The US-China trade war as a conflict of values

The tariffs that the Trump administration has imposed on Chinese goods are seen by the Chinese government as unprovoked and unjustified assaults. So there are few opinions more unwelcome right now than that China brought the trade war on itself. Yet that is more or less what a couple of Chinese liberal intellectual are saying openly: that trade conflict with the West is the inevitable result of China’s promotion of a state-centered development model.

One of these voices is Sheng Hong of the well-known Unirule Institute, who published an interesting article on US-China relations on FT Chinese on October 19. The Unirule website has helpfully provided an English translation, but I have re-translated the portions below myself for greater clarity:

China’s reform and opening up is the guarantee of strategic cooperation between China and the US. Such strategic cooperative relations would never have been possible if China was still stuck in the Cultural Revolution, when it practiced class struggle and a planned economy domestically, and exported revolution abroad. Reform and opening up not only brought people economic freedom, but also changes in the political structure. The emancipation of thought has to some extent loosened controls over the freedom of speech, and the freedom of the market economy has allowed people to throw off the shackles of their work units. As the market played a greater role in more areas it reduced government’s direct control over society. Implementing market regulation relied on a just legal system. Only a China that is in this way progressing toward marketization, rule of law and democratization can be accepted by the US on a strategic level, and create the framework for strategic cooperation with the US.

Without a doubt, reform and opening up eliminated the ideological conflict between China and the US, as well as the whole Western world, and gradually brought convergence in terms of values. … Some of the so-called “socialist core values” promoted by the Chinese Communist Party overlap with values recognized by the US and the western world, for instance freedom, democracy, rule of law, equality and justice; while other values, such as civilization, harmony, integrity and dedication, are not in conflict with the values of the US and the western world.

We must clearly recognize that such convergence of values is the basis for strategic cooperation between the US and China. Only through a convergence of values can China be deemed a factor of peace and stability in international relations, and be seen as a trustworthy nation with which close cooperation is possible, rather than one that proclaims the overthrow of the capitalist world and does not renounce the use of violence. Only such a country that advocates peaceful means to resolve disputes between nations,  and does not resort to the threat or use of force, can provide the world with a stable and just international order.

Therefore, China’s reform and opening-up and the China-US strategic cooperation are two inter-related things. That is to say, there is no strategic cooperation without reform and opening-up, nor is there reform and opening up without China-US strategic cooperation. … China should not, and cannot, seek hegemony over the world by going against the rules of civilization accepted by China and most of the countries in the world. Only on the basis of respecting the consensus rules of human civilization can China overcome the mistakes and deviations of the US, and become a civilizational center with moral legitimacy and great economic strength. Today, China faces the risk of leaving the path of reform and opening up, which would risk the loss of strategic cooperative relations with the US. Such a result would be a complete failure.

ShengHong

Sheng Hong

Somewhat similar sentiments appear in an October 14 speech by Zhang Weiying, a prominent liberal economist at Peking University (liberal in the Chinese sense of favoring free-market policies; Zhang is more of a Hayekian libertarian). The following is my translation of some portions of a summary that was posted on the website of the National School of Development (it was later removed after attracting press coverage).

The rapid development of China’s economy and the improvement of people’s living standards over the past 40 years are facts denied by no one, but there is still controversy over how to understand and interpret these facts. At present, there are two interpretations of China’s growth in the past few decades, the theory of the “Chinese model” and the theory of the “universal model.” The former holds that China’s economic development benefited from a unique Chinese model, with a strong government, many large state-owned enterprises, and wise industrial policy.

The latter holds that China’s remarkable achievements are, just as with the rise of Britain, France, postwar Germany, Japan and the Asian tigers, based on the power of the market and the creative and risk-taking entrepreneurial spirit. China also made use of the technologies accumulated by Western developed countries over the past three hundred years. As I explained in an article published early this year, China has in the past 40 years of reform and opening up experienced the three industrial revolutions that took the Western world 250 years. The latecomer’s advantage means that we have avoided many detours and directly share the technological achievements that others have already obtained through experiments of great cost. …

The above evidence shows that the theory of the “Chinese model” is seriously inconsistent with the facts. China’s high growth over the past 40 years has come from marketization, entrepreneurship and the technology accumulated by the West over three hundred years. The bigger problem is that using the “Chinese model” to explain the achievements of the past 40 years is not beneficial for China’s future development.

Domestically, misleading yourself means a future of self-destruction. Blindly emphasizing the unique Chinese model means going down the road of strengthening state-owned enterprises, expanding government power, and relying on industrial policy. This will lead to a reversal of the reform process, the abandonment of our predecessors’ great cause of reform, and ultimately economic stagnation.

Externally, misleading the world leads to confrontation. From the Western perspective, the “China model” theory makes China into an alarming outlier, and must lead to conflict between China and the Western world. The unfriendly international environment we face today is not unrelated to the mistaken interpretation of China’s achievements over the past 40 years by some economists (both Chinese and foreign). In the eyes of Westerners, the so-called “China model” is “state capitalism,” which is incompatible with fair trade and world peace and must not be allowed to be advance triumphantly without impediment.

291205348hwf

Zhang Weiying

In some ways it is not surprising to hear such statements from Sheng and Zhang, whose views are well established, and also far out of the mainstream of Chinese intellectual opinion. What is interesting is that these views are coming out at this moment–although since the comments of both authors are regularly scrubbed from the Chinese internet, it is hard to know how much impact they have.

Reading the Communist Manifesto with Xi Jinping

Last week, Xi Jinping led the Politburo of the Chinese Communist Party in a “group study session” of the Communist Manifesto of Marx and Engels–170 years after its first publication. This event seems destined to have a special place in histories of socialism and its reinterpretation: in what other study of this document would class struggle and the public ownership of the means of production not even rate a mention? At least, those terms did not appear in the Xinhua dispatch issued after the session (Chinese original here); Xi’s no doubt lengthy speech to the meeting has not yet been published in full.

Such evasions are one reason why there is a tendency for outsiders to see these kind of events as a kind of playacting that has no meaningful content and is disconnected from the realities of the country. But I think they can be quite informative about how those running China think. In my reading, I saw three key terms that dominated Xi’s discussion, which together can help us piece together his vision:

Scientific. This word was used a lot: according to Xi, the Communist Manifesto is “a classic work of scientific insight into the laws of the development of human society.” And the passage of time has not made it at all irrelevant. “The current trends of a multipolar world, economic globalization, use of information technology, cultural diversity, unprecedented interconnection and interdependence among countries–these completely validate the scientific forecasts made by Marx and Engels in the Communist Manifesto.”

Xi does not dwell on what the scientific laws of development are exactly. But I have no doubt that he firmly believes that there are such laws. I think the emphasis on being “scientific” reflects a quite 19th-century view that human societies and economies can be understood and managed fairly easily. This is really an expression of confidence: that whatever challenges and problems the government encounters can in fact be dealt with. It is not quite an endorsement of central planning. But such confidence is certainly the polar opposite of the libertarian or Austrian view that the economy is an incredibly complex system that cannot be easily understood and so should be left largely to its own devices.

Development. The Communist Manifesto “provides powerful ideological weapons for us to understand the world and change the world,” Xi says. Again, there is absolute confidence that the world (or at least China) should be changed, that he knows how to do it, and that the Communist Party has the ability to do it. And the Manifesto also makes clear, he says, that the point of changing the world is to “promote the overall development of people and the overall progress of society.”

The lineage of this idea runs all the way back to Lenin’s 1920 statement that “Communism is Soviet power plus the electrification of the whole country” and Deng Xiaoping’s line in 1980 that “The purpose of socialism is to make the country rich and strong.” Since the late 1970s, China’s version of socialism has been more about the pursuit of national development than the implementation of a specific ideological arrangement of society. These days Xi is de-emphasizing purely economic measures of development in favor of a broader concept, but the message is ultimately the same.

Leadership. While the concept of development these days is much more flexible than the old ideas of a classless society and a heavy industry-led economy, there are some things for which flexibility is not permissible. Chief among them, of course, is the leadership role of the Communist Party. “The Party will lead the people in advancing a great revolution of society and in achieving the great rejuvenation of the nation,” Xi says. The Party “will always be the backbone of the Chinese people and the Chinese nation,” and it is the Communist Manifesto that laid the “theoretical foundation” for this idea.

In this interpretation of the Communist Manifesto we can thus see the fundamentals of what Chinese-style socialism is: the Communist Party pursuing the social and economic development of the Chinese nation, on behalf of the nation. It is clear that this social and economic development should not arise spontaneously from the free interactions of individuals, but should be directed and managed “scientifically” by the Party.

Whether these ideas can actually be found in the Communist Manifesto itself, or are just retrospective projections, is a question for another day.

41lhk0snqgl-_sx335_bo1204203200_

Tianjin’s 1955 campaign to expel rural migrants

The recent forced eviction of thousands of migrant workers from Beijing (see this ChinaFile discussion for an overview) has been a rather depressing confirmation of what I wrote about in my socialist urbanization series of posts earlier this year. China’s urbanization policy is, unfortunately, still captive to a vision of top-down management of population flows with its origins in socialist planning.

While there were campaigns to push migrants out of Beijing earlier this year, the latest one has been notably harsher, and has attracted much more public criticism. I can’t begin to sort through everything, but one interesting tidbit did turn up in the flood of online commentary. An article from 2016, describing a 1955 campaign to expel rural migrants from Tianjin, has been reposted across the Chinese internet–without additional commentary, since the parallels are pretty obvious to everyone.

It’s interesting enough that I have translated several excerpts from it below:

After Tianjin’s port opened in 1860, rural villagers gradually developed a tradition of seeking work there, because of Tianjin’s advantageous geographical location and transport links, along with the difficult conditions in surrounding rural villages. After the foundation of New China [in 1949], the spontaneous movement of peasants into Tianjin did not decline. In just seven days in March 1953, more than 1,450 people “blindly” moved into urban districts. In the year from January 1954 to February 1955, the rural population migrating to Tianjin reached 119,923 people.

From the perspective of the government, peasants “blindly” migrating to Tianjin was not beneficial to the city or the countryside. Therefore, in 1955 Tianjin carried out its first campaign-style program of “mobilizing the blind inflows of people into Tianjin to return to the villages and work.” This program used many kinds of mobilization strategies simultaneously, and in the end, many tens of thousands of rural migrants in Tianjin were successfully returned to their villages. In the following decade, the Tianjin government repeatedly organized campaigns to return peasants to their villages, but generally their methods were based on the 1955 campaign.

The government was fairly worried about all the peasants moving on their own into the city. At the time, the Tianjin Municipal Committee said: “After these people move in, the vast majority do not find work, and become part of the city’s consumer population, adding to the burden on the government.” But this statement is not entirely consistent with the actual situation at the time, and did not help people understand the true reasons why rural people were moving to the city. According to the statistics of one police station in Tianjin for February, April and October of 1954, “after these people came to the city, 21% found steady employment, and 23% found irregular employment.” That is to say, in the area covered by this police station, 44% of the rural migrant population had found work. …

One of the ways peasants would make a living in Tianjin was to use city friends or relatives, or the labor market in Wandezhuang, to find positions as temporary workers or apprentices in factories, mines, enterprises and shops. Another was for them to carry their own simple tools and walk down the streets and alleys asking for work. …In fact at the time, because grain rationing had not yet been implemented in the cities, and urban wages were fairly high, they could feed their families. From the perspective of the peasants, moving to the city is the natural result of a rational calculation.

But this was not the case from the government perspective. The development strategy of prioritizing heavy industry limited the ability of the city’s labor market to absorb new workers. According to statistics, every 100 million yuan of investment in light industry would require 16,000 workers, but the same investment in heavy industry would require only 5,000 workers. … After the start of the heavy industry construction under the First Five-Year Plan, investment in commerce and services gradually declined. One result was that people’s life in the city became less convenient, it became harder to find places to eat or make clothes; another result was that the number of job openings shrank, and Tianjin’s job market could not absorb all the people coming from the countryside.

The large-scale migration of peasants also reduced the farm labor force and threatened agricultural stability, and with it the national plan for economic development. The propaganda of the time said: “if agricultural development cannot keep up with the demands of industrial development, and industry cannot obtain sufficient supplies of grain and raw materials, socialist industrialization cannot be achieved.”

Overall, from the government perspective, the “blind” migration of peasants to the city damaged the order of the nation’s planned economy, worsened the pressure on urban employment, reduced the productivity of the countryside and affected agricultural output. It’s worth pointing out that in 1953 and 1954, Tianjin carried out two operations to discourage rural migration, but because only regular methods were employed, they were not very effective.

Because of the increasingly serious in-migration problem, in 1955 the Tianjin Municipal Committee decided to launch the first focused, citywide operation to mobilize the migrant population to return to the villages, led by the Party committee and the government and assisted by multiple departments. This operation required all work units to “take effective measures to ensure the migrant population in a planned and step-by-step manner returns to their villages to participate in production, and to prevent continued blind inflows of external population to the city in the future.” Designated as a project with “historical significance for the work of socialist transformation,” it was Tianjin’s first campaign-style peasant mobilization since 1949, and policymakers had high expectations for its success.

“Propaganda and education” was very important to the mobilization work. Compared with the Communist Party of the Soviet Union, the Chinese Communist Party is better at techniques of “persuasion and education,” and these were used the most. … But in practice Tianjin also used administrative measures relating to labor, household registration and grain to consolidate and expand the initial results of the mobilization campaign.

From 1949 to 1954, the city government’s administration of hukou was fairly relaxed. During this period, due to the relevant provisions of the “Common Program” [the temporary constitution of 1949] on the right to freedom of movement, Tianjin basically did not restrict the transfer of hukou and migrants could apply for an urban hukou as long as they had migration permits. However with the 1955 campaign to mobilize peasants to return to their, such a relaxed policy was no longer appropriate, and in July the Tianjin Municipal Committee restricted the hukou registration of “people blindly entering Tianjin from the countryside or other places.” However, the ability of the household registration system to control migration would not have been great without its being linked to grain supply and employment.

In August 1955, the State Council and Tianjin Municipality announced the start of the grain rationing system in Tianjin. Each resident of Tianjin would be issued grain vouchers for a fixed amount of grain, depending on their work and age, and grain would be supplied according to the vouchers. Without a Tianjin urban hukou, it was not possible to complete the procedures to obtain grain vouchers, and thus impossible to buy grain. The supply of grain was also limited: in 1955, the first allocation plan called for distributing an average of 26.51 pounds per person, 2.81 pounds less than the original plan. Many people felt that this was not enough to entertain friends or family, or make festive dishes for the holidays. Because the grain quotas could only satisfy, or not even completely satisfy, their own needs,  urban residents found it difficult to assist their rural friends and relatives.

For those unemployed workers that fit the profile of those to be returned to their villages, the Tianjin municipal employment agencies stopped providing job placement services, and stopped or delayed their unemployment relief. In May 1955, the Tianjin Administration of Industry & Commerce also carried out a campaign to ban unlicensed street vendors, and to mobilize rural street vendors to return to their villages. In August 1955, the effort was expanded to licensed street vendors who met the requirements for being returned to their villages. To encourage the vendors to leave, state-owned companies stopped supplying them with goods, and local police stations limited the distribution of grain vouchers. By the second half of 1955, those peasants doing business on the streets of Tianjin could tell which way the wind was blowing. …

By mid-February 1956, when the mobilization campaign concluded, 126,324 peasants in Tianjin had been mobilized to return to their cities, and the flow of population into the city had been greatly reduced. …

Before the founding of New China, the Chinese Communist Party thought of peasants as the predecessors of workers, and that therefore in the future many millions of peasants would enter the cities and work in factories. But after the founding of New China, the government did not welcome the rural population spontaneously flowing into the cities. It thought that the building of the nation must be carried out in a planned and organized manner, and that peasants must not be blindly drawn into the cities.

The author is Wang Linran, a historian at Nankai University in Tianjin. The Chinese citation for the original article is 王凛然,《“进城”与“还乡”:1955年农民“盲目”进津与政府应对》, 《史林》,2016年,第4期,第157-168页.

tianjin-1956

A Tianjin coop in 1956

Zhou Tianyong says 100 million people have missed out on urbanization

Here is an interesting article from Zhou Tianyong, a well-known professor at the Central Party School in Beijing, that adds a fresh angle to the discussion over the effects of China’s hukou system. He argues that there is now a large group of people who have been prevented from urbanizing by hukou restrictions, and who realistically will never be able to urbanize in the future–thereby resulting in a permanent loss of income.

The piece is short and very clear, so without further ado here is my (slightly abridged) translation (Chinese original here):

A person has a natural life cycle, from birth to old age, from entering the workforce to retirement, from being able to adapt to the urban environment to being less able to adapt to the urban work and living environment in middle and old age. Thus in an individual’s life there is a fixed window of time when they can migrate to the city. If they cannot enter the city and become city people in that window, then they have missed out on urbanization. This is a phenomenon that occurs under China’s system, and needs to be carefully examined and analyzed to understand the transformation of China’s dual [urban-rural] structure.

In 2013, some economists put forward the view that urbanization will drive the rapid growth of China’s economy in the future. This is because because the level of urbanization in China was only 52.6% in 2012, while in developed countries urbanization has reached 75% or even 80%. The lag in China’s urbanization compared to developed countries is, in this view, actually a latecomer’s advantage. China’s urbanization rate can in the future increase by 1 percentage point every year, and become a strong driver of national economic growth. This is one of the arguments that some people use to argue that China’s economy can grow at more than 8% for the next 15 to 20 years. …

There is another point of view that China’s “floating population” of rural migrant workers face a lot of obstacles in urbanization. Many rural people are able to migrate to cities when they are young, but in the end they cannot bring their families with them to the city and cannot become city people. This group of people have missed out on urbanization because of the hukou system and control of migration: because cities do not provide education and other public services, or because they do not have any income from rural land while urban housing prices are too high.

How many of these people are there? The technique I use to calculate the number of people who have missed out on urbanization is based on the gap between potential urbanization (estimated based on the urbanization level in South Korea, Taiwan and other countries) and actual urbanization. I also consider that the potential urban population below the age of 50 still has the potential to urbanize. The formula is therefore the potential urban population minus the actual urban population times the share of the total population over the age of 50. The results of this calculation are shown in the chart [Y-axis unit is ten thousand persons]:

 

ZTY-urbanization

You can see that with the growth of the population, the population that has missed out on urbanization has also steadily risen, although the growth rate has slowed in recent years because of some relaxation of migration controls. In 2015 the population that has missed out on urbanization totaled 98.42 million—almost one hundred million people—or 7.16% of the population.

But urbanization does not wait for people. The high fertility rate and high population growth rate of the early period of industrialization have created a huge potential urban population, but many of them cannot enter the cities, or once they enter the cities they cannot become city people. Young people leave the village to work, and old people leave the city to return to the village. Those who cannot become city people at the right time of life end up becoming rural people who have missed out on urbanization.  …

And because of the decline in fertility and population growth at the later stages of industrialization, which is especially sharp in China because of its forced family planning policies, the proportion of people in rural areas who can still urbanize is falling. This is quietly lowering the rate at which the future rural population can urbanize.

Thus, in countries where there are obstacles to migration during the process of industrialization, the level of urbanization that can be achieved at the end of industrialization may be much lower than countries with free migration or that provide assistance for migration. With 7% of China’s population already having missed out on urbanization as of 2015, and this proportion set to gradually rise in coming years, it is impossible to reach 75% urbanization within 10 years.

The existence of a large group of people who have missed out on urbanization creates economic losses in three ways. First, an overly large labor force in agriculture results in relatively low productivity. These people could have higher productivity in the city, but in rural areas they can only do some basic agricultural work, which is a huge loss for the national economy. Second, the delay in urbanization results in a loss of consumer demand. Because rural migrant workers cannot easily urbanize, there is a big gap between their spending power and that of true urban residents. Third, people do not realize their potential to create and distribute wealth, which leads to a huge loss of national income. Much rural land is abandoned because it cannot be used for large-scale operations, houses are rundown and the woods empty because the land cannot be allocated by the market and re-purposed by investors. In fact rural land is becoming a zombie asset that cannot be re-allocated to other uses because of restrictions on private capital, resulting in a huge loss of potential output and value.

My guide to the debate raging over China’s Northeast rust belt

Over the past week or so, an impassioned debate has broken out over what should be done to help China’s struggling rust belt in the Northeast. Justin Yifu Lin, perhaps China’s most famous living economist, sparked the debate when his think tank released a long (400+ pages!) report proposing an industrial policy strategy for Jilin, one of the three Northeastern provinces. The report’s recommendations were seemingly innocuous–develop more light industry, tourism, and agriculture-related businesses–but they nonetheless attracted vociferous online criticism.

Why? The summaries in the English-language press (see the SCMP and Caixin) give the impression that it’s a debate over whether government policies should promote light industry, or something else. If that were the case, this would be a typical academic tempest in a teacup. In fact, a lot more is at stake: the debate over what to do about the Northeast (aka Dongbei, aka Manchuria) involves fundamental differences over how to understand Chinese economic history and the development trajectory of countries and regions really develop. The debate over how to help such struggling regions is also one where conventional Western economic wisdom has little to offer, so the field is wide open. After doing some reading on both sides, here’s my guide to the debate (warning: this is a long post).

Continue reading →

Is the Manchurian Recession over?

China’s provinces are reporting economic data for the first half of 2017, and the long-suffering northeastern provinces, where the recent economic downturn was most severe, are putting up some better numbers. The main exception is Liaoning, but this is because an anti-corruption investigation found that the province had inflated some statistics and forced them to be marked down–however the historical figures haven’t been revised so growth rates don’t make any sense right now. While Liaoning’s numbers look worse than the others, in reality it’s probably doing the same or better.

manchurian-recession

The downturn in the northeast prompted a national-level effort to boost growth in the region, so the pickup is getting a lot of attention. At least one article declaring the “worst is over” for the northeast has appeared in print, and this cautiously optimistic tone is common in official channels. Here is how, Sun Donghai, the director of the Anhui provincial Development Research Center, summarized the situation:

In the technology-intensive regions, represented by Guangdong, Jiangsu, Zhejiang, Shanghai, economic growth is stable, and there is a lot of momentum for both upgrading traditional industry and developing new industries. … Regions heavily dependent on natural resources, such as the three northeastern provinces, Shanxi, and Hebei, are facing great pressure to transition, but developing new growth drivers will require a long time. At the same time, we can see some positive changes, some resource-dependent provinces have reversed the declining trend since 2013, and economic growth has bottomed out and recovered. Jilin’s GDP grew 5.9% [in the first quarter] for a stable start to the year: economic growth has returned to an appropriate range, and has started to move on a normal track.

A more in-depth view of official thinking comes from Fan Hengshan, a deputy secretary-general of the National Development and Reform Commission who has traveled frequently to the northeast. In May he gave a lengthy interview on the northeast to the China Economic Times. He starts out in the conventional way, attributing the improving indicators to the government’s supportive policies for the region, but also noting the recovery of commodity prices (more significant in my view):

The government’s implementation of the new round of the northeast revitalization strategy is now taking effect, objectively speaking it has provided an effective policy environment and systemic support for the stabilization of the northeastern economy. At the same time, the rollout of supply-side structural reform has had a clear impact on the internal dynamism of economic growth. Following the implementation of supply-side structural reform and the stabilization of international commodity prices, industries that are significant for the northeast, like oil, coal, and steel, gradually returned to stability. For resource-dependent and single-industry cities this alleviated the severe mismatch between fiscal revenues and expenditures.

While maintaining the requisite note of optimism, Fan’s discussion of the problems in the northeast’s economy focuses on deep-rooted structural issues that seem quite difficult to solve. Here are some excerpts (my translation):

The problems faced by the northeast are, on the surface, caused by a lack of external demand and weakness in investment. In fact, they are the manifestation of the institutional, systemic and structural problems of an old industrial base.

From the institutional perspective, the northeast region’s level of marketization is still insufficient compared with the developed eastern region. The decisive role of market mechanisms has not been fully developed, and efforts at economic development still have a pronounced administrative tone. The historical burdens of state-owned enterprises are heavy, their vitality is insufficient, and a modern system of enterprise operation and governance has not been completely established. The old problems of incentives and restraints for state-owned enterprises have not been completely eliminated. Development of the private sector is insufficient, and the spirit of entrepreneurship in society is weak. The northeast has a strong foundation in education and science, but these scientific resources cannot be effectively transformed into real activity.

In terms of economic and industrial structure, out of the three growth drivers of investment, exports and consumption, the northeast’s economy is excessively reliant on investment. The investment rate is too high and the efficiency of investment is relatively low, and this kind of growth model is not sustainable. The industrial structure is not adapted to market demand: the leading industries are mainly the investment-facing sectors of energy, raw materials and heavy equipment manufacturing, while new emerging industries are small and undeveloped. Many cities have undiversified industrial structures with only a single pillar industry or two interrelated industries. From the perspective of industrial organization, there are many gigantic enterprises but few small and medium-sized enterprises. A development model based on industrial clusters and the integration of large, medium and small enterprises has not yet formed.

It’s interesting that Fan talks about the northeast in the same way that many foreigners talk about China: the problem is obvious, their economy is too dependent on investment and state-owned enterprises are stifling the vitality of the private sector. It’s all relative I guess.

But the northeast has an additional burden: people are leaving in droves, and companies can’t get them to stay (see my previous post on the emerging demographic crisis in the northeast). Here is more from Fan:

Many enterprises and research institutions in the northeast have told me that in recent years it has gotten more difficult to attract and retain personnel. Some graduates of top universities choose to go elsewhere for jobs, and some local technical and management personnel also leave the northeast to seek better job opportunities.

The northeast still has a “big government, small market” environment, where local governments are still directly allocating resources and micromanaging. This kind of system is a constraint on the development of enterprises and people. Particularly in recent years companies in many traditionally strong industries and sectors have encountered difficulties, so the salary, benefits and career development opportunities they can offer are pretty limited compared to companies in the east. Objectively speaking, their ability to attract mid- to high-level staff has declined.

In addition to salary considerations, people are also increasingly looking at a city’s level of modernization, the convenience of its transport, and social, cultural, ecological and other “soft” environmental factors. It is worth noting that some local governments and businesspeople report that, because the northeast’s winter is cold and long, the low temperatures are increasingly becoming a reason for some people to choose not to stay in the northeast and work. This creates many challenges for high-tech enterprises in the northeast to attract talent, and some companies have no choice but to set up branch offices in the south in order to attract high-level staff.

This all rings true: the northeast  has a brutal climate and a closed economy where it is difficult to get ahead if you don’t have government connections or an SOE job. This is, in my experience, more or less what Chinese people from the northeast say about their home–it is no mystery why they leave.

So I would lean toward viewing the current recovery in the northeast as reflecting the recovery in commodity prices more than anything else–although if China’s government can succeed in keeping prices stable with its many interventions into commodity demand and supply (policies that go by the somewhat deceptive moniker of “supply-side reform”) that unquestionably will help these provinces.

More broadly, I think the current regional problems in the northeast are another reason to see China’s SOE reforms of the late 1990s and early 2000s as incomplete and only partially successful (see a previous post on this topic). The northeast felt the brunt of the layoffs of that era, but once the commodity boom evaporated so did many of the apparent improvements. Here is a nice piece of oral history that gives a worker’s-eye view of the trajectory of a major SOE in Heilongjiang:

It was with honor that a sprightly 19-year-old Wang Dianyu heeded the central government’s call and joined the ranks of China’s heavy industry workers. Almost 60 years later, his eyes still glow with the pride of having worked for one of his country’s largest state-owned factory groups: China First Heavy Industries (CFHI).

Founded soon after the establishment of the People’s Republic of China in 1949, CFHI was a beacon of the country’s industrial ambition, churning out gigantic pieces of machinery both civilian and military from its base in Fularji, a district in Heilongjiang’s second-biggest city, Qiqihar. “We had a lot of catching up to do,” Wang tells Sixth Tone of China’s then-inferiority compared to the might of international rivals. “Heavy industry is the backbone of a country.”

Today, that backbone is buckling. Economic growth in the industrial northeast, once fondly known as “the Republic’s eldest son,” is slowing, and an era of overproduction for the region’s heavy industries has given way to rampant borrowing. For the 2016 fiscal year, CFHI reported losses of 5.73 billion yuan (around $850 million), compared with 2015’s loss of 1.8 billion yuan and 2014’s loss of 25.7 million yuan; it is now scrambling to pay back debt by selling off shares to its parent company, China First Heavy Industries Group Co. Ltd.

CFHI’s troubles were compounded in 2015 when its chairman, Wu Shengfu, died suddenly just weeks after the state’s anti-corruption watchdog launched an investigation into CFHI’s parent company. Some news outlets at the time quoted sources stating that he was found hanging in his office, a detail that was downplayed in later state media reports. The anti-graft investigation discovered a number of infractions, including mismanagement of state funding, violations of recruitment procedure, and “indifference toward Party principles.”

Ren Zhiqiang has an acerbic take on Xi Jinping’s urban planning

There’s been an extraordinary amount of hype about the government’s plan to build a new city southwest of Beijing; some are saying it could be China’s biggest public-works project ever. The plan for the Xiongan New Area was personally overseen by Xi Jinping himself, according to an official account, and it has been lauded as a qian nian da ji, or roughly a “great plan for the next millennium.”

136206714_14921344615981n

Xi Jinping inspects the Xiongan New Area

Xiongan is the latest development in the Beijing-Tianjin-Hebei integration plan, a pet project of Xi’s that aims to develop the regions around the capital. The official line is that the creation of the new city will ease Beijing’s pollution and congestion problems by allowing some less essential facilities and functions to be relocated out of the capital. But the enormous propaganda blitz has not permitted much detailed discussion of the specific benefits and costs of these initiatives.

So this seems like a good moment to air some critical views, which are not being permitted much space domestically. The piece below was published by the outspoken property tycoon Ren Zhiqiang in August 2015, before Ren was censured for his public criticism of Xi Jinping’s policies. The article has been repeatedly deleted from Chinese internet sites, though it can still be found by searching for its title. Since the Xiongan announcement, the piece has been getting forwarded around again, and its argument is still relevant.

Here is my somewhat abridged translation:

Once again a new wave of construction is being prepared, in the name of Beijing-Tianjin-Hebei integration and to support the development of the capital. It has really made everyone excited! But after reading these propaganda documents and summaries, I do not see there is anything that should make people happy.

China has shouted out the slogan of “urban-rural integration” before, but why was there no way to achieve such a goal? The root cause is that there was no way to break down the restrictions on free movement and migration in the hukou system. And this has produced a whole series of related problems.

In the planned economy era, population movements were restricted, and the people’s communes used the so-called “integration of government administration and economic management” to tie farmers to the land. After the reform of the household responsibility system and national identity cards, farmers could leave their land and go to the cities. But the hukou system did not allow them to change their identity as peasants. “Rural migrant workers” took the place of the working class. Social security, healthcare, education, housing, family–all are still linked to the land.

Whenever I see these slogans of “urban-rural integration” and “Beijing-Tianjin-Hebei integration” I think, if we cannot make human rights equal, and completely eliminate all vestiges of these differences [created by the hukou system], then how can we discuss integration? Can Hebei and Tianjin people equally share all the rights of Beijing hukou holders? Can they share Beijing’s benefits of education, health care, social security, employment and so on?

This so-called integration is nothing more than Beijing squeezing out the industries, businesses, and people that it doesn’t want, and arranging them in Hebei and Tianjin. In this way Beijing can still enjoy the goods and services they provide, but does not have to bear the burden they put on Beijing. The end result of this so-called integration is to dump a big burden on the surrounding areas, in order to ensure that Beijing can meet its goal of strictly controlling its population.

Even the purchase of housing in Tongzhou [a suburb of Beijing where some city government offices are being relocated] by people who have a Beijing hukou and pay taxes in Beijing has become a barrier that integration cannot cross. So how can the population of Hebei and Tianjin be integrated?

Urban density is the result of market competition, and also the result of a choice between urban and rural areas. Not to acknowledge the role of competition and choice, and to attempt to use the government’s administrative power to force integration, must result in failure.

Market competition necessarily leads to concentration of technology, resources, human capital and innovative capability; these resources will be matched with the most advantageous areas, where their returns are highest. Currently they are being concentrated in cities, especially large cities. No administrative power can change these flows and this concentration. Economic rules cannot be changed by decree.

Some people say the equalization of public services and public resources can solve this problem. Can public services really be equalized? Yes, they can. But this requires the whole society to have reached a relatively high level of economic development. Currently even developed countries like the U.S., U.K., Germany, and Japan cannot achieve this goal, so how can China in its current circumstances achieve it?

Let me ask a question: to punch someone with the most force, do you open your fingers, or close them into a fist? If we took those great professors who are concentrated in Peking University and Tsinghua University and “equalized” them by sending them to backward regions, would this raise or lower the overall level of education? If all of Beijing’s good doctors were “equalized” out into backward areas, would this improve the level of health and research capabilities?

Does the process of “integration” and “equalization” raise the efficiency of resources? Or is it just the use of [political] authority to redo the allocation of industries and human resources? And will the market agree?

When Tongzhou prevents people who do not have a local hukou from entering, can it develop talents on its own? It is hard to see how blocking talented people from moving in can benefit Tongzhou’s overall development. When Beijing strengthens these kind of restrictions in order to control its population, can it attract talented people? How can you know who can become a great entrepreneur or political leader?

When urban incomes are so far above rural incomes, when incomes in Beijing are so far above those in Hebei and Tianjin, how can people not be allowed to seek those high-income jobs? 38% of China’s rural population is engaged in agricultural work, but this only generates 9.5% of its GDP. This is root cause of the urban-rural divide and income gap. If urbanization cannot be used to lead more farmers to change their economic role, how can this income gap be eliminated?

All countries in the world have faced the same conflicts in the process of urbanization, but there is not one that has used administrative power to limit urbanization. All have dealt with it by using market methods and allowing people to freely choose. And in fact when people in the cities can get along harmoniously, this raises the efficiency of cities. …

After many years of reform in which China has moved from complete public ownership to allowing some private ownership, most people have already become property owners. Even more people are working hard in hopes of becoming property owners. So the allocation of financial and other assets is decided by their owners, not by administrative power. If it limits property owners’ freedom to deploy their assets, then they will have no choice but to move abroad.

The backward areas of Hebei may feel that these industries that Beijing is getting rid of are actually an advance for them. Those industries that Beijing thinks use too many resources and generate too much pollution can perhaps generate higher incomes than agriculture. But is it only possible to reduce pollution in advanced regions, or is it also possible to reduce pollution in backward regions? Is this kind of transfer of industries being more responsible to society and to nature, or is it just passing off responsibility?

Perhaps the final goal is still to integrate Beijing, Tianjin, and Hebei, and to optimize the city of Beijing. But this goal is not one that can be decided by administrative power.

Today China Mobile just canceled roaming charges among the three regions [of Beijing, Tianjin, Hebei]. But how many restrictive policies have not yet been canceled? Can cars without Beijing license plates freely enter Beijing? Why can Beijing create restrictions, but Tianjin and Hebei cannot? Can this lead to integration?

When a society based on small farmers modernizes, individuals become the main actors in both economic production and social life. The prosperity of a region or a city, and even of a nation and a people, depends on the innovative capabilities of individuals, and is decided by the depth and extent of innovation. It is not something that can be decided by administrative power. When any administrative official limits or blocks an individual’s innovative capacities and ability to choose their environment, it must weaken the spirit and development of innovation, and harm the overall economy.

This so-called integration is not a market-based process. A shift to rely once again on administrative power to arrange the pattern of economic development must ultimately be a failure.

In conclusion, when CCTV is cheering for Beijing-Tianjin-Hebei integration, a rational understanding of the story behind it may be necessary. A clear head leads to fewer mistakes.

I don’t really agree with Ren’s market fundamentalism, which is rather explicitly a counsel of despair for everywhere but the most developed urban centers. It is however another example of how economically-liberal thinkers in China are increasingly hostile to the government’s regional development policies, which they see as a huge waste of resources recalling the failures of the planned economy.

But I think Ren is right to call attention to how the grand plans for “integration” call for lots of more-or-less forcible relocations of people and industries, but do nothing to break down the hukou system’s institutionalized discrimination based on geographic origin. On the whole I think China could do with less focus on building new development zones and more focus on liberalizing migration.