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COMMENTARY No. 42

a CANADIAN SECURITY INTELLIGENCE SERVICE publication


CHINA IN TRANSITION

April 1994

Unclassified

Editors Note:

Developments in modern China can be characterized in three ways: enormous, contradictory and rapid. For example, China is going to have to create approximately 200 million jobs in the next ten years to avoid massive unemployment. Annual inflation in many provinces in 1993 exceeded 20%, eroding rural incomes and forcing over 25 million peasant families to leave their farms for work mostly in the southern coastal cities, in turn creating incredible pressure on the country's social and economic systems. Numerous peasant revolts, a rising crime rate, an inequitable tax system and uncertain political succession after Deng Xiaoping all constitute sources of significant potential instability.

Yet China's recent economic advances have been spectacular, due in part to the impressive behaviour of private enterprise initiatives in the villages and townships; and estimates for fiscal 1994-5 indicate a continued growth rate at more than double that of any other industrialized country. An enormous labour pool has led to increased foreign exports, and China's trade balances are improving, particularly with the West.

As the author here points out, we are witnessing at once an industrial revolution of unparalleled proportions, the emergence of a so-called socialist/market economy and the release of forces in the civilian society that the current régime is finding very difficult to control.

Author: An analyst with the Analysis and Production Branch of CSIS


Disclaimer: Publication of an article in the COMMENTARY series does not imply CSIS authentication of the information nor CSIS endorsement of the author's views.


AT THE WATER'S EDGE (Shui Hu Zhuan)

In June 1993, China was on the brink of an economic and social crisis. The structural factors pertaining to population and land management, circumstances associated with political succession and the current economic reforms were all factors that combined to indicate clearly that another crisis was about to shake the régime. The phenomenon of illegal immigration (Ren She) since August 1991 and the recent rash of hijackings are, moreover, symptomatic of the situation in China.

A turbulent year (Duoshi zhi Qiu)

The 16-point austerity program and other measures adopted by the government since June and July 1993 have resolved certain urgent economic and financial problems. The measures adopted have been successful insofar as they seem to have met the demands of the peasants without nipping economic growth in the bud. The government is, moreover, preparing to announce new reforms.

Nonetheless, the sword of Damocles continues to hang over the régime. Under-employment and unemployment remain the régime's two-edged weapon: an almost inexhaustible source of cheap labour to conquer international markets, but also a potential source of instability. There are reportedly still close to 80 million people living below the poverty line, according to China's criteria.

Corruption has, moreover, seriously damaged the Party's credibility, but the absence of a strong and organized opposition, the population's fear of chaos, the support of the army and economic growth have enabled the régime to hold its own. The Party must, however, adapt and broaden its reforms if it wants to avoid a crisis.

THE LEGACY OF DENG XIAOPING: old horses know the way (Laoma Shitu)

China has experienced remarkable economic success since establishing its "open door" policy and undertaking economic reforms at the instigation of Deng Xiaoping. According to the IMF and the World Bank, the Chinese economy ranks third in the world and eleventh in international trade. China's economy is increasingly affected by market forces (price, production, funding, special economic zones), and the poverty rate has been steadily decreasing since 1979.

Decline of traditional rites and music (Libeng Yùehuài)

With the reforms under way, the Chinese people have launched a quiet revolution leading to a modernity that has disrupted traditional Chinese institutions and ethics (Confucian and Marxist). The reforms may have also affected what J. Needham, the great expert on Chinese affairs, called the homeostatic stability of Chinese society. We are, in fact, witnessing the emergence of a truly New China—and such a transformation cannot occur without some difficult periods.

Pull on a seedling to hasten its growth (Yamiao Zhuzhang)

In January 1992, Deng Xiaoping initiated a program of growth in China. As a result, China's economy experienced exceptional growth in 1992 (12%) and 1993 (13%) after three years of economic correction and adjustment, which also coincided with three years of good harvests. This growth was, however, marked by a very sizeable increase in the money supply, credit, investments and industrial output.

This situation enabled Chinese industry to meet internal demand, but also propelled China into its fourth inflationary "crisis" since 1951. Consumer prices rose by close to 20% in China's major cities, and the cost of production facilities increased by 38%. Bank deposits fell, purchases of durable goods increased dramatically and imports overtook exports for the first time since 1989.

Billions of yuan in the form of "unauthorized" loans were poured into speculative projects and construction or were used to cover losses and pay salaries and bonuses. The central government had a difficult time selling its bonds on the market, and peasants were paid with promissory notes. The value of the renminbi fell drastically in relation to the US dollar, and the funds available in the central government's coffers plunged to an alarming level.

The golden monkey brandishes his legendary staff (Jinhou fènqiqian junbàng)

Economic upheaval and dissatisfaction in rural areas forced the government to institute another 16-point austerity program in July 1993; numerous measures were also adopted by organizations that come under the State Council. Among other things, these measures made it possible to moderate the economy slightly, to recover three-quarters of the 100 billion yuan in unauthorized loans and to ensure that the majority of peasants were paid in cash for the summer harvest. The yuan also gained ground on the market, and the government forced workers to buy its bonds.

The government was thus able to resolve (at least temporarily) a number of urgent problems, and to consolidate (at least in theory) its control over the anarchical financial system. The austerity program will, however, also have a negative impact on the economy. Moreover, the government must deal with huge structural challenges that cannot be resolved in the short term. Like Yugong who wanted to move mountains, Deng Xiaoping has entrusted this task to the next generation.

The true face of Mount Lushan (Lushan zhen miànmù)

The Chinese population reached 1.18 billion in 1992 and continues to be an insurmountable challenge for the Chinese government. Despite the success of the government's national policy on family planning (decline in the birth rate, decrease in the number of "unplanned" births and increase in the number of families with one child), the Chinese population is rapidly increasing, due in part to a greater life expectancy and a very low infant mortality rate. In 1992 alone, the Chinese population increased by 13.48 million.

Another important characteristic is the population's distribution over the territory of China: 20% of the population is found in the northwest and 80% in the southeast; 26% live in cities and 64% in rural areas. Recent years have witnessed mass urbanization and migration to coastal cities, where the fluctuating population is estimated at close to 70 million people. Overall, urban population has increased considerably in recent years, reaching a level of more than 370 million in 1992. This increase can be attributed primarily to urbanization rather than to the birth rate. Since 1982, the number of cities has increased from 236 to 456 and the number of municipalities (towns) has gone from 2,664 to 9,322.

The tree prefers calm, but the wind continues to blow (shuyujing er fengbuzhi)

Economic reforms and market forces have affected population control in China in terms of work units and place of residence. The cumulative effects of the population's growth and movements, particularly between cities and rural areas, in turn exert incredible pressure on the country's economic and social systems, especially those relating to employment and public security.

RURAL CHINA

China's rural areas have moulded the country's history and overthrown dynasties. These areas now accommodate close to 900,000,000 people. Deng Xiaoping's success lay in initiating his reforms in the agricultural sector and ensuring that the peasants benefited. Agricultural production increased quickly and became more diverse. The average per capita income of peasants has risen from 160 yuan in 1979 to 784 yuan in 1992. China is, moreover, fond of comparing itself to India and stressing that, with only 7% of the world's arable lands, it is able to feed 22% of the world's population.

Unfortunately, since about 1985, the reforms have been, in part, at the expense of the peasants, who have been burdened with statutory labour for projects often unrelated to agriculture. The price-fixing policies for agricultural (wheat vs rice) and industrial products, including the materials required for agriculture (pesticides, fertilizers and diesel), have also penalized the peasants.

Thus, the rate of growth of the peasants' income, eroded by inflation, fell to below 1% from 1989 to 1991, whereas their income had increased by close to 5% a year from 1985 to 1988 and by about 15% annually from 1978 to 1984. In addition, the total income of peasants as a percentage of the national economy decreased from 42% in 1985 to 36% in 1991. This figure had previously increased from 18% in 1980 to 48% in 1984. It should also be noted that the difference in income between cities and rural areas, and between the various rural regions of China, is steadily increasing.

In some regions, particularly Sechuan, Hubei and Hunan, the peasants received promissory notes in lieu of cash for their harvests. Peasant families also had trouble cashing postal money orders sent by relatives working in the city and were given the excuse that the Post Office had no more money in its cash. The government recently ordered an end to such practices. In some regions, it is less profitable to farm. One study on agricultural production costs in the Suzhou region indicated that wheat was the only lucrative crop and that it was no longer profitable to cultivate corn, long-grain rice, cotton, silkworms, soya beans or rapeseed. In fact, it is increasingly cost-effective for a peasant family, confined to small parcels of land (an average of 8.5 mu per family, [one mu equals 0.0667 hectares]), to invest or work in secondary or service industries rather than cultivate the land.

Despite these difficulties, several years of good harvests have enabled China to accumulate large quantities of grains, in part because they cannot be sold. These reserves would be sufficient to meet the demand for about six months to a year, depending on the region. However, the per capita production of grain has barely increased since 1984.

The amount of cultivated land is steadily decreasing by approximately 12% since 1950. If the ratio of 8.5 mu per family is correct, this means that the equivalent of 25 million peasant families have had to leave the farm to work in industries and in the cities. This situation is partly the result of the creation of special economic zones throughout China, the number of which varies from 1,700 to 9,000, depending on the office or ministry concerned. The State Council recently ordered that 750 of these zones be closed, and more than 250 others may soon suffer the same fate.

The village of the great swamp (Dazexiang)

Anger has spread throughout the countryside and, since last year, there have been close to 200 demonstrations and riots in at least 11 provinces of China. The suicide rate among peasants and the uprisings in Renshou in January, and again in May and June of 1993, have sent a clear message to Beijing. The situation has become so critical that the central government has had to react by repealing 37 taxes and 43 types of "contributions" in the form of money, equipment and statute labour imposed on the peasants. It has also forced the regions to pay the peasants in cash.

The government has maintained 29 types of taxes to be paid and has promised to amend 17 others. Although this is a clear improvement, the government appears to have appreciable difficulty establishing these reforms. Regional requirements and the ingenuity of local officials will probably lead to the imposition of new taxes and/or an increase in current ones to make up for the lost revenue.

The biggest problem continues to be under-employment of the workforce in rural areas. According to China's Ministry of Agriculture, China currently has a surplus of about 120 million workers, and this number will increase by another 100 million over the next 10 years. The government's policy is simple: "Leave the farm, but remain in the country." In practice, this means that about 100 million jobs must be created in agriculture and close to 110 million in secondary and service industries in the villages over the next 10 years.

In economic theory, this problem might be viewed as a relative advantage. In fact, since 1978, the enterprises created in the villages and townships have already absorbed close to 100 million peasants. These businesses, a number of which have undergone impressive growth, are one of the factors that explain China's economic success and stability. By expanding its domestic market and developing its exports, China could perhaps absorb another 100 million peasants into its economy over the next 10 years. It is, however, difficult to foresee that the economy will allow the creation of 210 million jobs.

The job market

Reforms have had a very large impact on the urban job market, which is subject to market pressures and the political desire to make the deficit-ridden state sector profitable. Non-agricultural urban employment reached 146.79 million in late June 1993, down 1.13 million from the start of the year, according to China's Statistics Bureau. The government-owned enterprises that employ over 108 million people have reduced their personnel by 762,000. In addition, the number of permanent workers fell to 74.3 million, while the number of contract workers increased by 719,000 for a total of 21.3 million. Close to 12.5 million people have so-called temporary jobs.

Collective enterprises have also reduced their personnel by at least 654,000 during 1993. Private enterprises and those funded by foreign investments have, however, hired close to 286,000 people. The number of small family businesses has also increased in recent years and there is now estimated to be more than 15 million such businesses, employing close to 25 million people.

The income of city workers is generally more than twice that of peasants. In the first six months of 1993, their income (salary, bonuses, commissions, benefits and subsidies) increased by 21.7%, more quickly than the economy. This was supplemented by a 23.3% increase in income from a second job, interest on savings and stock profits. Nevertheless, 31% of state-owned enterprises are running deficits and are surviving only through government subsidies. In August 1993, the government announced a salary freeze, and if it is unable to control inflation, there could be an increase in strikes.

Unemployment

Unemployment and under-employment will continue to worsen over the next few years. Official unemployment in China is estimated at 2.3% (3.6 million people), although this figure (see below) does not include recipients of various unemployment insurance benefits. A study by the Ministry of Labour and the All-China Federation of Trade Unions indicated that the number of unemployed has increased by 10% over last year, and will continue to climb this fall as millions of young people join the labour force.

The unemployment insurance system is still in its early stages. In 1992, 340,000 state workers who had lost their jobs benefited from this program. Their numbers doubled in 1993, reaching almost 700,000 in the first six months of the year. Some provinces, in particular, Anhui, Hainan, Shandong, Hubein, Zhejiang and Fujian, and the cities of Shanghai and Tianjin, also have their own programs for workers outside the state sector. This explains why the official unemployment rate is so low.

THE STATE AND ITS ROLE IN THE ECONOMY

The state budget

According to Xing Guojun of the Institute of Industrial Economics at China's Academy of Social Sciences, reforms have had a significant impact on the state budget and have reduced the state's role in and control over the economy as a whole. Between 1979 and 1991, for example, the government's revenue as a percentage of the national income fell from 32.9% to 22.4%; the government's expenditures as a percentage of the national income decreased from 38% to 23.6%. The government has also altered its role in the economy. Purchases and acquisitions as a percentage of total state expenditures went from 93% to 70%, whereas transfer payments increased by 7% to 30%.

The 1979 Basic Law, the 1982 Constitution and the reforms have also favoured a transfer of powers to local governments, both in terms of institutions and areas of intervention. According to Yuan Dong of the Ministry of Finance's Science Research Institute, this has altered the distribution of financial resources between the central government and the provinces. The central government's share of total revenue has been steadily decreasing, falling from 66% in 1980 to 45% in 1989.

The very rapid growth in some provinces has further accentuated this gap. The central government's share of the gross domestic product apparently fell from 30% in 1978 to about 15% in 1991. Two Yale graduates, Wang Shaoguang and Hu Angang, see this as a decline in the power of the central government and foresee disaster after Deng Xiaoping's death, if the government fails to rectify the situation.

The government has also initiated reforms that give greater autonomy to the directors of state-owned enterprises and favour the creation of at least 55 large industrial and financial groups. The powers or the level of autonomy accorded these large enterprises will have a significant impact not only on the profitability of the enterprises, but also on the role of the Party and the state in managing the economy. The success of these reforms could also better position China to compete on international markets in the future.

Price reform

In 1978, the central government began a series of price reforms that have gradually transformed the Chinese economy into one that increasingly operates according to the laws of the market. The government has made selective adjustments, delegated authority to local governments and applied fixed and "incentive" pricing policies, depending on the product. Overall, between 60% and 80% of product prices, depending on the sector, are now set by market forces—an extraordinary turnaround for a so-called socialist economy.

Inflation recently forced the government to tighten its control over price fixing. Inflation had attained alarming levels in the cities, reaching 21% in June and 23% in July in China's 35 main cities (35% in Guangzhou). Prices for raw materials and other production facilities increased even more quickly. The success of the government's inflation control policy is of prime importance to the stability of China.

The deficit: a chronic and spreading malady

With the exception of 1985, the central government has accumulated deficits every year since at least 1979. In 1992, the state registered a deficit of 23.66 billion yuan, 2.88 billion more than anticipated. The central government's deficit totalled more than 20 billion of this amount, and is added to the accumulated deficit of 108 billion yuan. A deficit of 20.5 billion yuan was recorded in 1993. This amount constitutes only the unfinanced portion of the deficit. The total deficit in 1992 was actually 90.3 billion yuan, including 45.5 billion funded nationally and 21.2 billion financed outside China.

The debt: an evolving cancer

China began to borrow on the domestic market again in 1979 and on foreign markets in 1981. China's foreign debt totalled $69.32 billion (US) at the close of 1992, an increase of 14.5% over the previous year. According to the State Administration Exchange Control, medium and long-term debt amounted to $58.475 billion, whereas short-term debt totalled only $10.845 billion, 15.64% of the total.

Foreign debt is no longer a serious problem, despite its considerable increase in recent years, rising from $15.8 billion in 1985 to $69.32 billion in 1992. Foreign debt service is only about 7% and the exchange reserves total more than $18 billion. In addition, China has diversified its foreign loans in foreign currencies, and has kept the level of its short-term debt below internationally acceptable limits. China has also benefited from prime-rate loans.

The debt's rate of increase has, however, exceeded the rate of economic growth since 1985. In addition, prime-rate loans are becoming increasingly rare. Debt repayment also reached alarming levels in 1989 and 1990, totalling close to $17 billion both years. Finally, the foreign exchange reserves are declining slightly.

Domestic debt is also increasing very rapidly, reaching 108 billion yuan in 1992. Between 1981 and 1992, the Chinese government apparently issued bonds worth a total of 160 billion yuan. In 1993, the government issued bonds worth 30 billion yuan and had to force people to buy them.

Taxes

Reforms have led the government to establish a new taxation system for companies and individuals. This system has apparently enabled the state to double its revenue from industrial and commercial taxes since 1986, for a total of 260 billion yuan in 1992. Joint ventures and enterprises funded by foreign investments paid more than 10 billion yuan to the state.

The current system is also partly responsible for the success or overheating of the economy since 1992, since it gives state-owned enterprises tax privileges, particularly on loans and investments. Billions of yuan have thus been deducted before taxes, thereby depriving the government of substantial revenue.

The tax system is neither unified nor equitable, and the management and collection system is deficient. Fiscal fraud is common. For example, in 1992, 151 companies provided 7,200 false sales receipts for amounts totalling 5 billion yuan and 1,377 false tax receipts totalling 749 million yuan—and this is just the tip of the iceberg.

The Tax Administration Bureau estimates that tax evasion cost the state more than 8 billion yuan in 1992. State-owned enterprises have been ordered to repay 5.47 billion yuan to the government, and almost 54,000 other individual, private and collective enterprises have been fined. Tax collection is one of the most dangerous occupations in China. Between 1987 and 1991, more than 12,600 collectors were reportedly beaten and 22 died while exercising their duties.

A unified taxation system for businesses has been tested in several places, particularly Shenzhen, Hainan, Xiamen, Chongqing and Shanghai, reforms that will probably serve as a model for a future national taxation system. Establishing such a system is an enormous challenge, but its implementation could bring order to the current system, make companies more competitive and, perhaps, help stabilize public finances. An unequal distribution of taxes between the central government and the regions could, however, cause tremendous tension.

AN OUTWARD-LOOKING ECONOMY

International trade

The Chinese economy is becoming increasingly international in nature and it may, therefore, become more vulnerable to outside pressures in the future. International trade is not, however, the deciding factor in the Chinese economy. It represents between 7% and 16% of the GNP, depending on the method used to calculate the actual strength of the economy. China does have a very great potential to increase its share of the world market. Government attempts to limit imports, particularly of cars and steel, have not prevented the 1993 trade deficit from rising to $7.8 billion.

Hong Kong is playing an extensive role in the internationalization of the Chinese economy, serving as a warehouse and transit point for a large percentage of China's exports. These exports to Hong Kong, which are then re-exported to other countries, allow China to deny there is a trade imbalance with its trading partners. This situation highlights the problem of determining a product's origin for the purposes of international trade.

The trade deficits of China's main clients—including the United States and Canada since 1989—could prompt them to demand that China further open its market to foreign products or, failing that, impose quotas on Chinese products—a strategy adopted with Japan and Taiwan with well known results.

Investments

Foreign investments in China increased drastically in 1992 and 1993. The number of companies financed with foreign capital apparently rose to about 130,000. A considerable discrepancy has, however, been noted between investment plans and actual investments, and sizeable amounts of capital have been taken out of China. There are, in addition, increasing numbers of Chinese companies with stocks and bonds trading on the international market. In 1993, contracted foreign investment reached $122.7 billion, while utilized foreign investment reached nearly $37 billion. These represent enormous increases of 76.7% and 91.5%, respectively, over 1992.

Since 1 March 1993, the Chinese government has permitted its citizens to take up to 6,000 yuan with them when they leave the country. The Chinese money can be exchanged in Hong Kong and in certain places in Russia and Vietnam. This is, in a way, the beginning of the Chinese yuan's internationalization. During the next few years, the government plans to make the yuan convertible according to international standards.

PUBLIC SECURITY IN CHINA: signs of instability

Despite of the success of the reforms, public security has deteriorated in several provinces, including Sechuan, Hunan, Jiangxi, Shanxi and Anhui, which were listed as somewhat unstable in a top secret State Council report made public in Hong Kong in January 1992. A recent report of the Ministry of Public Security indicated that, in 1992 alone, there were 540 illegal demonstrations, 480 strikes and 75 incidents in which government and Party offices were attacked. Another secret report released in Hong Kong indicated that, between 1986 and 1992, the Ministry of Public Security dismantled 1,370 illegal organizations, including 62 considered to be "hostile forces opposed to the socialist régime".

Corruption has also increased among government and Party members and is literally eroding the régime's credibility. Recently, huge scandals involving senior Party and government officials forced the Party to launch another national campaign to fight corruption. Between January and July 1993, there were 95 cases of corruption and misappropriation of funds, each involving amounts of over 1 million yuan. Between 1988 and 1992, the courts ruled on more than 101,000 cases and sentenced nearly 78,000 people, including more than 25,000 who were found guilty of embezzling sums in excess of 10,000 yuan and 31 who were guilty of offenses involving amounts of over one million yuan.

Drug trafficking has resurfaced in China. In 1992, authorities seized 4,489 kg of heroin and 2,660 kg of opium. More than 28,000 people were arrested for drug trafficking in 1992 (18,000 in 1991). In an internal police document published in Hong Kong in May 1992, the number of drug addicts was estimated at over 300,000—four times higher than in 1989. With the drugs has come an increase in violent crimes: murders, extortion and armed robbery. In addition, according to official reports, the number of people carrying the HIV virus has gone from one in 1988, the year in which the first case was diagnosed, to almost 1,000 in early 1993; 11 of those infected have developed AIDS.

These signs of instability are in keeping with the general trend observed over the past five years. According to the President of the Supreme Court, Ren Jianxin, the number of criminal cases (2,016,357) has increased by an average of nearly 7.9% a year since 1988. More than 750,000 of these cases have been considered serious and over 1,100,000 criminals have been sentenced.

The official crime rate in China is one of the lowest in the world; however, the trends seen in recent years and the fact that communities no longer hesitate to use violence to deal with autocratic local despots are indicative of the general unrest in China. An official document published in August 1992 estimated the crime rate at 2 per 1000. About a year later, a representative of the Ministry of Public Security put the rate at between 4 or 5 per 1000.

The army

The ultimate guarantor of stability is the People's Liberation Army (PLA). During 1994 the Chinese government boosted the defence budget by 20%, the highest percentage increase since 1979. China's military outlay now officially accounts for 9.59% of total government expenditures, but the actual figure may be much higher depending on whether revenues from PLA enterprises are included. The changes occurring within the PLA in recent years, however, appear primarily concerned with its external rather than internal role.

In an effort eventually to develop a credible blue water fleet, the navy has commissioned a new class of destroyer known as the Luhu, a new Jiangwei class of frigates and new support ships. It is also reportedly building a naval base in Myanmar (Burma). China's power projection capability has also been advanced by upgrades to its air force. The PLA has purchased a squadron of 25 long-range SU27 fighters from the Former Soviet Union (FSU), air-to-air refuelling technology from Iran, and has built an airstrip in the Paracels, all of which serve to increase its effective range. China is positioning itself strategically to become a regional superpower vs a regional power; during 1992, Beijing entered into a strategic alliance with Iran and Pakistan, forming a so-called iron triangle. A more outward looking PLA could have significant consequences in the region should a more aggressive form of Chinese nationalism emerge in the post-Deng era.

Put the past behind and pave the way for the future (Jìwang Kailai)

As was so accurately pointed out by Harvey Stockwin in the South China Morning Post, China's political system is suffering from the "Emperor's syndrome". Deng Xiaoping's successor will have to wait, even though Deng no longer occupies a position in the Party hierarchy. But there are already rumblings within the Party.

In China, succession is essentially a political phenomenon within the Party. It is based on loyalty to individuals whose ideas and prestige make it possible to ensure China's development and the Party's survival. This system poses a problem, not only because of the factions that have traditionally divided the Party, but above all, because the new generation of leaders—although better educated in technical and economic areas—do not yet possess the stature of Mao Zedong or Deng Xiaoping in order to impose their policies on the bureaucracy and the army.

The problems involved in reaching a consensus on the economic rate of growth, prior to Deng Xiaoping's pilgrimage to southern China in January 1992, and on the economy's state of health before the austerity program was implemented in July 1993, are indicative of the dissension within the Party and the government. The success of the economic reforms and the austerity program could give the régime the necessary prestige, but first the basic inconsistencies inherent in these reforms will have to be eliminated. It is clear that the reforms will have to continue, since the régime cannot afford to procrastinate. The government will quickly have to develop the macroeconomic tools it needs to better manage the economy and will be forced to take action to resolve the structural problems that China is now facing.

IMPLICATIONS FOR CANADA

China is changing but the goals and desired conclusion of this transition have not been clearly articulated by the Chinese government and remain unclear. It is apparent, however, that the course China undertakes will have implications for Canada, with respect to our bilateral relations and also on an individual level amongst the 700,000 Canadians of Chinese ancestry, many of whom have ties to the homeland.

A structural trade deficit?

Trade between Canada and China has increased considerably since diplomatic relations were established in 1970. It has, in fact, increased by a factor of 16, although it still represents only a fraction of Canada's total international trade. Until 1988, the trade balance was always favourable to Canada, but Canada's share on the Chinese market has decreased in recent years in the face of international competition. In 1989, Canada registered its first trade deficit with China.

A new wave of immigration?

Immigration from China will continue to increase over the coming years because of the uncertainties in that country. The phenomenon of boat people and illegal workers in the United States, Hong Kong, Taiwan and elsewhere is a reflection of the serious difficulties facing in China. A serious economic crisis or another purging of the ranks of the "nomenklatura" could cause a new wave of immigration, and Canada would be called upon to admit a large number of these immigrants.

Hong Kong's retrocession to China in 1997 has already caused a sizeable wave of immigration. Canada accepted more than 130,000 immigrants from Hong Kong between 1988 and 1992, and this number will continue to climb if China cannot ensure the territory's peace, stability and security, as well as the level of autonomy and freedom promised in the Sino-British accord. There are also close to 97,000 foreign citizens living in Hong Kong, including 19,000 Canadians.

Increased crime?

Crimes in Canada of so-called "Asian" origin have increased in recent years, along with the increase in immigration. Police forces are, moreover, concerned by this phenomenon, as indicated in the recent Report of the Committee on Organized Crime of the Association of Chiefs of Police. This phenomenon is not new, nor is it racial in nature. It is a "normal" phenomenon that results, in part, from the expansion of criminal organizations to markets in countries to which their normal clientele have immigrated. The individuals involved are a very small minority, as has been the case with other ethnic groups in the past.

The course China charts to lead it into the next century will have a very great impact on Asia generally and on Canada. Given the structural problems China must tackle, a smooth transition is highly improbable. Canada's growing trade and the various personal and cultural linkages to China maintained by the significant ethnic Chinese population in Canada ensure that the actions China undertakes as it better defines its path will affect a significant number of Canadians. One must look beyond China's impressive growth to truly assess whether the Party will successfully manage the inherent contradictions of the socialist market economy while containing dissent and preventing an inexorable erosion of its powers to the provinces.

OUTLOOK

The political (successions and changeovers of political power) and economic (plans, restructuring, reforms) cycles have profoundly altered China since 1949. This country has gone from a totalitarian Maoist régime to an authoritarian and still Leninist government that is developing a so-called socialist market economy. We are currently witnessing an industrial revolution and the emergence of a dual merchant class, with one segment that is technocratic and born of the Party's mandarinate, and another that is private. The pursuit of freedom is slowly extending to the economic arena and releasing forces in civilian society that the régime is finding very difficult to control.

The state is gradually modifying its role in the economy, but continues to use administrative and authoritarian measures to try to correct excesses. It is also passing more and more laws, the application of which is posing immeasurable problems. Finally, the Party is still in command, but corruption has damaged its credibility. Many groups with divergent interests are emerging and developing with or without Beijing's accord.

The implosion of China is not inevitable; China is not the former USSR. The Party remains united despite internal dissension, and China's economic growth is real. There is no Chinese Yeltsin, nor any credible and united opposition. The government is firmly in control of the army and the security forces, and the ethnic conflicts in Tibet and Xinjiang are isolated and do not themselves represent a threat to the régime.

But the changes underway and the challenges to be met are so great that it is reasonable to believe that China—like Europe in the 19th and 20th centuries—will undergo further large-scale, socio-political and economic crises before the end of the century. The media and experts on China are already contemplating the possible scenarios. Continuation, overthrow, transformation or collapse of the régime all figure in these predictions.

The Party

When one speaks of China, the reference is often used interchangeably with the Party. It is becoming clear that the economic changes set in motion by the Party are making the utility of defining China in terms of the Party less meaningful. What is necessary for the survival of the Party is not necessarily good for the development of the society. Regionalism will play a far greater role in a future China and the existing fault lines, which generally follow provincial borders, will be exacerbated by centre / region conflicts.

The Party may attempt to demonstrate its relevance by aggressively introducing macroeconomic controls to cool down the unprecedented economic growth of the coastal economies or develop tax régimes to obviate regional income disparities. Through such a policy the Party could assert its role in the economic arena; however, any interference by the centre beyond what is strictly required would not be accepted by the wealthier provinces who now hold the economic levers in China. The current austerity program seems to indicate that we may be seeing a "strategic convergence" between what might be called neo-authoritarianism and neo-conservatism. Be that as it may, and quite aside from personalities and factions, Chinese-style modernism and regionalism will continue to play a dominant role after Deng Xiaoping's death.

Should the Party find itself unable to address the key economic issues and structural deficiencies, it may resort to nationalism to prevent any further erosion of its power. China maintains territorial disputes with countries on virtually all its borders. Escalating a border dispute into armed conflict is one way to distract the population from more fundamental concerns and to counter centrifugal forces. Encouraging nationalism in a country as diverse as China, is dangerous and accordingly, would be the final paroxysm of a Party desperately seeking to revitalize its role and legitimacy. In light of the PLA's efforts to develop its power projection capability, the spectre of an expansionist China is, however, conceivable.

The Party must overcome a number of challenges, some historical and some resulting from its pragmatic desire to develop a socialist market economy. In formulating a response to these difficulties the Party will be guided by the imperative of maintaining, as far as possible, its power. The Party has proven itself flexible but will not willingly allow itself to be broken even at the expense of economic development or its relations abroad. Within this context China's current crackdown on dissidents just prior to the debate in the United States over whether to extend China's Most Favoured Nation (MFN) status clearly indicates that China is prepared to take positions not anticipated or expected from a strictly economic perspective.


The views expressed herein are those of the author, who may be contacted by writing to :

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ISSN 1192-277X
Catalogue JS73-1/42


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