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The China Model

From the November/December 2007 Issue

How long can economic freedom and political repression coexist? ROWAN CALLICK examines Beijing’s sinister policy formulation.

The China ModelFrom Vietnam to Syria, from Burma to Venezuela, and all across Africa, leaders of developing countries are admiring and emulating what might be called the China Model. It has two components. The first is to copy successful elements of liberal economic policy by opening up much of the economy to foreign and domestic investment, allowing labor flexibility, keeping the tax and regulatory burden low, and creating a first-class infrastructure through a combination of private sector and state spending. The second part is to permit the ruling party to retain a firm grip on government, the courts, the army, the internal security apparatus, and the free flow of information. A shorthand way to describe the model is: economic freedom plus political repression.

The system’s advantage over the standard authoritarian or totalitarian approach is obvious: it produces economic growth, which keeps people happy. Under communism and its variations on the right and left, highly centralized state-run economies have performed poorly. The China Model introduces, at least in significant part, the proven success of free-market economics. As citizens get richer, the expectation is that a nondemocratic regime can retain and even enhance its power and authority. There is no doubt that the model has worked in China and may work as well elsewhere, but can it be sustained over the long run?

The Communist Party of China, or CPC, rose to power in the mid-20th century after decades of civil war, starvation, and eventually the invasion of the Japanese. But under Mao, communism fell far short of its economic promise. Then, after the bitter chaos of the Cultural Revolution, which began in 1966 and culminated with the death of Mao in 1976, Deng Xiaoping carefully devised and implemented the formula through which the CPC today retains its legitimacy: the party ensures steadily improving living standards for all, and, in return, the Chinese people let the CPC rule as an authoritarian regime. This economic basis for the party’s power gives it a credibility that is being projected well beyond its own borders, with all the more success because of the recent decline in the international standing of the United States, focused as it is on its tough and increasingly lonely task in the Middle East.

The economic portion of the model works like this: open up the doors—kai fang—and let in foreign capital, technology, and management skills, guiding the foreigners to use China initially as an export base. Engage with global markets. Let your manufacturing and distribution sectors compete with the best. Give farmers control over their own land, and support the prices of staples.

Do everything you can to lift living standards. Give your middle class an ownership stake in the newly emerging economy by privatizing most of the government housing stock for well below the market price. Corporatize as much of the state sector as you can, and then list minority stakes on the stock market to provide a new outlet for savings. But don’t let the central bank off the leash; use it to maintain a hold over the currency exchange rate and other key policy levers. Keep ultimate control over the strategic sectors of the economy; in China’s case, these include utilities, transportation, telecommunications, finance, and the media.

The China Model's advantage over the standard authoritarian or totalitarian approach is obvious: it produces economic growth, which keeps people happy. Communism didn't do that.

The leaders of the Deng and post-Deng years have mostly been engineers, people of a practical bent with a particular enthusiasm for pouring cement and building infrastructure. The salient features of China’s economic system, which is still evolving, include increases in inputs, improvement in productivity, relatively low inflation (with the state maintaining a grip on some prices while others are gradually exposed to the market), and rising supply, especially of labor. The country has a large pool of surplus rural workers, as well as many millions more who were laid off as state-owned enterprises underwent rapid reform, emerging from welfare-focused loss centers to become market-focused profit centers.

As it became easy to import sophisticated components from elsewhere in Asia and assemble them in China, most of the Asian neighborhood has been earning bilateral trade surpluses, becoming intimately enmeshed in the Chinese economy. The services sector remains undeveloped, a massive field awaiting investment and exploitation. Huang Yiping, chief Asia economist of Citigroup, says, “The mutually enhancing effects of reform and growth were probably the secret of China’s success.” The regime has succeeded in one of its prime goals, to generate sufficient surplus value to finance the modernization of the economy. China holds $1.3 trillion worth of foreign reserves.

Even after 30 years of the kai fang strategy, however, the Chinese economy remains only selectively open. For instance, although the currency, the yuan, can be converted on the current account, chiefly for trade, its conversion on the capital account, for investment, remains strictly controlled. China is still substantially a cash economy, with little use made of Internet banking or even of credit cards or mortgages.

The People’s Bank of China remains a tool of government rather than an autonomous institution, as most Western central banks now are. A large range of core industries are, by policy, fully or majority-owned by the government, and although the four “pillar banks” have attracted massive investments from Western corporations and from international shareholders, their boards and management are regularly shifted according to the needs of the party-state. Foreigners are free to establish fully owned firms in a fast-growing range of activities from manufacturing, processing, and assembly to banking and leasing, rather than being required, as before, to enter joint ventures with local partners. But the regulatory hurdles to register such companies usually take many months to negotiate. Indeed, much of China’s business environment is negotiable. There appear to be few absolutes.

The People’s Bank of China remains a tool of government rather than an autonomous institution, as most Western central banks now are. A large range of core industries are, by policy, fully or majority-owned by the government.

Nontariff barriers to trade are declining, but they remain legion, especially in the services sector. Still, more and more foreigners are successfully doing business in China “below the radar” with small operations, such as restaurants, art galleries, and marketing firms, while the latest American Chamber of Commerce survey says that 73 percent of American companies operating in China claim they are operating profitably, with 37 percent adding that their profits in China are higher than their average global profits.

This steady but cautious opening of the economy to foreigners and to domestic entrepreneurs to a defined degree has ensured that as global liquidity has soared, much of it has found its way to China. The country’s very scale, with a population of 1.3 billion, is a lure in itself, but it is the nation’s convulsive arrival as not merely a receptacle but a driver of globalization that best explains its attraction to international business.

Many of China’s global partners require transparent governance, independent courts, enforceable property rights, and free information. None of these is present in China today, or will be unless the party surrenders a degree of political authority it has so far regarded as inconceivable. Won’t pressure for these four requirements in itself apply sufficient pressure to force liberalization? Not necessarily—because China meets all four, plus a freely convertible currency and a free port, in its own city of Hong Kong, governed under the “one country, two systems” format devised by Deng. Hong Kong is a valve to release pressures that might cause a rigid centralized economy to explode.

Nor does China seem especially vulnerable to outside shocks. Daniel Rosen, principal of China Strategic Advisory, says that at the time of the Asian financial crisis a decade ago, which China largely sailed through, “the country had not opened its capital account, relied on foreign debt, floated its currency, freed monetary policy from political control, or even relinquished the role of the state as a predominant force in financial flows. A decade later, with a new sort of financial crisis unfolding in the United States subprime mortgage market, many believe the factors that insulated China in the past still buffer it today.” However, he concludes, this isn’t the final word: “The macroeconomic outlook is strong not because China is immune from adjustment pressures amplified by global credit conditions, but because it has a demonstrated willingness to accept adjustment where necessary.”

The China Model is demonstrating this cautious adaptability by shifting its focus from inward investment to outward investment—making its foreign reserves start to build the returns it will need as it faces the demographic jolt caused by the shift in policies from Mao’s “populate or perish” to the one-child urban family. “In addition,” says Italian journalist Francesco Sisci, “the party has shown itself adept at co-opting potentially troublesome private sector businesspeople by recruiting them into the National People’s Congress and the Chinese People’s Political Consultative Conference.”

When previous leader Jiang Zemin opened the Communist Party to such people, many commentators saw capitalists taking over the party. The reverse has happened, with the party extending its controls into the thriving private sector, where growing numbers of party branches are being established. But, Sisci concludes, “it is very hard to believe that in 15 to 20 years, when the middle class could be asked to pay 30 percent or more of its income in taxes, and both Chinese society and the world at large have become more open, that this middle class will remain content to stay out of politics.”

No one, however, is anticipating such a shift anytime soon. In the 1990s, a presumption grew that the crowds of well-connected young Chinese returning with their Ivy League MBAs would not acquiesce to the continued unaccountable rule of the cadres. But many of them instead joined the party with alacrity. A striking example is that of Li Qun, who studied in the U.S. and then served as assistant to the mayor of New Haven, writing a book in Chinese on his experiences. After his return to China, he became a mayor himself, of Linyi in Shandong Province in the Northeast. There, he swiftly became the nemesis of one of China’s most famous human rights lawyers, the blind Chen Guangcheng. First, Chen was placed under house arrest and his lawyers and friends were beaten because of his campaign against forced sterilizations of village women. Then, Chen was charged, bizarrely, with conspiring to disrupt traffic when a trail of further arrests led to public protests. He was jailed for four years.

Thus, best of all, in the view of many of the international admirers of the China Model, is that the leaders, while opening the economy to foster consumption, retain full political control to silence “troublemakers” like Chen. Indeed, the big attractions of China to capital from overseas has been that the political setting is stable, that there will be no populist campaign to nationalize foreign assets, that the labor force is both flexible and disciplined, and that policy changes are rational and are signaled well ahead. Economic management is pragmatic, in line with Deng Xiaoping’s encomium to “cross the river by feeling for stones,” while political management is stern but increasingly collegiate, the personality cult having been jettisoned after Mao and factions having faded together with ideology.

The Communist Party 'has shown itself adept at co-opting potentially troublesome private sector businesspeople by recruiting them into the National People’s Congress.'

The CPC is replacing old-style communist values with nationalism and a form of Confucianism, in a manner that echoes the “Asian values” espoused by the leaders who brought Southeast Asian countries through their rapid modernization process in Singapore, Malaysia, Thailand, and elsewhere. But at the same time, in its public rhetoric, the party is stressing continuity and is assiduously ensuring that its own version of history remains correct. Historian Xia Chun-tao, 43, vice director of the Deng Xiaoping Thought Research Center, one of China’s core ideological think tanks, says, “It’s very natural for historians to have different views on events. But there is only one correct and accurate interpretation, and only one explanation that is closest to the truth.” The key issues, he says, are “quite clearly defined” and not susceptible to debate. “There is a pool of clear water and there’s no need to stir up this water. Doing so can only cause disturbance in people’s minds…. However much time passes, the party’s general judgment” on such key events won’t change.

The party, for example, required its 70 million members to view, late in 2006, a series of eight DVDs made by the country’s top documentary producers about the fall of the Soviet Union. The videos denigrated the Khrushchev era because it ignored the crucial role of Joseph Stalin and thus “denied the history of the Soviet Union, which in turn triggered severe problems.” Young Soviet party members who grew up in this atmosphere lacked familiarity with the party’s traditions, and “it was they who went on to bury the party.” According to the CPC version of history, Stalin was wrongly viewed in the Soviet Union as the source of all sins, “in spite of the glories of socialism.”

But the documentary series ended on an upbeat note: the Russian people are rethinking what happened, and two-thirds of those surveyed now regret the fall of the Soviet Union. “When Vladimir Putin stepped in, he reestablished pride in the country,” according to the videos. For Stalin, of course, read Mao. The CPC has no intention of taking Mao’s vast portrait off the Tiananmen Gate, nor burying his waxed corpse, sporadically on view at the Soviet-style mausoleum whose construction destroyed the feng shui, the harmony, of Tiananmen Square that Mao himself created.

In the May/June edition of the american, Kevin Hassett, director of economic policy studies at the American Enterprise Institute, explained that evidence is emerging that developing “countries that are economically and politically free are underperforming the countries that are economically but not politically free.” China, of course, is in the lead of the economically free but politically unfree nations. Hassett wrote, “The unfree governments now understand that they have to provide a good economy to keep citizens happy, and they understand that free-market economies work best.... Being unfree may be an economic advantage. Dictatorships are not hamstrung by the preference of voters for, say, a pervasive welfare state. So the future may look something like the 20th century in reverse. The unfree nations will grow so quickly that they will overwhelm free nations with their economic might.”

The kleptocrats who have ruled many developing countries in past decades have tended to come unstuck when Western aid dwindles, their own economies falter and then fall backward, and all too often rivals emerge within their armies. The China Model presents the possibility that such rulers can gain access to immense wealth through creaming off rents while at the same time their broader populations become content, and probably supportive, because their living standards also are leaping ahead. This formula also entails hard work, application, policy consistency, and administrative capacity spread through the country—hurdles where followers of China are likely to fall. But for now, they’re lining up in hope and expectation.

Even some Westerners are impressed by the new China. American swimming superstar Michael Phelps said on a visit to Beijing, the host city of the Olympic Games next August, “Going to the hotel, we see Subway, 7-Eleven, Starbucks, Sizzler, McDonald’s. It’s like a big American city. They have everything we have in the States.” In fact, they don’t. They lack basic freedoms.

It is true that the Chinese people are free to consume whatever they can afford. That’s novel. They have also gained in the last three decades the freedom to travel where they want, at home and abroad. They can now work for whom they want, where they want. They can buy their own home, and live where they choose (the houkou system of registration is breaking down). A Chinese woman can marry the man she loves, though in the cities the couple can still only have one child unless they can afford the fine for having more. The Chinese can study at any institution that will have them. They can meet anyone they like, but not in a suspiciously large group.

The emerging middle class also benefits from a “gray economy” that, a recent survey by the National Economic Research Institute led by Wang Xiaolu has discovered, is worth a breathtaking $500 billion a year, equivalent to 24 percent of China’s GDP. That’s why new graduates clamor for government jobs ahead of those with glamorous international corporations—because the opportunities to get rich quick during this transitional period of asset transference from the state, and to benefit hugely from rent-seeking, are so great.

But Chinese citizens can’t form a political party, or any other organized group, without official permission. They can’t choose their leaders. Even the ordinary CPC members have no say in their hierarchy. Sisci, Beijing correspondent of the Italian newspaper La Stampa, writes in the China Economic Quarterly that “there is something like a 75 percent avoidance rate on personal income tax” because few people anywhere choose to concede taxation without any representation. “There is a political pact,” he writes. “The government allows tax evasion in return for political obedience. So far, the middle class has acquiesced: it prefers to pay less taxes and not vote, rather than buy its right to elect the government by paying more taxes.”

Phone calls, text messages, and emails are likely to be screened, and many Internet sites—such as Wikipedia and BBC News—are blocked or filtered by the 30,000 “net police.” Bloggers must give their real names and identity card numbers to their Internet service providers, which must in turn make them available to the authorities when asked. Tim Hancock, Amnesty International’s campaign director in the UK, says, “The Chinese model of an Internet that allows economic growth but not free speech or privacy is growing in popularity, from a handful of countries five years ago to dozens of governments today who block sites and arrest bloggers.”

All books published in China must bear a license code from a state-owned publishing house. Books under question are sent out to groups of retired cadres to censor. Before art exhibitions, says painter Yao Junzhong, who now sells most of his work overseas, the local cultural bureau usually sends a list of taboos to the organizers, and through them to the artists: “You will be told not to attack communism, not to attack the party. Sex is sensitive. So is violence. But not as much as politics.” He recently had to send three photos of a painting, ready for an exhibition, to a gallery owner, the cultural bureau, and the exhibition organizer. The picture showed his young son holding a gun, set in a renminbi coin. “I named it ‘Qianjin,’ which means advance, and also means money.” A cadre couldn’t put his finger on it, but felt “there must be a political element,” so the organizer was told it was not appropriate.

Says an official of one of China's core ideological think tanks, 'It’s very natural for historians to have different views on events. But there is only one correct and accurate interpretation, and only one explanation that is closest to the truth...There is a pool of clear water and there’s no need to stir up this water.'

All films must be vetted by the State Administration for Radio, Film, and Television. All print media are government- or party-owned. The party’s propaganda department has recently introduced a penalty scheme for media outlets that deducts points for defying government guidance. Twelve points means closure. Every inch of public territory remains tightly defended, although warnings are usually not explicit, leaving maximum space for artists to choose to censor themselves. Leading new-wave filmmaker Jia Zhangke, winner of the top award, the Golden Lion, at last year’s Venice Film Festival, says, “If we don’t touch the taboo areas, we will have a lot of freedom. But then those areas grow larger. If your tactic is to guess what the censors are thinking, and try to avoid their concerns, you are ruined as an artist.”

Chinese people do not expect to obtain justice from the courts, which are run by the party, the judges answerable to the local top cadres. Ordinary people, the laobaixing, have to negotiate their way out of any troubles if they can. They have grown accustomed to, but not accepting of, widespread corruption. They are meant to report to the neighborhood police whenever someone new comes to stay with them. A file is kept on Chinese citizens, which follows their work and home moves, but they cannot see it. There are only two legal churches that the Chinese can join, the Catholic and the Three Self (Protestant) organizations; the leaders of both are ultimately responsible to the party. Evangelism is not permitted. There are no church schools. Freedom House, in its annual survey, gives China a ranking of “7” for political rights—the organization’s lowest rating and the same as that of North Korea, Burma, and Cuba (Japan ranks “1”). China ranks only slightly higher, at “6,” for civil liberties, the same as Iran, Saudi Arabia, and Zimbabwe.

In the 1980s, wishful thinking on the part of some Western observers, combined with a form of historical determinism that was, in its way, a tribute to the thinking of Hegel and Marx, had China inevitably becoming more free and democratic as it became more of a market economy. The Tiananmen massacre caused some head-scratching for a while, but Western business, in particular, tended to take the public view, when pressed, that a semi-capitalist country was bound to evolve in time into a democracy, because the emerging middle class would demand it.

Now, such views have faded. Premier Wen Jiabao said during the last annual session of China’s version of a parliament, the National People’s Congress, that the country would remain at the present “primary stage of socialism,” during which it would require continued guidance by the party, for at least another 100 years. This model of the state has power going from the top down, and accountability from the bottom up. It also leans heavily on the seductive story of China’s ancient uniqueness, its serial defiance of foreign prescriptions.

This story of cultural heroism, even though it is bound up in the China Model, with its far warmer embrace of globalization than most other developing nations have conceded, has acquired a glossy appeal because of the sheer, palpable success of China’s modernization drive. The nation’s gross domestic product has grown at an average annual rate of more than 10 percent since 1990.

When 21 leaders controlling three-fifths of the world’s economy met at the latest Asia Pacific Economic Cooperation summit in Sydney in September, The Nation newspaper in Thailand editorialized: “One could easily spot who the real mover and shaker among them was. It used to be that what the leader of the U.S. said was what would count the most. That is no longer.” The new mover and shaker is China. The entire piece was reprinted by The Statesman, an influential English-language newspaper in India. Developing nations believe that, as an ideal, the China Model has replaced the American Model, especially as embodied in the “Washington Consensus,” a set of 10 liberal democratic reforms the U.S. prescribed in 1989 for developing nations.

Last November, 41 African heads of state or government were fl own by China to Beijing for a summit hosted by President Hu Jintao. The government ordered most cars to stay off the roads as the leaders sped to meetings and banquets. One million security forces were deployed for almost a week to ensure the summit went smoothly. Abundant affirming slogans such as “La Belle Afrique” and attention to ingratiating detail—hotel staff learning African greetings, rooms decorated with African motifs, magnificent gifts even for the thousands in the presidents’ and prime ministers’ retinues—marked a contrast with concerns about corruption, crime, and cruel civil war that comprise most Western encounters with Africa.

Chinese citizens can’t form a political party, or any other organized group, without official permission. They can’t choose their leaders. Even the ordinary party members have no say in their hierarchy.

Premier Wen said that two-way trade between China and Africa would double to $110 billion by 2010, after soaring tenfold in the last decade, with fuels comprising more than half of China’s imports from Africa. China is canceling its debts due from the least developed countries in Africa, setting up a $5.5 billion fund to subsidize Chinese companies’ investments in the continent, and increasing from 190 to 440 the number of items that Africa’s poorest countries can export to China tariff-free. Already, by a large margin, China is the biggest lender to Africa, providing $8.9 billion this year to Angola, Mozambique, and Nigeria alone. The World Bank, by contrast, is lending $2.6 billion to all of sub-Saharan Africa.

The Western requirement that good-governance medicine must be consumed in return for modest aid is now not only unwelcome but also, as far as many African leaders are concerned, outdated. They are no longer cornered without options. Now they’ve got China, which is offering trade and investment, big time, as well as aid. And more than that, they’ve got the China Model itself.

This is no longer the communist program that Mao Zedong tried to export with little success except in places like Peru and Nepal, where Maoists have survived long after they have vanished from China itself. It is, instead, the program that gives business room to grow and make profits, while ensuring it walks hand in hand with big, implacable government. And, of course, the China Model holds out the promise of providing the leaders of developing nations the lifestyles to which they would love to become accustomed.

This is the China Model: half liberal and international, half authoritarian and insular. Can it last?

A few writers have become mildly wealthier by forecasting doom. The best known is lawyer Gordon Chang, whose book, The Coming Collapse of China, published in 2001 by Random House, concluded, “Beijing has about five years to put things right.” Chang made clear that he did not expect the party to pull it off. His litany of likely triggers of collapse included entry into the World Trade Organization (which happened in December 2001), within whose regulatory structure, he said, China could not remain competitive; the impossibility of reforming the 50,000 state-owned enterprises, which he said sucked up 70 percent of domestic loans while producing less than 30 percent of the economy’s output; the failure of the reform of the banking system, with its huge burden of nonperforming loans and planned restructuring through inexperienced asset-management companies; the government’s lack of revenues; corruption; and the rush of new global information and views made available on the Internet. Chang’s critique was plausible at the time, but now, six years later, it merely underlines how dangerous it is to bet against China’s pragmatic economic reform program.

Randall Peerenboom of UCLA describes in his new book—China Modernizes: Threat to the West or Model for the Rest?—the country’s “paradigm for developing states, a 21st-century, technologically leap-frogging variant of the East Asian developmental state that has resulted in such remarkable success for Japan, South Korea, Hong Kong, Singapore, and Taiwan.” China resisted the advice of foreign experts to engage in shock therapy, he says, and has persisted in gradual reform. The state has played a key role in setting economic policy, establishing government institutions, regulating foreign investment, and mitigating the adverse effects of globalization in domestic constituencies. And the strategy has broadly worked: “Chinese citizens are generally better off” than in 1989. “Most live longer, more are able to read and write, most enjoy higher living standards.

China outperforms the average country in its income class on most major indicators of human rights and well-being, with the notable exception of civil and political rights.”

Where China fails to match up, however, is in creativity and innovation, without which it may have to resign itself to remaining a net importer of new technologies, and a manufacturer under license. It has failed to produce a single global brand to compare with its neighbors. Japan has its Sony, Toyota, Panasonic, Honda, and the rest. South Korea has its Samsung and Hyundai. Taiwan has its Acer, BenQ, and Giant bicycles. China’s Haier white goods and Lenovo personal computers remain, for now, wannabes. The controls that China deploys on use of the Internet, the battles it wages with its artists in every field, the focus in its education system on rote learning, the continuing failure to implement its own intellectual property rules, and now the embracing of a new Confucianism—all of these inhibit lateral thinking and invention.

As Maoism and Marxism lose their grip, the dangers of nationalism as a defining value system become apparent, and religion remains under suspicion as a potentially powerful rival to the Communist Party and the authoritarian state, China’s leaders are eagerly rediscovering the country’s 2,500-year-old Confucian tradition.

Contemporary philosophers claim to be reengineering Confucianism to suit the needs of 21st-century China by, for instance, focusing on the ecological potential in its advocacy of “the unity of heaven and humanity” and on its requirement of self-discipline. But the reasons that early-20th century modernizers and artists, including China’s greatest writer, Lu Xun, rejected Confucianism as essentially authoritarian and inimical to modernization remain unaddressed.

Lee Yuan-tseh, the president of Taiwan’s top research institute, Academia Sinica, describes how, after a traditional Confucian upbringing, he shifted for postgraduate opportunities to the United States, first at the University of California at Berkeley, then Harvard, then Chicago, and back to California. He says that the inquisitive academic climate there “made me think bad thoughts: that my teacher was wrong.” In time, he took what he describes as the biggest step of his life—telling the teacher so. In 1986, he won the Nobel Prize for chemistry. In 2000, Gao Xingjian won the Nobel Prize for literature, but only after he had exiled himself and become a French citizen. No person has ever won a Nobel Prize for work in China; the U.S., by contrast, has won nearly 300 Nobel Prizes, winning or sharing four of the six 2006 awards.

Even in entrepreneurship and wealth creation, the CPC retains its grip. Carsten Holz, an economics professor at the Hong Kong University of Science and Technology, wrote in the Far Eastern Economic Review that “of the 3,220 Chinese citizens with a personal wealth of 100 million yuan ($13 million) or more, 2,932 are children of high-level cadres. Of the key positions in the five industrial sectors—finance, foreign trade, land development, large-scale engineering, and securities—85 percent to 90 percent are held by children of high-level cadres.”

Attempts are being made to shift the economy higher up the value-added chain by creating and importing more capital-intensive companies. For instance, on a vast industrial estate southeast of Beijing, Richard Chang, a Taiwan-raised American citizen, has built a $1.5 billion microchip-making factory for his company, Semiconductor Manufacturing International Corporation. The factory employs 2,000 staff who work in “clean rooms” constantly tested for dust and humidity. The machines there cost up to $30 million each. About 55 percent of the staff have undergraduate degrees, and 10 percent are hired from overseas. All have three months of in-house training before they begin work.

In 2006, manufacturers in China bought $64 billion worth of chips, but much of that hardware was imported. Whether SMIC—which Chang founded only in 2000, after working for 20 years with Texas Instruments—can build the research capacity and the skills needed to compete will provide an important test of China’s ability to move its model on to a higher plane. China, in typical fashion, threw a heap of incentives Chang’s way to ensure he got up and running: free land, syndicated loans, R&D aid, zero tax.

Chinese people do not expect to obtain justice from the courts, which are run by the party, the judges answerable to the local top cadres. Ordinary people, the laobaixing, have to negotiate their way out of any troubles if they can.

Like most other East Asian states, China’s route to development placed economic reforms before democratization. But the China Model differs markedly from most of the region in that it has resisted taking any serious steps down that road to democracy. There is talk of “intraparty democracy” within continued one-party rule, but unsurprisingly, no champions of it have any real influence. There were also some token village elections, but they have remained dominated by the CPC and its cadres. Commentator Shu Shengxiang wrote in July, on the influential website Baixing (“the common people”): “The democratically elected cadres are gouging the people [by corruption] too. They do not know that a democracy which only has elections but not supervision is at best a half-baked democracy, if not a fake democracy. Half-baked democracy not only harms the villagers’ personal interests, but even gives them the misconception that democracy is not good.”

At the same time, however, the party is refining its contract with the Chinese people to reflect shifting popular concerns about living standards: the quality of growth as well as the quantum. Leading this new agenda is the environment, which surveys show tends to top, together with corruption and access to health and education services, the concerns of most Chinese. The World Bank says China contains 16 of the world’s 20 most polluted cities in their air quality, and anxieties about both water and air have triggered a large proportion of China’s “mass events”—demonstrations and protests—which even official figures estimated at 87,000 in 2005.

The central government has effectively opened the environment to media commentary and to the establishment of NGOs, and has pinned the blame for the worst environmental disasters on avaricious or neglectful local officials. Ambitious targets have been set, in the five-year plan that began in 2006, for reduction of carbon dioxide and sulfur emissions, and for the use of energy per unit of production. The goals are not being met, and the central government appears determined to impress the whole apparatus that its new green program is not just rhetoric, but that it means business.

This shift from quantity to quality of growth will form the core of the agenda in the second term of the current “fourth generation” of leaders around Hu Jintao and Wen Jiabao. At the party congress, which occurs every five years and started on October 15, their aim is to ensure that only people on board this quality-of-life program get promoted, both in the central institutions and in the provinces. The key principle for their decade in power is the Confucian concept of harmony—as in stability and avoidance of dissent.

The China Model presents the possibility that kleptocrat rulers of developing nations can gain access to immense wealth through creaming off rents while at the same time their broader populations become content as living standards leap ahead.

This China offers a seductive model that is being eagerly taken up by the leaders of countries that have not yet settled into democratic structures: Vietnam; Burma; Laos; the Central Asian dictatorships that were part of the Soviet Union; a growing portion of the Middle East, starting with the United Arab Emirates, including its glossy new centers like Dubai; Cuba; most of Africa, including South Africa; and even to a degree the hereditary cult that is North Korea. Beijing sometimes gives more than it receives to cement its developing world leadership, according most-favored-nation status to Vietnam, Laos, and Cambodia even before they join the World Trade Organization. In an unsettling way, the China Model is attractive to the leaders of some countries that had already become democratic, such as Venezuela. The model is even inspiring democratic India to compete with its own adaptive version.

The China Model is, of course, admired in the West, too, with business leaders’ words (at platforms such as Forbes magazine conferences and the World Economic Forum, which has just instituted an annual summer session in China) providing great reinforcement for Chinese leaders. The World Bank is just one of the international institutions that champion China (its greatest client and in some ways its boss) as a paradigm for the developing world. Also fascinating is the appeal of the China Model to Russia, which as Azar Gat, professor of national security at Tel Aviv University, writes in Foreign Affairs, “is retreating from its post-communist liberalism and assuming an increasingly authoritarian character as its economic clout grows.” China is exporting scores of Confucian Institutes, most of them at first just language schools but in the future offering platforms for extending Chinese influence.

In the 1980s, wishful thinking on the part of some Western observers, combined with a form of historical determinism, had China inevitably becoming more free and democratic as it became more of a market economy. Now, such views have faded.

But back to our question: Is the China Model sustainable? Two recent books come up with opposite answers. The British center-left economist Will Hutton, author of The Writing on the Wall, says China must accede to Enlightenment values or start to fall back again. American journalist James Mann, author of The China Fantasy, argues, in contrast, that the Chinese middle class is thoroughly behind the China Model as its major beneficiary, ensuring that the usual source of confrontation with the power elite is not just docile, but eagerly applauding.

It may take a non-Sinologist like Hutton to see how very strange it is that a one-party state that pays lip service (at least) to the doctrines of Marx, Lenin, and Mao should not only survive into the 21st century after all its principal totalitarian and authoritarian peers have collapsed, fallen apart, or been beaten in world wars, but actually prosper, to the degree that its system is starting to gain such currency in the developing world.

“The party is facing a growing issue of legitimacy,” he writes. “If it no longer rules as the democratic dictatorship of peasants and workers, because the class war is over, why does it not hold itself accountable to the people in competitive elections?” The answer is in the phrase Hutton himself frequently uses: “party-state.” The party won power by force of arms. The People’s Liberation Army answers to the party, not to the government or the nation, insofar as those concepts can be levered apart from the party any more. The party’s legitimacy, as viewed by most Chinese, lies in its history and past leaders, in its contemporary success at bringing prosperity to a thankful nation, and in its unyielding grip on the trappings of nationalism.

The large gold star in China’s fl ag, for instance, represents the CPC, the four smaller stars the workers, the peasants, the petty bourgeois, and capitalists sympathetic to the party. In the early 1980s, there was some vestigial discussion about separating party and state, but the idea was abandoned as both impractical and undesirable. The party rules today through four pillars—the army, the legal apparatus including the courts and police,

the administration, and the state corporations that dominate the “strategic” sectors of the economy. Without cutting away these pillars, without separating the powers, any attempt at “competitive elections” would be hollow. But the pillars appear, to use an understatement, firmly entrenched.

Hutton reiterates the old contention that China’s middle class, “more internationalist than its poor,” will ultimately insist that the party loosen its political control. James Mann replies that the middle class is doing very nicely, thank you, within the structure as it is. Its members are substantially incorporated into the party and are the structure’s biggest supporters, not its underminers.

When 21 leaders met at the latest Asia Pacific Economic Cooperation summit in September, a newspaper in Thailand editorialized: 'One could easily spot who the real mover and shaker among them was. It used to be...the U.S...That is no longer.'

Hutton’s most convincing critique is that “China has no business tradition that understands the moral facet of capitalism,…whose ‘soft’ institutions (a common culture and shared purpose) are as integral to growth and sustainability as the ‘hard’ processes.” The difficulty Chinese enterprise has in understanding, let alone absorbing and practicing, the morality and trust that are at the root of capitalism and of successful globalization is on display ever more luridly as food, drugs, toothpaste, toys, and a growing list of other products ring international alarm bells and cast a shadow over the “Made in China” brand credibility.

His core conclusion is this: “Welfare systems, freedom of association, representative government, and enforceable property rights are not simply pleasant options. They are central to the capacity of a capitalist economy to grow to maturity…. The party can relax its political control to allow the economic reform process to be completed. Or it can retain political control, watch the economic contradictions build, and so create the social tension that may force loss of political control.”

Hutton is not the first commentator to draw up a balance sheet of economic and social pluses and minuses for China, and figure that something has to give politically. “The clock is ticking,” he warns. But time keeps passing unremarkably, and one diligent and uncharismatic group of leaders quietly makes way for the next, and the party-state not only remains intact but also appears to flourish.

James Mann, however, says that if China does retain a repressive one-party political system for a long time, this “may indeed be just the China that the American or European business and government leaders who deal regularly” with the country want. The “fantasy” in his book’s title is the notion that commerce will lead to democracy or liberalization. One of his scenarios is that the party is still in power 25 years from now, though perhaps called the “Reform Party.” But if it is to change names, the CPC will probably find that the “China Party” is the easiest sell.

Leading Australian economist Ross Garnaut, a former ambassador to China, adds an important element of historical perspective—that first Britain, and then the United States, industrialized in a helter-skelter way, which was crucially moderated and channeled by institutional accountability that prevented the industrial-baron entrepreneurs from losing proportion, alienating the population, and misallocating capital disastrously. The institutions that developed to meet this challenge of a rampant new power elite included parliaments, legal structures, and independent regulatory agencies. Will China follow suit, or will its go-it-alone party steer its economy, after three decades of success, into difficult waters (or onto the reefs) because it lacks the true self-confidence to expose itself to other sources of power?

The Western requirement that good-governance medicine must be consumed in return for modest aid is now not only unwelcome but also, as far as many African leaders are concerned, outdated. They are no longer cornered without options. Now they’ve got China.

It is almost certain that China will push on with its present structure, but with the prospect of broadening democratic competitiveness for posts within the party, and institutionalizing consultations with more diverse groups in Chinese society, some outside the party. The “ample evidence” that Randall Peerenboom catalogs in his book, “that other countries are looking to China for inspiration,” reinforces the CPC’s determination to persevere. Laos is following China’s lead in implementing market reforms and producing higher growth. Iran and other Middle East countries, including Syria, have invited experts on Chinese law, economics, and politics to lecture to senior officials and academics. They are all attracted by what they see as China’s pragmatic approach to reform. The official newspaper China Daily recently hosted on its website a reader discussion on the theme: “China is a role model to all developing nations. After centuries of oppression and domination by Western nations, most developing nations are trying to pull themselves up from poverty. They look at China’s rapid progress as an example. China also gives aid and technical help to these nations.” The theme attracted a host of supportive responses, such as, “China has shown that you can be successful by expanding through commerce and diplomacy, not by the imperialism demonstrated by the U.S. and UK.”

Vietnam, Cuba, Burma, and Venezuela provide good examples of the China Model’s attraction. Vietnam, whose economic reform program, doi moi, began 20 years ago, has followed China closely, especially replicating its outward-looking foreign investment regime. As a result, strong links have been created between the two communist countries, which are also the fastest-growing economies in Asia. In 2006, China had 377 direct investments in Vietnam. Since China and Vietnam resumed official economic relations in 1991, after Vietnam had allied itself with the Soviet Union, bilateral Chinese-Vietnamese trade has grown at an annual average of 40 percent. Meanwhile, Vietnam maintains a political system as authoritarian as China’s, with a ranking of “7” for political rights from Freedom House.

Vietnam’s new prime minister, Nguyen Tan Dun, says he wants to ramp up economic cooperation with China, and that the countries “should increase their cooperation to accelerate trade promotion and investment, plus organize trade fairs and exhibitions, to help each other seek more trade and investment opportunities.” In Vietnam’s north, close to China’s booming Guangdong Province, average wages and real estate are much cheaper than in coastal China. Vietnam is the most successful economically of the countries using the China Model, and its entrepreneurial talents suggest that in some areas it could in time even leapfrog it.

Where China fails to match up, however, is in creativity and innovation, without which it may have to resign itself to remaining a net importer of new technologies, and a manufacturer under license.

China’s ability to honor Mao, even as it tears down the economy he set in place, could provide a model for Cuba, says William Ratliff, a research fellow at Stanford University’s Hoover Institution who is an expert on both countries. “During the past 15 years, important members of the Cuban political, military, and business elite, including Fidel and Raúl Castro and two-thirds of the members of the Communist Party Politburo, have visited China and remarked with great interest on the Chinese reform experience,” Ratliff says. After Raúl’s visit to China, Zhu Rongji, a leading architect of economic reforms who was then premier, sent one of his chief aides to Cuba, where he lectured hundreds of leaders, with substantial impact.

Ratliff cites a Cuban intelligence official as saying: “Once Fidel Castro is out of the game, other areas of the Chinese experience will most probably be implemented in Cuba rather quickly.” Besides the economic model, the Chinese concept of an orderly succession of leaders within an authoritarian system also holds a deep attraction.

Former Chinese Foreign Minister Tang Jiaxuan, often sent as an emissary by President Hu to neighboring countries, said in September that “China wholeheartedly hopes that Burma will push forward a democracy process that is appropriate for the country.” The statement underlines China’s crucial support for the ruling military regime, which usurped the election won convincingly in 1990 by Aung San Suu Kyi’s party, with 390 of 492 seats. But Tang adds a note of disquiet; China is no longer blasé about being viewed as the main backer of dictatorships, including Sudan and Zimbabwe, and would rather that Burma, like those other outcast countries, worked harder to establish better relations with the rest of the world. In his speech, Tang was supporting the Burmese rulers’ plan to introduce a new constitution, and at the same time move toward a market economy, reinforcing the influence of China as their key model.

Since the start of 2007, there has been a surge in diplomatic and business visits by leaders between the countries, with the intention of strengthening economic and strategic ties. As in other countries committing themselves to the China Model, the exchanges entail Chinese businesspeople, technicians, and workers coming to live in Burma for lengthy periods. The South China Morning Post has described three Burmese cities—Lashio, Mandalay, and Muse—as “virtually Chinese cities now.” China is building a tax-free export zone for its own industries next to the port of Rangoon.

At the same time, however, the party is refining its contract with the Chinese people to reflect shifting popular concerns about living standards: the quality of growth as well as the quantum. Leading this new agenda is the environment.

Meanwhile, Venezuela’s regime has become the leader of the hard left’s opposition to Western-led globalization. In August 2006, President Hugo Chávez said on arriving in Beijing: “This will be my most important visit to China, with whom we will build a strategic alliance. Our plans are to create a multipolar world, and to challenge the hegemony of the United States.” His attempts to enmesh China in his high-stakes campaign against the U.S. were deflected by courteous formalities, but China’s economic support—chiefly through investment in energy projects and purchase of oil, despite

Venezuela’s heavy crude being costly to refine and expensive to transport across the globe—considerably aided Chávez’s election campaign last December. Chávez praised China as an economic model for the world: “It’s an example for Western leaders and governments who claim that capitalism is the only alternative. One of the greatest events of the 20th century was the Chinese revolution.”

Joshua Kurlantzick, the author of Charm Offensive: How China’s Soft Power Is Transforming the World, writes: “No one has experience with today’s China as a global player.... In a short period of time, China appears to have created a systematic, coherent soft power strategy, and a set of soft power tools to implement it”—particularly public diplomacy, aid, and trade—“though it is still in a honeymoon period in which many nations have not recognized the downsides of Beijing’s new power.” Those downsides might include a cavalier approach to the environment—other people’s as well as China’s own—growing military clout, the migration of large numbers of Chinese workers and businesspeople accompanying its trade and investment, harsh labor standards on its projects, and in general a new variant on old colonialism.

Kurlantzick writes: “As China becomes more powerful, other nations will begin to see beyond its benign face to a more complicated reality. They will realize that despite China’s promises of noninterference, when it comes to core interests, China—like any great power—will think of itself first.

“China could create blowback against itself in other ways, too. Still a developing country itself, China could overplay its hand, making the kind of promises on aid and investment that it cannot fulfill. And in the long run, if countries like Burma ever made the transition to freer governments, China could face a sizable backlash for its past support for their authoritarian rulers. ‘We know who stands behind the [Burmese] government,’ one Burmese businessman told me last year. ‘We’ll remember.’”

The U.S., Japan, and other countries have been urging China to become more transparent about the rapid development of its military capacity, underlined last January by its missile shot that successfully destroyed an aging satellite, and by the sudden surfacing of a submarine, earlier this year, within five miles of the American aircraft carrier Kitty Hawk. At least some of the increased military budget is intended to compensate the People’s Liberation Army for its lost revenues when it was required, by forceful former Premier Zhu Rongji, to sell off most of its considerable business portfolio.

'The party is facing a growing issue of legitimacy. If it no longer rules as the democratic dictatorship of peasants and workers, because the class war is over, why does it not hold itself accountable to the people in competitive elections?

The principal foreign policy goals appear clear: preventing Taiwan from converting its de facto independence to de jure independence, maintaining a constant capacity to attempt an invasion, extending China’s capacity to open up new forms of access to reliable sources of energy and other commodities, and helping safeguard such routes.

China’s capacity to project adventurist military power far beyond its borders, or to offer significant help for other countries to do the same—for instance in Venezuela, unsettling the U.S.’s immediate neighborhood—is limited today both by its resources and by its reluctance to leave its heartland short of the muscle the party may need to quell domestic disturbances like those that swept the country in 1989.

To prevent a growing fear of China’s economic power, Beijing wants to demonstrate, Kurlantzick points out, that as it grows, it will become a much larger consumer of other nations’ goods, creating—in a favorite phrase of the current leadership—“win-win” economics. Chinese leaders constantly talk up the value of likely investments and trade, with total outward investment rising, according to official statistics, 1,000 percent in 2005, though this figure includes mere commitments and the total is only $7 billion, compared with $60 billion in foreign direct investment (excluding the finance sector) flowing to China.

China’s soft power offensive and the lure of the China Model remain, however, entirely official government programs. Where soft power has worked durably and has permeated connections among nations and nationalities, it has also involved civil society and the media, the arts, cultural attraction—the broad range of informal human contacts. Beijing will not let such areas of life off the leash at home, let alone license them for export. Thus, its charm in the developing world remains that of the official with his jacket still on, the limousine with darkened windows waiting outside—fully paid for—and the critics regularly, clinically rounded up and removed beyond earshot.

Rowan Callick is the Beijing-based China correspondent of The Australian newspaper. He has previously written for THE AMERICAN about coal in China and economic resurgence in Japan.

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