Why China Works

Of course, the increase in Chinese prosperity has also created more opportunities for corruption, yet steady progress is visible even when it comes to graft. In just under a decade, China has fallen from 52nd most corrupt country to the 72nd, according to Transparency International's ranking of the world's most corrupt regimes. While Chinese and Western business people don't like to be quoted by name on the subject, they seem to agree that corruption in China tends to be of the soft, "wheel-greasing" variety, rather than the violent and disruptive type. "You don't have to worry about someone coming to your door with a bulge under their arm," laughs one British businessman working in Shanghai. One chairman of a large European firm, who has worked in a number of developing markets, makes this comparison: "In Russia, if there's $100 in the bridge-building pot, the official takes $90. In China, they take $30, and at least you know the bridge will eventually get built."

Many point to the current insider-trading case involving the detention of China's richest man, Huang Guangyu (the founder of electronics retailer Gome), as proof that the government is also getting more serious about prosecuting corruption. Independent economist Andy Xie (formerly of Morgan Stanley) says that the more important point is that Gome, the company, will most likely survive regardless of what happens to Huang—a sign that Chinese markets are maturing. Xie also notes that recent legal changes in stock-ownership law have made markets more liquid, putting them farther out of the control of state authorities. That's one reason authorities have tried since August to revive the stock market by scrapping the stamp tax on share purchases but in vain. The market is getting too free for the state to control.

That said, there's no doubt the state's hand in the economy will grow in this downturn. Much of the new stimulus package will flow through state-controlled sectors like transport and power and construction, which can spend it quickly. Beijing has also chosen this moment to issue new 3G mobile licenses, which will further funnel money through the state telecoms sector. And in Hong Kong, there's evidence that investors are moving money from commercial to state banks, because of the implicit promise of state support.

Perhaps the most intriguing evolution in China's hybrid markets is in the way leaders are tracking public sentiment, including political sentiment. Beijing is sending out consultants to teach local officials American-style public-relations tactics, part of a new "openness" campaign designed to quiet public protests triggered by economic tensions. Last November in Chongqing, China's largest municipality, party secretary Bo Xilai went out in the street to talk down thousands of striking taxi drivers, an almost unprecedented move for a senior party official. Bo later brought together a meeting between government officials, drivers and citizens' representatives to hammer out a deal that included lower management fees, increased fuel subsidies and approval for the drivers to form a union. "The government is learning from the mistakes of the past," says Wang Shuo, managing editor of the Beijing-based economic magazine Caijing. "There has been a lot of social unrest in the last decade, but they are handling things much better—no blood, and no major repercussions. They understand that is a life or death issue for them."

Savvy management of public opinion may prove crucial as economic conditions head south. The Chinese love the idea of choice—reality TV shows similar to "American Idol," which allows viewers to vote on the winner, are hugely popular. While they can't vote on their political leaders, in many places they can now post their views about local government on city-run Web sites, and local leaders are required to answer individual complaints within three days. Public rankings of various city departments are posted based on the number of positive and negative comments.

It's part of a government strategy to use the Internet and public opinion to put pressure on provincial officials, as well as to influence policy decisions. Victor Yuan, chairman of Horizon, a Beijing market-research firm, conducted public polls to help the government set Olympic ticket rates and figure out what to charge for natural-gas upgrades in remote areas, in order to avoid public outrage over too high prices. Next year, he'll be launching a poll-based ranking of 10,000 middle- and upper-level Chinese officials, and Yuan believes it's possible such a poll might be extended to include the very top officials, perhaps by 2014. "This is very much a performance-oriented administration, and they need to understand what the people want in order to avoid trouble," says Yuan. "Since Deng, leaders are no longer supermen. They need legitimization, and the approval of the people."

It's getting tougher even for radical pragmatists to deliver on Deng's promise. Thirty years ago, there were 963 million people in China, and 30 percent of them were hungry. Today, there are 1.3 billion, and 97 percent of them have a full stomach, but the step up to the middle class (in which only 6 percent of Chinese live today) is harder. Ruchir Sharma of Morgan Stanley has pointed out that China's per capita GDP recently hit $3,000—the level at which Japan's miracle economy began to slow to a more mature pace.

China's successful use of command capitalism also carries, at most, limited lessons for the United States or Europe. It's much easier to boost growth by ordering engineers working in an autocratic system to build roads where there are none, as in parts in China, than to stimulate growth in a developed nation like the U.S. Still, the fact that an increasingly rich China still works so well is worth studying, not least because the credit crisis is provoking a wider questioning of free-market orthodoxy. "It is worth remembering that China is the only major nation that is experiencing neither a credit crisis, nor a crisis of confidence," notes Rothman. "Its still safe to say that nobody worries about the Chinese government's ability to get things done." As Wen Jiabao has said, "confidence is worth more than gold," and the Chinese people still believe in their system—at least for now.

With Melinda Liu and Mary Hennock in Beijing and Duncan Hewitt in Shanghai

© 2009