Why I Left China
Parting Words from An Entrepreneur
Translated by Pengying YU
(The author of this article is a Chinese entrepreneur who had actively participated in public social contribution activities in China. He is deeply concerned about China’s future development. On January last year, he left China. Onboard the plane, he wrote this article and sent it to friends. This article was widely distributed in the net and at least several million people read it before it was censored in China. The New York Time has realized an interview with him about it https://www.nytimes.com/2019/02/23/business/china-entrepreneurs-confidence.html But there isn’t an English version. We think the text is an important document. Not only it pointed out some of the challenges that China is facing, but more importantly, it showcases a raise of the political awareness of the entrepreneur class in China. The author gave recently a lecture in Collège d’Etudes Mondiales in Paris about the Chinese economic situation, during the lecture, he mentioned this article, some auditors wished toread it, so Pengying YU, with good intention, translated and sent it to us. We are grateful both to author and translator. We publish it here hoping that this article could help the western people to understand better China today.)
Index:
1. Running Away from A Dynasty and Finding A Good Place To Settle Down
2. China's Economic Downturn Has Been Hard to Reverse
3. When Will The Great Flood Strike Again?
4. When Those Responsible for Maintaining Social Stability Become The Targets of Social Unrest
5. Four Proposals to Stabilize Chinese Society
Running Away from a Dynasty and Finding a Good Place to Settle Down
In early 2018, I was on a plane from Malaysia to Shanghai for the Chinese New Year. While on the plane I wrote an article entitled, "Will the Great Flood Strike Again? - One of My Noah's Ark", which still can be found on Baidu or Google. There was no amendment to the constitution at that time, nor had the trade war began. But later developments in China have confirmed my concerns. The trade war is only the tip of the iceberg. There will be a temporary rapprochement between China and the United States at the economic level, but the conflict between the Chinese Communist Party (China’s only real “interest group”) and universal values and international rules will continue. The conflict is not rooted in a particular person or a certain matter, but in the inevitable fact that power derives from violence (and still depends on violence). After China’s reform and opening up over the past thirty years, the government has accumulated enough capital to persist in its system. China’s disadvantages will be very hard to get rid of now, the window has closed for China’s to adopt the Soviet Union and Eastern European transition model.
The critical condition for the peaceful transition in Taiwan, Chile and Spain was that the private ownership of wealth dominated the economy. There were not ,many state-owned assets, and when the public consciousness was awakened people in power would rather abandon the old ship than keep it. But China's state-owned economy still dominates. Moreover, it is still growing. The state controls and distributes the national wealth at its whim, which is highly toxic, addictive, and hard to resist. So, unless a miracle occurs, the situation in China will continue to deteriorate.
Most people sleepwalk, some people see the future but count on luck, very few people can really learn lessons from history. I am lucky to have the opportunity to choose. As a Chinese saying goes “A wise man does not stand by a falling wall, nor does he live in a crumbling country”, so I chose to leave China and to study English in Malta. I'm on the plane to Europe now. Before leaving many friends asked me why I chose to leave. I would like to write a few words, as an answer to them, but also as a parting statement.
China's Economic Downturn has been Hard to Reverse
The key element of a nation is its economy. The economy matters to everyone, and the bad consequences of lazy and clumsy administration and misgovernment will eventually be revealed through economic problems. Although the China-US trade war is a big issue. On the one hand, American's rely on developing countries, mostly China, for their daily necessities and despite some efforts, it has not been able to completely replace these needs in recent years. Nor can the U.S. government afford to offend its voters/consumers. On the other hand, the Chinese government is currently in trouble both at home and abroad. Neither side has enough chips in hand and so both sides are required to reach an agreement to a certain extent. (Please refer to the article <China-US trade war: cause, nature and China’s solution> written by Professor Zuoshi Xie and Mr Tianyong Chen in March 2018). The Chinese government will be forced to reduce tariffs, which is equivalent to offering Chinese people a tax cut to stimulate consumption, but no significant impact will be seen in national finance. The bigger problem is that after the trade war subsides, China’s economy is still far from optimistic.
Here I would like to share some of my analysis of China’s future economic situation with some details.
1. Industrial foreign direct investment is fleeing China’s economy
Foreign investment in China is fleeing on the scale of group enterprises related to the entire industrial chain. In Guangdong province, foreign invested enterprises in quite a few industries such as the rubber shoes industry and the furniture industry, both of which have migrated out of the region. Samsung, Foxconn, Uniqlo and MUJI have dramatically reduced their Chinese factories. Nike and Adidas have moved their production plants to Vietnam. Even domestic enterprises are also seeking to move out of the country.
The turning point of industrial out-migration is not the China-US trade war, – but Rome was not built in a day! – the process has been a long time in the making. For many years the Chinese government has encouraged nationalism: anti-Japanese, anti-American and anti-Western sentiments. In 2016 the installation of Terminal High Altitude Area Defense (THAAD) in South Korea incited China's large-scale xenophobia, which deeply depressed foreign investment[i]. It will take at least two to three years for an enterprise to plan its emigration and to actually carry out the plan; so for the next three years from 2019, the trend towards enterprise’s outside migration will increase every year. The consequences will be more serious than expected.
The China-US trade war is basically an argument yet the U.S. tariff sanctions have not yet been implemented on a large scale and it has not yet led to a sharp rise in the cost of exports of Chinese enterprises. Trump's trade war just adds another reason for foreign companies to leave China. Don’t think the foreign companies that want to relocate will stay after the trade war settles. The reason for them to leave is that China's overall costs are too high: mainly the exorbitant institutional costs (the costs that caused by the unreasonable system) coupled with the prevailing nationalism and populism in China. Foreign companies increasingly feel insecure , furthering pessimism about China’s future. China’s inability to successfully deal with Huawei’s international crisis related to Ms Wanzhou Meng[ii], will further accelerate the flight of foreign capital.
Industrial out-migration can be fatal for developing countries with large populations. Young and strong labor cannot be stored, the elderly become a social burden. China's resource reserves are far from comparable to Argentina's, it is too optimistic to predict that China will fall into the South American-style "middle-income trap". Look to Venezuela and Zimbabwe, that will be the image of China in the future: tyranny miserably continues, people endlessly suffering, the younger generation sees no future, and the society as a whole sees no hope of improvement.
Industrial out-migration has been occurring in Hong Kong since 1980s. Today there is almost no manufacturing sector in Hong Kong, the current financial services sector in Hong Kong is in recession, which leaves the community in a state of despair.
The degree of out-migration of Taiwanese enterprises is slightly lower than in Hong Kong, but it has also led to little improvement in remuneration for Taiwanese workers for almost two decades, with young people's starting salaries remaining at NTD22K (NDLR: approximately 750 USD). Every presidential candidate in Taiwan has been shouting about the economy, but little improvement can be found. The gap between mainland China and Taiwan and Hong Kong is obvious. We are in the era of global trade integration; enterprises are constantly facing international market competition. Manufacturing enterprises are particularly sensitive to costs, in democratic countries politicians use high welfare to please voters, while autocratic governments need to maintain social stability by force. The operating costs of both systems are difficult to reduce, so manufacturing enterprises can only constantly "move from place to place in search of water and grass," to survive in a place with lower overall costs. Now the investment environment in Southeast Asia and India is improving: overall costs have been significantly lower than in China and foreign companies in China have no hope of surviving if they do not move. Some domestic companies will struggle to survive the next few years if they do not move to lower-cost locations.
The relocation of manufacturing enterprises is backbreaking, so once the industry is transferred to other countries, it is impossible for them to come back. The output of foreign-invested enterprises in China accounts for more than a quarter of China's GDP; and with the related industries, foreign-invested enterprises affect 40% of China's GDP and approximately 50% of China's import-export volume (please refer to <China Foreign Investment Report> of the Ministry of Commerce of China 2017 statistics). Coupled with the fact that domestic private enterprises have also begun to shut down in large numbers, industrial out-migration will lead to hundreds of millions of unemployed in China in the next three to five years. Migrant workers over the age of 50 might be willing to return to their rural hometown, but rural areas cannot provide similar employment opportunities, nor similar salaries or living conditions as in the city. The majority of young migrant workers, however, will not accept the poverty and starvation of the countryside. The second generation of migrant workers who are born in the city are even more reluctant to adapt into the rural living conditions. So large numbers of young and strong migrant workers and the city-born, second-generation migrant workers, will face a difficult situation. The cities cannot offer then chances, but what the rural hometown offers is even worse. The large number of unemployed migrant workers will become the source of social movement.
Poverty and unemployment will become a hotbed cultivating nationalism and populism. Populism is the most powerful accomplice of autocracy. An economic downturn will not only lead to the problem of living frugally, but more importantly it will trigger the spread of populism. The Chinese sage Confucius said that ‘Shortage gives no cause of concern, but inequality does.’ The middle- and upper- classes will become the targets of populism. Once again ‘Combating local tyrants and distributing land’ [iii]is bound to happen. Only by transitioning to a constitutional democracy before the economy deteriorates seriously, and forming a system of social pluralism, can we avoid populism. If China does not immediately begin the constitutional process, the populist tide will flood China in the next few years, and the Boxer Rebellion will come again[iv].
There are certain material requirements for a transition to a constitutional democracy. When people live in dire poverty violence is the only language that the mob understands. The hierarchy of needs determines that constitutional democracy is hard to establish when there is general poverty in the society. Constitutionalism is based on the “gentleman's agreement”. As Guan Tzu said: ‘Only when granaries are full, will the people follow rules of conduct; only when there is enough food and clothing, will the people know what honor is.’ [v]When the economy crumbles, it is difficult to establish a constitutional democracy.
China has no hope if its economy crumbles. Can China's economy be restored? It depends on whether China will implement disruptive changes in its system in 2019. China must significantly reduce the overall cost for private enterprises.
2. Why are the costs so high for Chinese enterprises? Can they be reduced?
Find the cause to cure the disease. Most scholars say that the high cost of Chinese companies comes from heavy taxes and high social security, so they call for tax cuts and lower social security contributions. Not really.
China's social security accounts for nearly 40% of salaries, which is in fact an income tax and a heavy burden on enterprises. But in China, apart from the companies in Beijing, Shanghai. Guangzhou, and Shenzhen, most companies pay social security on only about 30% of their workforce.
China's tax burden is indeed high, the tax structure is especially unreasonable – proportionally, more taxes are paid on the production and circulation sides than on the consumption side, which is adverse to promote enterprises to increase the accumulation and to expand investment. Taxation on different economic links has different effects: costs rise when taxation on the production side is distributed to the consumption side.
The popular fallacy believes that investment, export, and consumption are the troika in driving economic growth. In fact, private enterprise investment is the only driving force for the economy; export and consumption are the result of effective investment. China's high taxes seriously affect the ability of enterprises to expand production, limiting economic development. Tax reduction is necessary.
I run my own business. I also have a lot friends running business in China. In general, private entrepreneurs conclude that only about 20% of the difficulties come from heavy taxes; another 20% comes from the labor laws and social security burden which intervene free labor market; and the remaining 60% are from all kinds of power interventions made by government officials. These include such things as various checks, frequent rectifications, arbitrary fines, fastidious environmental assessment standards, forced production restrictions, business closures by order, demolition of unapproved structures, driving out migrant workers, limitation on the scope of business, restriction on study for the children of migrant workers, and strict rules of purchase of properties and so on. Private enterprises are fed up with the costs associated with these kinds of incursions. Although taxation and social security is unreasonable, as long as the rules are clear, private enterprises can still have a clear expectation.
The burdens of taxation and social security can be partially avoided and risks can be spread out from an early stage. But private enterprises can do nothing to prevent the burdens and risks from government officials, who can intervene in business operations with the hand of political and bureaucratic power, implementing power rent-seeking in the name of law enforcement. Business operators are exhausted from dealing with this kind of harassment. The time, energy, and money consumed by these incursions are the biggest costs to private enterprises. But because this kind of cost is difficult to quantify, to express, (and to avoid), scholars and politicians often turn a blind eye to it. Moreover, the government needs to keep a large number of redundant personnel to maintain social stability, corruption is a special lubricant to an autocratic system, ‘to connive at its soldiers’ is a way of keeping its soldiers. Therefore, although officials power rent-seeking and arbitrary disturbance to enterprises will result in loss and burden which are much higher than heavy taxation and social security, it is still impossible to avoid such losses and burdens under the current system.
Government officials' power rent-seeking and constant harassment hurt businesses more than heavy taxes and social security. Discipline inspection and supervision obviously cannot solve this problem as officials always have a legal basis, at least nominally. The government sets high standards of legislation, but implements them selectively. In practice, virtually all enterprises are in a state of illegality meaning government officials can come to the door at any time and enforce the rules as strictly as they wish. This is the normal situation that all Chinese private enterprises are facing. The bigger an enterprise is, the more official blackmailers it meets. ‘An innocent man gets in trouble because of his wealth.’ What is worse is that private enterprises have no remedies at all in facing public power infringement; the only option for them is being oppressed and exploited.
China has modified discipline inspection and supervision by government officials in recent years, but the harassment that private enterprises face has not been reduced. Things have gotten weird. On the one hand, private enterprises have to pay extra money to officials to get things done; but on the other hand, officials dare not accept money from private enterprises when there is no one known who can act as a go-between. Therefore, private enterprises pay more on intermediate links than the amount given to the officials directly. Moreover, the private enterprises have to find a proper financial solution for such shady incentives to protect the bosses from being taken away when the officials involved are investigated by the discipline inspection and supervision officers. These are especially heavy burdens for private enterprises. According to China criminal procedure law, a suspended murderer can see a lawyer within 24 hours of the arrest, but entrepreneurs can be lost for months after being taken away by discipline inspection and supervision officers. Neither the management of the enterprises nor their family members have a clue about where the bosses have been taken. Once the bosses of private enterprises are in pre-trial detention in the name of ‘helping the investigation’ the China Discipline Inspection and Supervision Department ( a government sector which is similar to t Commission Against Corruption the entrepreneurs will be very likely to suffer worse torture than in jail. This possibility threatens all entrepreneurs as their worst nightmare. Mr Youxi Chen – a famous Chinese lawyer – wrote an article “All Chinese Entrepreneurs are Walking On the Road to Jail” years ago, in which, he described in details Chinese entrepreneurs’ bitterness. This article is still read.
China’s supervision and inspection regulations lack procedural justice. The inspection and supervision department is a political organ, not a judicial organ. The Department has the right to put any citizen into pre-trial detention and prevent the citizen from meeting his lawyer. This is against modern legal principles. Evil law is not law! China will slip away from a modern legal system if no changes are made to the supervision and inspection regulations.
Official-owned property disclosures, and supervision by public opinions have been proved to be the most effective measures against corruption in all civilized countries worldwide. It is extremely easy to have official-owned properties disclosed and supervised in the era of Big Data. Instead of implementing these two easy measures, the Chinese government persists in ‘hitting the flies around a cesspit’, which makes its anti-corruption not just inefficient but ridiculous. Power rent-seeking in China is getting worse and worse, I once wrote an article about the negative correlation between the price of Maotai (a famous and luxury spirit brand in China) and the Corruption Perception Index. Maotai’s price rises as much as the expansion of the supervisory committee. It is delicate that the government makes itself more valuable by the connivance of its officials.
To sum up, unrestricted public power leads to severe power rent-seeking and arbitrary infringements to all Chinese private enterprises., This is the heaviest burden. Nationalism and populism in China increased insecurity among foreign invested enterprises, which adds additional costs.
In addition, the government’s monopoly of land leads to high housing prices. It also controls the price of basic raw materials and fuel through monopolies on upstream industries, further increasing costs for Chinese enterprises. Housing prices are the cost of living of workers, which is equivalent to the labor costs for enterprises, for employers will have to pay salaries which can at least maintain employees’ standard of living. Taxes, utilities, oil, gas, pollution charges, under-the-table commissions, high prices on upstream raw materials, etc., all these costs are linked to each other; the cost of one affects the costs of the others.
Private enterprises are too restricted by the Chinese government and are putting too much money into the pockets of officials. Chinese enterprises are not only facing competition from South East Asia and India for their competitive labor and material costs, they are also suffering from the world’s worst exploitation – interventions and rent-seeking from the power of the state. Despite hard work, entrepreneurs have done their utmost but earned only enough to keep the workers and to feed the power. Profits are virtually non-existent. Private enterprises are overwhelmed: business is shutting down on a large scale. An economic downturn in China is inevitable even if there had been no trade war.
If the trade war continues, it will hit China's manufacturing sector hard. A temporary agreement will be reached. However, if the trade war cannot bring changes to China's political system, China's development is still a threat to other countries; foreign companies and foreign orders will still have to move to other countries in large numbers. China's real manufacturing output will shrink by nearly half in the next five years.
Some argue that the domestic demand market can largely sustain the current size of the economy, they claim that the reduction of exportation to the United States will affect only a few points of GDP. This is totally wrong. If a village has no income from outside migrant workers, all families will have to be self- sufficient; it will result in depression and maybe the only ‘industry’ that survives will be the water mill. Income from migrant workers is the precondition and foundation of the prosperity for other industries in the village. Foreign trade income (in another words, US dollars) is the anchor of RMB note issuance; only a stable stream of foreign trade income can drive supporting industries and services and industrial growth. With modern finance and services, the GDP can be expanded more than several times as foreign trade income can be amplified by credit and transmitted by service industry. China has an annual GDP of more than 80 trillion RMB ($11 trillion USD), half of it has been accumulated from direct and indirect output driven by foreign trade income of more than 2 trillion USD per year. Foreign trade income is the first domino that drives economic growth. China’s effective domestic demand will be reduced dramatically if there is no foreign trade income. How can there be effective domestic demand if there is no basic income?
Only when China’s institutional costs get reduced can the costs of Chinese enterprises be reduced. In order to maintain the size of China's economy, China must maintain the scale of foreign trade. In order to maintain the scale of foreign trade, China must first retain foreign-funded enterprises. Now China cannot even retain domestic capital with local entrepreneurs’ panicking: how can China's economy continue to develop? Take a step back, can China's economy survive at its current scale?
The most important question is – will there be a crucially important institutional change in China in 2019? If nothing changes, China's recession and its consequences will be more severe than most people think.
When Will The Great Flood Strike Again?
Billionaire Mr. Wu Xiaohui, director of the board of Anbang Insurance Group, was sentenced to 18 years in prison; Anbang Insurance was taken over by the government. Billionaire Mr. Xiao Jianhua, owner of Tomorrow Holding, was arrested from Hong Kong and has not been freed yet. Billionaire Mr. Wang Jianlin, founder of Wanda Group, has been selling his assets for many years. Billionaire Mr. Guo Guangchang, chairman of Fosun Group, was requested to withdraw his investments abroad. Billionaire Jack Ma announced his retirement in 2019 (at the age of 55 years old!). Billionaire Mr. Ma Huateng, founder and chairman of Tencent Holdings, and Mr. Richard Liu Qiangdong, founder and CEO of JD.com, experienced a rapid fall in their company stock prices after they visited Yanan, the revolutionary base of the CCP, wearing the Red Army’s clothing[vi]. Mr. Liu Qiangdong said in an earlier time that big data can help achieve communism within 20 years! As a graduate of Renmin University of China[vii], he should know that communism is the terminator of private ownership; perhaps he already knew that his assets would be shared in common? One cannot have peace of mind if one cannot possess a piece of land. A few months ago Mr. Liu Qiangdong got drunk and had an affair[viii], which suggests a lack of peace of mind and a desire to just enjoy it while he can.
For these entrepreneurs, the Flood has come.
Many scholars and businessmen have felt the coming flood politically and economically.
Small shopkeepers of online stores should also feel the storm. The e-commerce law requires all online stores to obtain business licenses and pay taxes. In my opinion, the real purpose of this law is to strengthen social control rather than to collect taxes: The cost of tax collection from small shops will be more than the amount of taxes collected. Like the other brutal and unreasonable measures – sealing the windows of street shops and shutting down certain street business – the e-commerce law has burnt many people’s boats. The underclass, most of whom do not benefit from social welfare, work hard to earn their livelihood. The Chinese government does not support or encourage such self-reliance. On the contrary, it stymies these efforts. These measures have destroyed normal market operations, increased people’s living cost and business operation costs, thus increasing the number of poverty-stricken Chinese.
The State Administration of Taxation issued “the information disclosure regulation of major tax violations” on November 18th 2018, which stipulates that anybody owing taxes over 100k RMB （15,000$） will be black-listed, These people will be prevented from leaving the country or purchasing houses, etc. (The regulation further states that "the results of the tax credit evaluation should be shared with relevant departments.” It suggests that restrictions or prohibitions should be implemented in enterprises’ business operation, investment and financing decisions, access to government land supplies, import and export, passport control, registration of new companies, project bidding, government procurement, honor distribution, security permits, production permits, occupational qualifications, compliance, etc.”）
On January 1st 2019, the "Requirements on the reporting of large transaction of non-bank
organizations by the People’s Bank of China> was implemented, This rule stipulates that any transaction over 50k RMB (75,000 $) or accumulated sum over 50k RMB in a day, or any transfer over 200k RMB ] should be monitored as suspended transaction.
In the era of Big Data, everyone is under supervision, propertied citizens have no protection at all for their private assets, nobody can be spared from exploitation and punishment by the government.
The majority will not be aware of the flood until they themselves or their relatives and friends are in a desperate situation. In the meantime, the flood might reach their shoulders and suddenly they will realize that it is too late to escape.
Many people are cautiously optimistic about the short-term economic situation in 2019. I am not optimistic about the short term, and I am even more pessimistic about the long term. Several days ago, the People’s Bank of China cut the RRR (reserve requirement ratio) by 1 point (100 basis points), releasing up to RMB 15,000 trillion yuan ($2,100 trillion USD). When in economic downturn, the Chinese government will definitely continue to prime the pump to stimulate the economy, as well as to enlarge government investment in order to stabilize employment and growth. However, wealth will be eliminated when there is no profitable investment. Most investment of the government has poor profit, even worse than the bank interest rate, not mention the huge amount of cost in operation and maintenance of such investment, which are real burdens to the people.
Chinese society does not lack for money, but it does lack opportunities to earn money. China's private overseas enterprise investment channels are blocked by the foreign exchange control policy; most profitable domestic industries are monopolized by state-owned enterprises and private enterprises’ overall costs are too high to earn a profit. All three of these factors will cause a downturn in China's economic growth.
With no cure for these ills, the government will have to continue to prime the pump and increase government investment to stimulate the economy. In other words, to transfer more and more social wealth to the government further diluting the people’s wealth. The result of such measure is that the government will expand its control of the economy. State-owned enterprises are far less efficient than the private sector, so the current policy will continue to reduce the efficiency of China's economy. China's economy is falling into a vicious circle. China is drinking poison to quench its thirst. Huge money printing and great inflation are inevitable under the current policy. Urban real estate will be the only asset that remains that remains inflation proof. But real estate will also freeze the wealth, giving the property owners nowhere to escape from government exploitation. Years ago, I analyzed the end of China’s real estate market in my article “When will China's real estate market fall?”. Today, China’s economy is like a heavy loaded boat, heading into the abyss. Without fundamental changes, the ship will sink and the passengers will drown.
When those responsible for maintaining social stability become the targets of social unrest
China is currently at a critical point of socio-economic and political change. Social stability in China depends on the steady growth of the economy, or at least no setbacks. International competition is fierce and the economic development of a country is like rowing upstream -- when one stops rowing one starts regressing. Weak growth in China’s economy will result in industries out-migration and mass unemployment. This will lead to social unrest.
Q: When will the critical point of China's social unrest arrive?
A: When government finances can no longer bear the hefty expenses of a large number of government personnel who are fed by the government, then the stability maintenance personnel themselves will become the object of stability maintenance.
There are currently 56 million ex-soldiers in China. They were once the force that maintained social stability, but now they are the object requiring stability maintenance. More than 30 million public institutional personnel will become the second group requiring stability maintenance. Government finances are currently no longer able to support them and this will only be more so in the long term. Moreover, many of them have lost the capacity to support themselves.
When the economic downturn leads to a serious shortage of government finance, a large number of temporary workers in the departments of the Police sectors and the City Administration sectors will be laid off. Those who are lucky enough to keep their jobs will be overloaded and will live hand to mouth.
As we have seen many times in Chinese history – from Chen Sheng and Wu Guang, junior military officers of the Qin Dynasty or Li Zicheng, a laid-off soldier of the Ming Dynasty, to Zhang Xianzhong a policeman of the Ming Dynasty, and the Revolution of 1911 – the pioneers of social revolution were mainly frustrated members of the government system. Therefore, the expansion of the stability maintenance team is likely breeding evils. Stability maintenance requires government financial support, once the government has fiscal difficulties, the former stability maintenance team becomes the main force of social unrest. If the government refuses fundamental systemic changes but sticks to its state machine violence, the more they put into stability maintenance, the more unstable the society becomes.
With insufficient resources and an aging population, China has been accumulating class conflicts. Chinese society is now totally atomized, neither the gentry’s stratum nor religious belief has survived.
Once China suffers social unrest it will be like an overloaded truck sliding backward downhill with no breaks; nothing, no one will be able to stop it. How many years will it take for China to get out of the cycle of chaos? In late Qing Dynasty the government fortunately had capable high officials like Zeng Guoxuan, Zuo Zongzong and Li Hongzhang who strove to protect society from collapse, but still the Taiping rebellion succeeded for fourteen years and more than 100 million people died during the period. Today, talented and capable officials have been continuously eliminated in the government system: I am afraid there will be no Mr. Zeng, Mr Zuo, or Mr Li anymore.
Everyone is a victim of the disordered social unrest. Flourishing or dying, a nation’s people always suffer. Never count on the social unrest; you never know whether there will be a better country after chaos.
After recession and social unrest, China will return to the law of the jungle. Those who take power and/or force will exploit its people aggressively. At the same time, they are also precarious. They are in danger of being slaughtered by others. Businessmen become the last feeders of the power chain, all sorts of disguised misappropriation policies will be aimed at entrepreneurs’ assets and the masses will likely cheer it. At present, business leaders have become prey in cages. Super stars have countless fans, they usually receive hundreds of responses from fans when they call, but in the past six months, when they were facing the public power of all kinds of exploitation, they were still helpless. If it's your turn, are you more capable of self-preservation than those business leaders and super stars?
The economic downturn will also lead to a general decline in the standard of living of China's largest middle class - the government officials - which means that the power rent-seeking will become even more out of control. China's disciplinary Commission and the Inspection Committee have been ruling the government officials illegally but even severely for many years. On the one hand, officials have been intimidated to some extent and rent-seeking has been inhibited a little. But on the other hand, such illegal tactics have undermined the rule of law and officials are now the group with least respect for and faith in the law. They are slow at work ; they fear the Committees but they do not respect them. They are driven by the government’s high standard of welfare and under-the-table income. Once the government can no longer sustain the existing welfare standards and the society can no longer feed them with under- the-table “commissions,” the iron-bowl[ix] will turn into a plastic bowl. Then normal government officials will be fearless and disrespect the inspection Committees. But they will still need to maintain social stability and their power rent-seeking will be even more rampant. The law does not blame the public, regulators in the Committee know but have to turn a blind eye, and the officials of regulators also rent- seeking, they can blackmail other normal officials, or, conspire with other officials to blackmail the entrepreneurs.
Theoretically, China’s large economy and complete industrial supply chain can be self-sufficient as it was in Kangxi and Qianlong Dynasty (two emperors in Qing Dynasty). But if this happened today the quality of life of the people would return to that of the early 1980s. The middle class would be most affected and the Chinese officials who are the majority of the middle class would disobey orders from the higher authorities – acting a double part to the superiors and connivance to the subordinates. Unelected bureaucrats always have a one-way ratcheting effect: they strengthen orders which are in favor of power rent-seeking such as expanding investment, enhancing industrial restrictions and increasing control on enterprises and the people, while they delay and disobey orders which limit power rent-seeking.
The bureaucratic class has its own interests and also has relative independence. The existing bureaucratic class agree with Deng Xiaoping’s "reform and opening up" policy and they are foiling the far-left in turning back the clock. They have been trying hard to stop the country from reversing and pushing the nation back to the time of Hu Jintao and Wen Jiabao – a relatively liberal and tolerant time which included tolerance for official corruption. But the trend toward constitutional democracy throughout the world has advanced. At the same time, the environment at home and abroad is changing and the Internet has accelerated the integration of the world. Today, social stagnation means retrogression.
If "Defending reform and opening up" is misinterpreted as ‘return to Jiang Zemin and Hu Jintao era’, then the above-mentioned problem of reducing the all-in cost of enterprises will not be solved. The thought of ‘stability is all’ cannot solve the problem of the ruling party's own vicious expansion either. Instead, ‘stability is the top priority ’ is the cause of China’s current problems. It is easy for the ruling party to wave its butcher’s knife to its people, but hard to turn it on itself. Therefore, although China has been shouting about downsizing the public workforce and simplifying administration, it has achieved nothing. In fact, the vicious expansion of the public workforce has become an unbearable burden on Chinese society.
It is understandable that some scholars put forward "farewell to reform and opening up" theory, but how to practice it? Both defenders of ‘reform and opening up’ and those opposed to it share the same goal. They both agree on what the country should be, but they disagree on how to achieve the goal. The more radical the more noble? Not the case. Or the more radical the more effective? Not the case either. Motivation is not important; the results are what are important. It is surely good if we can achieve the goal with one leap, but how to do it? If one cannot take a leap, then let’s begin with a single step: reform should not be ridiculed. Real reform and opening-up is the common interest of the Chinese, including the ruling class and everybody needs to be involved.
It is important to understand that China has only two options at present: step forward into democratic constitutionalism and peaceful transition or return to a totalitarian dictatorship and eventual collapse.
Four Proposals to Stabilize Chinese Society
Many of my friends have made their protests in China and I have great respect for them. Before New Year's Day 2019, nearly a hundred of our friends wrote something for the "China’s 100 public intellectuals’ suggestions upon Forty Years of Reform and Opening-up". I am a small businessman not an intellectual. By the courtesy of some intellectuals, I was invited to say a word: Real reform has to be conducive to the protection of private property rights and the free market economy; the direction of reform should be to increase freedom.
It will be a blessing for China to avoid social unrest and achieve a peaceful transition. Social reform should be people-oriented, flourishing or dying of a nation, people always suffer. It is not important to follow a specific whatever-ism: the well-being of the people is the priority. From this point of view, I am a reformist. Every citizen should take his responsibility in a nation’s destiny so I would like to make four proposals here:
1. Implement constitutionalism in China.
Convene a political reform conference in 2019, to forge ahead with a constitutional democracy. Constitutionalism is the restriction of power. Only when government power is limited, can downsizing the public workforce and simplifying administration procedures be achieved. Only when the burden on enterprises and the public can is eased can private enterprise stabilize the economy.
Only with a democratic constitution and the acceptance of universal values can China truly integrate into the world. Until then, China's development will be regarded as a threat to the civilized world. And then China can take advantage of its comparative advantage and maintain its share in the world trade system. By achieving this, can we define that the government governs for the people and benefit the people?
Constitutionalism is the common civilization of the human world regardless of regional differences and special national conditions. After World War II, MacArthur kept several young Americans in a secret room for nine days who drew up the Japanese constitution with their American thinking. After more than 70 years not a single word was changed in the constitution. It helped Japan develop into one of the world's happiest leading modern countries.
To accept constitutionalism first and foremost China needs to accept political pluralism. Wise rulers of China should take the initiative to cultivate moderate opposition parties and promote the peaceful transition and avoid violent social conflicts. The CCP has to understand that there is no permanent ruling party. What harm it has done to others when it is in power will eventually be done to itself or to its future generations. Harm set, harm get. Violent rule shall be returned in blood. (Please refer to “Return on Blood – the Survival Games in Chinese History”by Mr. Si Wu.[x])
Freedom of thought and freedom of belief are the foundations of constitutional democracy. In China many social media accounts are banned and posts are deleted, free speech is suppressed, Christians are pressured, certain minorities are persecuted, and human rights have been seriously violated: all of which should cease immediately. Freedom of belief is a basic human right and religion is a stabilizing factor in a good society.
It is either stupid or bad to reject universal values. Leave aside all successful models, but insist on ‘ difficult exploration of Chinese way’ just to maintain power, pulling the whole ruling class into the deep just to satisfy its own desire – all these cannot last long. Dictators are always eradicated by the awakened. Look at Ceausescu, at Saddam Hussein, and Gaddafi: none of them had a good end. The Chinese system brings together most of the country's elite, and political reform is their urgent need too. Some friends predicted that if the very top does not take the initiative to move towards constitutionalism, then within two years there will be social upheaval in China. I dare not be so optimistic, but I know that the status quo cannot last. If there is no benign change, then the only possibilities are reverse or collapse and nobody survives. Most people will either become the perpetrator, or the victims of violence, or both! The middle class, including government officials, white-collar workers, and business owners, will be the object of mob violence. The so-called leftists, the rightists or the centrists in China now – they are all in middle class – will all be burnt in a fire of mob justice.
The implementation of constitutionalism provides the best hope for both sides: it cares about those classes which are losing benefits at the moment, as well as saving the vested interested group.
2. Deregulate the monopoly of all industries except the military industry.
Fully deregulate the industries of banking, oil, communications, mobile communications, internet, power, railway, highway, airlines, gas, water, minerals, metallurgy, chemistry, medicine, education, insurance and other monopolized industries in order to release great economic vitality.
In China there are actually four major taxation systems: the National Taxation Bureau and the Local Taxation Bureau and the Social Security Bureau have already been merged into the first system; State-owned enterprises are in fact the second taxation system. State-owned enterprises monopolize all fundamental industries of the people’s livelihood. The monopolistic premium has three taxation features: compulsory payment, indirect quid-pro-quo, and fixed. Moreover, governors know that state-owned enterprises are inefficient and extravagant. They do not benefit the economy but eliminate social wealth. Nonetheless, governors count the state-owned enterprises as the party’s properties, which are the private coffers of the interest groups (mainly CCP and its cooperators). Loss of state-owned enterprises is equivalent to the cost of taxation; the interest groups will never easily hand over their coffers. Land finance is the third taxation system in China. Nowadays the local governments have income of more than 5 trillion RMB a year through land sales, any shortage of land finance will lead to government shutdown. The People’s Bank of China and the country’s financial system is the fourth taxation system, which can issue bank notes without limitation. Issuing notes causes inflation which can dilute the purchasing power of people's savings. Note-issuing is like seigniorage, through which the government invisibly plunders the wealth of civilians. The rich can buy foreign exchange or properties to resist inflation but the poor have no choices and are thus the biggest victims.
The current industrial restructuring policy cuts capacity in private enterprises. The environmental protection policy protects the relatively inefficient state-owned enterprises. Together these policies seriously damage productivity. Now China is facing an economic downturn and the government has slightly loosened its policies but many private enterprises have already been seriously damaged. Uncontrolled public power is like the sword of Damocles which always hangs over the heads of private enterprises. Lives and wealth are threatened all the time, not to mention that the government never admits its mistakes. Many private enterprises are still in danger of breaking the law; they have no confidence to develop.
If the Chinese government insists on expanding and strengthening the state-owned economy, then private enterprises will have no room for development. If the referee insists on playing the game, then the game cannot go on. Only by liberalizing all upstream industries which have been monopolized by state-owned enterprises and giving profits to the people can China's economy be revitalized.
3. Liberalize excessive restrictions on land use and loosen the function of land.
Land is the most important wealth of the people. China's land is monopolized by the state, which limits the effect of land wealth. Land privatization is essential. The government needs to liberalize the excessive restrictions on land use and let land demand be regulated by the market. It also needs to loosen restrictions on the land use and plot ratio etc., Allowing land transactions and securing land use rights by private enterprises and individuals, would unlock the potential value of land, and an the most important source of wealth. Idle land can be reduced and more wealth can be created for the people.
The draft amendment to the Land Management Law was passed at the 7th session of the Standing Committee of the 13th National People's Congress from December 23 to 29, 2018, which states that "collective construction land can be placed directly into the market without expropriation." This broke the impasse of the government land monopoly. But there is a conflict between the draft amendment and land finance. The local government plays dual roles of the vested interest group and the referee. How could it allow the farmers’ group to take the plum from its mouth? If the land financing policy is abolished, local governments in most parts of China will shut down immediately. How can local governments accept this drafted amendment which is against their own interest? How can they implement the draft amendment smoothly without obstruction from the local public power? — To mitigate responsibilities and to reduce the related power of the local government responsibilities and related power, here is not only where local officials can implement power rent seeking but it is also a real burden to local officials. Mitigating responsibilities and reducing power reduces its burden.
Active competition among local governments in China has been an important driving force for economic development. On the premise of compulsory state ownership of land, local governments compete to develop industrial zones, change the land use from agricultural use into industrial use, discover differential land income, which has contributed to the preliminary clarification of property rights. Local governments and officials benefit from the competition, at the same time, China’s economy has developed out of the competition. In this respect the local governments are like companies, competition between these “companies” reduced the initial entry costs for investors. China has major ‘institutional advantages’ in infrastructure construction and urban construction, China has the most efficient urban construction. But by now, the special dividend of local governments competition based on state ownership of land has been exhausted Land has become an important tool for the government to seize the wealth of the people, high housing prices outstrip the incomes of the majority of ordinary people. The cost of living of for employees is the salary costs for enterprises. High housing prices have become the unbearable burden of the people and the enterprises. The allocation of state-owned land resources is inefficient, wasteful and unfair. It has to be changed right now.
It is a Pareto improvement to all parts if China can unlock the institutional dividend of land use. At present, local government and enterprises are enthusiastic supporters of change. It is the central government that needs to loosen its rigid controls on land use. The so-called red line policy of 296 million acres of farmland is absolutely fixed[xi] but new remote sensing data shows that the actual existing farmland in China is more than 379 million acres. It will be more than sufficient if 5% of the farmland can be used for industrialization and urbanization, which can significantly reduce the cost of living, reduce the overall cost of enterprises, and improve the international competitiveness of Chinese enterprises.
4. 4. Remove the Hukou restriction and remove the privilege attached to Hukou[xii].,
The trend towards urbanization is the urbanization of big cities. Economic efficiency and innovation are greatly improved in big cities. China strictly controls the development of mega-cities, which counters urbanization and seriously damages economic efficiency and innovation. China's control of mega-cities is a political concern: it fears that a large number of unemployed people will be gathered in big cities during the economic downturn and become the source of social unrest. But human beings have a migratory instinct, it is an out-and-out lie for the government to call for migrant workers entrepreneurship, which is actually calling for migrant workers back to the rural area to farm. Agricultural work is inefficient with low incomes, and China's rural labor force has been in a serious surplus.
Hukou restrictions in big cities must be removed. The government must allow Chinese people to buy, to live, to work and to attend school in big cities freely, and eliminate the benefits attached to Hukou so as to allow free human resource turnover, which will greatly promote economic vitality. The current practice of driving the "low-end labor force" out of big cities violates human rights, damages the economy and is unlikely to be truly conducive to social stability. ‘Hunger breeds discontentment’, the society will be stable with a blooming economy. On the contrary, when the economy is bad, rural workers cannot be locked on their farmland by severe restrictions and various fight for survival cannot be banned either.
In sum, we only need two words for the four proposals mentioned above: Increase Freedom!
Economic development and enterprise innovation are private enterprise's instinctive needs. It does not need the government’s comprehensive guidance. Protect private property rights, liberalize land use restrictions, give people more freedom, and China will surely achieve economic development and innovation. To truly protect private property rights, government’s right to power must be restricted. The Chinese government has to break the industrial monopoly and lift capital controls on the state-owned enterprises. It must return the freedom of speech to the people. These are the basic conditions of property rights protection. The root cause of the trade war and many international conflicts is the conflict of values. If China's ruling party can take a step back it will find more space around it enough to implement constitutional government as soon as possible.
At present, China's social transition requires the sincere cooperation of the visionary elites both inside and outside the system. The peaceful transitionshould be the result of the collaboration of elites both inside and outside the system. Constitution jurisdiction requires mutual respect among the elites and full negotiation to seek common ground while preserving differences.
Most of China's elite are still inside the government system. They are more aware of the social problems, as well the elite outside the system, and both of the parties are more ready to accept constitutionalism. To destroy the elite society, there must be only ignorance and recklessness left. The original meaning of constitutionalism is to accept peaceful negotiations among different interests groups and the elite in the system is one of the important interest groups. Social reconciliation needs broad-mindedness. Our grandparents have already shed too much blood. I sincerely hope that we do not bleed again and that we do not use violence. Constitutional democracy cannot be established by violent revolution. The higher the price the revolutionaries pay, the more unlikely they are to give up the power. The revolutionaries will become another despot -- the dragon slayer will become a dragon himself. Powers need to be balanced against each other. Constitutionalism is not a power-grab, it is restrictions on the public power.
When will the butcher be willing to lay down his knife? – When they feel no threat from the outside. A tenacious constitutional democratic reform is China's only remaining hope of peaceful transition. If the government continuously and brutally suppresses the reformists the opportunity for peaceful improvement will be missed. The long-term violent process of governance of the ruling class has accumulated too much hatred. It is in the best interests of the ruling class to peacefully and actively transform and to peacefully handover the power. People remember the bloody February 28th incident in Taiwan[xiii], 38 years of martial law with white terror, many debts of blood and full of public wrath. But Taiwan achieved a peaceful transition at last, four million migrant "ruling class" people live in harmony with local residents. The Taiwan Chinese successfully avoided historical liquidation by the implementation of constitutional democracy, which has made a good demonstration of social reconciliation and smooth transition.
(I'll write another article - Reconciliation and Transitional Justice - to elaborate on this topic when I have time.)
China's new historical turning point has begun and we all have an opportunity to witness history firsthand. Is it to conform to the trend and promote social reconciliation and constitutional transition? Or is it to crash and burn the whole nation out of unscrupulousness? I appeal to all the people on this big ship of China, for the sake of your families and loved ones, for yourselves and for future generations, take on the historical mission, refuse to go backwards, practice constitutionalism, and generate goodwill to promote social reconciliation and a peaceful transition.
For the politicians, please give up thinking of fighting, compromise with the world, and set the people free.
Any one of the above four proposals can release huge potential for development. If all four can be achieved in the next three to five years, China will still have great hope. China is facing increasing internal and external pressures. If China refuses to change in any of the four key issues and buck the world trend and go on with its own totalitarianism then with no doubt Venezuela and Zimbabwe is our future.
If possible, my friends, vote with your feet, leave if you can. Take care and good luck!
January 05, 2019 on the plane to Malta
[1] In 2016, the South Korean government decided to install the American anti-missile system Terminal High Altitude Area Defense (THAAD) in South Korea facing the threat from North Korea. Beijing considered this act an American threat via South Korea and encouraged mass demonstrations against Korean compagnies established in China in order to pressure the South Korea government.
[1] Meng Wanzhou is the deputy chair of the board and chief financial officer (CFO) of China’s telecom giant Huawei, founded by her father Ren Zhengfei. On December 1, 2018, Meng was detained upon arrival at Vancouver International Airport by Canadian Police and arrested on a provisional U.S. extradition request for fraud and conspiracy to commit fraud in order to circumvent U.S. sanctions against Iran. On January 28, 2019, the U.S. Department of Justice formally announced financial fraud charges against Meng. The first stage of the extradition hearing for Meng began Monday January 20, 2020 and was concluded on May 27, 2020 when a BC Court ordered the extradition to proceed.
[1] This was one of the most famous slogans in Mao’s communist revolution, in which millions of landowners were eliminated by the revolutionaries-peasants.
[1] The Boxer Rebellion was an anti-foreigner, anti-Christian uprising in China between 1899 and 1901, towards the end of the Qing dynasty. The name comes from the fact that the participants practiced Chinese martial arts, considered as “Chinese boxing” in West. This rebellion is debated subject of research and intellectual discussing, but one characteristic of this historical rebellion shared by all was its xenophobia and ignorance.
[1] Guan Tzu was a politician and thinker living in the Spring and Autumn Period (770-476 B.C). There is a book with his name but we can’t be sure that Guan Tzu was the real author.
[1] By this kind of act, they passed the message to PCC that they are loyal to it.
[1] Before becoming the recent university with this name, this university had been a ‘grande école’ for training the PCC for cadres.
[1] Liu Qiangdong is a Chinese billionaire (born in 1973 ) who has been called the "Jeff Bezos of China". He founded his company JD.com, one of the most important e-commerce companies in China In August 2015, Liu married Zhang Zetian, an internet celebrity better known as "Sister Milk Tea". On August 31, 2018, Liu was arrested in Minneapolis, Minnesota with the charge of “sexual misconduct ”. The office of the Hennepin County Attorney concluded after that they had not found enough evidence to charge Liu. In 2019, Liu Jingyao, a student at the University of Minnesota, formally filed a civil lawsuit against Liu Qiangdong for that.
[1] “Iron-bowl” is an expression used by the Chinese to designate the guarantee of employee by State
[1] Wu Si is a public intellectual and historian. In his book Xuechou dinglv-Zhongguo lishi zhong de shengcun dinglv (Return on Blood – the Survival Games in Chinese History, Beijing, Gongren chubanshe, 2003) he analyses the phenomena in Chinese history of people shedding their blood to allow themselves to survive and obtain their interests.
[1] The Chinese government has fixed a policy since 2006 to keep 296 million acres of farmland like the red line in order to guarantee China’s food security.
[1] Hukou is a unique household registration policy in China. Individuals are registered on th basis of family unit. There are two categories of Hukou – the Agriculture Hukou and the non-agriculture Hukou. Hukou limits individual’s freedom of movement, it also limits human rights in many ways, such as education, medical treatment, social security, welfare employment, the purchase of properties, etc.
[1] The February 28 incident was an anti-government uprising in Taiwan that was violently suppressed by the Kuomintang-led Republic of China government, which killed thousands of civilians beginning on February 1947. From that time, followed by 38 years of martial law, commonly referred to as the "White Terror," which lasted until the end of 1987.