Tuesday, 28 August 2007

Is China really "Rotten": The Guardian reports

In today's Guardian Jonathan Fenby writes about the rotten state of China linking to the product recall issue and the broader problem of corruption and political stability.

The environment in China gets top billing yet again. There is no getting away from the increasingly close link between economic success and environmental damage.

This balanced article at least explains that the Mattel recall was as a result of a design fault from the US and not a result of poor manufacturing.

Many of the issues discussed below have been covered in this blog.

My bold.

The rotten state of China

First it was tainted pet food and poisoned toothpaste. Then it was lead-coated toys and catfish dosed with dangerous levels of antibiotics. Now it is mattresses and children's clothes treated with unsafe levels of chemicals.

To the long-running saga of China stealing jobs from more developed economies, add the safety factor. As Hillary Clinton put it when addressing a trade union conference: "I do not want to eat bad food from China or have my children having toys that are going to get them sick. So let's be tough on China going forward." Does Chelsea still play with lead-daubed Dora the Explorer dolls?

As always, things are somewhat more complicated than they appear. The 20m toys recalled by the Mattel company this month were, indeed, made in China, but most are being called back because of a design fault (a magnet) written into the specification handed out by the American firm. Already, some voices are saying that - as with China's terrible environmental record - it is really all the result of the West and Japan having foisted industrialisation on China, as if Deng Xiaoping was secretly in the pay of foreign companies seeking cheap labour or Chinese entrepreneurs did not sign up wholesale for plants burning brown coal or spewing poisonous waste into rivers.

In trade terms, the effect is small as yet, though it could become much more serious if the allegations of use of dangerous chemicals spread to textiles as a whole. But, while insisting that 99% of its exports are safe, China has reacted by appointing its main trouble shooter, Wu Yi, to head a committee to look into safety standards and food quality. Officials now say that 85% of food meets standards - which is worrying for those who consume the other 15%.

Though it is the foreign alarm that catches the headlines, the effect is more serious at home where Chinese consumers have been subject to sub-standard and downright dangerous goods for years. In the latest case, reported in Shanghai recently, more than a tonne of dried seaweed was being soaked in vats of industrial dye and preservative containing sulphur dioxide to make it seem fresh. Other raids in the city discovered 13 tonnes of rice wine and five tonnes of vinegar containing ethyl alcohol and industrial salts.

Like China's huge environmental crisis, the safety issue is the result of headlong manufacturing development without accompanying regulation. Both are systemic problems that go to the heart of how China works, and how governance does not function at a level the economy requires. Of course, global demand for Chinese products lies behind the unregulated boom. But it cannot be blamed, in itself, for what is coming to light. The heart of the matter lies in the People's Republic, not with consumers in the developed world.

While big, modern manufacturing companies have emerged, like Bao Steel, Haier, and Lenovo, a major motor of Chinese growth remains the small and medium-sized enterprises which were given their head by Deng in the 1980s. Between them, they have as many workers as the entire US labour force.

Most are, in effect, outside any kind of control except that of the local authorities, which may well have a personal or institutional interest in their activities in return for having granted land and been otherwise helpful. How likely are those local authorities to rein in the village and township enterprises, or impose environmental or safety standards that would cost them all money, particularly when the abolition of land taxes leaves local government short of cash?

Equally, the major contractors with which American, European or Japanese brands deal generally sub-contract to a mass of small firms. The directors, sitting in Hong Kong or Shanghai or Guangzhou, proffer assurances that standards are being met, but have little control over the small plants in Zhejiang or in the sprawling hinterland of Guangdong. Quality control takes place when the goods arrive at the export destination, not when they leave China. With tight margins, the modus operandi is to fill as many containers as possible without asking questions.

The system has worked like a charm in terms of growth. It has enabled China to by-pass the business procedures and standards of classical economics. With a tidal wave of liquidity flowing in from trade, the PRC has been able to follow its own path. Soon, the natural resources acquisitions of recent years will be followed by hundreds of billions of dollars aiming to buy foreign assets to fill China's technological and brand gaps.

Since Deng Xiaoping lead the Communist Party into business after 1978 - although it is easy to forget how long it took him to vanquish the conservatives - the Chinese Communist party has had to maintain growth. That further diminishes its already circumscribed ability to influence the economy. Provincial governments may be told to pay more attention to environmental standards, but they are still marked on their ability to produce growth. Thus, Beijing decrees a slowdown in the steel sector and makes tax changes to deter exports, but output and exports go on increasing.

The irony of a Leninist system with a weak centre is not that surprising, given China's history, particularly in the pre-Communist era. But the result is a line that leads directly from President Hu Jintao having to scrabble for support in the politburo standing committee, down to sub-contractors daubing lead paint on toys.

Wu Yi will bang the table, and China will take counter-measures against allegedly unsafe imports - a list that already includes American soybeans, turbines, pacemakers and orange juice concentrate. But, so long as the peculiar hybrid Chinese politico-economic system continues, with the country posting such large trade surpluses, meaningful change may be impossible, if only because it would threaten the structure on which the regime rests.

In the end, Beijing has to decide what kind of economy it wants, and how it moves to the second stage of global integration. What has happened since 1978 has been easy given the strength of the global economy in which China has evolved. The second term for Hu Jintao, starting in the autumn, may be the more difficult test. Is China's unreconstructed Communist system up to it?

This final paragraph is key. China is growing fast and the political system is not used to such rapid change. This may be of some benefit if it means politicial stability continues but it appears that some cracks are beginning to show.

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