Riches and responsibility - Rebecca Lowe

China is destined to become the world’s largest economy, yet Western criticism of its governance both at home and abroad shows no sign of abating. Are such concerns valid or based on ignorance and envy?

It was called the Great Drain Robbery: the theft of thousands of manhole covers from across the world, from the UK to Kuala Lumpur, in early 2004. At first the crimes were a mystery – and then it slowly became clear. China’s rising demand for scrap metal had driven up prices and created an underground of black market trading. The Middle Kingdom was industrialising, and industrialising fast.

The gaping holes in the ground were perhaps the most visibly striking sign of China’s arrival as a key player in the 21st century global economy. Yet now, seven years later, the country has done more than just snatch the world’s manhole covers – it has snatched the ground from beneath our feet. With startling efficiency, its economy has grown to become the second largest in the world, leaving Japan and Europe reeling in its wake. By 2030, most analysts believe, it looks set to be number one.

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The world can hardly complain; it encouraged China out of its shell, after all, with multinationals excited by the prospect of selling their wares to another 1.3 billion people and civic activists convinced that economic openness would inevitably lead to political and social reform. Yet repressive measures by the Communist Party seem to be worsening, and China continues to attract criticism for its business practices both at home and overseas. It has stepped into the spotlight, yet remained in the shadows, keen to hold its head high while ducking below the parapet. And the West is getting frustrated.

But are concerns about democracy, freedom and corporate social responsibility (CSR) justified? As China’s power grows, is the world under increasing pressure to hold its policies to account, or are such efforts unwarranted, and ultimately counter-productive? In short: is China coping responsibly with its newfound riches – and if not, is there anything that can be done about it?

Wealth and wisdom

'It’s like the joke in China, that the guy is so poor because he only has money.’ Speaking by phone from Shanghai, David Liu, senior partner at Jun He Law Offices, is keen to debunk foreign preconceptions about his country. Far from being ruthless mercantilists, he stresses, China’s main aim over the past three decades has been merely to overcome severe poverty. Now, however, its ambitions are changing.

‘The fundamental question comes back to the purpose of the economy, the purpose of life,’ he says passionately. ‘My thinking is clear on this. China has come to this position because of its people’s desire to become rich. That is a fact. But now, after 30 years, people are longing for happiness, to add value to the world.’

It is easy to forget, Liu points out, exactly how poor China was in the late 1970s. The economy was nearly bankrupt and over a third of the population lived below the poverty line. Even when Liu graduated in the late 1980s, he received a salary of only 70 reminbi (US$11) a month.

‘The pursuit to be rich is obviously not very concerned with social responsibilities,’ he says. ‘So that’s why you hear a lot of voices on how poor the working conditions are in the southern part of China. A lot more attention is being paid to that now.’

The leadership is certainly going to great lengths to show it means business where CSR is concerned: three new labour laws, introduced in 2008, have led to a huge rise in litigation and arbitration over worker disputes, and the country’s 12th five-year plan (2011–2015) outlines definitive commitments to environmental protections and improving people’s livelihoods.

The impetus for responsible corporate governance is not solely government-driven, however. Jeff Blount, partner-in-charge of Hong Kong and Beijing at Fulbright & Jaworski, believes the explosion of large state-owned enterprises (SOEs) publically listed on global equity markets may have played an important role in shifting China’s focus from raw profiteering to CSR.

‘They have had to set a good example in terms of international best practices,’ Blount says. ‘So public shareholding has had a good leadership effect on domestic companies that are still private, because they see large Chinese companies doing well and having programmes for employees and green campaigns, and they think that’s a good example to follow.’

Listed companies are now obliged to publish a CSR code and the Chinese authorities want all SOEs to file CSR reports by next year. Zhang Yi, managing partner of King and Wood’s Shanghai office, is confident times are changing, but admits that implementation remains a problem without grassroots support.

‘China is paying more attention to CSR now,’ he says. ‘But, my personal feeling is that it is not enough to have a government requirement, so it is imposed top-down, but to incentivise the people to ensure it will really be implemented.’ Yet for the bulk of businesses, it is clear CSR remains little more than a PR exercise of lipservice and window-dressing. Many companies lack third-party auditors to oversee their records – a particular concern in a country lacking civic organisations to hold the authorities and corporates to account.

‘I think there is a fierce debate at the moment as to whether this is anything more than just cynical rhetoric on the part of the state-owned corporates,’ says Kerry Brown, head of Asia at Chatham House. ‘The way that Chinese companies operate in China isn’t hugely impressive in terms of the way they try to fulfil their CSR.’

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Overseas investment

Others might go further: for some, the way Chinese companies operate outside China has proved equally questionable. With nearly US$3 trillion of foreign exchange reserves burning a hole in the nation’s pocket, it has thrown its energies into exploring investment opportunities across the globe – including, to the West’s notable irritation, in several African countries.

Western concerns are manifold. Corporates complain of non-competitive business practices and opaque deals, while civic groups cite inadequate labour and environmental regulations. The Congo has proved particularly controversial: in 2009, a deal to provide US$9bn worth of infrastructure in exchange for 10.5m tonnes of minerals was renegotiated to US$6bn after the International Monetary Fund (IMF) deemed it transgressed the Congo’s debt obligations.

Since then, Global Witness has criticised various contractual ambiguities, which seem to favour the Chinese, and raised concerns about the lack of social and environmental protections. It has also reported the disappearance of US$23m of the signaturebonus payment to the state copper-and-cobalt firm, Gecamines.


‘It's like the joke in China, that the guy is so poor because he only has money.’
David Liu
Jun He Law Offices


 

Locals in the Congo have echoed some of these concerns, their main objection being the Chinese preference for shipping over their own workers, rather than training native labourers. ‘There is clearly a great deal that China is doing in Africa that is ethically problematic,’ says Rana Mitter, lecturer in Chinese history and politics at Oxford University. Yet he, like many China experts, is keen to point out the positive side of the investments, which have injected much-needed cash into regions that desperately need it. China, he stresses, is learning all the time.

‘Quite often the China issue is used by African opposition parties to say, here is another exploiter of our resources,’ he says. ‘So Chinese behaviour has had to make itself more ethical and suited to the needs of local populations, because otherwise their political allies will be voted out. In a way, the Chinese are having to come to terms with democracy on an international basis in a way that they are not having to do at home.’

For some – such as those who detect the faintest whiff of hypocrisy in the idea of the West condemning unethical business practices in Africa – the issue is simple: avoid blanket criticism and hold China to account via international trade agreements. ‘In the case of trade by any wealthy country with a relatively impoverished emerging market, there are always going to be stories about overreaching and unfair practices,’ says Blount. ‘But we can use the existing multilateral mechanisms – the IMF, the Paris Group, the debt relief initiative in Africa – to prevent this.’

 

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Socio-economic to human rights?

As social and economic rights tentatively venture into the spotlight in China, human rights defenders are hopeful that certain ‘inalienable’ freedoms – independent courts, democratic elections, free speech – may be next on the agenda. Yet such hopes, it seems, are premature. The so-called Jasmine Revolution barely reached the Twittersphere before it was no more, crushed by heavy censorship and the arrest of dozens of leading Chinese activists, including the famous artist Ai Weiwei. Foreign journalists reported being harassed, while six lawyers disappeared from their homes, one of whom recently resurfaced under circumstances suggesting he had been badly tortured.

For campaigners encouraged by recent government statements about democracy and transparency, the crackdown has proved an immense disappointment.


‘The way that Chinese companies operate in China isn't hugely impressive in terms of the way they try to fulfil their corporate social responsibility.’
Kerry Brown
Chatham House


 

‘The thing about Chinese officials is that they are amazingly arrogant and they feel it is appalling that anyone should dare mention these insignificant human rights people, who
are not worth a flea off their back,’ says Brown. ‘The political elite say wonderful things about human rights, while allowing their security agents to unleash murderous viciousness on people who are totally powerless.’

For many, it is the decline of respect for the rule of law that is the most worrying aspect of the repression. For years, the situation seemed to be improving, with around 10,000 laws passed over the course of a decade and a growing emphasis on educating lawyers. Yet whereas corporate law is showing signs of improvement, with more functional regulation and greater protections for IP rights, criminal law reforms have stagnated and the judiciary remains firmly under the power of the state.

‘This is not rule of law, this is rule by law,’ says one lawyer who has spent 20 years with an international law firm in China. ‘The government thinks it needs laws to control what the administrative function is doing, not to afford protection of individual rights.’

Mo Shaoping, the lawyer for jailed Nobel Peace Prize winner Liu Xiaobo, agrees: ‘Legal principles vanish when facing political power. The reform so far has solved the problem of having no laws, but has not – or really does not intend to – solve the problem of judicial independence.’

 

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Fighting corruption

Despite improvements in corporate law, experts in the region point out that businesses will not be immune from this backlash against legal reform. Without independent courts, they will always be exposed to a degree of instability and risk, dependent on toeing the political line to keep their foothold in the marketplace.

‘China’s human rights situation is beginning to play a bigger role in companies as they consider their future in the country,’ says John Kamm, former President of the American Chamber of Commerce in Hong Kong and founder of the human rights Dui Hua Foundation. Kamm cites the example of an American geologist, Xue Feng, who recommended that his employer purchase a database that he thought was commercially available and was later convicted of trafficking in state secrets. ‘As this kind of thing happens more often, companies will get more concerned about the safety of their employees.’

China’s increasing censorship will also affect businesses, Kamm believes, by interfering with the ‘free flow of communication, on which they rely’. ‘Nobody is packing their bags yet,’ he says. ‘But I know it’s beginning to be a problem.’

Yet most corporates, desperate to access a market comprising a fifth of the world’s population, seem unwilling to enter the human rights debate. Some analysts believe
they missed their moment: the time to speak out was ten years ago, when China was desperate for investment at any price. Yet many – like the lawyer quoted above – hope it is not too late.

‘Multinationals are silent about these things because they are frightened of repercussions. This may be the case if one does it, but if many do it, what could China do? They need multinationals, they are the fabric of society. If Siemens leaves, plus all the related companies, you have 100,000 white collar unemployed people on the street.’


‘I've been in China for 24 years... and never once has anyone said,  "what we need is a democracy  "’
Tim Clissold
Peony Capital

 

According to research at the Chinese Academy of Governance, the number of protests in China hit 180,000 in 2010 – twice the figure of 2006. A main source of anger, it seems, is corruption in local government.

‘Corruption is the primary eroding force of the moral right of the state to rule,’ says Tim Clissold, CEO of Peony Capital, a Beijing-based investment fund. ‘The state thinks it has a right to rule – a Mandate of Heaven – by creating exemplary moral examples. So it’s a huge problem.’

The authorities have launched numerous high-profile campaigns to help cleanse the system over the past two decades, but many believe it is fighting a losing battle. ‘The Party is a self-governing, self-regulating elite,’ says Richard McGregor, Financial Times journalist and author of The Party, a book about the Chinese Communist Party. ‘So even though they have periodic crack-downs on corruption, they are never going to get a real grip on it because institutionally they can’t.’

Without freedom to vent frustrations, protests are predicted to spread. As the tax system becomes more sophisticated, the population will almost certainly want a greater say in where their yuan is being spent. Combine this with growing inequality and a generation of workers who no longer remember the hardship of the 1980s, and people’s tolerance of the state may reach breaking point.

Ultimately, however, it may be the economy itself that convinces the state to unclench its iron fist. With a security budget now exceeding the military budget, few believe the current level of social control is sustainable in the longterm – especially if the economy stumbles around 2020, as many predict, due to the onechild policy and an ageing population.

According to Fu Hualing, head of law at Hong Kong University, such socio-economic unrest should not be underestimated. ‘These protests are not about political rights as such, but an essential part of their claim is to have the right to speak freely,’ he says. ‘So the direct demand is not political, but the means they are using is highly political.’

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Western democracy

So as societal cracks multiply, are we en route to a breakdown of the one-party state? Over the next ten to 20 years, few seem to believe so. Nationalism and pride is high in China, and it is clear the Party still enjoys widespread support among a population that has seen the nation’s wealth and status rocket under its guidance. ‘I think there is a feeling of tolerance towards the overall story the Party is putting forward, which is that the economy and China’s dignity have been improved under their rule,’ says Mitter. ‘As long as that continues, the people will essentially allow them to continue along that path.’

‘I’ve been in China for 24 years and have had thousands of conversations with ordinary Chinese people, and never once has anyone said, “what we need is a democracy”,’ adds Clissold. ‘Never once.’

For Martin Jacques, author and visiting senior fellow at the London School of Economics, Western-style governance is neither desired nor appropriate for the vast country, which has historically favoured stability over democracy. ‘Has the present system worked?’ he asks. ‘Brilliantly. Has the American system worked? No. No government has managed its economic transformation over the past 30 years better. Most people have seen their living standards completely transformed.’

Certainly, many believe a degree of judicial and media independence may be possible within the confines of a one-party state. ‘You could restructure the judiciary so it is not controlled by the local government, and give it an independent budget,’ says Hualing. ‘Lots of people would say this is achievable.’

Eastern sunrise

In February, Kamm asked a Chinese official why China had voted for the UN sanctions resolution against Libya. ‘He said it was because it was “the moral thing to do”,’ recalls the businessman. ‘I practically fell out of my chair. I think it was the first time I had ever heard a Chinese official say that.’

For some, this was a positive sign that China is willing to shed its historical insularity and assert a principled stance on the world stage. Though it is far from the only country to put commerce before conscience, its morally blinkered attitude to human rights abuses in countries such as Burma has done little to endear it to the international community. Others, however, believe it is not China alone that needs an ethical overhaul.

‘One of the biggest questions is not so much what will China do, but how will other countries react?’ says Clissold. ‘In the States you have a country that is highly democratic and therefore prone to demagoguery and an economy under enormous stress. Add to that a combination of Sarah Palin and Dick Cheney, and who knows what might happen?’

But it is clear that without mutual cooperation and respect, East–West relations may become little more than a diplomatic stalemate – and the West may have far more to lose than a few hundred manhole covers.

Rise of the dragon
1949: Life expectancy is 35 years and infant mortality rate is 20 per cent.
February 1950: China forms the ‘Sino-Soviet Treaty of Friendship, Alliance and Mutual Assistance’ with the USSR.
1958 – 1960: Mao Zedong’s Great Leap Forward, which reforms China into a series of communes to stimulate agricultural and industrial production. Famine kills more than 30 million people and a severe economic crisis results.
1966 – 1976: Mao’s Cultural Revolution, designed to remove capitalist elements from Chinese society and undermine intellectualism. Millions are persecuted and displaced.
September 1976: Mao dies and Deng Xiaoping rises to power two years later.
1979: China’s GDP per capita is US$270 and its Gini Coefficient, measuring income inequality (0 being perfectly equal and 1 unequal), is about 0.3.
1979 – 1981: Xiaoping’s ‘period of readjustment’, to bring China into the market economy.
1981: Foreign Direct Investment (FDI) totals US$375m.
December 1984: Britain signs Hong Kong over to China.
June 1989: Hundreds of civilians are killed in the Tiananmen Square massacre.
1990 – 2005: Poverty rate falls from 60 per cent to 16 per cent, leaving 475 million fewer people in poverty.
February 1997: Xiaoping dies.
November 2001: China joins the World Trade Organization.
2007: Life expectancy is 73 years.
2008: FDI is US$148m.
2009: GDP per capita is US$4,985. Infant mortality rate is 1.3 per cent.
2010: China overtakes Japan to become the world’s second largest economy. Its Gini Coefficient hits 0.47 – the same as the United States.
2010: Trade between China and Brazil tops US$56bn and China overtakes the US as Brazil’s biggest trade partner.
August 2010: Premier Wen Jiabao begins making a series of announcements about the need for political reform to allow people to solve ‘the excessive concentration of unrestrained power’.
October 2010: China owns US$907bn worth of US treasury securities – more than any other country in the world.
February 2011: Standard Bank Group Ltd, Africa’s largest lender, estimates that bilateral trade between China and Africa will reach US$300bn by 2015, double the 2010 level.
February – May 2011: Dozens of lawyers, journalists and activists – including outspoken artist Ai Weiwei – are arrested or simply disappear following political protests.
March 2011: China amasses over US$3 trillion of foreign exchange reserves. The government publishes its 12th five-year plan, outlining commitments to environmental protections and workers’ rights.
2020 – 2030: China’s economy is predicted to become the biggest in the world.

To view an interview with Professor Fu Hualing on constitutional reform in China go to: tinyurl.com/ibafilms

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Rebecca Lowe is senior reporter at the IBA and can be contacted at rebecca.lowe@int-bar.org.


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