Jiang's Gutsy Gamble

It is the true denouement of the cold war--the final triumph of market capitalism over centralized Communist control. Beijing's decision to unload its huge state sector will have a monumental impact on the global economy. If China's new capitalists merely add to Asia's torrent of exports, the world economy could easily tilt toward overcapacity, deflation, and eventual recession. Should they generate strong domestic demand as well, China could be a force for global growth well into the 21st century. So big is China that the way it balances producer against consumer interests and protectionism against free trade will inevitably affect us all. There is no more important foreign policy issue than getting the Chinese to choose well, integrating it into the world economy.

Jiang gets credit for a gutsy move. In his Sept. 12 speech opening the 15th Party Congress in Beijing's Great Hall of the People, Jiang set programs in motion that are likely to end the dictatorship of the Chinese Communist Party. Jiang decided that the heart and soul of party power, some 300,000 state-owned companies employing 100 million people, are to be merged, reorganized, and otherwise reconfigured into enterprises that sell stock to private investors. The goal is to do what the Russians didn't: recapitalize state-owned companies and save China's banking system, now technically insolvent as a result of massive lending to the state sector. In the process, the party will lose control of millions of jobs that it uses to control the people.

To make the gambit work, China will have to tame its crony capitalism. A staggering 300 initial public offerings a year, many of them huge, may have to be marketed through Hong Kong to finance this giant asset transfer. But investors are already wary of corrupt Chinese managers who squander their money. Many China-based companies selling stock in Hong Kong use the proceeds to speculate in land and office buildings or to lend it out at high interest rates, rather than invest in capital and equipment. Indeed, business in China, as in much of Asia, is based on guanxi, or personal contacts, not contracts. If China is to raise hundreds of billions of dollars from abroad, it will have to substitute the rule of law to win the confidence of investors who insist on accountability and transparency. Jiang's speech gives the green light for enforcing the commercial laws already on the books. As the rule of law spreads, the party's arbitrary power will recede.

Jiang also gets kudos for expanding grassroots democracy. Even though personal freedoms are still severely restricted in China, his decision to allow town as well as village elections is important. Local politicians and bureaucrats have transformed many state-owned companies into TVEs (town and village enterprises) that are among the nation's most dynamic companies. Along the way, there has been plenty of asset-stripping and self-aggrandizement at the expense of shareholders and employees. By extending voting to towns, TVE officials will now be more accountable to local people.

The goal of a truly effective U.S.-China policy must be to reinforce Jiang's moves toward market democracy while turning back mercantilist tendencies that threaten economic instability. The export-driven economic policies of Japan and Southeast Asia are already putting deflationary pressures on the world economy. China is adding to that by protecting its domestic markets while engaging in an export blitz. Its exports are beginning to undermine Southeast Asian growth.

That makes the rules for China's entry into the World Trade Organization all that more critical. A balanced growth strategy is essential if China is to play a positive role on the world scene. That should be the message Washington delivers to Jiang when he arrives in October for his summit with President Clinton. Jiang's bold economic and political moves are a sign that China can play by international rules rather than buck them. Washington, and Congress in particular, should realize that red-baiting is obsolete when China's leader is more interested in red ink than ideology.

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