Before getting anointed China’s leader, in the fall of 2012, Xi Jinping disappeared from the public eye for two weeks. His meetings with foreign dignitaries including U.S. Secretary of State Hillary Clinton and Singapore Prime Minister Lee Hsien Loong were canceled, one after another. Xi’s absence, never explained by the government, sparked speculation about his health, and trouble in the Communist Party’s secretive leadership transition process. Some China watchers suspected a coup.
At a press briefing at China’s Foreign Ministry, a Western journalist asked the ministry’s spokesman whether Xi, who was then China’s vice president, was still alive. “I hope you will raise more serious questions,” the spokesman replied tersely.
Out of the public eye, Xi spent days brooding over his plans to restore China to its central position in global affairs. He felt he needed time to plot his next moves after the party leadership had purged his most powerful political rival and cleared the way for him to take over the reins of the country. Would he be able to continue China’s historic economic rise while keeping the party in power? What should he do differently from his predecessors? Xi chose Zhejiang province as the place to mull over his choices. He had served as party chief from 2002 to 2007 in the coastal province, in eastern China known as “a land of fish and rice.” Xi had scored early success there, presiding over an economy that grew 14 percent a year.
His record in Zhejiang put him in the running to one day lead China and taught him how to foster a vibrant private economy, while at the same time motivating entrepreneurs to become loyal party members. Huddling with a few close advisers in Zhuji, a Yangtze River city in Zhejiang, Xi mapped out the outline of what he would call his “China Dream,” a slogan that conveyed his desire to make China a global superpower. To make the dream a reality, Xi concluded, he would need to make sure he became as effective as the man who started China’s economic boom decades earlier, former paramount leader Deng Xiaoping.
Most Western economists see Deng only as a reformer. A short, stocky survivor of the lunacy of the Cultural Revolution, Deng heralded an era of “reform and opening up” in the late 1970s, after Mao Zedong’s death and the end of decade-long political chaos. He unshackled the nation from the ideological constraints of the Mao era, embraced market-oriented policies, and opened China to the world. The Communist Party under Mao had triumphed in the bitter civil war and united China. But Mao also sapped the country of its entrepreneurial drive while millions of peasants, intellectuals, and party officials lost their lives in various campaigns he launched to boost production or weed out dissent.
Although Deng and his family were persecuted during those years, he remained loyal to the party. He saw the party as a powerful force he could harness to make the changes he sought. The government should play a central role in directing the economy, he believed, and in China, the government is ultimately run by the party. With firm party control, China was able to shut down inefficient companies that were holding back the country’s rise without kicking up massive opposition from those thrown out of work. The party also focused China’s scarce resources on promising industries and organized vast projects to build highways, railroads, and airports to link the country’s interior to the coastal areas where factories were being built to serve Western markets.
At the same time, Deng opened the country up to foreign investment, markets, and ideas, a remarkable feat given the internal opposition to any policy that smacked of capitalism. “We mustn’t fear to adopt the advanced management methods applied in capitalist countries,” Deng once said. In doing so, Deng also began an era of export-led growth for China, taking a page from Japan and the Asian Tigers of Singapore, South Korea, Taiwan, and Hong Kong, which embraced export markets to drive industrialization.
Xi Jinping thought he could further advance Deng’s policy and sought to emulate Deng’s market openings as well as Mao’s unrivaled control of the party apparatus. Many in the West saw those two efforts as contradictory. How could China truly liberalize the economy if it was under the thumb of the party? Xi didn’t see a contradiction. The party helped build China under Deng, Xi believed, and would continue to do so under his direction.
Zhejiang taught Xi about both liberalization and control, and so it made sense for him to choose it as a place to ponder his future. The province was at the forefront of China’s revitalization and became a thriving center of entrepreneurship. In the farming town of Yiwu, a market started in 1982 with some 700 stalls selling socks and other small consumer goods. It grew into the world’s largest wholesale bazaar for bargain hunters from all over the world—46 million square feet, or the size of nearly 800 American football fields. A port in northeastern Zhejiang became the busiest in the world, measured by cargo tonnage. The city of Wenzhou, located in a mountainous region in southeastern Zhejiang, became famous for its small businesses and as a source of emigrants to the United States and Europe. Wenzhou people, as they are known, deepened the country’s ties to the outside world.
When Xi went to Zhejiang in the fall of 2002, the province’s economy was already growing at a pace of more than 10 percent, faster than the national rate of about 8 percent. He largely took a hands-off approach to the private sector and focused on finding ways to encourage local shoe and clothing makers to expand into more sophisticated industries like machinery and chemicals. “He believed in limited government intervention at the time and spent a lot of time talking to companies,” a Zhejiang official says.
But Xi wasn’t a market cheerleader. Following Deng, he used the market when it suited his purpose—continued growth—and also pushed to strengthen the party’s rule.
One of the first places he went to visit after arriving in Zhejiang was Fengqiao, a township of some eighty thousand residents. The little-known town gained national fame in the early 1960s when Mao praised the way Fengqiao officials mobilized the masses to energize the party rule. He named it “the Fengqiao experience.” Back then, Mao celebrated Fengqiao’s enthusiasm for identifying so-called enemies of the proletariat—capitalists, traditionalists, and the like—and punishing them, which led to some of the most brutal aspects of the Cultural Revolution. After that tumultuous period, “the Fengqiao experience” faded into history.
Xi sought to revive the concept but gave it a new meaning. He wanted to mobilize the masses to fix problems and complaints at the local level before they led to widespread social unrest. In a speech in November 2003, Xi urged Zhejiang officials to “cherish the Fengqiao experience, promote the Fengqiao experience, continuously improve the Fengqiao experience and effectively maintain social stability.”1 Xi’s effort to revive and evolve the Maoist concept was all the more remarkable given his personal experience. His father, Xi Zhongxun, a party revolutionary, was purged around the time that Mao called for class struggle and promotion of “the Fengqiao experience.” The experience didn’t sour the younger Xi on party power. He wanted to use it for different purposes.
Xi’s government has tried to use modern technology to revive “the Fengqiao experience,” especially the use of informants. An app launched in Zhejiang in 2016, “Safe Zhejiang,” keeps users informed about laws and regulations and lets them notify authorities of issues ranging from domestic violence and corporate disputes to traffic violations. They also can use the app to lodge complaints against officials. In return, informants receive rewards such as shopping discounts. Today’s “Fengqiao experience,” as Zhejiang officials put it, has gone digital.
In the village of Fengyuan, which is part of the Fengqiao township, average disposable income is almost 40 percent higher than the national average and most every household owns a Honda, Toyota, or BMW. No resident in recent years has trekked to Beijing and filed petitions against local authorities, says Luo Gentu, head of the Fengyuan village. Instead, complaints are handled locally.
Beijing wants to replicate that experiment nationwide. Since the beginning of 2019, officials across the country have been encouraged to attend “study sessions” hosted by Luo and his colleagues to learn how to use the Internet and big data to mobilize the masses. In a late spring session in 2019, Luo told a group of visiting prosecutors from northern Shanxi province about the challenges of governing an increasingly wealthy population. “Back in the 1980s, all you had to do was to round up those who had lots of grievances and tried to stir up trouble,” said Luo, who has served as a village official for three decades. “But now, as people have more money, they also know how to fight for their rights through legal means. So we have no choice but to adapt.”
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China’s rise is one of the world’s greatest economic success stories. It’s a complicated tale.
Henry Kissinger, the U.S. diplomat who helped open the United States’ diplomatic relationship with China, said that when he first visited China in 1971, “there were practically no automobiles, very limited consumer goods, and no high-rise buildings. The technology was fairly backward.”2 A year later, when President Richard Nixon traveled to China, Kissinger added, “We had to bring a ground station with us in order to communicate effectively and for our media to communicate.”
Over the following four decades, China increased per capita income 25-fold and lifted more than 800 million Chinese people out of poverty, according to the World Bank—more than 70 percent of the total poverty reduction in the world.3 China evolved from a nation filled with famine and deprivation into the world’s second-largest economy, and America’s greatest competitor for leadership in the twenty-first century. Skyscrapers and high-rise apartment buildings sprouted like glass-clad bamboo all across China. Rail lines and expressways zigzagged the country and began to knit together rural regions whose mountains had made them nearly separate countries. Made-in-China products came to dominate the store shelves of the developed world. Rising incomes made Chinese consumers the main pursuit of multinationals.
The country’s economic rebirth was even more remarkable, given the chaos of the late 1960s and early 1970s, when the country was in the grips of the Cultural Revolution. Mao launched the mass movement in 1966 to root out so-called capitalist and traditional elements of Chinese society and reassert his authority. The result was ten years of turmoil, bloodshed, hunger, and near paralysis. Millions of families were ruined.
Nationwide, schools were shut and the youths were sent to the impoverished countryside for reeducation. Intellectuals and party officials deemed to have “impure” thoughts were murdered or driven to suicide by youthful Red Guards. Classical literature and paintings were torn apart. Temples were desecrated. Many people sought to rid any bourgeois connotation from their names. Among those who did was the mother of one of the authors of the book, Lingling. Her mother, the daughter of Mao’s former aide, changed her Russian-sounding name, Lina, to Tao, which means waves, and only changed it back after the violence of Cultural Revolution ended.
Traditionally a nation of farmers, China under Mao had devastatingly low agricultural production because of government mismanagement. Under his centralized planning system, farmers were given a production quota but had little incentive to produce beyond that quota. By the late 1970s, there were widespread famines, including the disastrous Great Leap Forward of the 1950s. Tens of millions of peasants died then, as Mao’s program to boost steel production wrecked farms while failing to modernize the countryside.
All that was to change soon. During the Cultural Revolution, Deng Xiaoping was purged twice, paraded through the streets of Beijing wearing a dunce cap, and sent to work at a tractor factory for punishment. His eldest son fell off the fourth floor of a building during interrogation and was paralyzed for life.
But Deng persevered, outmaneuvered his rivals, and came to power after Mao’s death. He experimented with a splash of capitalism to increase food supplies. Deng changed the rigid quota system through policies that gave farmers formal control of their land, reduced their production quotas, and allowed them to sell whatever they produced above the quotas in free markets at unregulated prices. The new system increased China’s agricultural production by 25 percent in the decade following the change and gave Chinese leaders confidence that market reforms could work in other areas as well.
In urban areas, China deregulated prices for industrial goods and commodities, allowing the Chinese to avoid the shortages of the Mao era. Private businesses were permitted to operate for the first time since the Communist takeover in 1949.
Xi Jinping’s father, Xi Zhongxun, an ally of Deng at the time, played an important role in wooing foreign investors, who had been chased out of China by revolutionaries during the Chinese civil war. The elder Xi was assigned to run Guangdong province, which bordered the far wealthier city of Hong Kong, then a British colony. Daily wages in Guangdong were about 1/100th of those in Hong Kong. To try to prevent Guangdong residents from fleeing to Hong Kong, Xi proposed to Deng to carve out some areas in the province where the local government could experiment with economic liberalization and invite foreign capital.
Deng signed off on the proposal in 1979. “Let’s call them ‘special zones,’” Deng told the elder Xi, while adding: “The central government has no funds, but we can give you some favorable policies.” 4
The special zones on China’s southern and eastern coasts experimented with lower tax rates and reduced regulation. Guangdong and Fujian provinces—the latter two hundred miles off the coast of Taiwan—targeted foreign makers of clothing and electronics, often ethnic Chinese, to set up plants to make goods for overseas markets.
Deng later authorized more provinces and localities to take initiatives instead of waiting for directions from Beijing. Many townships and counties started companies and contracted them out to individuals to manage. They essentially operated like private businesses, giving local party bosses more experience with markets and market incentives. Many of those firms moved into textiles, chemicals, and other industrial sectors previously dominated by companies owned by the state and run by government officials.
Those de facto private firms “stimulated competition with state-owned enterprises (SOEs) and drove the process of marketization in the entire economy,” wrote professor Hong-Yi Chen at Soka University of America in Aliso Viejo, California. 5
China’s economy took off. Gross domestic product jumped thirty-fold from 1978 to 2001, vaulting China from the size of Mexico’s economy to the size of France’s. Foreign investments in factories and other projects, nonexistent before Deng’s reform, surged to $46.9 billion two decades later, bringing to the country much-needed technological and management expertise and helping Chinese firms move into more lucrative industries. With its armies of cheap labor, China started to become the world’s factory floor, with exports soaring 27-fold from 1978 to reach $266 billion in 2001, when China joined the World Trade Organization.
The process wasn’t pretty. Deng’s experimentation with liberalization didn’t include political liberalization. When students filled Beijing’s Tiananmen Square demanding democracy in June 1989, Deng unleashed the army, which killed hundreds, if not thousands, of the protestors.
The legacy of the party-led development model includes corruption, political repression, overspending, and inefficiency. Chinese economist Chong-en Bai of Tsinghua University says China has become a “special deal” economy, where local party leaders dole out aid, loans, and other help to favored firms. But he says the system has been saved from kleptocracy, so far, because local governments compete ferociously with one another for new development schemes. When one town comes up with a winning strategy—technology zones to lure computer chip companies—others copy and compete.6
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Xi Jinping sought to understand the elements of China’s success during his five years running Zhejiang province as party secretary and add to the region’s development. Like his predecessors, Xi wasn’t entirely comfortable with capitalist dynamics. He saw an important role for the government and party in keeping control of development and guiding private businesses to ensure they stayed on the right track.
A government adviser described Xi as someone who believed private businesses should be allowed to prosper so long as they stayed in the good graces of the party. Among the private entrepreneurs in the province that received Xi’s blessing was a village girl turned billionaire, Chen Ailian, who is now in her sixties and runs one of China’s largest makers of auto parts. Her story is the story of China’s rise, with its combination of guts, entrepreneurial drive, and party direction.
Chen is chairman of Wanfeng Auto Holding Group, based in a mountainous county in Zhejiang, though she sees herself as a party member first. She holds positions on government advisory bodies—an honor bestowed by the government to successful entrepreneurs—and devotes significant resources to party building. She works with the party to identify workers for party membership and also trains reserve forces for the People’s Liberation Army. Those efforts benefit her personally and professionally. Cultivating party officials has helped her turn the small company she founded in a dilapidated factory in 1994 into one that sells quality auto wheels and rims to Ford, General Motors, BMW, and other foreign firms. Her company now is expanding into aviation.
“We only support one party, which is the Communist Party,” Chen says. A photo of Chen and Xi, hung on the wall of Wanfeng’s exhibition center, illustrates the dynamics in greater detail: “The party and the government have built a beneficial environment for companies to grow,” the company wrote on the photo. “They encourage us when we make achievements, help us solve problems when we get into trouble, and show care and concern as we develop.”
One of five daughters of a veteran of the Korean War—or “the War to Resist America and Aid Korea,” as the Chinese call it—Chen grew up during the Cultural Revolution in a rural county in Zhejiang. With three big rivers and dense creeks winding through the county, Xinchang has a tradition of commerce. To enrich their land, local residents traded the green tea they grew for chicken feathers and other materials that could be used as fertilizer.
During the Cultural Revolution, all forms of trade stopped and, like the rest of the country, the area suffered from food shortages. Chen received little formal education during the decade of chaos. By the time she turned twenty, in 1978, when Deng started to give farmers more incentives to produce as part of his reform policy, Chen wanted nothing more than to become a tractor driver for the local commune—a prestigious job at the time when such vehicles were rare throughout the country.
She got her wish. Whenever she wasn’t working in the rice fields, Chen would drive around the town in the tractor from the local commune, helping farmers ship goods and observing how Deng’s policy turned the sleepy county of Xinchang into an increasingly vibrant one. “People became hopeful again about their lives, about the future,” she recalls.
In the early 1980s, Chen got a job at a textile mill owned by the county government and met her future husband there, Wu Liangding. He was a catch. A state company promised a job for life and the “iron rice bowl” of comprehensive cradle-to-grave benefits. Companies clothed their workers, housed them, fed them, and educated their children. But the expenses made the companies enormously inefficient. As China changed, most of the firms foundered. They faced fierce competition from a growing army of more nimble and efficient private businesses, especially in Zhejiang, with its traditional entrepreneurial zeal and lack of heavy-handed government intervention.
That’s when Chen and many others throughout the province and the rest of the country started to think about starting their own businesses. A Honda motorcycle her husband gave her as a gift for her thirty-fifth birthday in 1993 provided the entrepreneurial spark. The government was stepping up efforts then to build an auto industry, as the country started to transform from a kingdom of bicycles. But foreign imports remained scarce because of China’s high tariffs. Chen’s husband, then manager of the state textile firm they both worked at, had to use connections to sneak in a motorcycle from Hong Kong. “My Honda was the only imported vehicle in the entire county,” Chen says.
As she drove around town, she noticed how much more stylish and lightweight her Honda alloy wheels and rims were than the steel ones used in Chinese motorbikes. The aluminum alloy made for more agile performance and better acceleration. She investigated why Chinese motorcycles used inferior products and realized that state-owned firms used steel to make wheels and saw no reason to change. They sold all they made anyway.
Chen invited a few technicians from a local aluminum plant to tear apart her Honda. “I wanted to see if we could make such wheels,” she recalls. “And the answer was yes.”
Chen decided to set up her own alloy wheel business. She convinced a local bank to lend her 500,000 yuan ($58,000 at the time), a big loan when the average annual income was less than 5,000 yuan. She used it to purchase equipment and lease a facility from a teetering state-owned paper mill. In 1994, she founded Zhejiang Wanfeng Alloy Wheel Company and hired fifteen employees, who averaged thirty years old. Her employees included the technicians she invited over to dismantle her Honda. They worked out of a shabby single-story factory building located on a narrow street by a river.
In the early 2000s, Zhong Shan, then the province’s top trade official, went to visit Chen and her company as part of a mission to encourage more exports. That was when many businesses in China, especially in the coastal province, started to find more opportunities overseas. But they still needed to apply for export quotas from the government to venture abroad.
“I said to him, ‘I want to do more exports,’” Chen recalls.
“Yes, you can,” replied Zhong, who was picked by Xi Jinping as China’s commerce minister in 2017. Afterward, Wanfeng began an aggressive expansion overseas.
In recent years, the company has received government funding and other support to build a state-of-the-art factory that uses artificial intelligence and advanced robots to make wheels. A banner in the hallway of the factory celebrating Wanfeng’s use of AI, with Chen’s signature, promises to implement China’s “Made in China 2025” plan and promote AI manufacturing. The initiative aims to make the country a leader in technology of the future, but it has been assailed by the Trump administration as a protectionist policy that hurts U.S. firms, as we will see in later chapters.
Trump officials singled out one of Chen’s foreign acquisitions as an example of how the Chinese government uses subsidies to get the technology it needs to advance. In 2016, Wanfeng acquired Paslin Company, a Warren, Michigan–based maker of advanced manufacturing robots, for $302 million. The deal was financed in part by a $45 million investment from the city of Shaoxing, which oversees Chen’s county. The financing was designed to “activate a strategic industry,” according to the city’s finance department.
Around the same time, Chen’s company started to build an aviation complex in accordance with the city’s industrial plan. Within a year of buying Paslin, Wanfeng invested some $118 million—money raised from the government, other businesses, and the company itself—to improve its ability to use robots for manufacturing. A report by the Commerce Ministry credited Wanfeng for obtaining “key technology for the field of robotics” through the Paslin transaction. Such deals, Chen now says, help the country move from “‘made in China’ to ‘created in China.’”
At five feet six, Chen likes to dress in bright red and pink and boast about her connections to party leaders. Separate pictures of Chen meeting with Xi, Premier Li Keqiang, and Vice Premier Han Zheng are prominently displayed at the company’s exhibition center. On Wanfeng’s website, she’s listed first as the company’s party secretary and then as its chairman. Her friends in the party help in many ways. In 2017, when an extravagant wedding she threw for her son drew negative headlines from China’s social media, the government’s propaganda department intervened to put a stop to the bad publicity.
Chen is also an admirer of the West, and all its excesses. She drives a Rolls-Royce and lives in a mansion in the scenic county. Her company’s new headquarters are modeled on the twin towers of the World Trade Center. A sprawling aviation complex she is constructing features buildings that resemble the Arc de Triomphe, the White House, and the Great Hall of the People. Facing the complex is a famous local temple, where a giant wooden Buddha sculpture serves as a reminder of China’s past and its onetime embrace of simplicity.
In 1998, she traveled with a team from her company to an auto show held in Las Vegas. She set a strict no-gambling rule for her teammates and required them to be in bed no later than midnight. But several of her crew couldn’t pass up the city’s attractions and wandered around the city until the morning. “They couldn’t stop talking about the Las Vegas water fountains with the combination of music, water, and light,” Chen recalls. “But I told them, ‘Whatever the U.S. has now, China will have it someday.’”
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Other companies in Zhejiang prospered too, although not on the scale of Chen’s.
The number of private manufacturers in Zhejiang with annual revenue exceeding 20 million yuan—about $3 million—has more than tripled in the past two decades to nearly 28,000 now, making up 70 percent of all sizable industrial companies in the province. The vibrant private sector has helped Zhejiang achieve an annual growth rate of 12.4 percent on average from 1993 to 2001, when China joined the WTO and committed itself to adopting Western capitalist trade rules. After that, the province’s economy soared further, powered by exports of socks, ties, chemicals, auto parts, and many other products.
When Xi was running Zhejiang from 2002 to 2007, he courted overseas capital, offering tax breaks and other incentives to those setting up plants in the province. Foreign direct investments tripled in that period, to $10.4 billion. Today more than forty U.S. multinationals, including Ford, Boeing, and Harley-Davidson, have investments in the province.
In 2007, when Hank Paulson, a former Goldman Sachs chief executive with long experience doing business in China, made his maiden trip to the country as Treasury secretary, he chose to meet with Xi first, as he recounts in his book, Dealing with China.
“‘We need to foster a better climate for innovation,’” Paulson recalled Xi saying to him. The would-be Chinese leader told Paulson at the time: “‘Small and middle-size companies in the private sector can lead the way.’”7 Years later, after Xi took over the party in late 2012, his turn to greater state control over the economy contrasted sharply with the pro-market reputation he established while running Zhejiang, although he never hid his commitment to party rule. The switch shows the difficulty even seasoned China watchers have in understanding Beijing. Market people like Paulson see the market side of Xi, but overlook his party allegiance.
As for Chen, in 2018 her family made Forbes magazine’s list of China’s richest people, with total net worth valued at $1.1 billion. Wanfeng now has 15,000 employees with about $1.5 billion in revenue annually. But business hasn’t been easy, despite her party ties.
Time and again she’s found herself having to battle. A growing Chinese economy provided companies like hers huge market opportunities, but also increased competition. When Chen formed Wanfeng in 1994, 3 million motorcycles were produced in China. That figure more than doubled to 8 million in 1997, and by 2000 it reached 20 million. More companies started competing to sell wheels to Chen’s foreign customers.
Some of Chen’s competitors are state-owned firms, which have to worry far less about profit margins than private firms because they have easy access to loans from state-owned banks and subsidies from provincial authorities. Rarely do state-owned firms go bankrupt, whatever harebrained schemes they might pursue. In the 2000s, Wanfeng’s foray into the auto sector, dominated by state players, ended with a thud.
Foreign firms face these and other disadvantages when they compete with state-owned Chinese companies, including pressure to hand over their technology. Those complaints grew over time and helped ignite a trade war when Donald Trump entered the White House and faced off with Xi Jinping.