The End of Cheap China: Economic and Cultural Trends That Will Disrupt the World (13 page)

Yet with the money and skullduggery involved with real estate (
The Hurun Report
found that 23.5 percent of the 1,000 wealthiest Chinese earned their money primarily through real estate development), the situation is bound to worsen if the government does not enforce regulations in place.

The anger is very real, and for people who lost their homes, anger can potentially erupt into violence. Most people I have spoken to who have been evicted against their will are enraged, but believe the blame rests squarely on corrupt local officials in bed with real estate developers, rather than the whole government system.

Beijing’s leaders understand the direness of the situation. One senior leader exasperatedly told me, “We have to stop these thugs at the local level. Some of these people are truly evil. Some of these people act like gods and are not intent on helping the people, but enriching themselves. They don’t care about anyone but themselves.” One of the problems that has prevented crackdowns is the difficulty of controlling local officials, especially if they have powerful patrons at the central-government level. Many officials fear that the rot is far too widespread to be able to crack down easily, so they arrest a few high-profile people in the hopes of scaring the rest into order.

Local officials are given an extent of freedom that allows them to adjust application of policies to the local situation. However, the central government feels it needs to maintain its grip on power over local governments whenever it can, as well as the whole country, precisely because rampant corruption at the local level disrupts social stability and hurts everyday citizens. Central-government officials think that if they let their control slip and delegate their power, chaos could ensue. They are wary of American-style direct elections for the same reason. One official I spoke to summed up the government’s worries about elections this way: “Imagine how corrupt it would be if we had elections,” he said. “All the corrupt real estate developers could beat people up and intimidate voters to get their man elected. It would only hurt the people. We cannot allow elections when local officials in cahoots with tycoons could intimidate voters.”

One cool spring day in Shanghai, I got a firsthand taste of how many of these demonstrations must be developing in cities all over China. I was driving along a main thoroughfare near a Carrefour hypermarket, when suddenly dozens of balloons flew into the air. As they made their way into the gray sky above, my son Tom, sitting in the backseat, shouted and pleaded that he wanted one.

I turned to the place from where the balloons seemed to be ascending. As we got closer, I saw a dark-skinned man, wearing blackened clothes that looked more like rags, yelling at a parked van. Inside was a group of four
chengguan
—local officials from the City Urban Administrative and Law Enforcement Bureau, or city enforcers.

Most problems with government thuggishness are not due to the normal police—the
gongan
, officers from the public safety bureaus—but to the chengguan. They are poorly trained, lowest-level security enforcers, often people who had been unemployed. The government gives them jobs to help enforce routine laws, like clearing out unlicensed street vendors. As one vendor told me while hurriedly packing up her stock of mugs, “I’m not afraid of police; they are polite. It is them,” she said, pointing at a group of chengguan. “They hit.” They are not a part of the police force, but many Western journalists don’t make the distinction when they publish reports about fights or protests in Chinese cities. In fact, in my experience, the Chinese police are for the most part quite well trained and responsive to the needs of the people.

I went up to the roadside balloon salesman, who was near tears. He told me that the chengguan approached him without warning. He said they took out a machete-like knife, told him that he was not allowed to sell balloons, and cut the strings on the balloons, sending them all spiraling into the sky. He told me he had lost two weeks’ wages. I could see him wondering how he would pay for his family’s food, so I gave him money to cover his losses and confronted the chengguan in the van.

A group of furious onlookers surrounded the van and started yelling at the chengguan. Some started taking videos of the scene on their mobile phones. They had all seen what had happened. People started shouting that it was not right for the chengguan to simply take the balloon salesman’s livelihood away, especially when so many officials are corrupt. One man yelled that if the man had paid a bribe, he would have been allowed to keep his balloons.

Tensions ran high outside the van as the screaming continued. Inside the van, the four chengguan looked bored and ignored us. After about five minutes, the chengguan in the driver’s seat turned the ignition. Everyone outside parted and the van just drove off. And that was that—everyone just dispersed.

This situation probably would count as a situation of unrest, one that gets tabulated by the government among the hundreds of thousands of yearly instances of social instability, and which Western analysts use to indicate growing dissatisfaction with the government—but that would be an exaggeration.

Certainly no one in the crowd wanted to overthrow the central government and the entire administrative system. They, like me, simply wanted more accountability from the chengguan. In fact, many people in the crowd I spoke with said they wished the central government would do a better job of educating the chengguan. A middle-aged man who joined the crowd told me, “It is tough. Those chengguan are probably just are doing what they are told to do. None of us like it. They need jobs too. I hope the government can train them better.”

Often, local officials simply ignore central-government regulations meant to protect everyday people, which explains why Chinese can support the central government while still protesting brutishness at the local level. Aside from this contention, there is also much debate in different parts of the government over the best policies for the country. For some reason, Western media often oversimplify the political legislative process in China. They perpetuate the inaccurate notion that all decisions originate from the nine old men on the Politburo Standing Committee, completely insulated from external opinion or input. Western media portray these nine men as only caring about how to enrich themselves and their families, while perpetuating their own power through fear and violence.

The reality is that the Standing Committee of the Politburo does not exist within a vacuum. Members, like leaders in the democratic countries, also have constituents that they need to represent and placate. In many ways, because of the lack of direct elections, they have to listen to the needs to their constituents even more closely than members of elected governments. After all, in the West, voting only displaces people, but transitions in Communist countries are far rockier.

If we analyze one of the hottest topics in policy circles around the world right now, the exchange rate of the renminbi and its race with the U.S. dollar, it is obvious that senior leaders are not making decisions in a bubble, but are in fact listening and getting pressured by different constituencies. How the debate plays out within China will help senior officials make this key monetary decision, in an example of bottom-up-generated policy.

Many economists like Nobel Prize winner and
New York Times
columnist Paul Krugman argue that China artificially manipulates its currency to keep it low compared to the U.S. dollar to ensure that China’s exports remain cheaper. With the renminbi artificially low, Krugman argues, American manufacturers outsource to Chinese factories rather than to those in the United States. Krugman calls China a “bad actor” for its policies, and in a column titled “The Chinese Disconnect,” he says it is “stealing” American jobs by running a “beggar thy neighbor” currency strategy that undermines global growth.

Even though the Chinese government has allowed the renminbi to appreciate over 25 percent in the last five years, Krugman argues that the Chinese government is stealing jobs from hardworking American citizens. However, as the Laura Furniture case in Chapter 2 showed, it is far more likely that American firms would relocate factories from China to Vietnam or Indonesia, or keep manufacturing in China and simply increase end prices to the American consumer. It is unlikely that companies across most industries will shift production back to America.

Hu Jintao has repeatedly stated that the Chinese government will raise the renminbi, but at a slow and steady pace, to ensure stability in world financial markets and allow for long-term business planning. The renminbi has appreciated against the U.S. dollar by more than 25 percent since de-pegging from the dollar in 2005. Disregarding for a moment the economic reasons why the renminbi should or should not appreciate, let’s take a look at the different constituencies within China that influence Hu and other senior officials’ plan of overseeing a gradual appreciation rather than a faster revaluation.

The first constituency is manufacturers and their employees. Domestic factory owners making low-value goods like toys in places like Guangdong Province often operate on paper-thin margins of 2 to 3 percent. Their margins are getting squeezed further by soaring labor and real estate costs, leaving thousands of them at the cusp of bankruptcy. These factories employ tens of thousands of workers, are often connected to local officials through family relationships, and supply local government coffers with tax revenue.

For this group, a strong renminbi would further accelerate factory shutdowns already being precipitated by rising costs. For this reason, the manufacturing constituency has been lobbying hard to delay increases in the value of the renminbi. They want to slow the outward flow of Western brands, such as Laura Furniture, that are relocating manufacturing or sourcing operations to lower-cost markets like Indonesia or Vietnam.

In 2010 I met with Mr. Xu, a clothing accessories factory owner from the southeastern coastal city Wenzhou, for an interview. Mr. Xu grew up dirt poor in Zhejiang Province in the 1970s. He told me getting access to food was a daily challenge for his family. Through years of hard work, he has built up a clothing accessory empire, and is now one of China’s one million U.S.-dollar millionaires. He has a Mercedes and a BMW, and owns luxurious homes in different cities in China—and even several in Italy. We were sitting in one of his homes in Shanghai, a palatial apartment with breathtaking view overlooking the Huangpu River.

“An appreciating renminbi kills my margins. I do not want it,” Mr. Xu told me. “It will mean that I have to shut my factories down.” Nearly every one of the dozens of factory executives I have spoken has echoed this exact sentiment. Mr. Xu’s operations were big enough to make him rich, but they were not big enough for him to be able to relocate to other markets or regions, so he was facing factory closures.

Local governments in factory-laden municipalities have been lobbying the central government alongside factory owners against a fast-appreciating renminbi. Shuttering factories would hurt these regions’ tax revenue, cause massive unemployment, and potentially spur destabilizing labor unrest. There is a more important and much more personal reason local officials are equally anxious: namely, that GDP growth is one of the major criteria upon which they are judged to determine future promotion potential.

On the other hand, other factions and constituencies are lobbying for an appreciation of the renminbi. Energy companies that have to buy oil priced in U.S. dollars on the open market, for instance, would benefit. The government caps end prices of energy and gasoline for consumers in order to ward off civil unrest and inflation. Oil and energy prices have gone up in China over the last several years, but far slower than the rise of oil prices in the international markets, which is eroding energy firms’ margins.

Brownouts occurred in the summer of 2011 in 10 major manufacturing provinces because energy companies cut back on power generation. Former Prime Minister Li Peng’s daughter, Li Xiaolin, who runs China Power International Development, one of China’s largest energy companies, has pointed out that energy companies’ problems are due to rising commodity costs.

There are also groups that want the renminbi to appreciate even faster than energy firms do. Factions within the government that want to lower China’s trade surplus with America and other nations, and to move China away from high-pollution manufacturing toward more sustainable service businesses, are pushing for higher consumption. They urge greater appreciation of the renminbi to allow everyday Chinese to buy more goods.

Groups urging a stronger renminbi are motivated by the fear that China will fall into the “middle income trap,” as many developing countries, like Mexico, have done. The trap is a per capita GDP of about $6,000, at which point it is common for average salaries to stagnate, while the gap between the wealthy and the poor increases. To avoid the income gap and becoming a failed developing economy, Zhou Xiaochuan, the governor of the People’s Bank of China (the country’s central bank), has made it a priority to try and implement better social security and medical benefits, so that everyday Chinese feel more confident about their future well-being and are willing to spend more. Zhou has made it clear that stimulating more consumption will be a key goal of the central bank in the coming years.

Government institutions also support a faster appreciation of the renminbi. Some officials in the Ministry of Health are worried that pollution is causing the state-run medical system to creak under the pressure. They have told me they also want the renminbi to appreciate, which they believe will accelerate the shutdown of high-polluting factories, whose emissions are a major source of public health problems such as higher cancer rates. For these officials, who see their hospital budgets getting hit hard by pollution-related diseases, weaning the country away from low-value manufacturing to a more domestic-consumption and service-oriented market would be critical; the appreciation of the renminbi would help this cause.