Explore with me the problems and opportunities both America and China face if they are to achieve their rightful place on the world stage. In this section I address China's Problem with Transition from a Planned Economy to a Free Market Economy. If you would like to discuss the contents of my novel, Year of the Tiger, or any information on my website, you can email me at  stan@sowensmith.com.

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There are two tiers of problems that beset China's transition to an efficient market economy; 1) problems at the state level with both large and small banks, and 2) problems at the village level with 35,000 village cooperatives.

Large state-run banks have substantial bad debt and nonperforming loans (some analysts estimate are as high as 50%). The state is committed to restoring these large banks to a fiscally sound status in order to attract foreign partners and compete in open markets on equal footing without invoking state subsidies. This is a requirement for China to retain its place in the World Trade Organization.

Small banks that were formally viewed as successful models now reel with corruption scandals, soured foreign-investment deals and examples of overly rapid expansion. Faced with these challenges, the question is: can China rid itself of a culture of state-planned control and successfully transition as a responsible lender?

On an entirely different level, China must figure out how to unlock $35 billion in deposits which are desperately needed for investment by strapped small Chinese provincial governments. It's a Catch 22 riddle where the state counts on revenue from the provincial governments and at the same time must guarantee the security of these peasant deposits.

If the rural cooperatives are free to make loans lacking the right incentives, the money is wasted and fails to perform its objective. The example cited by the WSJ is of a Chinese village with fallow springtime fields because agricultural taxes had made them unprofitable to farm.

Officials from the village government proposed building hundreds of greenhouses that would add a second crop if properly constructed and thus turn the land profitable. The officials leading the project skimmed money from the greenhouse loan and the greenhouses were poorly constructed and subject to constant flooding which prevented planting the second crop.

The true cost came when the village officials and credit cooperative tried to collect on the loans. With no collateral, farmers closed their deposit accounts at the cooperative, fearing the money would be confiscated by the corrupt officials and cooperative. Since the cooperative isn't performing what it's intended to i.e., it can't make loans and pay taxes to the central government it becomes a financial sinkhole. Multiply this example by 35,000 cooperatives and you have a monumental problem.

These credit cooperatives control 12% of the states financial system not an insignificant sum. Given that the depositor's are amongst the country's poorest, the central government has no choice but to guarantee the deposits to prevent the poor from putting their savings in a tea can.

Although the political system is frozen in place, the political landscape has changed since Tiananmen. Young, urbane technocrats have emerged to replace the old revolutionaries and Marxism has morphed into a new form of Fascism. The changes that have occurred have been bottom-up with a determination to work around the impediments of a rigid leadership that refuses to take serious steps toward political reform.

As more Chinese enter the private sectors, the state is no longer able to control every aspect of daily life. An example of bottom-up changes was reported by the WSJ (August 16, 2004). Frustrated villagers with a badly polluted stream running through their village declared they would elect anyone village chief who would clean up the mess.

A local entrepreneur who had created a fortune manufacturing ball-point pens, who was not a party member, stepped forward. It is reported that 65% of 421 democratically elected village chiefs in this province are wealthy entrepreneurs. The motivation for these businessmen to enter the political arena is the lack of independent courts, industry associations and institutions necessary for their companies to survive. They are literally creating the local infrastructure necessary to support their businesses.

The downside is the danger of mixing business with politics which has led to the graft and corruption that plagues the central government, state owned enterprises and banking system. The flip side of the growing influx of Chinese businessmen entering politics is the increase of Chinese officials seeking sabbaticals in the private sector.

Critics charge this is illegal and Beijing repeatedly issues warnings it is illegal for government officials to hold positions in private companies. But lacking an effective civil-service system to train officials, these violations are overlooked. The message is, now that people are making their own economic decisions, they want to have a hand in making their own political decisions as well.

Countless stories have appeared in the WSJ and other news media documenting severe problems resulting in a society where entrepreneurial forces have been unleashed without adequate institutional safeguards. Tens of thousands of Chinese people have been evicted from their homes, land confiscated and old non-performing businesses demolished which were supposed to give way to major new projects that were intended to reward the displaced people with new homes, jobs and a higher standard of living.

The motivation for these "get rich quick schemes" were prompted by local and regional officials in towns and cities eager to become part of China's growth phenomena, but were not adequately schooled and monitored in the process of due diligence.

These failed projects result in large numbers of people being duped or forced into signing contracts for ill-conceived schemes where they ultimately lose their life savings and livelihood by what amounts to the authorities' illegal use of the "right of eminent domain" (the governments right to seize land and property -- for the better use and good of the state).

In many of these frauds, the victims have banded together and brought what amounted to class-action suits against the government. But the Chinese court system is another primitive work-in-process and none of these suits thus far appear to have been successful in reclaiming compensation for these displaced people.

How many Chinese people have been victims of these embezzlements sanctioned and encouraged by party members is impossible to determine, because, obviously, local officials have done everything they can to cover up their tracks. This sort of corruption is endemic where the juices of capitalism are unleashed without adequate safeguards.

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The Good News From China

The Bad News From China

Chronicle of China's Repressive Actions

China's Problems with Individual Rights

China's Rush to Arm and Proliferation

China's Transition Economy

America's Rush to Defend Itself

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