Taking the Bosses Hostage

The riot started, last December, in the wake of a simple pay dispute at a small Chinese factory that manufactured cheap suitcases. Orders had been dropping, and the factory closed down without warning, leaving wages unpaid. The workers started to smash up the factory, and looked for managers to attack. The police arrived on the scene, and attempted to restrain the workers by locking them inside the factory compound while the managers offered them a deal – part of their back wages would be paid if they left town. This strategy failed; according to an account in the Washington Post, more than a hundred workers fought their way past the police, scuffling with the security forces and chanting: ‘There are no human rights here!’

To outside observers used to thinking of China as a repressive state, such a protest might seem surprising. But even more surprisingly, the riot erupted in Dongguan, a humming industrial city in the Pearl River Delta, the manufacturing hub of southern China. The delta, which has cultural and commercial ties with Hong Kong, is the world’s workshop. Nearly every major Western company dependent on overseas manufacturing sources products in the low-slung factories that line its highways; inside, teams of young women, sought after for their manual dexterity, put in long hours assembling everything from children’s toys to computer chips. According to one estimate, the Delta, home to just 60 million people, produces 5 per cent of the world’s manufactured goods.

Yet even the Pearl River Delta can’t immunise itself against the wave of protest sweeping across China as the global financial crisis batters the country’s economy, which is heavily dependent on exports to Western nations. Most Chinese economists believe the country needs to grow by at least 8 per cent each year to absorb those entering the job market, from peasants migrating to big cities to young people finishing university. But the Royal Bank of Scotland’s economic research unit predicts that this year China will grow by only 5 per cent, and others argue that it may already have fallen into recession. Twenty million migrant workers have lost their jobs since the beginning of the crisis, and more than 60,000 factories have closed over the past year, as orders from Western companies have plummeted and foreign investment has collapsed. Government officials privately estimate that the unemployment rate now stands at its highest since 1949, the year the Communist Party took power.

The downturn could prove the first real threat to the regime since the 1989 Tiananmen protests. It challenges the wisdom of Beijing’s economic model, and threatens to break the implicit bargain between China’s middle classes and its rulers, whereby the regime will deliver high growth rates, and in return, the middle class, who benefit most from growth, will tolerate authoritarian government. In recent weeks, protests have erupted in other manufacturing cities: fearing lay-offs, workers are taking their bosses hostage, marching through the streets and smashing up factories, police vehicles, and even Communist Party offices. Some protesters have begun to organise across provinces, realising the party’s greatest fear, since it remains the country’s only truly national institution and is keen to prevent any other group from following suit. Over the winter, tens of thousands of taxi drivers, in a number of provinces, abruptly went on strike, to protest against the high price of renting their cabs. Last autumn a group of prominent intellectuals published Charter 08, an online manifesto calling for an end to one-party government and the establishment of a real rule of law. Within weeks, it had supposedly gathered more than 10,000 signatures, even though signing it potentially meant arrest. ‘It’s not that there is no anger there,’ Li Datong, one of China’s best-known political analysts, told me when I met him in Beijing. ‘The government has been skilful in convincing the middle class it’s futile to protest . . . but you only need one spark for that to change.’

In 1979, China would have been unrecognisable to someone visiting big cities like Shanghai today. What is now the eastern part of Shanghai’s commercial district, Pudong, was then just a long stretch of rice fields. Abandoning Mao’s constant internal warfare and his belief in state dominance of the economy, Deng Xiaoping launched what would become known as ‘reform and opening up’. He disbanded farming communes, began to allow private businesses and encouraged ordinary Chinese to embrace a capitalist economy, though he was always careful to describe his new ideology as a form of socialism. With Deng’s blessing, local governments started investing in light industry and other private enterprises. Realising that China desperately needed large-scale foreign investment, Deng created special economic zones in southern China to showcase to investors the country’s new openness and the availability of cheap labour.

Deng structured the reforms in such a way as to protect the party politically. As Bao Tong, a former aide to Zhao Ziyang, Deng’s premier, has noted, Deng never had any intention of abandoning one-party rule or embracing political reform. But he realised that without economic reforms, the Chinese people might abandon the party. In a famous speech, Deng declared that ‘some will get rich first,’ and investment, both foreign and domestic, was channelled first to large East Coast cities such as Shanghai and Guangzhou. Deng also oversaw the creation of an entirely new, economically open city, Shenzhen, in southern China, which ultimately became a kind of Oz for Chinese workers, a place where supposedly anyone could show up, penniless, and find a job. Meanwhile, the government prevented rural workers from moving to the big cities, keeping jobs safe for the politically connected, urban, middle-class elites who were capable of threatening the party’s rule, and who had organised the ‘Democracy Wall’ protests in Beijing in 1978, the first flowering of opposition to the party after Mao’s death.

For nearly three decades, the policy worked. China frequently posted annual growth rates of 10 per cent, and 150 million people were lifted out of poverty. In some years China surpassed the US as the world’s largest recipient of foreign direct investment. The East Coast cities grew into megalopolises with income levels on a par with far more advanced societies – Shanghai now has a per capita GDP of more than $7000. The co-option of the middle classes was pretty successful. By the early 2000s middle-class urban Chinese had become largely quiescent, or even supportive of a regime that had made them rich and, compared to Mao’s era, allowed them considerable social freedom. According to Jonathan Unger, in a 2006 essay in the Far Eastern Economic Review,

State employees who in the 1980s could not afford a fridge or colour TV or even leather shoes and who lived in dreary walk-ups now have gained a material life that they had never imagined possible. They do not want to upset the apple cart. If the government’s plan was to co-opt the salaried middle class, it has worked . . . There are, of course, exceptions, but most intellectuals tend to accept and approve of the status quo and see the straitened circumstances of China’s peasants and workers as the necessary price to be paid for China’s modernisation.

It seemed to many foreign observers that the regime had achieved an unusual degree of stability for an authoritarian government. Perhaps, even, a new model of capitalist development: one in which the state continues to play an active, interventionist role in many companies even as they compete in global markets, and in which the populace tolerates authoritarian rule in exchange for prosperity. In autumn 2007, probably the peak of the country’s recent economic power, I interviewed a series of Chinese academics and officials: three years earlier, most would have denied China had an economic model that could teach the world something; now, they were more boastful, swapping stories about the training programmes China runs for thousands of government officials and technocrats from developing nations.

But these decades of high growth disguised problems. Channelling investment to eastern cities created new divisions in a country that had previously not displayed great inequalities of income, by Asian standards. Today, wealthier provinces such as Fujian, in south-east China, have per capita GDPs ten times higher than those of interior provinces, and inequality is approaching that of stratified Latin American societies. In eastern cities, the push to attract investment has resulted in vast overcapacity; in the interior, farmers struggle to find the resources to get their goods to market. Cities such as Shanghai are full of half-empty high-rises, and unnecessary high-profile infrastructure projects such as the Maglev train, which whisks people from the new airport to the centre of town at 430 kilometres an hour. If anyone rides it, that is: when I’ve taken the Maglev, it’s been almost empty.

When you travel from eastern China into the interior, it’s impossible not to notice the stark difference. On one trip, I flew from Shanghai airport, where I drank an $8 latte while I waited for my plane, to Gansu, an arid, dusty province reminiscent of the American south-west, with its moonscapes and bleak canyons. There, I drove past farming villages of one-room stone huts, heated by coal-burning stoves. Most of these subsistence farmers still live close to the villages where they were born.

Busy buying off China’s middle classes, the government too often ignored the seemingly powerless masses in the countryside. Besides being passed over for investment, peasants face all manner of predation. Corrupt local officials force them off their land to make way for industrial and commercial developments, which often involve kickbacks to local party officials. Central government initiates infrastructure projects that divert water from rural areas to the East Coast cities; the groundwater beneath the North China plain, the major agricultural region of the country, could be completely depleted in less than thirty years. Some local officials simply steal state funds outright. (A few local party offices have become notorious for their lavish facilities, including karaoke bars and spas.) According to a 2007 policy briefing by Minxin Pei of the Carnegie Endowment, corruption consumes nearly 10 per cent of all state contracts. ‘The odds of a corrupt official going to jail are less than 3 per cent, making corruption a high-return, low-risk activity,’ the report states. ‘Even low-level officials have the opportunity to amass an illicit fortune of tens of millions of yuan.’

The urban elite have until recently paid little attention to the problems of these rural areas. As Unger wrote in his essay in the Far Eastern Economic Review, ‘They did not and do not want China’s peasant majority to play a decisive hand in deciding who rules. Most of them hold the rural populace in disdain.’ But the government could not ignore hundreds of millions of people for ever. Beijing’s leaders must be aware that peasant revolts in the late 19th and early 20th centuries helped put an end to imperial China. Over the past decade, hoping to prevent massive social unrest in the countryside, Beijing has begun to lift restrictions on movement, allowing rural workers to move to the cities, yet it has hardly prepared the country for the social and economic turmoil that has accompanied mass migration.

As Leslie Chang documents in Factory Girls, despite the tough working conditions – 12-hour shifts, sleeping in packed dormitories – factory jobs are coveted by many young migrant workers. They promise relatively high wages and, often, a kind of freedom – a life far from home, with money in your pocket. Some 130 million migrants have moved to the cities over the last ten years, overwhelming the state’s ability to house or to educate them, or to provide healthcare. After Deng’s wilful smashing of the ‘iron rice bowl’ – the Maoist era social welfare system – nothing was put in its place. Ordinary Chinese were left to fend for themselves in a society in which hospitals turn away patients who do not show up with cash, and parents with no money can’t enrol their children in a school.

In the late 1990s, China’s urban areas looked nothing like the cities of other developing nations such as India, where every intersection seems to swarm with beggars. With restrictions on movement to urban centres still in place, cities like Shanghai gleamed – you could hardly find a beggar or a homeless person. But over the course of this decade, things began to change. Unemployment rates remained officially low – migrant workers weren’t included in the figures – but the uncounted unemployed became a new underclass, with no access to social provision. In the provincial cities of the interior, often the first stop for migrants, squatter camps grew up near railway stations and water sources, full of young men sleeping rough while they hunted for construction jobs. Even in Shanghai and Beijing the poor were no longer invisible. Migrant workers clustered in run-down housing blocks on the outskirts of town or in shabby, prefabricated dormitories beside construction sites.

Before the relaxation of freedom of movement, few peasants had any idea how well those in the cities lived. Now, they saw with their own eyes China’s great wealth divide, and experienced the scorn of the urban middle class. This sparked intense anger, and migrants returning to the countryside fuelled resentment towards the coast, and encouraged the growing rural willingness to fight for their rights. Though educated human rights activists get more media coverage in the West, when I have spoken privately to Chinese officials, they have made it clear that rural unrest scares them far more. Indeed, the number of ‘mass incidents’ (i.e. protests) in the countryside each year dwarfs the number that take place in the cities.

With less to lose, rural protesters resort more quickly to confrontation. Rare in the post-Tiananmen years, violence has recently become common in rural disputes, with both protesters and local security forces armed with clubs, guns and even bombs. Even the police, the pillar of any authoritarian state, have gone on strike in some provinces. In a now infamous riot in December 2005, in the southern town of Dongzhou, local inhabitants, angry at plans to build a new power plant on land taken without compensation by local officials, marched through the town and faced down local security forces. For the first time since 1989, the security forces opened fire with live ammunition, killing 20 people.

China’s economic reforms were misguided in other ways. Deng’s strategy made the country far too dependent on exports, without a backup if foreign companies stopped investing and foreign consumers stopped buying. China amassed vast trade surpluses, allowing it to build up nearly $2 trillion in hard currency reserves. But by focusing so heavily on generating investment, the government failed to create the conditions for robust domestic consumer spending: it didn’t ensure that there were banks ready to grant home or car loans, or rural credit organisations capable of helping farmers modernise. Consumers stuck their money in the bank, or under the mattress, giving China one of the highest rates of household savings in the world.

This strategy was part of an implicit bargain with the US, in which China would essentially subsidise American consumption. According to Michael Pettis, an economist at Peking University,

Until recently, excess US demand and excess Chinese supply were in a temporarily stable balance. As part of running a trade surplus, China necessarily accumulated dollars, which had to be exported to (invested in) the US. This capital export did not occur in the form of private investment – indeed it was exacerbated by Chinese net imports of private capital – but rather as forced accumulation of foreign-currency reserves, which were recycled back to the US largely in the form of purchases of US Treasuries and other dollar assets by China’s central bank.

But China was too reliant on foreign investment in low-cost manufacturing. The country failed to build sophisticated domestic companies that could compete with multinationals and innovate in cutting-edge industries like green technology or mobile communications. China’s few homegrown international brands, like the telecoms company Huawei, depend on a vast, opaque web of state subsidies and loans from state-linked banks to expand. Most Chinese firms, lacking skilled management or effective customer service, have failed to compete in developed world markets. Instead, they tend to focus their energies in Africa, South-East Asia or Central Asia, where they often do not have to compete directly with Western and Japanese firms. China is also finding that, though it may seem to have a bottomless pool of cheap labour, neighbouring states such as Vietnam are already undercutting it and attracting away investment – China’s own entrepreneurs are flocking to north Vietnam to build factories.

China’s lack of globally competitive companies should perhaps come as no surprise. In a sharply written book based on reams of newly uncovered financial data, Yasheng Huang, one of the earliest critics of China’s economic miracle, argues that over the past 20 years the country has actually become less capitalist and less economically free. In the early 1980s, the government essentially strangled emerging private entrepreneurs, who had to compete both with massive state-owned enterprises and with giant multinationals. By comparison, many other Asian governments supported entrepreneurs by providing incentives for citizens to buy their products and effectively barring foreign firms from many segments of the market. This strategy worked: Japan, South Korea and Taiwan built companies, like Korea’s Samsung or Taiwan’s Acer, capable of competing in global markets.

Huang also shows that in the early 1980s much of China’s dynamism originated in rural areas, which were the first to embrace free-market capitalism by creating joint stock companies to sell their products. The farmers’ entrepreneurship helped ensure that economic growth in this period was fairly distributed, with both rural and urban areas growing strongly. But in recent years, as the state has starved farmers of support, rural dynamism has withered and income inequality soared.

Skilful at anticipating public opinion, China’s leadership knows it faces problems. At global financial summits and meetings with Western leaders, senior officials claim they have the situation under control. Speaking to the World Economic Forum in Davos in January, Wen Jiabao, the Chinese premier, assured delegates that his country would grow by the magical target of 8 per cent this year. Still, even Wen sees the danger. In Qiushi, a party publication, he warned that ‘factors that harm social stability will increase,’ an unusually blunt admission for a Chinese official.

Thus far Beijing has stuck to its battle-tested strategy for controlling unrest, a mixture of co-option and crackdowns. Local officials have begun to buy off protesters, promising to cover unpaid wages and, sometimes, slipping cash to protest leaders to shut them up. For its part, the central government has launched a $585 billion stimulus package designed to jump-start the economy – a far bigger outlay than any American or British plan when calculated as a percentage of GDP. Chinese leaders – especially Wen – have tried to appear sympathetic; in late February, he held an open internet chat session, as if he was an elected politician needing to win votes. This stimulus package could be the peasants’ best chance to improve their lives. Unlike previous government stimuli, the new package targets rural areas, and promises universal healthcare and cheaper housing.

Meanwhile, the State Council, the top policy-making body, is putting pressure on Chinese companies not to fire workers, and in February the central government reportedly convened marathon meetings of security organisations, aimed at discussing how to prevent protest spiralling out of control. Security forces have arrested signatories of Charter 08, tightened police control in restive regions such as Tibet and the Western province of Xinjiang, and dramatically increased monitoring of the internet. Chinese journalists, who previously had been granted freedom to cover protests, now find that reporting demonstrations might get them fired.

Yet all these measures may well fail. Chinese habits of saving, and the deep-rooted fear of economic collapse, will make it hard to kickstart the economy through domestic spending. Indeed, the opposite is likely to happen: in interviews with ordinary homeowners in major cities, I found that nearly all of them were trying to save more money, fearing they would lose their jobs over the next year. The People’s Bank of China recently admitted that the country faces deflation this year, partly because of weak domestic demand. No stimulus from Beijing will convince Western consumers to start spending again, which puts China’s leaders in the uncomfortable position of being unable to determine their country’s economic fate.

Nor will police measures be as effective at controlling protest as they once were. With the transition from state to private housing, many Chinese live beyond the reach of the party, which once possessed informants in nearly every public housing block. Demonstrators also have much more sophisticated tools to help them organise than they did in 1989, and are better at avoiding surveillance. They can now organise rallies of thousands of people by sending text messages or emails from remote servers that are hard for security forces to penetrate; in the eastern city of Xiamen, residents successfully used a text message campaign to stop a chemical plant from being built.

Wen and President Hu Jintao have spent years trying to improve China’s image, a campaign capped by the 2008 Olympics. Beijing now plays a major role on the Security Council, sends peacekeepers to far-off continents, and mediates over security threats such as North Korea’s nuclear programme. All this effort has worked: even as the economy melts down, Hu Jintao last month embarked on a multi-country visit to Africa and the Middle East, where he was welcomed like a king. A brutal crackdown on unrest, with the kind of bloodshed seen in 1989, would destroy all these gains. And unlike in 1989, when Deng Xiaoping clearly stood at the top of the Communist Party hierarchy, and made the decision to suppress the demonstrations in Tiananmen Square, the party is now more fractured, without a similarly revered and powerful leader. Hu Jintao would probably favour a tough line on protest but others in the leadership appear more liberal, and Hu does not command Deng’s authority. Perhaps, 20 years later, angry peasants and laid-off factory workers might accomplish what the students started.