China's Missing Pieces

By Terry McCarthy/Shanghai

When powerful men fly too close to the sun, two things can happen: they modify their course, or they come crashing down.

China's most daring highflyer, Premier Zhu Rongji, has come very close. He likes the altitude--it energizes him--and over the past five years he has seemed to defy gravity as he pushed his country's economic reforms further and faster than anyone thought possible. To his many admirers at home and overseas, he was the enlightened mandarin who single-handedly could break through the red tape and propel China's economy into the next century. Even Asia's debilitating economic crisis didn't seem to faze Zhu. In March he laid out a program for China to make its state-owned firms profitable, restructure its debt-ridden banking system, halve the bureaucracy and privatize the housing market--all by the year 2000.

But six months later, "Zhu-phoria" has disappeared and there is an unmistakable odor of scorched feathers in Beijing: Zhu has hit his ceiling. With the negative G-force of some 200 million unemployed pulling at him, a sharp decline in exports and foreign investment, a change-resistant culture of corruption, and an unfriendly economic environment in the rest of Asia, Zhu has been forced to reverse or put on hold all his key reform policies. Mounting reports of labor unrest around the country terrified his comrades in the leadership, whose fear of luan--chaos--approaches the phobic. "With no functioning social-welfare net," argues a Chinese economist, Zhu's reforms were "suicidal."

There has been no open criticism of the man known simply as "the Boss." Yet sometimes silence is more ominous. At a meeting of the Communist Party leadership last week in Beijing, the official topic for discussion was improving farmers' welfare. (The issue may seem mundane, but China has 800 million citizens living on farms, so agricultural reform remains essential.) The issue of preventing state industry and the entire banking system from disappearing into a black hole was not mentioned in the final communique, but Zhu's once ambitious plans are still the subject of a fierce backroom debate. Everyone knows where the buck stops in China's economy--not least Zhu, who, before he became Premier in March, coined his own version of the motto Harry Truman used: "I have 100 coffins--99 for corrupt bureaucrats and one for myself."

The first hint of backtracking came in July, when the government officially denounced "the wrong trend of selling small state-owned enterprises" because too many workers were being laid off by the new private owners. Instead banks were told to continue making "policy loans" to factories showing losses, in order to keep people at work. So much for bank reform. Then it became clear that the removal of state subsidies on rents (the average Chinese family pays $25 a month for housing) would be indefinitely postponed because free-market housing prices were too high.

The steely hand of control is also reaching back out into the political arena. The upbeat talk of new openness during the Clinton visit in June has fallen silent. Surveillance of dissidents has been increased, and in September police detained activists in four provinces for trying to legally register the China Democratic Party, which would have been the country's first opposition political group. Last week President Jiang Zemin issued a call to improve Communist Party control at the village level. This was a far cry from the village elections China holds, sometimes hinting that they are the first step toward democracy.

If the summer's slowdown has forced Zhu to eat humble pie, few are gloating. In the long run the success of the reforms is simply too important for China and the world--including American investors and the U.S. government. The obstacles are immense. The Asian crisis came at a bad time, but many of the other problems are home grown, starting with a pervasive climate of corruption and a lack of basic business know-how.

"Zhu Rongji is a good man, honest, with good ideas," says a mid-level government official in Suzhou, a city 50 miles west of Shanghai. "But even he is too weak to take on all the problems in China." The official then details the extent of corruption, inefficient industry, nepotism and financial chaos that plague his city, a microcosm of the mess China is in. Top cadres routinely "steal" houses for their children, he says, while others divert business loans to their own accounts and then walk away from the repayments. "It goes right to the top. The local party secretary's office was so expensively decorated--they say it cost $200 per square meter--that it was better than President Jiang Zemin's office. So when Jiang came for a visit, they had to arrange a meeting in a hotel instead."

The extent of corruption at a national level emerged last week in a report on the state purchase of grain. Out of a total of $65 billion set aside to buy grain from farmers since 1992, $25 billion--40%--had disappeared. Investigators found that much of the missing money had gone into luxury condominiums, futures trading and the purchase of cars and mobile phones--the kind of graft that makes the short-tempered Zhu go ballistic.

Asia's rocky economics remains a problem. With China's exports down 6.7% last month and foreign investment predicted to shrink 30% for the year, the government has embarked on a huge program of domestic spending to stimulate demand. "It is the old pattern in China--three steps forward and two steps back," says Joe Zhang, head of China research for HSBC Securities in Hong Kong. "At the moment we are backtracking." Says Andy Xie, chief China economist for Morgan Stanley Dean Witter in Hong Kong: "If they continue, they will end up renationalizing the economy. And that is not the way China needs to go."

If Zhu's meteoric rise--from tending livestock during a period of disgrace in the 1970s to being the country's top economic czar in the '90s--mirrors China's stunning growth over the past two decades, his future looks as turbulent as the economy overall. Insiders say his position is secure for the time being, not least because nobody in his right mind would aspire to take over the economic portfolio now. But if the economy keeps worsening, Zhu's joke about building his own coffin could come back to haunt him.

Zhu has no natural constituency to support him--neither in the military nor in the provincial party system nor in the central bureaucracy. Explains David Shambaugh, a China expert at George Washington University and the Brookings Institution: "Zhu has stepped on a lot of toes to get to the top, and he's alienated a lot of people. He has numerous vulnerabilities."

According to a source close to his family, the Premier is still calm and "far from panicking," although he is concerned about the health of the American economy, since the U.S. is one of China's key trading partners. A visit to Washington is on the books for next spring. One thing Zhu may have in common with his probable host in the White House: a pair of visibly clipped wings.

--With reporting by Jaime A. FlorCruz and Mia Turner/Beijing

With reporting by Jaime A. FlorCruz and Mia Turner/Beijing