stratfor.com: "China: Riding the Rural Tiger"

Stratfor: Geopolitical Intelligence Report - March 7, 2006


China: Riding the Rural Tiger

By Rodger Baker

Chinese President Hu Jintao and Premier Wen Jiabao have been touting
the "New Socialist Countryside" initiative. The initiative is being
painted as a priority for reducing China's widening rural/urban gap in
the near term, and for creating a more sustainable and robust economic
future in the long term. The problems of rural economic reform, the
social gap and rural unrest rank high on the agenda of China's central
leadership and in the current session of the National People's
Congress (NPC). Potential solutions to these problems form the heart
of China's 11th five-year economic plan (2006-2010).

Over the past quarter century, China has made remarkable economic
progress. By all accounts, its cities are booming: The bicycle-clogged
alleys of the past are now traffic-clogged avenues, and construction
cranes rise within cities as part of a seemingly endless rejuvenation
and modernization campaign. Statistically speaking, China has never
been stronger; gross domestic product (GDP) has risen from $200
billion in 1978 to $2.7 trillion in 2005. Foreign trade last year
reached $1.4 trillion, with a trade surplus of nearly $102 billion.
Exports accounted for 18 percent of the 9.9 percent GDP growth China
reports for 2005. In the same year, the country utilized some $60.3
billion in foreign direct investment and sent $6.92 billion overseas
in non-financial-sector investments. Foreign currency reserves at the
end of 2005 registered $818.9 billion, rivaling Japan's.

But the growth has been anything but even. Urban growth continues to
outpace rural growth, despite income increases across the board. In
2005, per capita disposable income reached $1,310 in urban areas,
compared to just $405 in rural net income. Income disparity in 1984
was about a 2 to 1 ratio; now it is 3 to 1. Overall, the poorest 10
percent of China's citizens hold only 1 percent of the nation's
wealth, and the wealthiest 10 percent claim 50 percent of the money.
Even in urban areas, there are massive disparities: The poorest 20
percent of urban-dwellers control just 2.75 percent of private income;
the top 20 percent control 60 percent of the total.

The gaps manifest in other ways as well. China's registered urban
unemployment stands at 4.2 percent, but rural unemployment -- which
isn't measured officially -- is anecdotally much higher, and even
Beijing admits that some 200 million rural workers have migrated to
cities recently in search of employment. That represents a substantial
portion of the total rural population, which numbers 800 million to
900 million. In the cities, these migrants are treated as second-class
citizens at best. In the countryside, they fare little better:
Measures of education and health care are substantially lower.
Moreover, there has been little legal recourse for farmers, who
technically don't even own the land they work, when local officials
confiscate the land for new industrial and housing projects.

The central government is well aware of these problems and, perhaps
ironically, began issuing public cautions about social and economic
tensions years before the international business community bothered to
notice. Unrestrained economic growth no longer is viewed as a viable
or sustainable option, and Beijing has begun to reassert more
centralized control over economic development, with a particular
emphasis on reducing the rural-urban gap.

But in seeking to address this problem, Beijing has exposed a deeper
issue: endemic corruption and self-interest at the local and
provincial levels of government. It is where economic disparity and
government corruption intersect that social clashes occur most often.

Geography of Corruption

More than 25 years after its launch by Deng Xiaoping, China's economic
reform and opening program has reached a critical juncture. Economic
reforms have outpaced social and political reforms, and historical
strains between the coast and inland regions, between urban and rural,
and between the educated and less-educated are threatening the fabric
of social stability and the central government's ability to rule. It
is easy to see the frayed edges: Local protests turn violent where
urban development projects eat away at the rural land. As the social
instability moves closer to the coastal cities, there is a risk that
China's competitiveness as an investment destination will be harmed,
thereby triggering a spiral of economic and social degradation. Social
instability also lays bare the growing rift between the central
government and the local and regional leaders.

From a historical perspective, China's apparently stunning economic
success stems from the pursuit and implementation of the
quintessential Asian economic plan, which can be summed up as "growth
for the  sake of growth ." Japan, South Korea, most of the Southeast
Asian "tigers" and China all facilitated their economic "miracles" by
focusing on the flow-through of capital, without regard for profits.
As long as money was flowing in, there could be jobs. As long as there
were jobs, there was a stabilizing social force. There was also an
overall rise in personal wealth, though rarely was it evenly spread.

The coastal provinces and cities became the focal points for
international investments in manufacturing, as investors exploited
preferential government policies and cheap labor. The rural areas --
traditionally the backbone of China's economy -- and the petroleum and
heavy industry of the northeast (which had been core to early
Communist Chinese economics) faded in relevance. Though Beijing
occasionally promoted more inland development and investment
opportunities, geography and a lack of infrastructure made these
unappealing to investors. The concentration of wealth in the coastal
regions was a source of minor social tensions, but restrictions on
internal migration kept a buffer between rural and urban populations,
and social frictions remained comparatively low. These restrictions,
however, have been only selectively enforced as of late, and many are
being lifted.

The booming coastal economies created clear opportunities for
corruption. As provincial and local Party cadre and political leaders
became the gatekeepers for foreign investments, they also became
mini-emperors of their own economic fiefdoms. Collusion and nepotism
-- always a part of Chinese political society -- became even more
entrenched as the money flowed in. With the central government fixated
on growth, the best-performing local leaders were rewarded. The more
foreign capital they were able to attract, the greater their personal
influence and takings. These officials were not measured on efficiency
or profitability, but on total flow-through of capital, rates of
growth, employment and social stability.

This partly explains why attempts by the previous government to
address the unequal development in China failed. Each time former
President Jiang Zemin or former Premier Zhu Rongji tried to adjust
policies and financial flows to the interior, there were strong
objections from the wealthier coastal provinces. When they launched
anti-corruption campaigns, the graft their investigators uncovered was
deep and wide, and in some cases even threatened to reach up to the
top echelons of power -- at times implicating Jiang himself. This only
further entrenched the problem and removed incentives for Jiang and
Zhu to act; after all, both were part of the so-called Shanghai clique
and derived their political support from the coastal regions.
 
Under these two leaders, the government was much more successful in
reducing the independence of the military, as neither Jiang nor Zhu
had significant ties into the institution. But because the economic
and political elite in the coastal regions were the source of the
central leadership's power, they were able to repel reforms sought by
the central government.

This all changed with the coming of Hu and Wen, both of whom are from
rural areas. Wen, a perennial political survivor known for his ability
to connect with the "common man," has been practically deified among
rural-dwellers on account of his 10-year-old coat. That the premier
still wears the same coat after 10 years is a clear sign (according to
ample coverage by the news media and blog sites) of his care for the
people, rather than for himself.

Herein lies the secret of Hu and Wen's strategy to regain control over
the local and regional governments and Party officials. Whereas Jiang
and Zhu tried using anti-corruption campaigns -- only to end up
implicating themselves and their core supporters -- Hu and Wen are
moving to harness the power of China's rural masses. Depending on
which Chinese official you believe, this is a mass of humanity
numbering from 700 million to 950 million people. Even at the low end
of the estimates, however, rural-dwellers make up more than half of
China's population -- and greatly outnumber the 300 million middle-
and upper-class Chinese living mainly in Beijing and the coastal
cities.

Harnessing the Masses

Chinese leaders have a long history of using the masses as weapons
when challenges to central authority arise -- from the attempts to
harness the Boxers at the turn of the 20th century to Mao's communist
revolution to the Cultural Revolution. In each case, the process was
chaotic and the outcomes were uncertain. Though Mao eventually
succeeded in rallying the rural populace to effect his communist
revolution, it simply served as a starting point for a new Chinese
system. The use of the Boxers led to the dissolution of the Chinese
dynastic system, and the Cultural Revolution wiped out whatever
economic gains had been made, leaving China to start nearly from
scratch once again.

What Hu and Wen intend to do is rally the masses to pressure local
leaders into returning authority to the center. From this, centralized
economic direction will, they hope, lead to more equalized development
without significantly undermining the country's growth (though a
slight slowing will be expected). Ultimately, the causes of social
discontent would be mitigated and social frictions reduced as money is
shifted to the interior.

This is a rather risky proposal, but China's core leadership sees this
as the least distasteful among a poor selection of options. The
initiative is being presented not as a disruptive social revolution,
but as the duty of those who got rich first to assist those who trail
them. The initial details of the official plan include greater
spending in rural areas on infrastructure, education, healthcare and
agriculture, with funding coming primarily from the urban centers. The
plan already is meeting with mixed reactions from China's regional
leaders -- and while the NPC is expected to approve the plan, that
doesn't mean that they like it.

However, as the government's core leadership has pointed out ad
nauseum over the past year, the Chinese economy is in a fragile state,
and the rural/urban inequalities threaten to undo everything China has
built up since the economic opening and reform program began. Unless
the central government regains complete control over economic strategy
and tactics, there is a fear that China ultimately would fracture into
competing regions, largely independent of any central authority -- a
sort of economic warlordism reminiscent of the final days of previous
Chinese dynasties.

Beijing's choice, then, is between taking no action against local
governments, out of fears of triggering massive capital flight or
inadvertently crippling investment and export activity, or rallying
the rural masses -- which would be another avenue toward
recentralizing control.

Thus, the central government has made a point of publicizing
ever-more-dire statistics concerning rural and urban unrest. The
Ministry of Public Security reported 87,000 cases of public
disturbances in 2005, up from 74,000 in 2004 and 58,000 in 2003. (The
numbers are high, but the definition of "disturbance" remains
ambiguous.) The ministry has also warned of an imminent "period of
pronounced contradictions within the people" in which "unpredictable
factors affecting social stability will increase." Meanwhile, Wen has
repeated that the cause of many protests is the confiscation of rural
land for development and industrial projects -- projects that often
are linked to corrupt local officials or are local initiatives that
don't match the central priorities.

The message to the local leaders, of course, is that China's masses
are on the move. In discussing the rural/urban gap, Chen Xiwen --
deputy director of the Office of the Central Financial Work Leading
Group -- noted recently (and somewhat ominously) that 200 million
farmers have left the countryside; Chen warned that "to increase the
living standard of these farmers, China should spare no efforts to
build the new socialist countryside." In essence, Beijing is
threatening the local leaders with the spectre of a rural rising. The
class struggle is on, and the farmers far outnumber the city-dwellers.
The implicit message is that, for the safety of the city, the farmers
must be funded and rural areas built up.

At the same time, Beijing is looking at a wholesale change in the
local leadership, beginning with the Party secretaries and chiefs of
China's 2,861 counties. New regulations -- not altogether welcomed by
the existing Party cadre -- will require new county-level Party
secretaries and chiefs to be around 45 years old and possess at least
a bachelor's degree. These individuals would be less likely to have
already built up their personal economic connections, and be more
beholden to the central government for legitimacy and support. Beijing
is also increasing supervision and admonition of Party and government
officials.

But to make these changes last, Beijing needs to give the lower cadre
some incentive to follow the central government's demands -- even if
it means a reduction in local investments or a rise in local
unemployment. Beijing must ensure that local officials are more
closely tied to the central leadership in Beijing than to foreign
investors and shareholders in Japan or the United States. For this,
Beijing needs to make it utterly clear what risks the local government
leaders face. Threats of prosecution and even the token executions of
some officials have not worked, but the potential for more and larger
social uprisings might.

This means Beijing needs to allow, if not subtly encourage, more
localized demonstrations.

And that apparently is where Hu and Wen intend to go. The central
government's response to stories of rural unrest has remained rather
low-key thus far. In reference to the  Dongzhou protests  in December
2005, where at least three were killed when local security forces
opened fire on the crowd, officials on the sidelines of the NPC
session recently made it a point to say the officers in question are
under detention and did not follow orders. In other uprisings, there
even have been suggestions of sympathy from the center. In the
cost-benefit analysis, Beijing apparently has determined that the
risks of allowing the current trend of growing regionalized power to
continue outweigh the risks of trying to manipulate popular sentiment
against local officials.

This, perhaps more than anything, underscores the severity of the
economic and governing problems facing China's central leadership.

The strategy of unleashing the rural masses, allowing and even subtly
encouraging protests could quickly get out of hand. However, given the
wide array of localized concerns, there is a natural disunity that
could be expected to constrain protesters -- keeping demonstrations
locally significant but nationally isolated. So long as protesters
don't join across provinces and regions, so long as no interest is
able to link the disparate demonstrations, the central leadership will
retain some leeway to implement its policies.

But as history bears witness, any attempt to harness protests and mass
movements is a very risky strategy indeed.

Send questions or comments on this article to analysis@stratfor.com.

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