#79 - The Chinese economic "miracle": a bounty for Western capital, a social disaster for the population

April 2007

The big number game

For over a decade, the media has been full of stories about the so-called "Chinese miracle". In addition, the champions of the profit system have been using it as a kind of Swiss army knife, which can serve all sorts of propaganda purposes depending on circumstances.

So, today, when workers protest against plant closures or cuts in wages and conditions, they are told that given the irresistible march of Chinese "competition" on the world market, there is no choice, but to submit to these cuts and be thankful that they are not even more drastic. When, on the other hand, capitalism displays symptoms of its degeneracy, the same "Chinese miracle" is pulled out of the hat, as proof that the system has a whole new lease of life ahead of it, since it can turn what used to be one of the world's poorest countries into a so-called "economic giant".

Of course, this is nonsense. Our purpose in this forum is to debunk these myths, to expose some of the contradictions and lies behind the "Chinese miracle" and to try to outline what it means for the working class.

The first myth, of course, has to do with the figures which are supposed to back up this "miracle". On this issue, it is worth looking at what the so-called "experts" themselves, have to say.

What may seem to be a somewhat unexpected example, is provided by an article published last November, in the columns of the very serious Hong-Kong-based business weekly, Far Eastern Economic Review. This article opened with a story which went like this:

"The United Nations Population and Demographics Office (UNPDO) reports that the average height of adult Chinese women has reached 170 centimetres, up from 159 centimetres in just about 25 years. On average, adult Chinese women are about four centimetres taller than American women. According to an opinion poll conducted on a group of American, European and Asian professionals who either have lived in or have visited both China and America, 97% attribute the height growth to 'better nutrition in the Chinese diet' or other factors such as the increase of interracial marriages as a result of China's open door policy. Only 3% of the polled suspect there is anything wrong with the data."

Weijian Shan, the author of this article, who is a partner in a respectable financial firm, went on to say: "I apologise to the respondents that I, the pollster, made up the Chinese height statistics and the UNPDO does not exist. But I thank them for helping me to confirm a hypothesis: people generally do not question statistics from what seem like authoritative sources, such as the UN, no matter how implausible the information."

The point of Shan's little story was to drive home the idea that no amount of World Bank statistics should be allowed to conceal what is really going on, on the ground in China. The country's economic growth and what he is professionally most concerned about, the growth of private profits, are not in question, says Shan. But, as he puts it, "a growing dwarf is no giant" or, as we would put it, more the point: not only is a growing dwarf not a giant, but if, in addition, it is surrounded by bloodthirsty sharks, this dwarf is unlikely to develop into anything other than an enslaved and stunted giant.

Shan's cynicism about the true nature of the "Chinese miracle" is not exceptional among the thin layer of business professionals which thrives out of China's economic development. But it is only in the specialist press, which only a selected few get to read, that it can be found.

So, what is really going on, on the ground? In January this year, the media announced with glee that China was now the world's 4th largest economy, after the USA, Japan and Germany. Predictions that it would take over the USA by 2020, or even earlier, followed immediately.

But isn't it somewhat strange to compare the wealth produced by China - in so far as its Gross Domestic Product reflects that wealth - to that of the USA, Japan or, in fact, any other country in the world? After all, with 1.3bn inhabitants, China's population is more than 4 times larger than that of the US. Surely, what should be considered "miraculous" or, rather, mystifying, is that China only manages to produce just over 25% of the wealth produced in the USA? If this should tell us something, it is certainly not that China is on the way to affluence, as the pundits claim, but that, on the contrary, it remains a very poor country! Its economy may be growing - there is no doubt about that - but it is only growing from a stage of utter deprivation to a stage of relative poverty, no less but no more. And even then, as we shall see, the simple fact of climbing these few steps up the ladder of under-development comes at a considerable cost to the vast majority of the Chinese population.

The "communist" riddle

Of course, the advocates of capitalism have an answer for everything: China's poverty, they say, is due to the legacy of what they call its "communist" past. And if it is finally pulling out, albeit slowly, of poverty, it is only thanks to its having embraced capitalism at last.

Except that this reasoning is based on entirely false premises. And in fact, as we shall see, these "experts" often get themselves entangled in all kinds of falsehoods, if not deliberate falsifications, when trying to explain away the contradictions of China's economic growth.

The truth is that there was never anything remotely "communist" in the Chinese regime which came to power in 1949, under the leadership of the Chinese Communist Party (CCP), with Mao Zedong at the helm. This event followed years of civil war against the Western-backed military dictatorship of general Chiang Kai-shek.

As early as 1945, Mao had made the intentions of the CCP leadership crystal clear, by stating: "Because the target of the revolution is not the bourgeoisie in general, but imperialist and feudal oppression, the programme of the revolution is not to abolish private property, but to protect private property in general. The result of this revolution will clear the way for the development of capitalism." So, when it came to power on the back of a peasants' mobilisation, the new regime strove to win the support of the national bourgeoisie. And if its success in doing so was only limited, it was not for lack of trying, but rather due to the fears of the Chinese bourgeoisie.

This was the main difference between what happened in China and the Russian revolution. In Russia, the revolutionary mobilisation of the working class resulted in the expropriation of the capitalist class, both economically and politically. But in China, the aim of the Communist leadership of the revolution was not to end capitalism. It was only to create the conditions for a capitalist development of the country, despite the looting of the imperialist bourgeoisie.

So, the Chinese working class was left to play a passive role in the revolution, which allowed many big capitalists to run away with their wealth and, in some cases even, with their machines, out of the reach of the new regime. Under the protection of the imperialist armies, Hong Kong, Macao and Taiwan, together with countries like Malaysia, the Philippines and Thailand, saw a large inflow of wealthy Chinese. These places became the strongholds of a rich Chinese diaspora which was to play an important role a quarter of a century later, during the so-called liberalisation process.

Nevertheless, part of the Chinese capitalist class remained in China. The companies which had not been previously owned by the Japanese occupiers remained private and shareholders went on receiving dividends, although at a level which was determined by law, at 8% of the nominal value of their shares. This did not prevent the capitalists from carrying on parasitising the Chinese economy and being a major obstacle to its development.

In the end, the CCP leaders had no option other than to clamp down on the greed and short-sightedness of the propertied classes. In 1955, all remaining private industries were nationalised. And the following year, 120 million peasant families were coerced into forming rural cooperatives in order to boost agricultural production and feed the towns.

Regardless of the rhetoric which was used at the time, but mostly later, in order to describe these moves, the CCP's decrees were not directed against capitalism or private property as such. Much in the same way as the states of most of the rich countries had nationalised the basic industries after World War II, the nationalisations and collectivisations carried out by the CCP were simply designed to make up for the capitalist class' parasitism and impotence at rebuilding an economy which had been plundered by the imperialist powers for decades and destroyed by the war.

In fact, the former owners were generously compensated and shareholders went on receiving dividends, set now at 5% - so much so that, in 1980, one million shareholders were still receiving dividends on shares dating back to the 1950s. Technically the capitalist class lost any direct control over the economy, but in practice, a large part of the cadres of the new nationalised industries were drawn from the ranks of the former capitalist owners, now described as "capitalist patriots who have the courage to take the road of socialism".

Thus, China's capitalists retained key positions within the economy and they were soon prominent within the ruling political structures of Mao's so-called "socialist" state, at every level. This was a direct reflection of the social nature of the Chinese revolution and it put Mao's regime in a very different league from the USSR.

Understanding this fact is obviously key to understanding the developments of the last two decades in China. But, never mind. Today's so-called "experts" will keep on blaming the chaos generated by the capitalist market in China on the failings of its "communist" regime - just as, during the Cold War, they justified the West's economic blockade of China by the need to contain the "communist threat".

Two decades of western blockade

Mao's regime was determined to limit the looting of China by the imperialist powers, but it certainly had no intention of breaking relations with the rest of the world, least of all of breaking trade relations.

However, the imperialist powers decided otherwise. The new regime had committed an unforgivable sin by defeating their favoured stooge, Chiang Kai-shek, and taking political power against their will. Worse, it had deprived the Western powers of a decisive victory in the Korean war. An example had to be made. And since it was out of the question for the imperialist governments to defeat Mao's regime militarily, they embarked on a war of attrition aimed at starving the new China, through an economic blockade which lasted for over 20 years.

China's economy was under-developed in every respect. The limited amount of industrial infrastructure it had, had been entirely designed to serve the trade needs of the imperialist powers operating on its soil, and not the needs of its population. The western blockade meant that, with the exception of the USSR for part of the time, China was deprived of any outlet for its export industries and of any supplier for its basic domestic needs.

By an ironical twist, by putting Mao's regime in such a tight corner, the imperialist powers played a significant role in forcing it to adopt more radical economic measures than it might otherwise have chosen. The repressive measures which were adopted against recalcitrant capitalists in the mid-1950s, in particular, might not have been necessary in Mao's view, if it had not been for the deadly straight-jacket imposed on the Chinese economy by the western blockade.

As to the waves of repression against the population, which are usually blamed on the "communist" nature of the regime, it should be recalled that they expressed the regime's fears of social unrest resulting either from the chronic famines which affected the countryside or from the enormous efforts imposed on the population in the drive to rebuild the country's economy. And in both cases, the root cause of the problem was, once again, the western blockade.

Eventually, what brought this period to an end was not a change of policy on the part of the Chinese regime, but a change of policy on the part of those who had originated the blockade in the first place - the imperialist leaders and, more specifically, the US leaders. By the beginning of the 1970s, the US government was faced with a political crisis with the anti-Vietnam war movement and a social crisis, following a series of explosions in the black urban ghettos. A US withdrawal from Vietnam was increasingly likely. But the US leaders feared the possibility that other nationalist forces might be encouraged to follow the Vietnamese example as a result. The only way to avoid this was to secure China's cooperation in policing Asia.

So, in 1971, Beijing took the UN seat which had been occupied by Taiwan up to that point, and the following year, Nixon made his famous visit to China, paving the way for what today's commentators describe as China's "opening up to the world market" - but which, in fact, was the opening up of the world market to China, by the imperialist powers.

The re-emergence of the capitalist class

As noted before, all along, during these years, the Chinese capitalist class had never ceased to occupy certain positions in the political and economic machinery of the state. The poverty of the country and the stranglehold imposed on its economy by the western blockade had made the centralisation of control over the economy by the state a vital necessity. And it was only to that extent that the Chinese capitalists had tolerated the restrictions imposed on them during the period.

Once the main reason for these restrictions - the western blockade - looked set to disappear, the consensus among the ruling circles of the Chinese capitalist class moved towards a cautious restoration of the market economy. This cautiousness had nothing to do with the determination of the "communist" state to retain as much control of the economy as possible - as today's commentators keep claiming. It was certainly motivated by a reasonable suspicion towards the West and a legitimate concern not to allow Western companies to raid the economy. But above all, probably, it was motivated by the Chinese capitalists' fear of a possible backlash from the masses, should a brutal return to the market result in drastic social consequences for the poor.

In any case, it took more than 15 years for the regime to take, one by one, the decisive steps necessary to dismantle the main collective structures which had allowed the economy to develop during the previous period. First, the collective farms were dismantled and plots of land were contracted out to individual farmers. The workshops and small factories which had been set up before as part of a collective farm or under the auspices of local authorities, became independent, thereby creating a vast industrial fabric of small factories eager to find new sources of income. In turn, these factories were contracted out, often to their existing management, before being part-privatised later.

In hindsight, it is interesting to note how the capitalist class re-emerged from within the fabric of Mao's so-called "communist" regime. In fact, long before the beginnings of the so-called liberalisation, private companies had begun to emerge in the loopholes left open by the system, usually as intermediaries or service companies operating illegally under the patronage of some state functionary.

For instance, Coca-Cola's main Chinese rival, the soft drinks group Wahaha, came to life in the 1960s, by selling drinks in schools in Hangzhou. When the liberalisation took place it became a legal enterprise under the control of the local council and took over the ancillary services of the education authority, before being finally privatised to take its present form. Another example is that of the auto-parts manufacturer Wangxiang, which started as a repair workshop for agricultural machinery in 1969 and then moved on to produce agricultural equipment. Today, it has sales worth £1.7bn a year and its owner, Lu Quanqiu, is China's 11th richest man.

Such examples can be found right across the Chinese economy, up to the very top. There is, for instance, the case of Rong Yiren, who died recently. He was from a rich capitalist family which had fled to Hong Kong in 1949. Rong Yiren stayed behind, at the head of an industrial empire employing 80,000 workers. When his factories were nationalised in 1956, he received $12 million in compensation and was appointed deputy-mayor of Shanghai, before becoming deputy minister in charge of the textile industry. In 1979, he was appointed head of the country's second largest financial institution, CITIC, before being elected China's vice-president in 1993. Although a member of the ruling elite, Rong Yiren was never a member of the CCP. But he certainly never ceased to be a member of the Chinese capitalist class!

Indeed, while the Chinese capitalist class retained a degree of direct control over the Chinese economy, from within the machinery of the state, the capitalist diaspora maintained a similar level of control indirectly, through family ties. In fact, long before the formal opening up of foreign trade, the border between the mainland and Hong Kong had become porous enough to allow the development of a big export trade via Hong Kong. And the main intermediaries in this semi-legal trade were old mainland families which had taken refuge in Hong Kong in 1949, while maintaining links with relatives back home.

It was quite natural therefore that the main source of foreign investment pouring into China once state controls were relaxed, should come also from this diaspora, following the lines of family connections which had been maintained over several decades of separation.

They want their cake and eat it

Of course, it would be hard to find anyone among the champions of the market who would acknowledge the extent to which Chinese capitalists, and by the same token, imperialist capitalists, are indebted to the state inherited from Mao's days. Quite the opposite is true - for them, it is Public Enemy number 1. And in fact, the bitterness with which the champions of the capitalist market blame the Chinese state for acting as a brake on the extension of the market is little short of farcical.

Lately, a number of critics have concentrated on the slow pace of privatisation in the Chinese banking system and the huge amount of "bad loans" which the state banks have been allowed to endorse. The argument is that if a company depends on huge indebtedness to make profits, it should be forced to go bust. Apparently, this is how the market can instill 'discipline' and 'efficiency' on companies.

It is ironical that such criticism should come from financial commentators who operate in a capitalist world, in which the largest and wealthiest companies are typically the most indebted, far more so, in any case, than most Chinese companies.

But it is even more ironical when one bears in mind, that if it had not been for the Chinese state's systematic distribution of direct and indirect subsidies to the new private companies for more than a decade, there would be hardly any private companies at all in China today, let alone a market in the capitalist sense of the word.

Indeed, if the vast fabric of small companies formed out of previous municipal and village enterprises developed at all, it was first and foremost thanks to the contracts they won from the bigger state-owned companies. If they were able, first, to buy new machinery and, later, to take part in mergers, it was thanks to loans from state-owned banks which everyone knew they would be unable to pay back. If there is today a tiny, but significant, class of rich capitalists who can afford to buy western luxury goods, it is because they were able to divert some of the state's largesse into their own pockets, at the expense of the population.

Likewise, if foreign companies investing in China find economic zones which are already fitted for their needs, with fully equipped factories, energy sources and means of transportation for goods and workers, it is because the state's banks have been lending billions of pounds to regional and town administrations in order to build these economic zones - billions of pounds which will never be repaid, because the tax incentives provided to industrial foreign investors mean that they bring very little fiscal income.

The reality is that in China, even more so than in the rich countries, the state is the milch cow of capital. If the Chinese state was not spoon-feeding its capitalists, there would be no "Chinese miracle".

An unequal relation with the world

Another common, but ridiculous, claim is that China is holding the rich countries to ransom due to its huge trade surplus with the US. Linked to this, is the supposed threat which this is meant to represent for working class jobs in all of the rich countries. The reality, however, is that the reverse is true. In fact the relationship of China with the rest of the world is very one-sided, with China giving a lot and receiving very little.

China is accused of building huge reserves in dollars due to its trade surplus. But something that the Chinese leaders have learnt from the experience of the 1997 financial crisis in Asia is that they have to be able to resist the pressure of floating capital speculating against their currency. And one of the games which some large western fund managers like to play these days is to bet on a re-evaluation of the Chinese yuan. So, massive flows of speculative dollars have entered China, converted themselves into yuan and are waiting there for such a re-evaluation. Then they will reconvert into dollars and exit as fast as they can. But if the Chinese central bank fails to have the cash when it is needed, this could turn into a financial meltdown. So, in the meantime, it keeps several hundred billion dollars in the most easily convertible form possible - US Treasuries, that is bonds issued by the US government, which pay virtually no interest. At the same time, however, China helps to finance the extravagant budget deficit of the Bush administration. It was calculated, for instance, that the amount of US Treasuries bought by China, Japan, South Korea and Taiwan in 2003, was enough to finance the cost of the US war in Iraq during that year!

But this imbalance applies just as much to trade itself. Take mobile phones. China is now, by far, the world's biggest producer of mobile phones. However, outside a few electronic components, a mobile phone costs peanuts to produce. And guess what? China does not produce these components, but has to import them from Japan, Korea, the US or the European Union. Likewise for flat screens. China is the world's largest producer of these expensive screens, with over £13bn worth of these screens exported in 2005. But the LCD components, which are the high-tech elements of these screens, have to be imported. The same applies to all electronic products, which constitute the country's largest single export group. Only the crudest components are made in China. In the main, products are merely assembled and packaged there, and sometimes not even tested in China.

So by and large, China's high-tech industry is actually low-tech. Not because the country lacks the knowledge nor the scientists, but either because it lacks the high-precision machinery required to produce high-tech components, or because the patents necessary to produce these components are owned by some foreign company which makes sure to retain a monopoly over their use.

Of course, in theory, China could develop its own high-tech products and it certainly has the human resources to do this. The trouble is that in order to sell them, it would still have to use the services of Western multinationals which have a vested interest in retaining control of the market. And since China does not have a market of its own, what would be the point of developing its own products if it has no-one to whom it can sell them?

This is why the "threat" of China taking over the world market because of its cheap production is a red herring. The reality is that the Chinese economy has its hands tied by the imperialist multinationals, both for its supplies and for its exports. In fact the overwhelming majority of China's high-tech exports are produced by companies which are controlled by Western investment.

And when Chinese companies try to break out of this stranglehold, as Lenovo did, by buying IBM's home computers division, they still cannot sell equipment under their own brand. Who has ever seen a Lenovo computer sold in a British super market? Lenovo was, and remains, primarily a company that assembles computers for others. And this is not to mention the cases of Chinese companies which are prevented from buying Western rivals - as was the case when China's National Offshore Oil Corporation put in a bid for the US company UNOCAL, last year.

As to production being moved from the rich countries to China, there is, of course, a certain amount of that happening. But it is far more limited than we are led to believe. For a start, because most production which requires specialist skills is difficult to transfer anyway. But even in the case of labour-intensive productions, the threat, if there is one, does not come from China. It comes from our own bosses.

A typical example of this is textiles. The end of 2005 marked the demise of the Multi-Fibre Trade Agreement and its system of export quotas allocated on a country-per-country basis. In the run-up to this demise, hundreds of thousands of jobs disappeared in the rich countries as companies pushed productivity to the limit. But exactly the same happened in China, where 3.8m jobs where cut, or around 40% of the total in the industries concerned.

It was a similar situation in manufacturing: between 1995 and 2002, 11% of all manufacturing jobs disappeared in the world's 20 richest countries, but 15% of China's manufacturing jobs disappeared in the same period. Meanwhile, production in the same 20 richest countries increased by 30%.

In other words, the real cause of job losses is not so much that production is being moved to China or elsewhere. Jobs are being lost because of the intensive profit drive of companies based in the rich countries. Contrary to what union leaders, politicians and, unfortunately, many people on the left, tell us so often, the workers of the rich countries are not confronted by the faceless phenomenon of "globalisation", but with real bosses and shareholders in flesh and blood, whose greed for profits would become their comeuppance, should workers decide to confront their attacks on jobs.

A consumers' paradise?

And what about the famous Chinese domestic market which, according to some, is so promising that it could give a new lease of life to manufacturing in the West?

The story explaining last year's fantastic rise in oil prices by the huge increase in China's consumption may have seemed dubious at the time, but then oil prices went down, without China's consumption changing, so that story, at least, bit the dust.

As to China's consumer market per se, this is what a Chinese economist writing in the Financial Times in January, had to say about it: "Stories of a Chinese consumption boom are largely fantasy, the latest version of the 19th century Manchester mill owner's dream, of every Chinaman adding an inch to his shirt-tail. For the most part, China remains what it has long been: a large country, inhabited by many people, most of whom do not have any money." The author then proceeded to estimate that 150m Chinese, or 11% of the population, have a purchasing power equivalent to £2,500/year. This says, the author, would put the value of China's consumer market at a level comparable to that of South Korea - which is not negligible, but very far from being the acclaimed consumers' paradise which would justify that every single multinational should set shop in China's main towns, Nevertheless, this is precisely what has been happening.

The car market is an illustration of this. Earlier in April, the BBC published an article about the production launch of two new models by Nanjing Auto, the MG7-saloon and MGTF sports car. Both are inspired by designs bought by Nanjing Auto at the time of the closure of the Rover Longbridge factory. For the occasion, says the BBC, there was "music from the City of Birmingham Symphony Orchestra and a video wall showing shots of Tower Bridge and Buckingham Palace" - no doubt, all the ingredients needed to make every British businessman feel duly proud of his "Britishness", as Brown would say. But how about the Chinese consumer? These cars will sell at between 180,000 and 400,000 yuans - or the equivalent of 18 to 40 years' average income for the inhabitants of Shanghai, China's most wealthy town! And then the BBC journalist goes on to hail "the Chinese car market which is growing by 10 million new cars every year".

The trouble is, that it is not. According to a study published by financial consultant Deloitte (which is heavily into promoting China and therefore unlikely to underrate its market), 2005 was the first year when the 3m barrier was passed, (2004 had been far worse) and 2006 is estimated to be just about at the same level. Indeed, judging from the production targets adopted for new models, the expectations of the car manufacturers themselves are not that high: for instance the production target of the new Roewe 750 (the Chinese version of the Rover 750 manufactured by SAIC) is only 50,000 a year - hardly a mass market! In fact, the existing production capacity in China is estimated to be twice as large as the market's expected demand.

Booming social inequalities

What have been the consequences of the supposed "economic miracle", for the 1.3 billion Chinese people?

The World Bank begins its "quick facts on China" by telling us how much poverty has fallen over the last 20 years - 400 million Chinese were, as they put it "lifted out" of poverty. The Bank congratulates the Chinese authorities on this "impressive achievement".

But what was achieved, even according to official statistics? These 400m were lifted out of extreme poverty- that is, they are now above the $1/day level, but $1/day is not even subsistence level! What is more, 150m - or 11% of the population still lives below $1/day. So (again, taking official statistics) that means that perhaps as many as 550 million Chinese - almost half the population - are still poor. And that is likely to be an underestimate.

Of course, between 60% and 70% of the total population is still living in rural areas. The most destitute live in more remote areas, like the far west province of Xinjiang, where they try desperately to join the estimated 200m "floating" migrant worker population which is looking for work at any one time, in the cities and big towns. This floating population has been called "the worlds largest ever peacetime migration" equivalent to more than three times the total population of Britain! That said, it only constitutes 20% of China's rural population.

Of course there are probably just as many, if not more, critics warning of an impending social catastrophe as there are protagonists who speak in admiration of China's booming economy. The international press is full of articles with titles like "China's rural time bomb is ticking" as the International Herald tribune featured recently. The BBC recently reported on "China's rural millions left behind". And last year the US Congress itself published a report on "Social Unrest in China".

Naturally, the establishment is very worried that the social stability which seems to have prevailed up to now - with the exception of the Tiananmen Square protest in 1989 - will not be maintained.

They have good reason for their concern.

The inequality gap in China has just hit an all-time record in the world in 2006. In 1990, according to official figures, 10% of the Chinese owned 40% of the total bank deposits. By 2000, 40% of these deposits were owned by just 5% of the total population. And 20% of the depositors, mainly urban residents, owned 80% of the money held. Although we do not have more recent figures, what we do know is that average rural incomes are less than one third of urban incomes. But if government services like education and health are included, urban residents are six times better off than rural residents - who are excluded from such benefits.

Ironically, for a country which was once hailed as one of the most equitable societies in the world, the inequalities which now exist and which have built up over the past 30 years, are not only glaring between the new capitalist class and the proletariat, or between rural and urban populations as a whole, but between urban residents of small, medium and large cities and between regional populations of the coast and the interior.

The great divide

The urban/rural divide has undoubtedly been facilitated by the hukou system.

This hukou system is a kind of cross between an ID card system and an internal passport, which allows the authorities to monitor the population and control its mobility. Today it is the chief instrument whereby the rural poor are excluded from the cities and from urban social benefits, if they do succeed in migrating. But it should be remembered that its first purpose, under Mao, was not to keep the peasants out of the cities - which it did during the 1960s and 1970s, but to isolate the urban working class, which posed the biggest threat to the Maoist regime.

The hukou system still requires every resident in the country to be registered with the local Public Security Bureau, which keeps household booklets containing information on names, places and dates of birth, occupations, marriage status, religious belief etc., for every single member of a household. Each person has only one place of permanent registration and you cannot acquire legal permanent residence and the numerous location-based rights and benefits anywhere else, unless you obtain new registration from the authorities.

Although 11 out of the 23 provinces are talking about abolishing the hukou system of household registration, it still prevails. In 2005 the central government acknowledged that it should allow migrant workers into the cities and that they ought to have access to social services. But actual reform of the hukou system is in word, not in deed. This is partly due to the laying off of so many urban workers in state-owned companies creating large numbers of unemployed workers. So city governments try to keep migrants out and also avoid the expense of having to extend education and health services to them. On the other hand, the factory bosses are keen to keep unregistered migrant workers - because they can exploit them so much better - and even not pay them at all.

Since 1985, if you moved outside of your hukou zone for more than 3 days, you had to get a temporary guest registration at the local police station and if you did not, you would be liable to a fine and removal. To facilitate this, hotels and boarding houses were connected via the internet to the Security Bureau and were required to transmit data on all residents. Staying outside one's zone for more than 3 months requires a Temporary Residential Permit. This is necessary to work, rent housing, open a bank account, enter public buildings (even libraries) and receive registered mail.

But it doesn't come for free. To get a 6-12 month temporary permit can cost between 200-500 yuan which is £12-£30 although some localities have lowered the fees, due to shortages of available cheap labour. Of course, in many cases an additional bribe is needed and it is well-documented that the police in some of the coastal SEZs like Guangdong, Shenzen and Dongguan, where the fee was reduced to around 50p, actually charge £10 to £15. Permits need to be renewed within 6-12 months, with more bribes.

Many migrant workers just cannot complete the registration process and end up staying illegally in the cities, where they are constantly vulnerable to exploitation by the police, landlords, bosses, and local officials and of course forced removal.

In 2001 the government began to abolish the 10-year old rural-to- urban quota system in all small cities and towns and some medium sized cities (but not in the big cities). So anyone who has a stable income and has lived there for 2 years is eligible for permanent residence. But, for example, in Guangzhou city, migrants must have lived in one place in the city for 5 years and have stable employment, in order to qualify. Other cities stipulate a certain level of income, or a specific employment requirement, or expect applicants to have bought a house. This hukou reform will apparently take 5 years to complete, however, and will not be extended throughout the country, either.

On the other hand, to control selective migration to the major cities, there is the "hukou for talents and investments" to attract the rich, highly skilled and educated, requiring a 5 year contract of employment, or a certain minimum level of investment, plus the purchase of a house with a minimum price of £16,000. In central Beijing, permanent residence will only be granted to entrepreneurs who have paid a minimum of £45,000/year in local taxes for a minimum of 3 years. In other words, only the wealthiest are welcome in China's big cities.

That said, the authorities do not want to prevent the new capitalists from obtaining cheap labour easily - so there are moves afoot to ease some of the restrictions and exclusions which migrants suffer. The first to go, was the restriction on renting housing - for obvious reasons. But migrants still await the possibility of access to education and health services. In some cities, better-off resident migrants have set up their own schools out of their own funds to educate their kids who are shut out of the state system. But these schools are constantly under threat of closure by the authorities, on the grounds of 'unsafe buildings' or being unlicensed. That said, in the Beijing districts of Fengtai and Haidan there were over 200 schools serving over 40,000 children by 2000. And when in 2006, five of these schools were closed down by authorities in Haidan, the 5,000 children thus affected were promised reassignment to state schools. In practice though, many were forced to return to their home villages because of an unaccountable delay.

Of course the hukou system, alone, cannot be blamed for the inequities in Chinese society as some activists and academics claim. But it certainly has helped the regime to prevent the build up of peri-urban slums and squatter camps due to rural-to-urban migration, which are prevalent in other Third World countries and particularly in India, which is the country most comparable to China in terms of the size and make-up of its population. This is why the regime is unlikely to abolish it, especially not in the run-up to the 2008 Olympics in Beijing, despite the growing outcry against its injustices.

Working conditions

Because the majority of workers residing in urban areas were employed in State Owned Enterprises or SOEs - that is, up until these started to be run down, privatised or just closed entirely - they have been relatively privileged compared to the majority of workers in rural areas and, of course, the migrant workforce.

In the cities and big towns, each factory or workplace used to be responsible for the social and cultural welfare, and the housing of its workers. The system of social benefits built up by these work units or danwei, was then gradually extended to all urban residents. During the peak period of the urban danwei, from the mid 1960s and in fact right up to the mid 1990s, urban residence meant access to a job with security for life, guaranteed low prices for basic food and necessities, access to subsidised healthcare, a pension, as well as primary and middle school education for children. 70% of state enterprises ran schools. They also supplied low-cost housing for their workers. Some SOEs were almost entirely self-sufficient units in which people were born, lived and died. This is what is either praised or derided, depending on who says it - as "the iron rice bowl".

At the beginning of the 1990s, the majority - 70% of the urban workforce still worked in state-owned work organisations. By 2000, this had fallen to 54% as a result of lay-offs and forced early retirement. In fact total employment in SOEs actually increased up to 1996, to a high of 75m. However, in 1995 the state began to institute a policy of "grasping the big and letting go of the small". It started by cutting back on subsidies to loss-making firms, then it allowed the management to lease, sell off or close down many small SOEs. As a result, 6,000 small and medium state enterprises were going bankrupt per year.

Closures and privatisations caused a totally unprecedented surge in unemployment. It leapt from 3 million in 1993 to an official figure of 25 million in 2001, although unofficially this was closer to 60 million. Last year, the government admitted that almost 30 million SOE workers had been laid off up to 2005, and another 6 million were expected to be laid off in 2006.

Already in the late 1990s protests by laid-off SOE workers over loss of benefits and pensions had become commonplace. The jobless rate in urban areas as a whole was 15%, but up to 25% in the old heavy industry "rust belt" cities of the north-east. Some of the largest workers' protests ever, took place in 2002. In the old industrial city of Liaoyang, 30,000 workers staged co-ordinated protests outside city offices about unpaid wages, living allowances, and pensions - but also about government corruption and the arrests of their activists. 50,000 oil workers in Daqing also demonstrated against lay-offs. But there were and are, still frequent protests over unpaid pensions and benefits by ex-SOE workers.

The re-employment service centres which SOEs were supposed to create when laying off workers were only supposed to function until 2000. In fact the laid-off SOE workers were not actually classified as unemployed. They were meant to receive an income from the re-employment centre for up to 5 years, get skills training and had a priority for rehire to any vacancy in a new or restructured SOE. After 2000, it was expected that private employment agencies would replace the state-sponsored ones. To quote one academic source - "the re-employment centres will disappear having accomplished their historic role in facilitating the transition of the welfare system from dependency toward self-sufficiency, as the United States Family Support Act of 1988 did in the US."! This says it all!

In the meantime the government's policy has been to free the SOEs from their social obligations so that, a supposed 'level playing field' is created between them and the private sector companies. Workers will have to pay for their own insurance schemes - either state or private - in order to receive benefits.

Migrant workers are sinking not floating

As for the migrant workforce, not only has it no social benefits but working conditions are probably among the worst in the world, particularly in the unregulated Export Processing Zones where health and safety is often so poor that just being in the factory is risking your life.

Despite the fact that labour contracts are now required by China's 1994 Labour law, an official survey found that in 2005, as many as 46% of migrant workers had no contract. Less than 20% of small and medium sized enterprises issue them. A random check of 134 companies in Suizhou City, in Hubei, found that not one company issued contracts. In Jinan the daily newspaper conducted a survey of workers and discovered that 8 out of 10 migrant workers did not know what a labour contract was.

Wages are very low. In May 2005 an official survey found that the average wage in the Pearl River Delta (just outside Hong Kong), which has one of the biggest migrant worker populations in the country - an estimated 25m - was around 600-700 yuan per month. This can buy 4 bowls of fried bean sauce noodles a day and is 200 yuan short of the minimum required to cover food, accommodation and transport.

Another feature of the exploitation of migrant workers is the hours that they are forced to work. In the Pearl River Delta's manufacturing plants the usual working day is 12-14 hours, 7 days a week with only one day off per month. If workers are late they are fined per minute. To avoid paying overtime most of these factories pay piece rates. They also fine workers who take time off sick. But worst of all, they often do not pay them at all.

In December 2003 the Beijing Youth Centre for Legal Aid and Research surveyed 8,000 rural to urban migrants and found that 48% of them had experienced non-payment of their wages. The Ministry of Construction announced that by the end of 2003 the total value of unpaid wages and defaulted construction fees was as much as £11bn! This caused premier Wen Jiabao to make a pledge that the problem of unpaid wages would be solved by 2004. In fact the unpaid wages owed by the construction industry in 2006 fell to "only" £6m, which was considered good progress! But subcontractors still simply disappear leaving huge unpaid wage bills.

A BBC report in March this year related how "the Chinese internet buzzed with the story of a rural migrant from north-west China sentenced to death for a brutal double murder. The man had stabbed his victims to death during a fight at a construction site. The argument began when he went to claim back-wages. It turned out the man had not been paid for 2 years." This 27-year old worker was later executed. Another case which was publicised, was that of Xiang Guanghui who was beaten so severely by the contractor who owed him wages that his skull was fractured. The boss got away with just paying for his initial hospital visit, but not the £3,000 which Xiang had to pay for an operation to put a plate in his skull.

Housing conditions for many migrant workers are usually appalling. They are often dependent on what an employer will provide, but given the long hours of work they have little time to rest anyway. A 21 year old migrant worker described a single room in an unfinished underground storage house, with no window or ventilation in which 30 people slept on bunk beds. Despite the "no shanty town and no slums" assertions of the Chinese government in fact many "migrant worker villages" exist - particularly in the coastal regions, but even around Beijing. They are periodically demolished but just spring up again, because the workers have no alternative.

While many migrant workers may not know much about their rights or appear very vulnerable, this does not mean they do not fight back.

In fact in Pearl River Delta alone, between January and October 2004 863 protests were registered. For example, in September 2005, 100 workers at a shoe factory in Guangzhou battled police and smashed vehicles over unpaid wages. In July 2005, 3,000 mostly migrant workers in a Hong Kong-owned garment factory near Guangzhou rioted for higher pay. A report of this incident noted that there were thousands of such "explosions" every year in the garment industry.

In 2005 there were altogether 87,000 "public order disturbances" throughout China - which includes strikes, protests and demonstrations, group petitioning and legal challenges over land grabs, evictions and forced removals, demolitions etc. This is a 50% increase in just 2 years. The December 2005 clash between villagers and the Peoples' Armed Police in Dongzou village in the southeastern Guangdong province in which up to 20 people are thought to have been killed, was one of many violently suppressed protests that year. But such events are increasing, even though the armed thugs of the Chinese state are sent to smother them and even though the activists are invariably given very long jail sentences. So, for instance, in June 2006, hundreds of people rioted in Guiyang City (Guizhou province) after officials beat a migrant worker lacking a temporary residence permit.

The interstitial economy

While much of China's growing mining industry still comes under the auspices of the state-owned enterprises or joint ventures involving the state, many towns and villages which had their own coal mines under the collective rural industry system have sold them off to private entrepreneurs - local or foreign. It is here that the ugly face of these privatised companies - legal and illegal, shows itself most graphically.

In 2006, 7,000 coal miners were killed in explosions, floods and collapses in coal mines - 70% of them in privately owned mines. In March 2007 alone 100 miners were killed in 8 mines. To quote from the Chinese Youth Daily: "On 22 March at the Shangjiwu mine in Ruzhou city, Henan province 15 miners died after flooding and high levels of methane gas encapsulated mine shafts. Mine owners attempted failed rescue ... and only alerted mine safety officials 2 days later. Two other cover-ups occurred in the aftermath of a pair of tragedies on 18 March at illegal mines. At the Miaojing mine near Jincheng city, southeast Shanxi province, 21 miners died in a gas explosion, Two days later the mine owner and 10 others were arrested charged with operating an illegal mine and failing to report an explosion. The mine owner of Dongfang No1 mine in Liaoning Province was arrested after a deadly fire occurred in his mine. He tried to hide the incident and the deaths from work safety officials. Six miners were killed and 15 injured.... On 15 March 8 miners died inside shafts after a gas leak near the city of Xingyang northern Henan province... China's worst disaster in March occurred at state-owned Fuishun Group's Laohutai mine near the city of Fushun. On 10 March, 29 miners were swept to their deaths off a mine platform following a mass release of water."

This gives some idea of what is quite normal in the course of a month in China's mines. As a result of the accidents in March, the government ordered 900 private mines to cease operation pending safety checks. It is usual for owners and also safety officials to cover up the extent of the accidents or even to disappear to avoid arrest.

The government repeatedly claims that it is going to close small mines but nothing happens and the deaths and injuries continue to mount to unbelievable levels. Given the ability of the government to mobilise its thugs to stop protests against land grabs and privatisation just about anywhere, it is obvious that this is not because of any inability to do anything about mine safety - but a conscious choice.

The rural reversal

The majority of China's population, of course, still lives a rural existence in the countryside in 3.8m villages and hamlets, although by now, in the coastal areas, villages have merged into a semi-urban sprawl.

In the interior regions and the west, many homes are still just mud huts, without windows or build of rammed earth. The rest are wood and brick and in wealthier villages one might see two story structures made out of reinforced concrete.

Only 619,000 villages have access to a telephone, and only 349,000 of them have running water. 300 million Chinese do not have access to clean drinking water. 80% of rural households still cook with coal or wooden twigs, having no electricity and their houses are dark and smoky. In fact as a BBC report related in March this year, "the countryside is today considered a grim and dirty place where people are poor and life is harsh".

The government now promotes the idea of the administrative village which should have its own committee as an institution of self-government to carry out some of the functions which the collectives used to have. At the end of 2004 there were 632,000 of these, which can incorporate smaller villages or hamlets into one unit.

In fact the de facto disbanding of the collectives had the effect of killing off completely one of the few positive features of the Mao era - that is the rural primary healthcare system. Whether the 2005 announcement to "build a new socialist countryside" will begin to remedy this is doubtful.

In fact it was as a result of one of Mao's proclamations - in 1965 - when he said that the focus of health work should shift to the countryside, that a comprehensive network of rural medical services was actually developed by the mid-1970s. Sure, it was rudimentary, but it was very effective within its limitations and it was not replicated in any other Third World country - and certainly not even in India. This was one advantage, at least, of China's centralised state-controlled economy.

As a result, as many as 6.8 million rural health workers were trained - which meant at that time that there were 4 or 5 for each village. Some were 'barefoot doctors' who underwent a 6 week training in local towns, while others were trained in basic sanitation, hygiene and first aid. Their services were provided free if people could not pay, and the health workers were paid by so-called 'work points', out of the collectives' budgets. The farmers were actually covered by medical insurance - also paid by the collective out of the taxes it collected from them. This ensured that they could be referred to a hospital in the nearest town for more serious medical complaints. Up to 80% of the rural population was covered by such co-operative health services by the mid-1970s. This had an impressive effect - life expectancy increased from 50 to 60 years between 1964-82.

With decollectivisation in the 1980s, the villages could no longer support social services out of a local public fund. By the mid-1980s only 10% of the rural population was covered by any kind of medical insurance - and almost all of these were in the richer coastal areas. The barefoot doctors simply disappeared from the villages and many set themselves up in private practices. By 1992, the number of active rural health workers had dropped to less than a quarter of the 1970s peak. The number of rural hospital beds fell by half, by 2003.

Today farmers must take out individual health insurance and pay regular premiums. And although the village and township governments contribute one sixth of the cost, most still cannot afford it.

With the highly infectious SARS (Severe Acute Respiratory Syndrome) outbreak in 2003, which spread to most of the largest cities, 4.5m rural migrants fled back to their villages. And of course, some took the disease home with them. But since there was hardly anything left of the rural healthcare network to deal with a potential epidemic, this could have meant catastrophe. By luck, the epidemic burnt itself out in the summer season. But having realised the danger, the central government proposed to build a new kind of rural health system, which would be subsidized by upper tiers of government. So far, however, there has been only marginal increase in health coverage - up to 14% in the rural areas.

Today, when rural residents in towns and cities need health care, they must pay up to 87% of the costs, compared to urban residents who pay only 44% of the cost. This is because most urban residents continue to be covered by some kind of health insurance - but this coverage is also declining. Moreover, during the 1990s, the prices charged for hospital stays increased six times and the prices charged by clinics increased 8-fold. Government figures show that while hospital visits dropped by almost 5% between 2000 and 2003, hospital profits increased by 70% over the same period. A survey of rural residents in 2004 found that 46% did not seek medical care when they became ill because they could not afford to. The World Health Organisation has rated China 187th out of 191 countries when measuring equality of medical treatment.

The poorest of the poor

The poor agricultural heartland in the central provinces has been slow to develop rural industry or attract foreign investment. Here poverty still reigns and incomes actually declined between 1984 and 1990 just as the coastal regions were expanding. The local tax regime and predatory officials exacerbated the farmers' poverty even more.

Agricultural taxes and levies rose to as high as 30% of income for some of the poorest farmers. This was a consequence of central government policy, in fact, which decentralised taxation and other fiscal powers to the rural administrations. It gave free reign for the richer coastal areas to prosper - no doubt Deng's version of Bukharin's "get rich" policy towards the Russian kulaks.

Decentralisation, however, meant the local financing of the payrolls of the officials and of course the local schools and health centres. We have already spoken about the consequent dismantling of health structures. But when it came to financing the local bureaucracy, it was another matter. In non-industrialised areas the officials just imposed illegal levies and all kinds of taxes under the pretence that this was for local services when in fact these went straight into their pockets. As a result, peasants in the central and western regions have faced staggering burdens because of arbitrary fees and levies. In 2005, the central government at least abolished the state agricultural tax and transferred additional funds to compensate for lost revenues. But it is unlikely that this will prevent the local officials from continuing to extort heavy fees from the villagers.

Unsurprisingly, rural discontent has increased over the past two years. And it is quite possibly going to get worse.

China's WTO membership is expected to mean decreased prices for agricultural exports and the loss of 13m domestic jobs. It is claimed that this rural unemployment can be absorbed, with 2.5m jobs becoming available in other agricultural occupations and 10 million jobs in textiles, apparel, commerce, construction. But even if this is so, it means another 10 million peasants will have to migrate to the urban areas to find work. And for that, for the time being, they will still need a residence permit. But even if the hukou is eventually abolished, it is not clear whether migrant workers will then be allowed access to ever-dwindling urban social services. Will they have to give up their family's right to their piece of land back in their village - which remains their only security? Indeed, they already lose their land if all family members are re-registered as urban residents, which is why at least one family member is always left behind to farm the land or just to occupy it.

In the meantime, the booming cities are gobbling up farmland at a voracious rate, so that in the last 20 years a total of 16 million acres have been lost to cultivation.

25km north of Beijing is the township of Yangge which has been sold to a property developer for several million dollars. The villagers were never consulted about the transaction and the township officials pocketed the money. Now, less than 100 metres from the village, rows of huge new American style villas are appearing out of the fields - with one thousand of these due to be built at an asking price of $1m each!

In fact such land grabs are the biggest cause of violent protest. Last year 20 people were shot dead in Guangdong province when villagers organised a demonstration against the developers.

A recent issue of the Economist reported on the successful resistance of a couple against the private developers of a high rise housing and commercial complex in the south-west city of Chongqing.

Their struggle to prevent the developers from demolishing their home and restaurant without giving them adequate compensation and guaranteed rehousing became a cause celebre. Pictures appeared on the internet of their building perched atop a single column of earth in the middle of a huge dug-out, ready for the foundations of the new complex. According to the Economist, people who refuse to allow their homes to be demolished by developers are called "nail households" - because they get clobbered by the hammer in the end. Most end up being chased away by the developers' thugs or forcibly removed by police and very few get fair compensation. This case was seen as a test of the new law on property rights which was passed in March this year.

Only one way out of poverty - the proletarian way

In the end, the balance sheet of the last three decades of "liberalisation" can be summarised this way: China is not on its way to become a "rich" country nor a "consumers' paradise". Nor is it on its way to dominate the world, but it is certainly returning to a kind of under-development dominated by the imperialist looters, which is not all that different from how things were during its pre-revolutionary years.

There are all sorts of possible degrees of degradation for a society, when going down such a road. The ruling state machinery, which has so far been capable of imposing certain limits on the greed of the imperialist powers and on the rapacity of the Chinese capitalists, may remain sufficiently in control to be able to carry on doing so. However, there are already indications that it will be able to maintain this role and, what is more, there are ominous signs of what could develop as a result.

There is, for instance, an unquestionable rise in corruption - both in the high spheres of society, in which it seems less and less unpalatable to be considered corrupt, and local level, where the same corrupt practices, so common in every poor country, are spreading across the state machinery. And, as in any other poor country, corruption is merely another mechanism through which the capitalist class can exercise its greed and take its pound of flesh from society.

The rise of unemployment and the running down of public services, education, health and collective infrastructure generate social deprivation and suffering, which can only contribute to a weakening of the fabric and cohesiveness of the society which had been built during the previous period. The same is true of the rising inequalities.

Besides, China is not only a large country, but it is also a country which includes many ethnic minorities, language groups, etc.. Centrifugal forces had been relatively unknown since the Japanese invasion, with the exception of some Central Asian minorities. But is this going to remain the case? Provincial strong men are already playing a dangerous game in order to boost their fiscal incomes. Since the 1980s, customs barriers have been erected between provinces. People and goods have to cross what amount to national borders, in order to go into some provinces. And although the central government is officially opposed to such practices and committed to fighting them, it seems impotent, so far. How far will the divisions go - and is there a risk that China might implode at some point, in a way comparable to the USSR, or worse, like Yugoslavia?

No, there is nothing positive in the developments of the past 30 years for the working population and poor of China - nothing positive, and yet it is the best that the capitalist system can offer them. Pulling China out of its poverty and its chronic under-development would, of course, be possible, especially given the huge size of its proletariat and the enormous human resources it has. But this would require that the Chinese working class takes the lead in pulling China out of capitalism. In so doing, it could well lead the rest of the world out of the capitalist quagmire as well.