Internationalizing China: Domestic Interests and Global Linkages by David Zweig Ithaca, New York: Cornell University Press, 2002 290 pp. $45.00 hardcover, $22.50 softcover

nternational businesspeople who have found themselves suddenly swimming in the surf of China's economic and commercial explosion at any point since the early 1980s may have wondered just exactly what was going on. Few in business have failed to sense that something bigger was under way, of which their venture, sale, or contract was somehow just a tiny part. But the architecture of those larger changes remained obscure.

David Zweig calls this process "internationalization" and defines it as "the expanded flows of goods, services, and people across state boundaries, thereby increasing the share of transnational exchanges relative to domestic ones, along with a decline in the level of regulation affecting those flows."

He examines four sectors of Chinese life in which internationalization proceeded after the end of the Cultural Revolution and the return of Deng Xiaoping to supreme power: urban life, the rural economy, higher education, and—in a different vein—what he calls "the struggle over overseas development assistance."

From the start, internationalization spelled opportunity (including the opportunity for financial gain) for many Chinese. The chance to recruit foreign investment, export to foreign buyers, get a fellowship and study abroad, receive assistance from the World Bank or some enterprising foreign nongovernmental organization was instantly compelling. It changed minds, perspectives, lives. And it wound up changing the dynamics of China's economic and bureaucratic order.

Central government policy changes played their roles: If Deng had not personally encouraged foreign investment, or the establishment of special economic zones, or study abroad, processes that led to the weakening or dissolution of the old-time instruments of control and monopolization of power would not have started bubbling. But Zweig's book makes clear that, once the notion of opportunity and self-promotion began to ferment, a collective momentum drove China toward a culture of opportunistic entrepreneurialism.

Bureaucrats and officials at various levels of Chinese administration discover economic opportunities falling into their hands. Some thrive on "rents," Zweig's lingo for unearned or illegitimate income, including corrupt payoffs. Others take a piece of the business they are supposed to regulate.

Zweig's portrayal of a closed and politically hamstrung society evolving helter-skelter into a remarkably more fluid one should be encouraging to the many observers of China who wonder whether, for example, foreign business plays a constructive role in the development of a more institutionally and ethically progressive society in the PRC. While most of China's increasingly market- and law-oriented behavior has resulted from the needs and wishes of the Chinese themselves, Zweig leaves no doubt that international commercial engagement with China was critical in pushing changes forward.

One of the most interesting of Zweig's observations is that the process of internationalization, so corrosive to so many established economic and bureaucratic interests, proceeded without the emergence of decisive opposition, despite periodic bursts of concern. Zweig notes that China's entry into the World Trade Organization (WTO) in 2001 finally sounded the alarm for economic sectors and bureaucratic champions who could see extreme danger in China's WTO laundry list of commitments to liberalization. He notes, as well, the political significance of some of the side effects of internationalization, such as the opening of immense gaps in living standards between the dynamic internationalist coastal region and the far more conservative noncoastal areas of China.

Zweig notes, too, the dangers of incomplete transformation, in which the internationalizing process undermines the institutions of governance and social control, but new guarantees of government integrity and social discipline fail to emerge in time to prevent society from falling into unending corruption and abuse of power by privileged elites.

But in the end, Zweig argues that internationalization is irreversible and more likely to conduce to increasingly positive social and political development; on this he is, in his scholarly way, very optimistic.

Internationalizing China will appeal heavily to scholars and social scientists bent on dissecting the complex phenomena that swept over the Chinese economy in the 1980s and 1990s. And for businesspeople who lived and worked their way through these transformations, and who have a long air trip or other interval for quiet, concentrated reading, Zweig's book will offer valuable insights and perspectives.

—Robert A. Kapp

Robert A. Kapp is president of The US-China Business Council.

Back-Alley Banking: Private Entrepreneurs in China by Kellee Tsai Ithaca, New York: Cornell University Press, 2002 316 pp. $35 hardcover

hrough most of the 1990s, China's average annual economic growth ranked first in the world, based upon World Bank figures, with an astonishing 11.2 percent rate. Questions concerning the how and why of China's two-decade-long economic expansion abound. The "why" explanation brings us back to classic neoliberal economic theory: a convergence of abundant labor and capital. But the more salient question is how does China keep its economic engine humming? Given the oligarchic nature of Chinese politics and policy directives to state banks to lend to large, inefficient state-owned enterprises, we ought to witness tremendous market distortions. Yet, such distortions are not apparent. Kellee Tsai, an assistant professor of political science at Johns Hopkins University in Baltimore, has found a partial answer to this question in her research on informal financing networks.

Tsai's scholarship is the culmination of two years of thorough field work. She digs deep into China's commercial life and takes the pulse of the informal financial arteries that trace their genesis to imperial China. In Back-Alley Banking, Tsai argues that informal financing networks are the bedrock of China's economic robustness. Tsai is primarily concerned with an economic policy paradox in China: though growth increasingly depends upon the private sector, in particular the 30 million new private businesses that have sprouted in post-Mao China, burdensome and restrictive lending requirements for private enterprises discourage borrowing through official channels. In one humorous account, a Chinese entrepreneur, who was forced to turn to an informal financing network for a loan, tells Tsai, "A state bank wouldn't give me a loan if Chairman Mao himself rose from the dead and told them to give me one!"

Tsai reveals that, as of 2000, less than one percent of loans from the entire national banking system are allocated to the private sector. Hui, or unofficial rotating credit associations, are thus the main source of financing for most of China's entrepreneurs. Various types of hui have existed in China since the Tang Dynasty (618-907 AD) but their prominence in China's credit market today is remarkable.

Informal credit networks vary greatly even among similarly situated entrepreneurs. Tsai argues that the entrepreneurs have different political and social identities. Those with stronger social or political ties, such as the businesses that have successfully curried favor with government officials, have an opportunity to borrow through more institutionalized finance channels and pay lower rates of interest.

Tsai also attempts to explain why "localities with comparable economic structures and, presumably, comparable levels of demand for private finance exhibit dramatic variation in curb market activity." Her answer is one that is often overlooked—the developmental policies of the first three decades under Mao contributed, ironically, to the financial success of certain areas because the dearth of investment and industrial policies compelled those areas to turn to entrepreneurial activities to survive. The prime example is Wenzhou.

Wenzhou, a district in the southern coastal province of Zhejiang, was neglected by state planners under Mao (because of its proximity to Taiwan) but thrives under capitalism today. "Although Wenzhou accounts for 11 percent of the province's land mass and 15 percent of its population, it received only 1 percent of Zhejiang's fixed capital investment throughout the Mao era," Tsai writes. But by the mid-1980s, "Wenzhou's private economy flourished...in tandem with its informal financial sector, which both defied and competed with formal financial institutions." In Wenzhou, the so-called "Red Hat Disguise," in which a private entrepreneur associates his or her business with a state-owned business or registers as a collective enterprise to tap into the formal financing networks, was rampant. As access to capital became easier for private entrepreneurs, informal lending institutions, such as hui, competed aggressively to lend money. Wenzhou's dynamism, it seems, springs from an instinct for survival, as seen in the hours kept by informal lending institutions, some of which are open 24 hours a day, seven days a week.

This book should be required reading for faculty and students focusing on China's political economy. Private entrepreneurs venturing into China should also avail themselves of this work. It is replete with statistical data on the macro effects of the informal finance network in China. Tsai has done academic and business interests a tremendous service by documenting how private entrepreneurs use informal financial networks.

—Mark T. Fung

Mark T. Fung is a PhD candidate in China Studies at the Paul H. Nitze School of Advanced International Studies at Johns Hopkins University and is on the Term Member Advisory Committee at the Council on Foreign Relations in Washington, DC.

China's Economic Challenge: Smashing the Iron Rice Bowl by Neil C. Hughes Armonk, NY: M.E. Sharpe, 2002. 235 pp. $24.95 hardcover

mashing the iron rice bowl is more than an economic challenge for China. Economic reform and liberalization initiated by Deng Xiaoping in the late 1970s has opened the gates for a flood of economic, political, and social challenges for the government and its people—insolvent banks, limited cropland and bulging cities, a deteriorating environment, booming telecommunications and information industries that test the government's ability to filter information, and waning political legitimacy. In China's Economic Challenge: Smashing the Iron Rice Bowl, Neil Hughes provides a sweeping account of all that ails China today. Hughes is not a China expert, but spent several years helping Chinese officials and state-owned enterprise managers implement economic reforms as an industrial and financial specialist with the World Bank. His book is a quick read, packed with information and analysis, and suitable for those new to the China scene as well as those already immersed in it.

After a short analysis of China's banking structure and reforms, Hughes concludes that the government must break the dependency of inefficient, unprofitable state-owned enterprises on China's banks. Hughes moves on to discuss agriculture, recounting the story of rural decollectivization and exploring the debate, popularized by the agricultural economist Lester Brown, about China's ability to feed itself in the coming decades.

Environmental problems, some of which are a consequence of current economic reform and others of long standing, pose considerable challenges to economic reform as the PRC government prioritizes development needs. While Hughes praises China for its recent focus on environmental issues, he points out areas that need still more attention. The chapter on urbanization makes the point (among others) that—contrary to the plans of the PRC government and domestic and foreign automakers—"there is no place in China's crowded cities for the private automobile." Continuing on the theme of environmental degradation and its human costs, a chapter on the Three Gorges Dam revisits the debate over the assertion that the benefits of electric power and flood control provided by the dam outweigh the damage to the environment, the money spent on construction, and the costs of relocating millions of inhabitants. (Hughes does not come down on one side or the other of this debate.)

Telecommunications and access to information round out the range of issues in the book. Beginning with the first telegraph line installed in China in 1877, guiding the reader through the reshuffling of China's telecom giants in the 1990s, and ending with the rise in Internet use, Hughes implies that China will move in fits and starts down the information highway as the PRC government struggles with its role as "Cyberspace Gatekeeper." Hughes concludes the book with a quick look at political and legal reform and the looming question of the future of the Chinese Communist Party.

With tidbits ranging from the historical use of cowrie shells as a medium of exchange to municipal sewage and industrial effluent ratios, Hughes's detailed book gives context to China's current reform efforts. And throughout, Hughes cites the lack of regulatory structures and accountability as a source of continued difficulty in reform. Though he is optimistic about the effect of China's World Trade Organization membership on the issues he addresses, Hughes points out that the future of politics in China will also be a major determinant in the ultimate success of economic reform.

—Rebecca Karnak

Rebecca Karnak is The CBR's research assistant.

 

China Can Get Rich by Zhang Tingbin Guangzhou: Nanfang Daily Publishing House, 2002 468pp.¥29.80 ($3.60) softcover

midst all the questions about the quality of China's economic growth and the concern over increasing inequality in Chinese society, up-and-coming journalist Zhang Tingbin has produced a book with an eye-catching title that affirms that, yes, China indeed can become a rich country—an aspiration targeted in the century-old slogan "fuguo qiangbin" (rich country, strong military).

China Can Get Rich profiles rags-to-riches entrepreneurs and professional businesspeople from the mainland that have made millions. The author, a member of the editorial board of the 21st Century Business Herald newspaper, published by the leading Southern Daily newspaper group in Guangzhou, uses interviews with 23 Chinese business elites as the basis of this book. These interviewees are members of a group he calls the vanguard of the rich—a sharp contrast to the "vanguard of the proletariat" of less than 50 years ago.

Before delving into case-study interviews, Zhang argues that China is on the brink of becoming a wealthy society. Focusing only on the period since 1995, Zhang argues that China has the momentum to propel itself into the ranks of rich nations, as Chinese entrepreneurs are now reaching the end of the long road to success, which took them through difficulty, exploration, and breakthrough, and is culminating in creation. In the individual profiles, the author provides glimpses into the business elite's secrets of success. Zhang categorizes these success stories into two groups: self-made businesspeople and those thriving in professional positions.

One individual profiled is 43 year old Wang Licheng, chair of the board of Zhejiang's Holley (Hua Li) Group. Wang reached the pinnacle of success from humble small village beginnings. He started his career as a technician, finished university through distance learning, and worked as a foreman in the then-small Holley Group factory at the age of 27. Thanks to perseverance and good investments, Wang, in the course of only eight years, expanded Holley from a small collective to a $300 million joint-stock company that is China's largest producer of electric meters. Wang has recently led Holley into pharmaceuticals and telecommunications with a high-profile acquisition of the technology rights to Royal Philips Electronics NV's CDMA technology. Other individuals profiled include Zhang Shengman, the youngest general deputy chair of the World Bank, and Fred Hu Zuliu, managing director for Asia Pacific Economics at Goldman Sachs Group.

Zhang concludes with a call for optimism about China's ability to become rich for four reasons. First, China's entry into the World Trade Organization offers the country tremendous opportunities for growth. Second, many of China's industries possess global competitive advantages in labor and technology. Third, China is going through a period of financial innovation that will lead to stronger fundamentals for growth. Finally, the Chinese people's cooperation with, and achievements in, the world economy will help boost China into the ranks of developed countries.

Though Zhang identifies factors that hinder the realization of China's growth potential, such as the prevalence of fraud and lack of investment opportunities, his study generally relies on the evidence of individual success stories to support his optimistic view. In many ways the book parallels the Horatio Alger stories that fed American rags-to-riches dreams a hundred years ago.

One must wonder, though, if China's true path to wealth ultimately lies in an institution that allows most Chinese to become "well-off"—as the Chinese Communist Party's latest slogan puts it—rather than rich. Time will tell if books such as China Can Get Rich continue to fly off the shelves or if stories focusing on middle-class prosperity take their place.

—Brian Goldstein and Sharon Liu

Brian Goldstein is research manager at the Council's Beijing office. Sharon Liu is an intern at the Council's Beijing office and will work for KPMG after graduating from Beijing University.