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17 July 2020, Gateway House

China’s internal dilemmas

China is the center of the universe and it's enjoying the attention - as also misusing it. Its rise changed geopolitics and trade starting two decades ago. And now in 2020, its rise is changing geopolitics and trade again. Dexter Roberts is the author of a new book The Myth of Chinese Capitalism, The Worker, the Factory, and the Future of the World. As the BusinessWeek and Bloomberg-BusinessWeek bureau chief in Beijing, Roberts has seen China first hand.

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China is the center of the universe and it’s enjoying the attention – as also misusing it. Its rise changed geopolitics and trade starting two decades ago. And now in 2020, its rise is changing geopolitics and trade again. Dexter Roberts is the author of a new book The Myth of Chinese Capitalism, The Worker, the Factory, and the Future of the World. As the BusinessWeek and Bloomberg-BusinessWeek bureau chief in Beijing, Roberts has seen China first hand.

But instead of staying in the cities, he spent time in the rural heartlands of China covering peasants migrants, coalmine workers, young Chinese, the communist party workers at the ground level. He has seen the rise of militant China and of digital China. After 23 years, he has come to this conclusion, that the hard work of the migrants of China have enriched not them, but the coastal elites. And that Chinese capitalism is a myth. He speaks to Gateway House’s Manjeet Kripalani.

Manjeet Kripalani (MK): The title of your book, why do you call Chinese capitalism a myth? Is it just state ownership versus private ownership? Is there more to it?

Dexter Roberts (DR): Broadly speaking, Chinese capitalism is shorthand for economic reform and whereas China, did have very real economic reform and is behind this tremendous surge in growth and the rise in living standards throughout the country and went on for many years and many of the years that I was based in China as a business and economics reporter. My argument is that reform has now really stalled if not outright stopped. And we’re seeing that particularly over the last five plus years under the present leadership of president and party secretary, Xi Jinping.

MK: And so the myth is that there’s no capitalism at all. It only exists for the party.

DR: First of all, China does have a very substantial ecosystem of private entrepreneurs and private companies. And, they had been doing very well over the last few decades and particularly over the last 10 plus years, but what we’ve seen is a real reversal in their standing within the economy. And one of the arguments I make in my book is that even though China does have a significant number of private entrepreneurs and private enterprises, ultimately, they will really only function with the goodwill of the Chinese Communist Party.

And that is something that is far more true over this last five or six years. Every successful Chinese private entrepreneur in China knows that if they reach a certain size and a certain level of success, they have really two responsibilities. One is the traditional responsibility of making money, turning a profit and so on. The other really is a political one. And that is to ensure that their corporate goals align with those of the Chinese Communist Party.

MK: Your dedication in your book, which is to the migrant workers of China and to their families, that’s a contrast to the capitalism you refer to. Tell us about the two Chinas you saw, the China of entrepreneurs and the China of rural migrants and why the two have not and may not ever meet.

DR: My book does focus to a large degree on this other China, for lack of a better way to describe them and this is a very substantial portion of the population of China. I am writing about the migrants, which number around 300 million people, which, just to note, [is about as large as] the U.S. population. And then there are their relatives in the countryside, which is another 300 million or more people and together that group of the other China, encompasses about half the population of China.

Another myth that I talk about in my book is that China will continue to keep growing its middle class under its present system, the way that it has done so successfully in previous years. And, what I talk again about in my book is an actual system built into the Chinese economy that ensures that this other China of migrants and their rural cousins are in effect second class citizens. This prevents them from becoming part of a future middle-class in China.

MK: Why has that happened? Because communism was supposed to be about the people, not about the middle class and China already eliminated all their middle class.

DR: This is one of the great ironies of the communist revolution in China, which is not always recognized and that is that going all the way back to the Mao era, there was a system put in place that really divided China into two major classes and one class was those people who lived in the city, the urbanites, who were seen as very important in Mao’s goal of industrialization.

And he was borrowing a leaf from Stalin at that point. So even as he talked about a revolution for the people, the reality was he needed, in order to drive industrialization, a very large population, in effect a captive population of rural people in order to provide cheap food, for the people in the cities that were going to build industrialization, at least in his plan. What’s happened today is even with the reform certain key policies that Mao put in place that created this dual China are still there and they’re actually behind the economic miracle of this made in China manufacturing miracle.That has produced these low cost exports for the world, a large degree based on this system, which keeps migrants and rural people in this second class status and ensured low wages in China for many years.

MK: You reveal that the coastal elites have benefited from the hard work of these migrants who have actually not benefited as much at all. How has that happened?

DR: Yes. So broadly speaking, you see in China, again, this division into those people that are born in the countryside, and those people that are born in the cities and the way that they in effect are discriminated against is through something called the household registration policy, which is a Mao era policy, but one that is still very much alive and well today.

And that policy in effect ensures that those people that are from the countryside or whose parents are from the countryside, do not get the same access to medical care. Their children do not get the same access to affordable public schools that those people from the cities get. And, it’s interesting if you look at some the protests that we’ve seen in China in recent years, we’ve seen protests by urbanites that have actually pushed back against efforts, well-meaning efforts by the government, to try to integrate migrants and rural people, more into the economy. So you have this interesting dynamic where urban people are very protective and not surprisingly so, of the privileges that they have in the system, and do not want to see reforms that although necessary perhaps to drive future economic growth, in the immediate term, mean they have to share their hospitals and their schools with the other half of China.

MK: And so this has created an unequal society.

DR: It’s deeply unequal. And again, I don’t know how much this is widely known, but China today has one of the most unequal societies in the world. If you look at it by the traditional Gini coefficient, it is very, very high. The other thing that’s quite striking in China is the growth in the wealth gap.

And we’ve seen in the research by Thomas Piketty, the noted inequality scholar, and a gentleman named Gabriel Zucman at Berkeley,that has looked at inequality in China and what they find is that inequality and the wealth gap have grown at a rate comparable to what we’ve seen in Russia, which is somewhat surprising.

We don’t usually associate a kleptocratic Russia as people have called it, with China today. But that is the reality.

Source: Dexter Roberts

MK: China is in a sense a child of U.S. led efforts. Can you elaborate on those efforts? You were eyewitness to how the U.S. helped and enabled China to join the WTO in 2001, thereby bringing it into the global community. Very few people know how much the U.S., Japan, Europe and the U.K. helped China become what it is today.

DR: Yes, I should start by saying that many Chinese might react strongly to that idea. Particularly today in China there’s not a lot of appreciation for the U.S., particularly with the antagonist relationship with the U.S., recognizing any role that the U.S. may have played, but it is a fact yes. I was there, throughout the whole WTO accession process and, the key agreement, was the U.S.-China bilateral accession agreement, which was signed in 1999. The main negotiator on the U.S. side was the very capable, former head of USTR Charlene Barshefsky. It was very interesting to see that whole process. And it was very much a give and take where both sides, particularly China, they had to open up all these different markets,from agriculture to telecoms, to finance.

So we’ve seen a mixed record on progress on meeting some of the promises, the WTO commitments, all these years later. But nevertheless, there was this give and take where, the U.S.and China would both open up access to their markets. Obviously a huge flow of foreign investment, a huge flow of American investment came into China, which helped not only provide financing at this key moment almost 20 years ago, but also a managerial know how, which really helped transform the Chinese economy as well.

So I think it is fair to say that the U.S. and some other major economies as well, Japan and so on, did play a very crucial role in this economic transformation. You have to keep in mind that before WTO and right shortly after I arrived in China in the mid-nineties, it was very much still a state dominated economy.

It’s returning to become more a state dominated economy in some ways today, but at that time there really wasn’t a private enterprise portion of the economy that was flourishing. And it was quite dramatic: I remember as a young reporter writing about the auto industry, the first thing we had to know was 85% of auto sales went to the government or to large state enterprises.So there was no real, private auto market to speak of at all back then.

MK: What a journey it’s been for China and for the world. On China’s world domination quest – is it a Xi Jinping quest or do ordinary Chinese truly believe that their time has come?Are they isolated in their own technology and state propaganda bubble, or do they really understand the world very well?

DR: I think the answer to that question is really both. I’m cheating by not coming down on one side, but the reality is your average Chinese, does feel, of course, real national pride and they do feel like this is a moment for China to take a much larger role on the global stage.

On the other hand, what that role will be, will be going forward, is very much being defined by Xi Jinping and by the senior members of the communist party. And, so I think you can say both are there. I do think as well, and it’s not a surprise to many of you, that the Chinese education system is still very tightly controlled by the party. Under Xi Jinping, it has become more tightly controlled.The trend has been towards more closing rather than opening, less access to information, a stronger firewall to try to block out what they perceive as unfriendly or unwelcome information. And again, in the education system we’ve seen a growing emphasis on teaching ideology at younger and younger ages. So you’ve got primary school kids that are learning Xi Jinping slogans, and memorizing various party slogans. There is real pride by the people who would like to see China take on a much larger role. But that role and the rather bellicose, belligerent version that we’re seeing now around the world, which is alarming to countries everywhere, including India, of course, is very much being defined by Xi Jinping and the senior members of the communist party.

MK: Bringing it closer to home in India, the Chinese Communist Party versus the People’s Liberation Army – are they one or are they fused, are they separate? Do they know what they’re doing because the Chinese will often say, the border issue is a rogue PLA element and then of course we know it’s not.

DR: Yeah, no, I think that’s really, not true. I think that’s an excuse if anything, for what’s happening. What I would say is the decision by local army units to act in the way that they do is very much driven by vision at the top.

And if the top leadership and Xi Jinping say that we want to push it a bit here. That’s coming from the very top of the leadership. And of course, what we’ve seen in India is a very good example of it, but we’ve also seen it in the South China Sea.

We’ve also seen it with PLA flights, crossing this unofficial midway line in the Taiwan Strait testing the Taiwanese air force. We’ve seen it with their relationship with Vietnam. And so we’ve seen it in many, many places. I think it’s absolutely untrue to say that these are rogue PLA elements and therefore the party somehow can pretend like, they’re not fully responsible.

I don’t think that’s the case.

MK: Chinese digital companies are now shifting away from listing in the U.S. and to listing at home. And until two weeks ago, they were all going to Hong Kong, but now, you know, maybe that’s just no longer possible.

First, will they get good valuations? And second with Hong Kong, less attractive, where are they going to go? Are Shanghai and Shenzhen good options.

DR: I think longer term we’ve been hearing for years almost since I arrived in China, that Shanghai and Shenzhen are going to be built up to become viable alternatives to Hong Kong and other markets around the world.

The progress has been very slow and it gets to the heart of China’s leadership and the system in China’s control over capital. And, the fact that it’s difficult to have a flourishing stock market when much of the financial system through the banks are still state controlled. And they have strong capital controls because they’re concerned about capital flight out of the country.

So, I think it’s going to take a while for Shanghai or Shenzhen to play a real role, replacing a market like Hong Kong. People have talked about Singapore, I don’t think Singapore is a viable alternative for Hong Kong either. I also think that the government in China as a priority would like to see it closer to home.

There’s a very strong interest in their mind to having their top companies list in a market that they control, which is Hong Kong. But then it gets to the question of killing the goose with the golden eggs, they want to control it, but they also want it to be a viable, attractive international market that appeals to companies from around the world, not just Chinese companies.

MK: And therein lies their conflict.

DR: Yes.

MK: Therein lies the same thing, the myth of capitalism. The Belt and Road, ambitious initiative. How much has that been damaged by current events? And how is Xi Jinping going to salvage his pet project and can he?

DR: Well, I think it’s definitely been damaged. And there was some research that came out in the last few weeks from the government that said that a very significant portion of projects, Belt and Road projects,had been put on hold because of COVID-19 in particular. And, and then of course we’re also seeing this growing pushback against China’s more, I would call it belligerent, stance towards the world, which has an impact on the degree to which countries are welcoming of these big projects.

So I do think there has been an impact, but as you just mentioned, it very much is a pet project of Xi Jinping. And so it’s very important. Anything that Xi Jinping says is important is going to be very important for China, at least for the time being. And so I do think that it’s not going to go away and he will do his very best to try to resurrect it, even in the face of this adversity from COVID-19 and also from a bit of a pushback from the rest of the world on China’s assertive global presence.

MK: The migrant workers you’ve described so beautifully in your book live in very tight conditions in a small apartment, six people to an apartment on meagre wages and for long hours. Is that common across all industries and cities?

DR: I should say that in the years that I was covering manufacturing and the labor movement in China, starting from the mid-nineties until recently, there was tremendous progress in improving conditions for many workers. And in particular, we’ve seen real improvements along the coast and in some of the more developed parts of China. One of the things we’ve seen in recent years, along with companies actually moving production out of China, is also as an alternative of moving their factories deep into the interior of China to poor regions.

In those cases, we’ve seen sort of a replication of some of the worst conditions that once I used to see along the coast. You have local governments that are very, in some cases, almost desperate for investment, much more willing to turn a blind eye to local environmental or labor regulations.

So, we’re seeing, unfortunately, a bit of a surge in problems, again, amongst workers in China. Also, I should say, sort of the less savory side of the internet, the so-called Taobao villages named after the Alibaba’s Taobao that have sprung up around the country. They tend to be short-lived small factories and crucially for their economic model, they often will try to keep under the regulatory radar and therefore not necessarily follow local regulations.

And this has also, showed up again, a return of some of the worst conditions for workers in China.

MK: You point to one of the worst jobs in China to be a courier for one of the e-commerce firms like and Alibaba.Can you tell us why?

DR: Well, it’s interesting because if you look at the big picture in China, we’ve seen a big shift in migrant workers, the majority of which no longer work in the factories and on the construction sites. Although that is still very substantial, as of a couple of years ago, it tipped over so there’s actually more migrants working in service industries and the Chinese government has tried to encourage that to a degree because they see the economy as transitioning to a more service driven economy. The problem is the jobs that the Chinese government has envisioned [are not materializing]. These less skilled, less educated migrant workers, unfortunately and sadly, have not taken the sort of the high-end service industry jobs that the government would like to see.

Instead, as you just mentioned, the most common job is this courier job, basically riding a motorcycle through often very chaotic traffic and trying to very quickly deliver goods in the cities. And it’s really what has defined urban China in recent years. The fact is, the pay is not that good, it’s not terrible, but it’s not that good. And in order to actually make a good living, they really need to just keep moving constantly. And that means taking no breaks. First of all, it’s not a very comfortable job.

There have also been some terrible traffic accidents related to this very high-pressure job. And that indeed is the number one employer for migrants as they leave factories in sort of the new China, and they have also been very important during COVID-19 as well, the delivery economy. But it’s really not a very ideal job for, for these people to take.

MK: How will the financial system sustain the non performing loans of almost 50% and the dual exchange rate regime ?

DR: To date China has dealt with its non-performing loans often by just issuing more loans, basically diluting them. There’s been a huge build-up in debt in China, particularly starting after the global financial crisis in 2008.

And China really responded by sort of unleashing the fiscal and spending spigots and pumping all this money into the economy. So, there have been efforts, real efforts to try to de-leverage and lower the debt in the economy. But, it’s very high now and at a level that, many countries would see as potentially destabilizing. And the dilemma that they continually face there is, yes, they know they need to de-leverage. They know that it’s not good to have a large number of nonperforming loans, but at the same time, they need to ensure that the economy can grow, and grow at quite a rapid rate. The economy’s less productive than it was before. And in order to generate GDP, they’re having to put more and more debt into the economy.

Crucially, they also need fast economic growth to try to create new jobs, including, for many of these migrants who no longer have jobs in factories and in some cases no longer on construction sites. So it’s a real dilemma for them. We see campaigns of de-leveraging and then we see them relaxed as now, when the Chinese economy and the global economy start to do badly.

MK: Will the class conflict affect the CCP’s leadership? Recently, Premier Li Keqiang advocated for the poorer classes in a party meeting.

DR: Yes. Li Keqiang has been a fairly regular advocate for trying to help out the lower classes.

As a student, he studied household registration and more generally, he’s studied urbanization and the role of migrants and bringing more people into the urban economy to try to drive the economy.

There is the potential for greater instability, given the surging wealth gap. I think that is recognized increasingly by the lower underclass, the people that haven’t done as well in China. And there is growing resentment about the fact that other people in China have done so much better.

There’s been this implicit bargain for many years, between the party and the people and the bargain has basically been you will not demand civil rights or real freedoms. You will not demand the right to have a free press, etc, but we will guarantee that living standards continue to rise.

That implicit bargain was already frayed for the other China that I talk about in my book. And, now as the economy starts to turn South, with the downturn globally, that bargain is fraying even more. So, I do think we need to watch particularly that other China and how they respond to that.

There are labor protests and other kinds of protests every day still in China, despite the controls of the party.

MK: How long do you think Chinese hegemony will last?Is it here to stay?

DR: There have been so many predictions made on the coming collapse of China that have been proven wrong and I’m certainly not going to predict that. And I don’t expect that to happen soon. What I am worried about is real stagnation in the economy and growing strife related to that within society in China. You have a very powerful Chinese Communist Party, which is working very hard to have a tighter and tighter control over the people within China. You see it in controls on the great firewall. You see it in, albeit piecemeal, these efforts to create a more national social credit system.

And by the way, some of these controls over the people and digital controls have been only strengthened through COVID-19 and I don’t expect the monitoring of the population that’s been done digitally in order to control this pandemic,I don’t expect it to go away when the pandemic finally leaves.

These are new methods of control that the party will continue to strengthen. So it’s impossible to calla date of when the hegemony might end, but I would say that the fissures and the pressures on the party are growing far more strong right now, and that is something the party is also very aware of.

MK: Is Chinese capitalism is similar to Asian capitalism? Who has learned from whom?

DR: It’s really hard to say. Obviously there’s been a real borrowing back and forth as, as is true with economic systems around the world, but I would argue, and I make this argument in my book, that the Chinese system has several unique characteristics, which makes it different from other countries. For the common people, for the other China, we have these legacy policies, the household registration policy that I mentioned to you, as well as something called the dual land system, which means in effect those people in the countryside cannot monetize the land and benefit from it the way people have in the cities.

And at the same time, the Chinese Communist Party, which runs the system and, does so quite effectively, is also by the way very ideological and is becoming more so, almost returning to a “politics in command” model, like during the Mao era. I do think that, there are some very, very important distinctions in Chinese capitalism. As I mention in my book, the Myth of Chinese Capitalism, the economic system in China is unique, with things we don’t actually see amongst its Asian neighbors at all.

MK:. Has Xi completely abandoned Deng’s doctrine? Is it  a strategic mistake? Mao remained in power despite the Cultural Revolution. How long do you think the “21st century CPC” will hang on with its new core?

DR: I do think on the first question that we are seeing what seems to be a real turning away from Deng Xiaoping’s old dictum about, keeping a low profile and biding your time. It was a policy that very much defined the rise of China, through the Deng Xiaoping era, this recognition at the time that China needed to open and benefit from exchanges with the rest of the world in order to grow. China was poor. It needed to keep his head low. It needed to not antagonize other countries around the world, particularly those that might be investing, and bringing expertise, technology, and capital to China. We’ve really seen that Deng dictum abandoned under Xi Jinping.

And, whether you look at the South China Sea, whether you look at India, whether you look at Taiwan, there is a new assertive China, which I think, bears no resemblance to what Deng was trying to do. And I think that’s something that all of us around the world need to be aware of. It has real ramifications for the world.

The second question again, just referring back to my last answer. I think it’s a fool’s errand to try to predict how long the party might last or how long the present leadership will last in China. But what I will say is that I moved to China in the beginning of 1995 and was there most of the last quarter century. And although there were times when it was clear that China and particularly the leadership was facing an uncertain course ahead and real pressures on maintaining its leading role in China, I think that those pressures and those challenges are much larger today than they ever were in all those years I was there. So I do think we shouldn’t be surprised if there are big shifts, economic and political, in China going forward.

Dexter Roberts is Non-resident Senior Fellow, Asia Security Initiative, Atlantic Council & author of the newly-released book – The Myth of Chinese Capitalsim – The Worker, the Factory & the Future of the World

Manjeet Kripalani is Co-founder and Executive Director, Gateway House.

This interview was exclusively conducted for Gateway House: Indian Council on Global Relations. You can read more exclusive content here.

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