[Congressional Record Volume 144, Number 145 (Tuesday, October 13, 1998)]
[Extensions of Remarks]
[Pages E2122-E2124]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                       CHINA: A POTEMKIN ECONOMY

                                 ______
                                 

                       HON. GERALD B. H. SOLOMON

                              of new york

                    in the house of representatives

                       Tuesday, October 13, 1998

  Mr. SOLOMON. Mr. Speaker, in 1787, Prince Grigory Potemkin, Catherine 
the Great's longtime prime minister and occasional lover, decided that 
the recently-annexed Crimea needed a little fixing up in preparation 
for an official visit by the empress. He is said to have erected a 
number of false-front buildings along Catherine's travel route so as to 
create the appearance of a happy and thriving peasant society. Thus was 
born the legend of the ``Potemkin village.''
  Today, autocratic regimes have more resources at their disposal than 
Potemkin ever dreamed of. In fact, it can fairly be said that the 
Chinese communists have managed to build a ``Potemkin economy''--an 
entire national economy that has the surface appearance of being 
dynamic and prosperous when, in truth, the real situation is something 
very different. The present-day equivalent of Potemkin's false-front 
villages are the empty skyscrapers that loom over every large Chinese 
city.
  The September 30 edition of the Washington Post contains a compelling 
article by Michael Kelly that looks behind China's imposing economic 
facade and finds an altogether different story than is usually 
reported. ``The central question of the most consequential of all 
American foreign policy issues is whether the People's Republic of 
China is evolving, under the munificent influence of capitalism, away 
from communist totalitarianism and toward democracy.'' If the answer 
given to that question is yes, then that ``answer, it is now 
authoritatively revealed, is dead wrong--and so is America's China 
policy.''
  Mr. Kelly based his article on a new book China's Pitfall, that was 
published in Hong Kong last year. This book, which has not yet been 
translated into English, is the subject of an extensive review by two 
China scholars in the current edition of The New York Review of Books. 
That review concludes with these words: ``What happened in China in the 
1990's is thus becoming clear. Reform was aborted when Deng Xiaoping 
strangled China's democratic forces in 1989 and when . . . he decided 
in 1992 to buy stability for his regime by pursuing rapid economic 
growth whose price was sharply increased corruption, financial 
deception, and the erosion of the moral basis of society.''
  Corruption. Deception. Erosion. Hardly the foundation on which a 
stable economy, to say nothing of a decent society, can be built. 
Indeed, the author of China's Pitfall, He Qinglian, identifies five 
negative trends that are tearing at the fabric of Chinese life: 
``population size, agricultural stagnation, inequality, corruption, and 
low standards in education.'' Ironically, the author reports, each of 
these problems is as bad or worse today as it was a century ago, when 
the Qing Dynasty was distintegrating and the entire country was 
plunging headlong toward revolution.

  How then to explain China's ``rapid economic growth'' in recent 
years? This is, after all, an economy that expanded at an annual rate 
of 10 to 12% in the years from 1981 through 1996.
  According to He Qingian, economic growth in the 1980's was largely 
based in rural China. As the communist command system in the 
agricultural sector was dismantled and rural communes were abandoned, 
the productivity of farms shot up and many farmers and villagers also 
established light industries and other entrepreneurial ventures. 
Agriculture and rural industry account for about three-fifths of 
China's gross domestic product, and so progress in these areas was 
bound to be reflected in the country's overall performance.
  By the end of the 1980's, however, the rural economy was stumbling: 
``the immediate gains from freeing agriculture could not be continued'' 
and ``extortion, overtaxation, and embezzlement by local officials'' 
were taking their toll. Moreover, the effects of ``decades of 
environmental devastation and neglect'' began to be felt. China has 
lost one-third of its topsoil

[[Page E2123]]

and arable land in the last 40 years. When floods come, as they did 
this year, rural areas bear the brunt because the government 
deliberately blows up small dams and dikes, inundating farmlands, so as 
to spare the cities.
  Small wonder then that an estimated 120 million people--twice the 
population of France--have migrated from rural China into the cities 
since the late-1980's. And small wonder that Deng Xiaoping decided that 
he needed a new strategy, especially in the wake of the 1989 Tiananmen 
Square massacre and unrest in the interior provinces.
  China's economic growth in the 1990's has been essentially an urban 
phenomenon, with many city-dwellers registering visible gains in 
personal income. Urban free enterprise employs only three percent of 
the Chinese people but accounts for about one-tenth of China's gross 
domestic product. Predictably, enterprises that employ cheap labor to 
make consumer products for export have proved to be the most 
profitable.
  But the real story of Deng Xiaoping's post-1989 ``reforms'' has been 
missed by the Western media. He Qinglian puts the truth in stark terms: 
Deng's so-called reforms are really a ``marketization of power''--``a 
process in which power-holders and their hangers-on plundered public 
wealth. The primary target of their plunder was state property that had 
been accumulated from forty years of the people's sweat, and their 
primary means of plunder was political power.''
  China's Pitfall describes in detail how China's economy in the 1990's 
has been fueled by plunder, a process in which wealth hasn't so much 
been created as it has been transferred. The plunder has taken place 
two ways.
  First, party and government officials manipulate the state-controlled 
sector of the Chinese economy, which represents about one-third of 
gross domestic product and includes all of the important industries, 
commodities, and essential services. A two-track pricing system has 
been put in place by which unscrupulous officials buy raw materials and 
industrial products at a government-controlled price and then turn 
around and sell them on the open market for a much higher market-
dictated price.
  The ``huge illicit profits'' that result from this maneuver get 
plowed into speculation in securities and real estate; they also 
provide the grease whereby officials allow foreign investors to evade 
having to deal with market costs when they set up joint ventures and 
other enterprises in China. Many of the more powerful officials in 
China also use these profits to establish so-called ``tertiary 
industries'' in which favored friends and relatives ``take control of 
the most productive section of a state enterprise . . . in order to run 
it as a semi-independent company.'' In other words, for a minimal 
investment they get the benefit of state protection while cashing in at 
market prices.
  The second means of plunder is even more brazen. All banks in China 
are state-controlled, and they serve as veritable cash cows for state-
controlled industries. He Qinglian estimates that $240 billion--nearly 
half of all personal savings that have accumulated in China since the 
1950's--have been transferred, as emergency loans, from banks to state-
controlled industries.
  There is little or not hope of recovering these ``loans.'' China's 
banking sector is verging on bankruptcy by any objective measures, with 
a huge burden of nonperforming loans that is overwhelming a shrinking 
capital base--a base that is shrinking all the more now that the equity 
value of most state enterprises (one-third of the economy, remember) 
has been reduced to zero and corrupt officials have discovered how to 
circumvent the restrictions against sending hard currency overseas.
  The net result of all this is a society in which zai, the Chinese 
equivalent for ``rip off'' has become pervasive, in both attitude and 
practice. According to The New York Review of Books, ``Probably in no 
other society today has economic good faith been compromised to the 
extent it has in China. Contracts are not kept; debts are ignored, 
whether between individuals or between state enterprises; individuals, 
families, and sometimes whole towns have gotten rich on deceitful 
schemes.
  ``He Qinglian sees the overall situation as unprecedented. `The 
championing of money,' she writes, `has never before reached the point 
of holding all moral rules in such contempt.' She finds the collapse of 
ethics--not growth of the economy--to be the most dramatic change in 
China during the Deng Xiaoping era. The challenge facing China is not 
just `survival' . . . but `how to avoid living in an utterly valueless 
condition.' She does not hold out much hope.''
  Nor do I. The danger signs are already appearing. The growth in 
average personal income has fallen sharply since 1996, and for millions 
of Chinese--in both urban and rural areas--personal income has actually 
declined. By the end of 1998, an estimated 22 million employees will 
have been laid off from the state-run sector of the economy, and 
millions more are subject to late payment, partial payment, or even 
nonpayment of their wages.
  The outflow of capital, which during the 1980's amounted to a level 
of about half of what was coming into China as foreign investment, has 
equaled or exceeded net foreign investment since 1992. Meanwhile, an 
estimated inventory of $360 billion worth of consumer goods has piled 
up--unsold and, for increasing numbers of people, unaffordable. China's 
much-congratulated decision not to devalue the yuan is not as 
impressive, upon close examination, as it first appeared to be to 
distant observers. For the Chinese communist regime, currency control 
is an instrument of political control. But even that may have to change 
now that China's export performance is slowing down.

  Organized crime, a substantial problem in the Chinese economy for 
decades, is getting much worse, and He Qinglian's book traces the 
emergence of a de facto ``government-underworld alliance'' that is 
serving to merge the legitimate economy with the underground economy 
controlled by the mafioso ``triads.'' Progress toward the development 
of a civil society, to say nothing of the rule of law, is being 
severely retarded, and the country is increasingly plagued by ``drug 
trafficking, smuggling, sale of human beings, counterfeiting, 
prostitution, and pornography.''
  The true nature of the Chinese economy was brought home to me with 
startling clarity this past August when I had occasion to visit the 
Shanghai Stock Exchange. Far from being some kind of citadel of 
capitalism, it was actually a good example of so-called ``virtual 
reality.'' Red-vested operatives were essentially there to sit around 
at the desks, because all the action is done through electronic 
transactions. When I was there, I saw various ``traders'' sleeping, 
reading newspapers, and wandering around talking to friends. But the 
real scorcher was to learn that the building which houses the stock 
exchange is owned by Wang Jun and Polytechnologies. Wang Jun is a 
notorious, internationally-known arms merchant whose military-backed 
conglomerate, Polytechnologies, supplies weapons of mass destruction to 
terrorist states and was caught red-handed smuggling AK-47 machine guns 
into California in the spring of 1996, barely three months after Wang 
had been feted at a White House tea party. Months later, with the 1996 
election out of the way, a Washington Post reporter asked about Wang's 
White House visit and was given what would come to be an oft-repeated, 
one-size-fits-all response: ``clearly inappropriate.''
  Mr. Speaker, I began these remarks by suggesting that China has 
become a ``Potemkin economy,'' a national economy whose growth and 
stability under its present management will be no more sustainable in 
the long run than Prince Potemkin's false-front villages were a lasting 
solution to economic problems in the Crimea. Potemkin's villages may 
have fooled some people 200 years ago, but there is no excuse for our 
being fooled today about what is really happening in China.
  In my considered judgment, U.S. policy toward China for the past 
twenty years has been one long exercise in wishful thinking. I have 
never ceased to marvel at how many otherwise reasonable people, from 
both parties and all points on the philosophical spectrum, manage to 
suspend their critical faculties whenever China is the focus of debate 
or decision-making. The notion that China is emerging as some kind of 
21st century economic colossus is just plain bunk.
  A more apt analysis might be to draw a comparison with Argentina in 
the early decades of this century or Iran in the 1960's and '70's. One 
hundred years ago, more than a few commentators were predicting the 
``Argentine Century.'' Well, it never happened. And the principal 
architects of U.S. policy toward China, Richard Nixon and Henry 
Kissinger thought Iran was a safe bet. too.
  China has built what appears to be an imposing economic edifice, but 
it stands on a foundation of sand. Sustained economic growth and 
stability in the modern age require a foundation of comprehensive 
institutional modernity, legitimacy, and transparency--and even these 
come with no guarantees. But China has none of it. And as the bills 
come due for China's peculiar brand of crony--and phony--
``capitalism,'' the price will be very steep.
  Mr. Speaker, I salute Michael Kelly for bringing the insightful 
review from The New York Review of Books to wider public attention. Liu 
Binyan and Perry Link, who translated He Qinglian's book, China's 
Pitfall, and whose review in the New York Review of Books provided the 
source, unless otherwise noted, for the facts and quotations in my 
remarks, are also to be thanked. I ask that Michael Kelly's article 
from the September 30 edition of The Washington Post appear at this 
point in the Record.

               [From the Washington Post, Sept. 30, 1998]

                         China's Robber Barons

                           (By Michael Kelly)

       The central question of the most consequential of all 
     American foreign policy issues is whether the People's 
     Republic of

[[Page E2124]]

     China is evolving, under the munificent influence of 
     capitalism, away from communist totalitarianism and toward 
     democracy. Since reversing its China policy in 1993, the 
     Clinton administration has bet the future that the answer to 
     this question is yes--that Beijing is ``reforming,'' and 
     that, therefore, Beijing must be befriended, its virtues made 
     much of and its flaws overlooked.
       That answer, it is now authoritatively revealed, is dead 
     wrong--and so is America's China policy. This news arrives in 
     ``China's Pitfall,'' a book by the Chinese economist He 
     Qinglian that is not yet available in English but is reviewed 
     in the current issue of the New York Review of Books by China 
     scholars Liu Binyan and Perry Link, perhaps the most 
     important article published in recent years on the China 
     issue.
       The reviewers begin by fairly stating the terms of the 
     debate over the meaning of what took place in China during 
     the Deng Ziaoping era of capitalist ``reform'' in the 1980s 
     and 1990s: ``In the U.S., many business leaders, followed by 
     the Clinton administration, aruged that Western commercial 
     engagement with China creates not only more wealth but 
     progress toward democracy as well. Skeptics countered that 
     more wealth, by itself, does not necessarily cure social 
     problems or lead to democracy.''
       Who was right? Binyan and Link write: `` `China's Pitfall,' 
     the first systematic study of the social consequences of 
     China's economic boom, vindicates the steptics so 
     resoundingly as to force us to reconceive what `reform' has 
     meant.'' China's reform, argues He Qinglian, was nothing more 
     than ``the marketization of power,'' and it has resulted not 
     in anyting approaching a democracy ``or even a market economy 
     in the normal sense,'' but instead has created an immensely 
     rich and immensely corrupt kleptocracy.
       What the American business community and the White House 
     chose to see as reform was, He Qinglian writes, actually one 
     of the great robberies of history, ``a process in which 
     power-holders and their hangers-on plundered public wealth. 
     The primary target of their plunder was state property that 
     had been accumulated from 40 years of the people's sweat, and 
     their primary means of plunder was political power.'' The 
     butchers of Beijing were also the looters of Beijing, and it 
     was to save their power to loot that they butchered.
       The plunderers were nothing if not bold, nothing if not 
     creative. He Qinglian chronicles quite an array of techniques 
     by which Beijing's evil old despots--sorry, reformers--
     exercised the levers of the state on behalf of helping 
     themselves to everyone else's money. One breathtakingly 
     simple way was to periodically tap into private savings 
     accounts. Other equally straightforward approaches included 
     ``borrowing'' public funds for speculation in real estate and 
     stocks, and reselling commodities purchased by the state at 
     fixed prices at much higher prices on the private market.
       The pro-Beijing camp points to Deng's 1992 call for 
     everyone in China to go into business and get rich ``even 
     more boldly * * * even faster'' as a milestone in China's 
     evolution. Indeed it was He Quiglian reports: Deng's message 
     was correctly interpreted by the power elite as a signal that 
     the government and the party would look with a benign eye on 
     even the most outrageous acts of the theft. In the words of 
     Binyan and Link, this message ``led virtually every official, 
     government office, and social group or organization in China 
     to `jump into the sea', and try to make money.''
       ``Reform'' simply served as cover for crooked schemes by 
     which these power-holders made money by transferring the 
     wealth of the state to themselves. Consider the 
     denationalization of state industries, and the creation in 
     their places of for-profit companies called ``tertiary 
     industries.'' This was hailed as clear progress toward a 
     free, open-market society. In fact, the state officials who 
     oversaw the denationalization process established their 
     children and friends as the owners of the new industries.
       Perhaps all of this is true, China apologists will argue, 
     but it is also true that China, in the process of making 
     money, is necessarily moving away from Communist Party 
     totalitarianism.
       Yes, but not toward capitalism and not toward democracy. As 
     Binyan and Link put it: ``The party indeed has lost some of 
     its political power, but has lost it not to the citizens but 
     to a new robber-baron class that now allies itself with the 
     party in opposing the rule of law.''
       This is the reality of China: a country where the primary 
     function of the state is to preserve power so that it might 
     preserve plunder. This is what the Clinton administration 
     praises, and supports, and defends against all efforts to 
     admit the truth.

     

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