellers within a two-mile-square area. Working together with the size of the market is the difficulty of transportation in China. Despite the increase in car ownership, the majority of the population still depends on public transportation. And while China’s stimulus package is helping to increase the availability of public transportation, the subways and buses remain unbearably crowded. There is a popular, rather lewd, joke in China describing a woman who gets pregnant just hopping on the bus. Even if you do have a car, the traffic conditions significantly dampen the appeal of traveling around comparison “shopping.” With the unease of transportation, consumers welcome the ability to travel to just one location to purchase goods, especially combined with one final characteristic of the Chinese consumer, an obsession with bargaining.

That Chinese love to bargain is no revelation to anyone who has been to China for even one day. Certainly, one does not generally negotiate the prices at stores such as Walmart or the Chinese grocery chain Jingkelong. However, the majority of consumer purchases still occur at small businesses, and the asking prices are very rarely the price that a buyer expects to pay. “Mainstream” stores have adopted pricing practices to reflect this mentality – while there may be a price sticker, there is almost always a matching sign posting an automatic “discount.” This long-standing and pervasive tradition of bargaining also means that one lives in constant dread of being cheated. Purchasing items from a place like the plant market in my neighborhood helps alleviate this fear. One is able to obtain eight price quotes in a matter of minutes. Because of the degree of competition among suppliers, the buyer has a better feeling that she is paying a fair price. The constant price negotiation also means that trust becomes very important. The Plant Lady has many long-time customers like me, and I’d bet that they come back to her for the same reasons I do. I know that if I’m a regular customer she won’t cheat me. I also know that if she doesn’t have something I want, she will check across the street, and if they have it, and since they know her and know that I am her good customer, they also will not cheat me. “Brand” loyalty, in a sense, may be more influential in China than it is elsewhere. In a country where there is no Consumer Reports, one good experience can mean a lifetime of continued purchases.

My layman’s observations suggest how one tiny corner economy in China arose and perseveres: one person left; stories back home brought relatives and fellow villagers; these newcomers were limited in their opportunities but came with a strong desire to operate their own businesses; because of the limitations, it was easiest and most expedient to enter into an existing market; the population is great enough to support this market; and transportation realties and consumer buying traditions enable this market to survive. It’s a situation that repeats itself throughout the city where I live and across the entire country.

Attitudes on Life

My friendship with the Plant Lady highlights some common characteristics among the Chinese people I have met – in all segments of society: self-sufficiency, generosity, humor, and optimism. In the Plant Lady’s hometown, they live in the family house. It has no running water and no gas or electric stove. Cooking and heating primarily come from whatever throw-off you can find – corn husks, plant stalks, trash. In the city where I live, the Plant Lady and her husband rent a 40-square-meter room for approximately US$11 per month. But it has running water and a gas stove. I live in a townhouse that I rent for US$2,000 a month, yet I have had many conversations with the Plant Lady and her husband in which she chastises me for helping them out too much as I live a much harder life because I am on my own. To help me out, this woman gives me fresh vegetables and sells me plants practically at cost.

China remains a country largely of very frugal people, trying their hardest, and quite often succeeding, their hardest to survive and improve their own circumstances and those of their children. In her mind, with each move, the Plant Lady has made her life better. Although the money was more certain in Guangzhou, now she and her husband spend their days working together, and they can control how much and how hard to work to earn what they can. The first year she started selling plants, she jokes, they could only eat mantou (steamed bread); this year, they can eat wheat pancakes (the difference in cost being about US$0.30). Last year they used part of their savings to purchase a van (at a price less than the cost of my mountain bike, I have recently discovered) – a necessity for purchasing stock and making deliveries. This year they purchased the lawn mower. She has enough money to send her child to a private school (an institution where 50-60 children attend class together, and at night sleep in one big room watched over by one teacher, at an annual cost of approximately US$300). In the summer, her child comes to visit and enjoy new experiences. Just recently the Plant Lady announced to me that she has a new plan. Her family was outgrowing the small family house, and since the economic crisis has decreased prices, during the winter when she’s back in her hometown she may take her savings and borrow from her relatives and build her own house – with a living room to entertain guests (how can friends visit you if they have to sit on your bed?) and a kitchen and a separate room for her daughter.

The media often report on the size of China’s migrant working population. By some statistics, migrants can comprise up to 50 percent of the population of China’s largest cities. News reports emphasize the poor conditions and lack of opportunities in China’s interior with the implication that migrants have no choice other than to leave their hometowns, and that they do so reluctantly. Without doubt, the economic gap between the cities and the countryside forces people to the cities for survival. Migrant workers are easy prey for unscrupulous employers who know that without proper working permits their workers have little recourse if, for instance, they are not paid their wages. Housing conditions can be substandard and families are split apart. But whether the people who leave their hometowns are as disgruntled as often portrayed is not so clear. At least, I don’t believe this is the case with the Plant Lady. (A perhaps important note here is that many educated middle- to upper-middle-class Chinese are also migrant workers and have moved to the cities from small hometowns to take advantage of greater opportunity. Very often, the families are split geographically, with the mother and father working in different cities, and the child often living in a third.)

Neither the Plant Lady or her husband, nor any of the other sellers, is getting rich. But each of them is making enough to pay their living expenses and save a little money; at least in the case of the Plant Lady and her husband, doing better than their parents, and, hopefully, providing better opportunities for their children. I asked the Plant Lady whether she wants her daughter to go to college. Of course, she says, but very few people from our town go to college; it all depends on whether she can score well enough on the entrance tests. But she has a precedent – the eldest son of her brother-in-law is in his last year of university. I asked the Plant Lady whether she would be back next year to sell plants. She says they would see: so long as the land was still empty and hadn’t been taken for some other use, she would be back. If it was taken, they would look for another location. If there was no other location, they would find something else to do. That’s the only thing you can do, she says.

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