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ArtieIe 31

China: The Quiet Revolution The Emergence of Capitalism

DOUG GUTHRIE

W hen Deng Xiaoping unveiled his vision of market institutions as the necessary medicine for trans­economic reform to the Third Plenum of the forming communist societies. Scholars argued that private 11th Central Committee of the Chinese Com­ property provides the institutional foundation of a market

munist Party in December 1978, the Chinese economy economy and that, therefore, communist societies making was faltering. Reeling from a decade of stagnation dur­ the transition to a market economy must privatize industry ing the Cultural Revolution and already falling short of and other public goods. The radical member of this school the projections set forth in the 1976 10-year plan, China argued that rapid privatization-the so-called "shock ther­needed more than a new plan and the Soviet-style eco­ apy" or "big bang" approach to economic reforms-was nomic vision of Deng's political rival, Hua Guofeng, to the only way to avoid costly abuses in these transitional improve the economy. Deng's plan was to lead the country systems. down a road of gradual and incremental economic reform, The Chinese path has been very different. While coun­leaving the state apparatus intact, while slowly unleashing tries like Russia have followed Western advice, uch as market forces. Since that time, the most common image of rapidly constructing market institutions, immediately China, promulgated by members of the US Congress and removing the state from control over the economy, and media, is of an unbending authoritarian regime that has hastily privatizing property, China has taken its time in grown economically but seen little substantive change. implementing institutional change. The state has gradu­

There is often a sense that China remains an entrenched ally receded from control over the economy, cautiously and decaying authoritarian govemmentnm by corrupt Party experimenting with new institutions and implementing officials; extreme accounts depict it as an economy on the them incrementally within existing institutional arrange­verge of collapse. However, this vision simply does not ments. Through this gradual process of reform, China has square with reality. While it is true that China remains an achieved in 20 years what many developing states have authoritarian one-party system, it is also the most success­ taken over 50 to accomplish. ful case of economic reform among communist planned The success of gradual reform in China can be attrib­economy in the 20th century. Today, it is fast emerging as uted to two factors. First, the gradual reforms allowed one of the most dynamic market economies and has grown the government to retain its role as a stabilizing force in to be the world's sixth largest. Understanding bow this the midst of the turbulence accompanying the tran ition change has come about requires an examination of three from a planned to a market economy. Institutions such broad changes that have come together to shape China's as the "dual-track" system kept large state-owned enter­transition to capitalism: the state's gradual recession from prises partially on the plan and gave them incentives to control over the economy, which caused a shift in eco­ generate extra income by selling what they could produce nomic control without privatization; the steady growth of above the plan in China's nascent markets. Over time, a foreign investment; and the gradual emergence of a legal­ market economic practices became more successful, the rational system to support these economic changes. "plan" part of an enterprise's portfolio was reduced and

the "market" part grew. Enterprises were thus given the stability of a continued but gradually diminishing planned

Reform Without Privatization economy system as well as the time to learn t set prices, During the 1980s and 1990s, economists and institutional compete for contracts, and produce efficiently. Second, advisors from the West advocated a rapid transition to the government has gradually promoted ownership-like

167

ANNUAL EDITIONS

control down the government administrative hierarchy to the localities. As a result, the central government was able to give economic control to local administrators without privatization. But with economic control came account­ability, and local administrators became very invested in the successful economic reform of the villages, town­ships, and municipalities under their jurisdictions. In a sense, as Professor Andrew Walder of Stanford University has argued, pushing economic responsibilities onto local administrators created an incentive structure much like those experienced by managers of large industrial firms.

Change from Above Even as economic reform has proceeded gradually, the cumulative changes over two decades have been nothing short of radical. These reforms have proceeded on four levels: institutional changes instigated by the highest lev­els of government; firm-level institutions that reflect the legal-rational system emerging at the state level; a bud­ding legal system that allows workers institutional back­ing outside of the factory and is heavily influenced by relationships with foreign investors; and the emergence of new labor markets, which allow workers the freedom and mobility to find new employment when necessary. The re ult of these changes has been the emergence of a legal­rational regime of labor, where the economy increasingly rests upon an infrastructure of ordered laws that workers can invoke when necessary.

Under Deng Xiaoping, Zhao Ziyang brought about radi­cal change in China by pushing the country toward consti­tutionality and the rule of law to create rational economic processes. These changes, set forth ideologically as a package of reforms necessary for economic development, fundamentally altered the role of politics and the Commu­nist Party in Chinese society. The early years of reform not only gave a great deal of autonomy to enterprise manag­ers and small-scale entrepreneurs, but also emphasized the legal reforms that would undergird this process of change. However, by creating a body of civil and economic law, such as the 1994 Labor Law and Company Law and the 1995 National Compensation Law upon which the trans­forming economy would be based, the Party elites held themselves to the standards of these legal changes. Thus the rationalization of the economy led to a decline in the Party's ability to rule over the working population.

In recent years, this process has been continued by global integration and the tendency to adopt the norms of the international community. While championing global integration and the Rule of Law, Zhu Rongji also brought about broader political and social change, just as Zhao Ziyang did in China's first decade of economic reform.

Zhu's strategy has been to ignore questions of p liti­cal reform and concentrate instead on the need to adopt economic and legal systems that will allow the country to integrate smoothly into the international community. From rhetoric on "linking up with the international com­munity" to laws such as the 2000 Patent Law to institu­tions such as the State Intellectual Property Office and the Chinese International Economic Trade and Arbitra­tion Commission, this phase of reform has been oriented toward enforcing the standards and norms of the interna­tional investment community. Thus, Zhu's objective is to deepen all of the reforms that have been discussed above, while holding these changes to the standards of the inter­national community.

After two decades of transition, the architects of the reforms have established about 700 new national laws and more than 2,000 new local laws. These legal changes, added regulations, and experiments with new economic institutions have driven the reform process. A number of laws and policies in the 1980s laid the groundwork for a new set of policies that would redefine labor relations in fundamental ways. For example, the policies that set in motion the emergence of labor contracts in China were first introduced in an experimental way in 1983, further codified in 1986, and eventually institutionalized with the Labor Law in 1994. While there are economic incentives behind Chinese firms' willingness to embrace labor con­tracts, including the end of lifetime employment, these institutional changes have gradually rationalized the labor relationship, eventually providing a guarantee of due pro­cess in the event of unfair t.reatment and placing workers' rights at the center of the labor relationship. Incremental changes such as these have been crucial to the evolution of individual rights in China.

The obvious and most common response to these changes is that they are symbolic rather than substan­tive, that a changing legal and policy framework has little meaning when an authoritarian government still sits at the helm. Yet the scholarship that has looked extensively at the impact of these legal changes largely belies this view. Workers and managers take the new institutions seriou ly and recognize that the institutions have had a dramatic impact on the structure of authority relations and on the conception of rights within the workplace.

Other research shows that legal and policy changes that emphasize individual civil liberties are also signifi­cant. In the most systematic and exhaustive study to date of the prison system, research shows that changes in the treatment of prisoners have indeed resulted in the wake of the Prison Reform Law. And although no scholarship has been completed on the National Compensation Law, it is noteworthy that 97,569 suits were filed under this law

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against the government in 1999, a proportional increase of over 12,000 percent since the beginning of the economic reforms. These institutions guarantee that, for the first time in the history of the People's Republic of China, individu­als can have their day in court, even at the government's expense,

The 1994 Labor Law and the Labor Arbitration Com­mission (LAC), which has branches in every urban district, work hand-in-hand to guarantee workers their individual rights as laborers. Chapter 10 of the Labor Law, entitled "Labor Disputes," is specifically devoted to articulat­ing due process, which laborers are legally guaranteed, should a dispute arise in the workplace. The law explic­itly explains the rights of the worker to take disputes to outside arbitration (the district's LAC) should the reso­lution in the workplace be unsatisfactory to the worker. Further, many state-owned enterprises have placed all of their workers on fixed-term labor contracts, which sig­nificantly rationalize the labor relationships beyond the personalized labor relations of the past. This bundle of changes has fundamentally altered the nature of the labor relationship and the mechanisms through which authority can be challenged. For more than a decade, it has been possible for workers to file grievances against superiors and have those grievances heard at the LACs. In 1999, 52 percent of the 120, 191 labor disputes settled by arbi­tration or mediation were decided wholly in favor of the workers filing the suits. These are official statistics from the Chinese government, and therefore should be viewed skeptically. However, even if the magnitude is incorrect, these numbers illuminate an important trend toward legal activity regarding workers' rights.

Lawyers lao r-----------------,

19l16 2000

Figure 1 An Age of Jurisprudence.

Year

The above graphs depict two recent trends in China: a growing body of lawyers and an increasing number of legal cases. As the graph at left indicates, the number of lawyers in China has increased dramatically in the past 20 years, rising from lewer than 10,000 in 1980 to over 100,000 in 2000. The graph at right shows the growth in various types of legal cases over the same period. In particular, there have been significant increases in civil, economic, and tirst­trial cases.

169

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Article 31. China: Tne YUlet n~vvl..........

Many of these changes in labor practices were not originally adopted with workers' rights in mind, but the unintended consequence of the changes has been the con­struction of a regime of labor relations that emphasizes the rights of workers. For instance, extending the example of labor contracts that were being experimented with as early as 1983, these were originally intended as a form of economic protection for ailing enterprises, allowing a formal method of ending lifetime employment. However, workers began using the terms of employment codified in the contracts as the vehicle for filing grievances when contractual agreements were not honored. With the emer­gence of the LACs in the late 1980s and the further codi­fication of these institutions in the Labor Law, the changes that were in progress became formalized in a set of insti­tutions that ultimately benefited workers in the realm of rights. In a similar way, workers' representative commit­tees were formed in the state's interest, but became an institution workers claimed as their own. These institu­tions, which many managers refer to as "our own little democracy," were adopted early in the reforms to co-opt the agitation for independent labor unions. These commit­tees do not have the same power or status as independent labor unions in the West, but workers have made them much more significant in factories today than they were originally intended to be.

Foreign Investment's Impact At the firm level, there is a process of rationalization in which firms are adopting a number of rational bureaucratic systems, such as grievance filing procedures, mediation

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ANNUAL EDITIONS

committees, and formal organizational processes, that are more often found in Western organizations. In my own work on these issues, I have found that joint venture relationships encourage foreign joint ventures to push their partner organizations to adopt stable legal-rational structures and systems in their organizations. These sta­ble, legal-rati nal systems are adopted to attract foreign investors, but have radical implications for the structure of authority relations and the lives of individual Chinese citi­zens. Chinese factories that have formal relationships with foreign, and particularly Western, firms are significantly more likely to have institutionalized formal organizational rules, 20 times more likely to have formal grievance filing procedures, five times more likely to have worker repre­sentative committee meetings, and about two times more likely to have institutionalized formal hiring procedures. They also pay about 50 percent higher wages than other factories and are more likely to adopt China's new Com­pany Law, which binds them to abide by the norms of the international community and to respect international legal institutions such as the Chinese International Economic Arbitration and Trade Commission. Many managers openly acknowledge that the changes they have set in place have little to do with their own ideas of efficient business practices and much more to do with pressure brought on them by their foreign partners. Thus, there is strong evi­dence that foreign investment matters for on-the-ground change in China.

Foreign investors and Chinese firms are not interested in human rights per se, but the negotiations in the marketplace lead to transformed workplaces, which affect millions of Chinese citizens on a daily basis.

Given the common image of multinational corporations seeking weak institutional environments to capitalize on cheap labor, why would joint venture relationships with Western multinationals have a more positive impact in the Chinese case? The answer has to do with the complex rea­sons for foreign investment there. Corporations are rarely the leading advocates of civil liberties and labor reform, but many foreign investor,' in China are more interested in long-term investments that position them to capture market share than they are in cheap labor. They gener­ally seek Chinese partners that are predictable, stable, and knowledgeable about Western-style business practices and negotiations. Chinese factories desperately want to land

these partnerships and pOSItIOn themselves as suitable investment partners by adopting a number of the practices that Western partners will recognize as stable and reform­minded. Among the basic reforms they adopt to how their fitness for "linking up" with the international community are labor reform . Thus, the signaling of a commitment to stable Western- tyle business practices through com­mitments to labor reform has led to fundamental changes in Chinese workplace labor relations. Foreign investors and Chinese firms are not interested in human rights per se, but the negotiations in the marketplace I ad to trans­formed workplaces, which affect million of Chinese citi­zens on a daily basis.

However, changes at the firm level are not meaningful if they lack the legal infrastructure upon which a legal­rational system oflabor is built. The can truction of a legal system is a pro ess that takes time; it requires the training of lawyers and judges, and the emergence of a culture in which individuals who are part of the legal system come to process claims. This process of change is difficult to assess because it relies on soft variables about the reform process, such as, for example, how judges think about suits and whether a legal-rational culture is emerging. But we can look at some aspects of fundamental shifts in soci­ety. All of these changes, in tum, rest upon a legal-rational system that is slowly but surely emerging in China.

Finally, beyond the legal and institutional changes that have begun to transform Chinese society fundamentally, workers are no longer tied to workplaces in the way that they once were. In the pre-reform system, there was ery little mobility of labor, because workers were generally bound to their "work units" for life. The system created a great deal of stability for workers, but it also became one of the primary means thr ugh which citizens were controlled. Individuals were members of their work units, which they were dependent on for a variety of fundamen­tal goods and services.

This manufactured dependence was one of the basic ways that the Party exercised control over the population, Writing about the social uprisings that occurred in 1989, Walder points out that the erosion of this system is what allowed citizens to protest with impunity on a scale never before observed in communist China: "[W]hat changed in these regimes in the last decade was not their economic difficulties, widespread cynicism or corruption, but that the institutional mechanisms that served to promote order in the past-despite these long-standing pr blems-lost

their capacity to do so." It is precisely because labor mar­kets have opened up that workers are no long r absolutely dependent upon the government for job placements; they now have much more leverage to assert the importance of their own rights in the workplace. And while the private

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ctor was nonexistent when the economic reforms began, ~e country has seen this sector, which includes both pri­vate enterprises and household businesses, grow to more than 30 million individuals. With the growth of the private sector, there is much greater movement and autonomy among laborers in the economy. This change has afforded workers alternative paths to status attainment, paths that were once solely controlled by the government.

Quiet Revolution Much like the advocates of rapid economic reform, those demanding immediate political and social reform often take for granted the learning that must occur in the face of new institutions. The assumption most often seems that, given certain institutional arrangements, individuals will naturally know how to carry out the practices of capital­ism. Yet these assumptions reflect a neoclassical view of human nature in which rational man will thrive in his nat­ural environment-free markets. Completely absent from this view are the roles of history, culture, and pre-existing institutions; it is a vision that is far too simplistic to com­prehend th challenge of making rational ec nomic and legal systems work in the absence of stable institutions

Article 31. China: The Quiet Revolution

and a history to which they can be linked. The transition from a command economy to a market economy can be a wrenching experience, not only at the institutional level but also at the level of individual practice. Individuals must learn the rules of the market and new institutions must be in place long enough to gain stability and legitimacy.

The PRC government's methodical experimentation with different institutional forms and the Party's gradual relinquishing of control over the economy has brought about a "quiet revolution." It is impossible to create a his­tory of a legal-rational economic system in a dramatic moment of institutional change. The architects of China's transition to capitalism have had success in reforming the economy because they have recognized that the tran i­tion to a radically different type of economic system must occur gradually, allowing for the maximum possible insti­tutional stability as economic actors slowly learn the rules of capitalism. Capitalism has indeed arrived in China, and it has done so via gradual institutional reform under the communist mantle.

DOUG GUTHRIE is Associate Professor of Sociology at New York University.

From Harvard Inlernalianal Review, Summer 2003. pp. 48-53. Copyright © 2003 by 'he President of Harvard College. Reprinted by permission.

171

In China, Ta k of DeDlocracy Is Simply That JOSEPH KAH

L ike the spring showers that give the parched land­ a force that can help party I aders stay in touch with the people

, scape a veneer of green, China's authoritarian leaders, and provide a popular check on corruption-rather than as the approaching the end of their five-year terms in office, core of a new political system in which people choose their

have suggested that they would like to see their country become leaders in free elections. more democratic. In an internal party document issued last year, Mr. Hu sharply

Communist Party journals and the state-run news media have criticized the Communist government of Vietnam for moving published a stream of commentaries by retired officials and aca­ too rashly toward so-called inner-party democracy. He argued demics on "political system reform" and the need for "socialist that the Chinese party had to maintain tight di 'cipline to prevent democracy," including a bold-sounding calI for China to mimic the promotion of a figure like the former Soviet I ader Mikhail Switzerland's worker-friendly democratic governing styJe. S. Gorbachev, whom Chinese Communists consider a traitor to

Top leaders have authorized the publication of the pro-democratic socialism, party officials who read Mr. Hu's comments on the political reflections of Lu Dingyi, a Long March veteran who advo­ subject said. cated political change before his death a decade ago, two party offi­ Still, some other leading officials, including Mr. Hu's most cials said. Prime Minister Wen Jiabao spoke at length about the value influential colleague within the party structure, Vice President of democracy in a nationally televised news conference last month, Zeng Qinghong, have been pushing to increa e the number of and promised steps toward political openness on a recent trip to Japan senior officials who participate in the selection of a successor to and South Korea. Mr. Hu. who is expected to retire in 2012.

China is not embracing Western-style democracy, even in At a minimum, the recent flurry of articles suggests that the theory. But by permitting a relatively open round of politi­ terms democracy and freedom have lost the taboo they had after cal discussion, President Hu Jintao and other top leaders have the bloody crackdown on pro-democracy protests in 1989, after sought to cast themselves publicly as progressives who are which Deng Xiaoping squelched talk of any democratic- tyle open-minded about ways to improve government practices and political change. reduce corruption, party officials and political experts say. "What we're seeing is a repudiation of Deng Xiaoping's edict

Mr. Hu may also be trying to rally support among younger that the party should focus exclusively on economic develop­party members and intellectuals ahead of an important party ment," said Lu De, an influential economist who has pushed for congress in the fall. At that time, the five-year terms of the most greater political pluralism. senior officials expire, and top leaders have begun lobbying inter­ Mr. Lu, known as a princeling because of his family ties to

nally for the personnel and the ideological positions they favor. the party elite, is the son of Lu Dingyi, a propaganda chief and Those who advocate faster political change say they hope vice premier under Mao who fell out of political favor during the

that Mr. Hu, who is expected to serve a second five-year term Cultural Revolution and p nt 13 years in custody. Lu Dingyi's as China's Communist Party chief, will broaden the use of elec­ thoughts on democracy and freedom, as recorded by Lu De before tions rather than rely almost exclusively on top-down appoint­ his father's death in 1996, were published this week in the party ments inside the party structure. journal Yanhuang Chunqiu after an extended review by top partY

But even that limited step toward devolving power remains leaders. a highly d licate one. China's leaders claim that the one-party "] think that Hu Jintao and Wen Jiabao have caught up with state has long practiced democracy, in the sense of governing the thinking of party leaders from an earlier era, who understood on behalf of the people, and they show no signs of preparing to that political change and economic change had to proceed hand in cede any political power. hand," said Mr. Lu, an economic policy adviser to China's State

E en some top Chinese intellectuals who favor more political Council, which functions as a cabinet. "Of course, they must piluralism tend to define democracy in instrumental terms-as move step by step, It will not be one big leap and we're there."

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Article 32. In China, Talk of Democracy Is Simply That

olitical analysts are more guarded. Big political events Chiang Kai-shek's rule on the mainland," he said. Chiang Kai­Manyp . . arty congresses, which are held once every five years, can shek's Nationalist Party was overthrown by the Communists in like p. es give rise to relatively unfettered debate that officials 1949. sonJeum

lerating after the congress settles on a new slate of lead- Mr. Wen, the prime minister, largely endorsed such think­stop: Hu stirred up expectations of imminent political change ing, though in more cautious language, when he held his annual ers. dr·the time he became Communist Party chief in 2002. But news conference in mid-March. Like Mr. Lu, he argued that aroun . then they say, he has pursued repeated crackdowns on sociali ts should welcome the ideas associated with liberal since, . . . alists, lawyers and rIghts advocates, leadmg many to con- thinking in the West.

~~: that the space for divergent political views in China has "Democracy, rule of law, freedom, human rights, equality and

brUnk on his watch. fraternity do not belong solely to capitalism," Mr. Wen said. S The state-run news media's newly prolific references to Diplomats and human rights groups say such statements have denJocracy to describe a range of prosaic political actions-like not been accompanied by any notable expansion of political setting up an e-mail address so that the public can comment participation or the development of an independent judiciary. on pending legislation-so devalue the tenn that critics of the The question remains whether the talk foreshadows a faster leadership suspect that Mr. Hu's goal may be to strip democracy pace of political change or just amounts to a hollow propaganda

of meaning. offensive. "They want democracy to belong to the party, not to belong Mr. Hu has tried to cast the Communist Party as more respon­

to people who oppose the party," said one retired party official sive to the concerns of the Chinese people, hundreds of millions who declined to be identified because top leaders sometimes of whom have not seen their fortunes rise as fast as those of the punish people for discussing elite politics. "If the party can urban elite during the years of China's robust but highly unbal­define what democracy is, then it will not be as dangerous." anced economic growth.

The essays in party journals do not endorse multiparty His catch phrase, "harmonious society," has become the ide­democracy. Most of the authors argue that democracy can be ological umbrella under which China has taken the first steps functionally consistent with single-party rule. But they say it is toward developing a redistributive welfare program. Mr. Hu necessary to enliven intellectual life and creativity, and to curtail has also encouraged broader discussion of Confucianism, the official corruption. political and social philosophy of ancient China, which treats

Lu Dingyi argued that the party should embrace democracy harmony as a core virtue. and freedom because intellectuals favored those ideas and the Democracy is seen domestically as another benevolent con­party needed the support of intellectuals. He said people in the cept that hints vaguely at inclusiveness and consultation. Mr. Hu sciences and the arts must be allowed broad latitude to express could well see it as useful at a time when riots among peasants themselves as they saw fit, provided they did not contest the and migrant workers have become a commonplace feature of party's political leadership. political life. political commentators say.

He also said the party must also move toward some fonn of Whatever Mr. Hu's motives, China is not in the proc ss of open elections. overhauling its political system, but rather preparing to engage

"If we're going to have democracy, the most important thing in its contentious and secretive ritual of succession. is elections," Mr. Lu is quoted as saying in the article. The party will decide sometime in the fall which of the cur­

He adds that the party cannot continue to act as both rent senior leaders will stay on for new terms and who among "player and referee" when it comes to corruption. The referee their proteges will enter the Politburo Standing Committee, one role belongs to the public, he said, and is "a basic function of of whom seems likely to replace Mr. Hu in 2012. democracy." Many analysts contend that the talk of democracy cannot be

Similar sentiments, though from less hi torically influential viewed outside the context of the congress. figures, were expressed in a series of commentaries in Study "This could signal differences at the top, or pressure from Times, a newspaper devoted to issues facing the ruling party, a particular group that wants to seize an opportunity to get its and some popular media as well. views out on the eve of the congress," said Bonnie S. Glaser, a

One of the most passionate calls came from another party China expert at the Center for Security and International Studies elder, Xie Tao, a former vice dean of People's University in in Washington. "It could also simply be part of the jockeying for Beijing, who suggested that China foJlow what he described as political position." a Swiss model of "socialist democracy." Writing in Yanhuang She said she did not view the flurry of articles as a sign that Chunqiu in February, Mr. Xie warned that unless the party China was about to become measurably more dem cratic, at embraced democracy, it was headed for defeat. least in the way that tenn is understood in the West.

"If we pursue only economic reform, to say it straight, we're "I'm not convinced that it means political reform is on the headed toward the path of bureaucratic capitalism that destroyed agenda," Ms. Glaser said.

From The New York Times, April 20. 2007. Copyright © 2007 by New York Times. Used by permission and protected by the Copyright Laws of the United States. The printing. Copying. redistribution, or retransmission of the material without express written permission is prohibited.

173

China to Join Top 3 EconoDlies The Asian giant is poised to overtake Germany this year as its growth soars. But challe ges await.

DON LEE

C hina's economy grew at an extraordinary rate of 11.9% in the second quarter, the fastest clip in more than 12 years and a pace that puts the nation on track to over­

take Germany this year as the world's third-largest economy. For the last 35 years, the United States, Japan and Germany

have ranked 1-2-3 in gross domestic product, but as growth in those mature economies has slowed, China's has accelerated, powered by foreign investments and trade amid a global shift in production activity to the Far East.

Just 12 years ago, China's economy ranked No.8, behind Brazil's, and was less than one-third the size of Germany's.

But figures released in a report by China's government Thursday show increasing challenges ahead for Beijing: surg­ing inflation, breakneck investments in factories and a dramatic jump in exports that is stoking tensions between China and its major trading partners, particularly the United States.

For the first half of the year, China's trade surplus with the rest of the world reached $115 billion, up 85% from a year ago.

In recent months, the U.S., Japan and Mexico have filed or joined complaints with the World Trade Organization that accused China of illegally subsidizing exporters.

Washington has also taken China to the WTO over piracy issues, and members of Congress are threatening to impose hefty tariffs on Chinese imports if Beijing doesn't change its currency policy, which some believe gives China an unfair advantage in global markets.

While China's economic transformation has lifted millions out of poverty, its 1.3 billion people have a long way to go before their standard of living catches up with those of the other top economies.

The government's intense focus on economic growth has led to environmental degradation and violent clashes as farmland is appropriated for development.

Shoddy manufacturing and tainted food products from China have recently damaged its reputation worldwide.

Ordinary Chinese were incredulous at the notion that China's economy, by any measure, could surpass Germany's.

"It's impossible," said a 42-year-old Shanghai merchant named Wang. "There is no way that China can compare with Germany.

For example, I have an electric shaver my friend bought for me from Germany, and r have been using it for many years and it is still working well. But for domestic ones, no matter how many I buy, each one breaks so n."

Analysts said the latest statistics signaled an ov rheating Chinese economy that would probably prompt the government to raise interest rates and take other measures to slow growth. But rate hikes in the past and other top-down controls have had little effect.

In the second quarter, China's gross domestic product, or total value of goods and services generated, expanded by 11.9% from a year earlier, far higher than expectations and ahead of the 11.1 % increase for all of last year.

By China's calculations, its GOP in 2006 was about $2.7 trillion. Germany's was $2.9 trillion, based on International Monetary Fund data, but its economy, like those of the U.S. and Japan, has been growing at a fraction of the rate China' has. The U.S. remains far ahead of the re t of the world in GOP, with $13.2 trillion in 2006.

Chinese leaders often have said they want more balanced and sustainable growth.

But at the local level, many officials seem to strive for the highest numbers they can achieve, seeing them as a key basis for their job evaluation and promotion. So they approve new plants and projects, sometimes indiscriminately, in an effort to boost tax dollars, employment and overall growth figures.

Through June of this year, investments in factories, roads and other real estate projects climbed by 26% from a year earlier. The new construction is soaking up more energy and adding to

the poIlution that is filling China's air and waters, and some­times spreading beyond its borders.

In a report released tllis week, the Organization for Economic Cooperation and Development said Beijing had been ineffective in countering the negative effects of its rapid economic develop­ment and industrialization.

China's "air pollution levels in some cities are among the worst in the world, one-third of water courses are severely pol­luted, and iIlnesses and injuries are associated with poor envi­ronmental and occupational conditions," the report said, adding

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. was poised to overtake the U.S. as the top emitter oft/Jal ChIna

nhouse gases. . . pee,. inflation is another worry. Consumer pnces Jumped

!Usmg I' f d' f 4

()f in June from a year ear ler a ter mo erate Increases 0by 4, "/0

bOut 2% last year. a F d prices have soared, largely a result of higher grain

00 . k f d'a shortage of pork In the wa e 0 a Isease outbreak costs,

'g farms and greater demand by consumers for meat. 00 pI ' . . Government statistics showed meat and po~ltry pnces 10

June were up 20% from a year ago, and egg pnces were 28%

higher.In the last two decades, economists said, almost every infla­

tionary crisis began with food price hikes. And it is starting to

pinch consumers. . " " "It's not like food pnces suddenly rose, but lIttle by lIttle,

said Qu Xilin, 25, a newspaper vendor in Shanghai who said he earned almost $400 a month but spent less than $1.25 a day on meals. "But what can I do? I have to eat every day."

It isn't just food. The cost of textiles, home appliances and services such as education and medical care are moving a bit too fast as well, said Zhu Baoliang, chief economist for the State Information Center Economy Forecast Department, a govern­ment-affiliated group.

"There is excessive demand ... we should be wary of such a trend," he said.

Beijing has taken steps to keep inflation in check, discourag­ing certain investments and bank-lending through a variety of

Article 33. China to Join Top 3 Economies

measures. The government this month cut or abolished a variety of rebates for exporters.

The United States, China's largest trading partner, reported a $232.5-billion trade deficit with China in 2006, and this year's figure was expected to be higher.

That has led to sharp calls from some American busine s groups and politician to step up pressure on China to revalue its currency, the yuan, which it allows to trade nly in a narrow range. The yuan has ri en about 7.5% against the d llar in the last two years, but critics say it is undervalued by as much as 30%, giving Chinese exporters an advantage in global markets.

Beijing bas insisted on maintaining its currency strategy, not wanting to jolt exporters and risk the loss of jobs and rising incomes.

Despite China's overall size and growing clout in the global economy, Chinese officials and scholars say the country is still developing and grappling with critical issues of lifting millions out of poverty and reducing the widening income gap between the city and countryside, where most Chinese live,

The figures released Thursday showed retail sales in the fir t half of the year jumped by 15% from a year earlier, Average incomes after taxes also rose briskly during the period. For the first six months, average disposable income for urban dwellers rose 14% to $921. For rural residents, it rose 13% to about $276, the government said,

"Being the world's third-largest is not that significant," said economist Zhu. "It's the quality of life."

From The Los Angeles Times. by Don Lee, July 20, 2007. pp. A I. Copyright © 2007 by The Los Angeles Times. All rights reserved. Used with permission of LA Times Reprints.

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