China, Hong Kong, Taiwan: dynamics of a new empire. (unity of the three Chinese economies during the East Asian financial crisis)

The year 1997 was a momentous and cathartic one for China. Lingering fixations on long-awaited landmark events ended when retired patriarch Deng Xiaoping's oft-reported death finally occurred on February 19 and when the Hong Kong handover was completed on July 1. Both events compelled the country to reflect anew on how to deal with rapidly changing situations, both domestically and globally. The fifteenth congress of the Communist Party in September enabled President and General Secretary Jiang Zemin to step out of the long shadow cast by Deng, ushering in a new era and wave of Dengist economic reforms. U.S.-China relations, after seven troubled years since the Tiananmen crackdown of 1989, has stabilized and continued to improve, but whether a new strategic partnership will take shape in the aftermath of Jiang Zemin's U.S. visit remains to be seen.

The death of Deng Xiaoping was a non-event in political terms. Deng's role as a semiretired "imperial father" behind the scenes had virtually ended in 1992 when his "Southern Whirlwind Tour" had rekindled economic reform, culminating in an unprecedented bout of rapid economic growth. Having already vanished almost completely from the scene, his physical demise merely marked the continuation of Dengism without Deng. Continuity was the watchword.

One of the most telling episodes during this period was a speech by the director of the People's Daily, who expounded that Deng Xiaoping's greatest merit was that he didn't drag down Mao Zedong the way Khrushchev had with Stalin, but had only criticized the mistakes of Mao. He thus had saved the historical position of the extravagant late chairman, the regime, and himself. The message was clear: Jiang Zemin extolled Deng Xiaoping to the sky and would preserve his legacy - but would redefine Dengism in light of new circumstances. These required more attention to the struggle against corruption and how the growing gap between the nouveau riche and the poor should be bridged.

The Core

Since he was called to national leadership from his post as municipal party secretary in Shanghai during the turbulent spring of 1989, Jiang Zemin has had eight years to consolidate his position. The widely held notion of the early 1990s that he was merely a transitional figure had become outdated by 1995 when he showed his mettle by having his main rival - the tough, powerful party secretary of Beijing, Chen Xitong - ousted from the top leadership and arrested for corruption and a "dissolute lifestyle." Jiang Zemin, whose standard honorific is "core of the third generation leadership," has been the first formal party leader to preside over two party congresses since Mao Zedong.

In a new hidden struggle behind the scenes, the number three man in the hierarchy, the mysterious and illiberal Qiao Shi, chairman of the National People's Congress, also considered a rival of Jiang's, spectacularly lost his seat on the standing committee of the politburo and central committee during the recent party congress. No explanation whatsoever was given, illustrating how far the party is still removed from transparency and accountability. The Chinese media hinted that Qiao is too old, but at 73 he is only two years older than Jiang himself. Few Chinese regret the departure of Qiao Shi for policy or personal reasons, but the abrupt, secretive way in which he was forced out is considered a setback for the cause of political reform that has slowly returned as a topic for debate on the national agenda.

ECONOMIC BREAKTHROUGH

The lack of progress in the political field at the Party Congress was amply compensated by a new breakthrough in the economic field in 1997. Key economic reforms of state-owned enterprises (SOEs) and banks had been lagging during 1994-1996, mainly because of concerns over massive layoffs as a result of bankruptcies and mergers. According to the blueprint for the transformation to the socialist market economy, announced in 1993, state-owned enterprises were to become "modern corporations" with the state continuing its ownership role and assuming a new role as a majority shareholder, leaving the rest of the shares for trading in stock exchanges. "Corporatization" (gongsihua in Chinese) meant partial de facto privatization but not de jure: Public ownership would put the socialist system in jeopardy, so shareholders would acquire de facto property rights without being able to exercise them. During the last few years, in any case, only limited progress has been made with corporatization due to strong leftist ideological opposition, vested interests, lack of clarity about property rights, and concerns about social unrest.

Although 1995 was meant to be the critical year for reform of the state sector, it turned out to be a year of slowing down rather than breakthrough. Since SOEs had more dramatic losses in 1996, the State Commission for Restructuring the Economy decided to extend the length of the 1996 "trial period" for the corporatization until the end of 1997. More than 80 percent of the 1,000 enterprises selected to test the modern enterprise system preferred the old system of full state ownership with the state as single shareholder and the chairman of the board of directors doubling as general manager.

This, of course, is hardly surprising. Most factory managers in China are Soviet-style engineers without expertise in modern financial management, which explains their reluctance to have a board of directors and outside shareholders in a superior position. Under the old system, they had a soft budget and could use their connections to plug the leaks; guarantee supplies of raw materials, energy, and credit; cover up fraud and theft; use state funds for luxurious meals, travel, and entertainment; and manipulate financial reports and falsify statistics to ensure their promotion. Many if not most of them would prefer to keep it that way.

Progress has therefore remained slow. Only 5 percent of large SOEs had been corporatized by 1996. SOEs still account for one-third of industrial …