- The Washington Times - Tuesday, December 3, 2002

The meeting-ending parade of the nine members of China's ruling Politburo Standing Committee, most of whom owe their political ascent to outgoing Chinese Communist Party (CCP) chief Jiang Zemin, seemed to dash the admittedly remote hope for real change in China. Hemmed in by Mr. Jiang's "Shanghai mafia," newly appointed CCP General-Secretary Hu Jintao emerged from the 16th Party Congress without the power to embark upon the massive political and economic reforms that China desperately needs.
To be sure, even before the 16th Party Congress convened to ratify the pre-ordained appointment of Mr. Hu, a protege of the late Deng Xiaoping, there was little in his past to suggest that he would have been up to the task even if Mr. Jiang had not effectively tied his hands by stacking the Standing Committee deck with his own proteges. After all, the colorless Mr. Hu caught the eye of then-paramount Chinese leader Deng in March 1989, when, as party chief of Tibet, Mr. Hu imposed martial law and engineered a brutal crackdown against protesters. It was an event that eerily foreshadowed the Tiananmen Square massacre and the declaration of martial law in Beijing, which occurred three months later.
Without a doubt, China has made extraordinary economic progress since Deng first unleashed reforms in 1978. Then again, after Mao Zedong's disastrous Great Leap Forward of the late 1950s and his apocalyptic Cultural Revolution (1966-1976), there was a seemingly limitless amount of progress to be made. But all of the easy reforms have been undertaken. First, reforms addressed the chronically moribund agricultural sector. Later they focused on small private enterprises and state-directed, export-dependent coastal economic expansion. The latter has been fueled by unprecedented levels of foreign direct investment which will likely exceed $50 billion for the first time this year.
Having already extracted the cream from the easiest reform options, China must now implement far more difficult measures. It has already proved in recent years to be a particularly daunting task, especially for a dictatorial party that insists on maintaining its monopoly over political power. In an extraordinary public admission, Prime Minister Zhu Rongji acknowledged last year that the Chinese economy likely would have "collapsed" in 1998 had not the state sector embarked on a massive stimulus spending campaign in response to the 1997-98 East Asian economic crisis.
Since that tumultuous period, a debate has been raging among China scholars over the credibility of the ever-impressive economic growth figures released by China. University of Pittsburgh Professor Thomas Rawski, the lead skeptic relying completely on Chinese sources, incredulously has asked how China's economy could have grown by the reported 25 percent from 1998 through 2000 while its energy consumption declined by 13 percent.
Moreover, much of China's recent growth has resulted from an overdependence on government spending, a trend that cannot continue indefinitely. The Chinese government insists that its debt-to-gross-domestic-product ratio is a non-threatening 16 percent. Some Western analysts, including Nicholas Lardy of the Brookings Institution, argue that it is closer to 100 percent. Much of the discrepancy relates to non-performing bank loans, which the Chinese claim to be 25 percent of total loans, an admission that is itself startling. Others, including Mr. Lardy, believe the dud loans are closer to 50 percent.
Wen Jiabao, who was elevated to the Standing Committee at the recent party congress and who is expected to replace the retiring Mr. Zhu as prime minister in March, has by all accounts made little headway resolving the burgeoning problem of China's technically insolvent state banking system. Solving the problem would require shutting down tens of thousands of inefficient state-owned enterprises, whose sole purpose in recent years appears to be providing employment for tens of millions of workers whose mounting labor protests have become increasingly strident. Beyond their oversized role in the turbulent rural sectors, state-owned enterprises employ nearly 50 percent of the urban workforce and consume a much higher percentage of loans from state banks loans that nobody ever expects to be repaid.
Clearly, to a much greater extent, the market must be enlisted in order to allocate resources much more efficiently. The dilemma confronting China's new leaders is simple: Expanding economic freedom in order to address the nation's serious economic problems would inevitably lead to demands for more political freedom, a prospect that is inconsistent with the party's maintaining its political dictatorship. In recent years, under Messrs. Jiang and Zhu, the party has attempted to muddle through the evolving crisis, even as the long-term problems worsen. Foreign investment has made this possible. But even that indispensable capital infusion cannot forever paper over the mounting problems.
The World Bank estimates that China will have to create an average of 8 million to 9 million jobs a year just to prevent today's rising unemployment from worsening. That's about 50 percent more jobs per year than China reported creating during the ostensible boom years of the second half of the 1990s. "Muddling through" is no longer a viable option. But with the new leadership lineup orchestrated by Mr. Jiang, it appears to be the path China will follow. It will do so at its peril.

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