THEWALL STREET JOURNAL.

Pulitzer Prize

China’s Naked Capitalism:Raucous Industrial Revolution Echoes Era of America's Robber Barons a Century Ago

2007

A collection of Pulitzer Prize-winning articles by

The Wall Street Journal Staffin the category of

International Reporting

The Wall Street Journal’s coverage of China’s

economic growth balanced the benefits with the

challenges created by a government system unable to

address social dislocations. Our stories took readers

from isolated villages, where children are exposed to

poisoned air, to the biggest cities, where migrant

workers toil at great peril.

Gordon CrovitzPublisher, The Wall Street Journal

China’s Naked Capitalism:Raucous Industrial Revolution Echoes Era of America's

Robber Barons a Century Ago

A collection of

Pulitzer Prize-winning articles

by

The Wall Street Journal Staff

in the category of

International Reporting

THEWALL STREET JOURNAL.

Special thanks to Joanna Tobias, Dow Jones Custom Reprint Dept., who designed this booklet.

2007 Pulitzer Prizefor

International Reporting

China’s Naked Capitalism:Raucous Industrial Revolution Echoes Era of America’s Robber Barons a Century Ago

A Poison Spreads Amid China’s Boom, by Shai Oster and Jane SpencerSeptember 30, 2006 ................................................................................................................................................................. 6

So Much Work, So Little Time, by Mei FongDecember 23, 2006.................................................................................................................................................................. 9

Bumpy Ride: As China’s Auto Market Booms, Leaders Clash Over Heavy Toll, by Gordon Fairclough and Shai OsterJune 13, 2006 .......................................................................................................................................................................... 13

River of Tears: In Booming China, A Doctor Battles a Polluting Factory, by Shai Oster and Mei FongJuly 19, 2006 ........................................................................................................................................................................... 15

Growing Pains: Booming Municipalities Defy China’s Effort to Cool Economy, by Andrew BrowneSeptember 15, 2006 ............................................................................................................................................................... 17

Western Frontier: China’s Big Push to Stoke Economy Rattles Rural Tibet, by James T. Areddy August 24, 2006 ....................................................................................................................................................................... 20

Bubbling Anger: Blogger Hits Home by Urging Boycott of Chinese Property, by Andrew BrowneJune 12, 2006 .......................................................................................................................................................................... 22

It May Be Too Late for China to Save the Yangtze Goddess, by Shai OsterDecember 6, 2006 ................................................................................................................................................................ 24

How Capitalist Transformation Exposes Holes in China’s Government, by Jason DeanDecember 18, 2006 ............................................................................................................................................................... 26

Illegal Power Plants, Coal Mines in China Pose Challenge for Beijing, by Shai OsterDecember 27, 2006 ............................................................................................................................................................... 27

THEWALL STREET JOURNAL.

January 2007

The Pulitzer Prize BoardColumbia University709 Journalism2950 BroadwayNew York, NY 10027

To the Judges:

China’s economic vitality has captivated the world. But after nearly three decades of market reforms,and twenty years of hell-bent growth, the nation is confronting the costs of condensing an entire industrialrevolution into the span of a single lifetime.

A country still nominally socialist, that once guaranteed an “iron rice bowl” of lifelong security for itspeople, has now swung to the opposite extreme: a land of gaping inequality where those who haven’t madeit rich are left exposed and unprotected. No surprise, violent protests are on the rise. In 2006, The WallStreet Journal set out to explore this tension, the product of a particularly raw form of economic Darwinism.China’s virtually unchecked growth is starting to disrupt its society and create what, if unresolved, will bemajor obstacles to its future development. And now that China is so integrally part of global trade, whathappens in Beijing will resound on far-away shores.

The excesses of China’s raucous new capitalism are reminiscent of the robber barons in America’s ownIndustrial Revolution more than a century ago. Unregulated factories pump poisons into China’s air andwaterways, maiming villagers and sending once plentiful wildlife into extinction. Workers with few rightsand few options mine coal and build skyscrapers for little pay, and often at great peril. And a centralgovernment, overwhelmed by rocketing growth and impotent to slow it, takes to spying on its own localgovernments via satellite to see where development is defying Central Party edict. What they find is that thedefiance is nationwide.

The Journal’s series of articles, written by the paper’s nine China-based correspondents and fiveresearchers, explored this terrain and more, bringing to light the often complex and long-lasting costs of thecountry’s unrestrained growth.

China’s central government may talk about shutting down polluters. But as reporters Shai Oster and JaneSpencer showed in their front-page story, local governments hooked on growth often protect those factories,refusing to close them. Villagers in Xinsi had complained about emissions from the town’s lead smelter foryears. But nothing was done until Xinsi’s children evidenced permanent brain damage, and their bloodrevealed the contents of the smelter’s smokestacks.

Cars—a sign of national well-being—are jamming China’s roads. Street-side pollution is one of the topcauses of increased respiratory disease, and the reason China’s cities are now the most polluted in the world.

Paul E. SteigerManaging Editor

200 Liberty StreetNew York, New York 10281212.416.2327 Fax: 212.416.2720

!

THEWALL STREET JOURNAL.

Gordon Fairclough explained why in another front-page story: There are more than 100 auto makers inChina, a staggering number that have propelled the nation overnight to the second-largest domestic carmarket globally. Every province and major city has its own car maker, regulation is scant, and consumptionis promoted over social welfare.

Despite China’s heady growth, more than 70% of its population is poor farmers, and many of them arecoming to the cities to find work. They are fuel for the nation’s growth machine, the source of itsproductivity. And they are dispossessed. In her front-page profile of construction worker Wei Zhongwen,Journal reporter Mei Fong tells the story of the two million migrant laborers behind Beijing’s mammothpreparations for the 2008 Olympics. It is a story of Dickensian deprivation, one that brought strong responseand many donations from readers round the world.

China’s problems are the world’s problems. The country is the biggest new economic force to emerge inthe last 20 years. Its cheap labor and mountains of cash keep inflation low in the U.S. It is arguably the mostinfluential economic engine in the world after the U.S. How this nation now deals with its wild internalswing to excess will similarly color the future of the global economy, and the health of Western nations.The Journal’s coverage in 2006 of China’s naked capitalism is a stark warning of the dislocation alreadyevident–and the growing cost of official inaction.

I am proud to nominate the Journal’s coverage of China’s growth for the Pulitzer Prize for InternationalReporting.

Sincerely,

Paul E. Steiger

6 Reprinted from THE WALL STREET JOURNAL SEPTEMBER 30, 2006

color television tubes and cables shipped aroundthe world.

It also poured out poisoned air containing 800times the permissible level of lead emissions, offi-cials say.

Nearly everyone from the village who has beentested so far—including some 250 children fromthree schools—has been found with unsafe amountsof lead in their bodies. Ten children remain hospi-talized and at least four are likely to have severebrain damage in the village of 1,800 people,according to Xinhua, China’s official news agency.

“There’s not one person in this village withoutlead poisoning,” says Zhou Xiang, whose son washospitalized with level of 488 micrograms per liter ofblood. “My children’s fingers are black and blue.”

The World Health Organization says that leadblood levels of 100 micrograms per liter and above(or 10 micrograms per deciliter, using the measure-ment standard more common in the U.S.) arecause for concern in children. Studies show evenslightly elevated lead levels can lead to permanentneurological damage and reduced IQ.

Clutching their carefully folded lab results andpointing to the numbers—304, 488 and even 798—theparents of Xinsi say they finally understand whytheir children have complained for so long of nau-sea, headaches and pains. They say their babies’teeth are growing black or not coming in at all.Parents and teachers say children are havingmemory and concentration problems.

The disaster shows how vulnerable China’s citi-zens are to the environmental damage inflicted bythe country’s rapid industrial growth. The result isa health crisis that could have long-term conse-quences for a generation of children. Even inwealthier areas of China such as Shanghai andGuangdong province, officials say the deterioratingenvironment is a factor behind a rise in birthdefects.

A lack of pollution controls has contaminatedChina’s soil, water and air with lead, mercury andother pollutants—and left millions of children withdangerously high levels of toxic metals in theirblood. Making matters worse, much of the manu-facturing that used to pollute the West has found aready home in China, where environmental regula-tions are loosely enforced.

About 34% of children in China have blood-leadlevels that exceed the WHO limit, according to arecent report by researchers at Peking UniversityHealth Science Center in Beijing, who reviewed 10years of data on the topic. The situation is consider-ably worse in factory towns like Xinsi. By compar-ison, fewer than 1% of children in the U.S. havelevels above the WHO limit.

High lead levels are “very common in myclinic,” says Yan Chonghuai, a specialist in child-hood lead poisoning at Xinhua Hospital, affiliatedwith Shanghai Jiaotong University School of Medi-cine. Dr. Yan treats cases from all over thecountry. On a recent day, the hospital accepted achild from Fujian province with a blood lead levelof 700 and another with a level of 500 from exposureto talcum powder contaminated with lead.

APoison SpreadsAmid China’s BoomDangerously high levels of lead are discoveredin many children; ground zero is Xinsi Village

An imported charm proves deadly in Minneapolis

Sha

iOster

By SHAI OSTER And JANE SPENCER

Xinsi, China

D OCTORS TREATING a five-year-old boy after a horrific electricalaccident this spring were surprised to find another, equally seriousproblem: dangerously elevated levels of lead in his blood.

The incident uncovered one of China’s worst known cases of lead poisoning.For a decade, a factory near Xinsi, an isolated village in the mountains ofChina’s western Gansu province, made lead ingots used in manufacturing

Xu Minzheng with his 2-year-old son, whose blood test showed an extremely high level of lead.

Reprinted from THE WALL STREET JOURNAL SEPTEMBER 30, 2006 7

In China, lead is still prized in manufac-turing because it is plentiful, cheap,malleable, and resistant to corrosion. Leadcompounds are regularly added to plasticsand vinyl to make them more resistant tohigh temperatures. Because lead is heavy, itis often added to cheap metal products tomake them seem more substantial.

Lead dust is sometimes added to herbalproducts that are sold by weight to makethem heavier and increase their value. Iflead is in a stable solution it may not pose aproblem. But lead can be particularlydangerous in toys and jewelry because chil-dren can swallow it.

China’s lead problem is drawing newattention from U.S. regulators. In the pasttwo years, the U.S. Consumer ProductsSafety Commission has recalled roughly 20products imported from China because ofhigh lead content. They range from beachumbrellas to portable karaoke machines tochildren’s animal-shaped flashlights.

“Given the nature of the global economy,the manufacturing processes abroad canhave a substantial impact on the health ofyoung children in the United States,” saysJohn F. Rosen, who runs the lead programat the Children’s Hospital at Montefiore inNew York.

Earlier this year, a 4-year-old Minneapolisboy died of lead poisoning after swallowinga metal charm that came as a gift with apair of Reebok sneakers. The charm, whichwas made in China, was 99% lead.

A representative of Reebok InternationalLtd. says the company takes “product safetyvery seriously” and immediately recalled500,000 products in 25 countries following theincident. The company has since stepped up

oversight of suppliers,and increased testingof products for re-stricted substances.

China’s pollutionproblems are in someways reminiscent ofwhat was seen duringthe rapid industrial-ization of 19th-centuryBritain and otherindustrial revolutions.But China’s rapidgrowth is taking placeat a time when gov-ernment officials arewell aware of the dan-gers of toxic sub-stances like lead.

C HINA IS INthe earlystages of a

battle against leadthat the U.S. started nearly three decadesago. During the 1960s and early 1970s,hundreds of American children were hospi-talized each year with severe lead poisoninglinked to exposure from lead in paint andgasoline. One in four hospitalized childrendied, because there were no treatments atthe time. The deaths led to laws banninglead in paint, gasoline and other industrialproducts. The campaign against lead waspart of a wave of environmental legislationpassed in the 1970s aimed at reining inrampant industrial pollution.

Now, China is confronting the same“trade-off between short-term profits byindustry and the long-term burden of humanand environmental costs,” says Bruce Lanp-hear, a professor of environmental health atCincinnati Children’s Hospital MedicalCenter.

After decades of ignoring the rising envi-ronmental toll of its breakneck economicgrowth, China’s central government is nowtrying to stem the damage. The governmenthas already taken some steps to curb leadexposure such as phasing out leaded gaso-line in the late 1990s and passing stricterrules on workplace exposure. Yet centralauthorities have found their efforts stymiedby local officials whose promotions arebased on growth in their local economies.

Xinsi, or new temple, seems like an un-likely place for an environmental battlefield.Eight hours by bus from Xi’an, the largestnearby city and home of the famed terra-cotta warriors, Xinsi is a farming village ofold mud-walled homes with traditionalcurved Chinese roofs and wood latticewindows.

The factory, which took lead ore andmelted it to separate impurities, was openedten years ago by a company called HuixianHongyu Nonferrous Smelting Co. Ltd.Huixian was owned at the time by a stateconglomerate called Gansu Luo Ba Nonfer-rous Group.

Government officials say the factory’ssmelter distilled lead ore into 5,000 tons ayear of lead ingots and dumped the waste inunsafe slag piles. Some of that output waseventually used in television screens orcables exported to the U.S. and SouthKorea, according to the parent company’sWeb site.

The factory lies at the base of a smallcreek, a stone’s throw from the localprimary school, and its smokestack domi-nates the countryside. It is far from anylead-ore deposits or convenient transporta-tion. One local official said the factory wasbuilt in Xinsi instead of closer to biggercities to avoid scrutiny. China’s environ-mental regulators and activists say it’sincreasingly common for heavily pollutingindustries to move to the countryside, wheresupervision is weak.

There are signs that the Xinsi factoryfollowed at least rudimentary safety proce-dures with its own workers, many of whomcame from outside the village. The factoryconducted blood tests and dismissed thosewhose lead levels were elevated. Zhou Fei, a42-year-old Xinsi resident, lost his job aftera failed blood test. His neighbors say he hastrouble remembering dates now. Askeddirectly, Mr. Zhou can’t recall when heworked at the factory.

Many Xinsi villagers say they had noidea that the lead dust spewed by thesmelter posed a hazard to them. “We’re justsimple peasants,” said Xu Minzheng, whose2-year-old son has a lead level of 263 micro-grams per liter of blood. His 7-year-olddaughter has a lead level of 316. He pointedto the smokestack overlooking the rutteddirt path winding past corn and red chilipeppers hanging to dry. “We didn’t haveany awareness of what lead could do. Butthe government officials should haveknown. We just don’t have the means todeal with this sort of thing.”

Sha

i Ost

er

A smelter (above) in Xinsi is blamed for broad lead poisoning.

Dangerous Metal

Source: China data from journal “Environmental Research”;U.S. data from city and state health departments

Percentage of young children in major cities with blood lead levels considered unsafe by the World Health Organization:

80.5%

55.3

35.7

24.8

9.0

3.6

1.0

0.9New York

Los Angeles

Chicago

Providence

Shanghai

Beijing

Haikou

Xinxiang

CHINA

U.S.

Note: Most data reflect exposure rates in children under 6 tested for lead. Study methodology variedby city.

8 Reprinted from THE WALL STREET JOURNAL SEPTEMBER 30, 2006

L EAD CAUSES brain damage bymimicking helpful metals found natu-rally in the body, such as calcium,

iron and zinc, and binding with the samemolecules and proteins. Calcium, forexample, is essential for brain developmentbecause it facilitates the growth of nervecells. But lead binds with the sites in thebrain that were intended for calcium,disrupting brain circuits critical forlearning, and sometimes impeding cellgrowth. The process leads to irreversibleintellectual impairment. Lead exposure isespecially harmful to children.

Last year, the Xinsi smelter’s parentcompany, the Gansu Luo Ba NonferrousGroup, went private in a management buy-out. The factory upgraded its emissionscontrols, but turned them off at night, whenthe factory would emit heavy smoke, to savemoney, villagers said. Earlier this year,government authorities told the factory tocease operating, but it continued to producein secret, according to the villagers and

Xinhua, China’s offi-cial state-run newsagency.

The situation mighthave continued un-changed if it weren’tfor a little boy’s cur-iosity back in March.Five-year-old ZhouHao was playing witha classmate near aslag heap fromanother factory intheir hamlet. Hoppingover an unfinishedwall, the boy touched

a big electric transformer. The massiveshock blew off his shoes and knocked himunconscious.

The boy’s parents rode with their badlyinjured son overnight in an ambulance tothe nearest big city hospital, in Xi’an, forthe first of many operations to save his life.His left arm was amputated, he needed skingrafts, and his badly gashed scalp swelledlike a balloon.

It was after blood transfusions for one ofthese operations that doctors diagnosedZhou Hao’s incredibly high levels of lead.The doctors couldn’t understand whyfarmers would have lead in their blood, until

Hao’s mother, Wang Shuhong, told themabout the factory.

Ms. Wang said she and her husband, un-educated farmers, didn’t realize the conse-quences of the high lead level and quicklyforgot about the doctors’ diagnosis. Takingturns sleeping and keeping watch over theirson at the hospital and worrying about howto raise tens of thousands of yuan for hismedical bills left the parents drained andexhausted.

It took another chance encounter—thistime with a worker in the Xinsi smelter theybumped into in Xi’an—for them to learnabout lead. They asked what pills theyshould take to get rid of the lead. He saidpills wouldn’t help their child.

By August, after five months of treat-ment, Zhou Hao’s parents brought himhome. Word began to spread about theyoung boy’s lead poisoning. A few farmersbegan sending their children to be tested inXi’an. But officials in the factory and gov-ernment denied the lead poisoning had any-thing to do with them, Zhou Hao’s motherand other villagers said.

Zhou Hao has lead levels that, due toblood transfusions, have swung between 262and 557, his parents say. The factory owners“did this for their profit,” says Ms. Wang.“They didn’t even think about lives at all.”

O FFICIALS ONLY started taking theallegations seriously after a localnewspaper in Xi’an reported Sept. 5

about all the villagers coming in for leadtests. That story was soon picked up byXinhua, which as the official organ of theregime nationalized the story and brought itto the attention of China’s central leader-ship.

A government investigative team fromBeijing is looking into how local and provin-cial officials allowed the factory to keepoperating for years despite its failure tomeet national emissions standards.

The factory has closed and parts havebeen torn down, villagers say. “Our stanceis very clear: If we should be found respon-sible for this, we will admit it and activelytake responsibility. It would be impossiblefor us to avoid responsibility,” said LiuXiaodong, office manager at Gansu Lou BaNonferrous Group. The local and provincialgovernments declined comment pending the

conclusion of an investigation.It is highly unusual in China for a com-

pany to make reparations for environmentaldamage. Occasionally a polluter will beforced to pay farmers for damage to crops.But there is no developed law for estab-lishing liability for health problems.

On a recent day, a shiny caravan of sportutility vehicles carrying a delegation ofregional officials roared through the ruttedmud lanes to meet with the villagers. Manyof the villagers gathered in an angry crowd.The officials agreed to distribute pills topeople suffering severe lead poisoning. Onetype of pill was a Chinese herbal remedy.

International health agencies say there’sno effective treatment for lead exposureexcept in the most life-threatening cases,when patients can be given drugs calledchelation agents that strip heavy metals outof the body. But the drugs cannot reversebrain damage that has already occurred,and they carry risks of their own becausethey also strip useful metals from the body,such as iron and zinc.

Wu Wenchou, a bright-eyed 15-year-oldgirl, is one of those who was poisoned. Ms.Wu speaks standardized Mandarin—a clearmark of an educationin a rural countywhere the local dia-lect dominates. “Iused to dream of go-ing abroad to study,maybe evenAmerica,” she saidquietly, barely hold-ing back tears. “Mydream has been shat-tered.”

Once a class star,young Ms. Wu beganhaving difficulty con-centrating on herhomework, and her test scores kept falling.Her once-proud mother shouted at her asher grades dropped. Her blood has leadlevels of 261—more than double the stan-dards for safety. She called her older sister,who is studying at a nearby medical school,and told her to come home for the lead tests,too.

“I’m afraid. We have no choice,” sheshrugged. “These are the facts, this isreality.”

Zhou Hao

Wu Wenchou

Reprinted from THE WALL STREET JOURNAL DECEMBER 23, 2006 9

Others rise at dawn. They work 15-hour daysor longer, seven days a week. When theytopple onto their bunk beds, it is 12 to aroom. There is no heat.

One of them is Wei Zhongwen. He hasmore than two decades as a construction

worker, and the injuries to prove it: amissing pinkie and a palm-size dent on hishead under his neatly cropped hair. In thepast decade, the 41-year-old has helped buildskyscrapers, shopping malls and much elsein Beijing and nearby provinces. He hasn’t

seen his wife or daughter in two years, andbecause of the press of work ahead of theBeijing Summer Olympics in 2008, he maynot see them this year either.

“For me, one of the biggest problems ofthis job is loneliness,” says Mr. Wei, puffingon a cigarette.

In his rural hometown, the money Mr.Wei has sent back has built his extendedfamily a five-room house with a thatch roof,a 21-inch color television set and roomshousing a horse and some pigs. The hard-ship of his work is worth it, Mr. Wei says, toeducate his daughter and sustain his familyon their farm.

Beijing is in the midst of an enormousbuilding boom—one of the most ambitiousconstruction projects the world has everseen. Cranes clutter its skyline. At morethan 10,000 sites across the city, there is atotal of 1.7 billion square feet of floor spaceunder construction—an area that, if laid out,would be nearly three times the size ofManhattan.

This colossal development is due to theefforts of a nearly invisible army, a group ofalmost two million migrant workers whodrift from China’s farmlands. Toting theirbedrolls from work site to work site, theyearn as little as 50 cents an hour. They workin a hazardous profession with practically noworkplace protections and little or nomedical coverage. Many of the workers liveright in the heart of the city, yet few ordi-nary Beijing residents ever glimpse theircrowded barracks, where privacy, cleanli-ness—even meat—are luxuries.

They often get paid late or not at all. Areport this year by the research arm of theState Council, China’s highest administra-tive body, found that in 2004, constructionfirms in Beijing owed roughly 700,000 oftheir workers more than $380 million inwages. Mr. Wei is fighting to collect about$400 he says he is owed—half his earningslast year—and he may never see it.

In such an uncertain environment,workers drift from job to job together. Theyrely on word of mouth to protect themselvesagainst bad bosses. And, in bad times, theyrely on each other.

These men—there are few women in theircrews—are working against a deadline:December 2007. That is when the bulk of theOlympic construction work must becompleted so that Beijing, one of the world’smost polluted cities, has time for the air toclear of construction dust before the Gamesbegin.

There is a lot to finish. The Olympics willattract a flood of foreign visitors andunprecedented media attention. Beijing’sconstruction workers are aiming to havebuilt a chunk of a subway system that, whencompleted, is projected to be the longest inthe world, surpassing London’s under-ground. They are erecting an airportterminal bigger than all five at London’sHeathrow Airport and about 110 hotels.Including suburbs of Beijing, the building

By MEI FONG

BEIJING—About a mile from Tiananmen Square lies a pitfrom which a 28-story hotel will rise in a little more than ayear. An army of construction workers lives and works at

the open site, enduring plunging temperatures and freezing winds.Some work the midnight hours, while the rest of the city sleeps.

SoMuchWork,So Little Time

As Beijing explodes in an Olympic building boom,Wei Zhongwen struggles with injuries and loneliness.

A hero in his home village

Chien

-min

Chu

ng/G

etty

Imag

es

10 Reprinted from THE WALL STREET JOURNAL DECEMBER 23, 2006

binge could cost more than $180 billion.Some call it China’s most ambitiousconstruction project since the Great Wall.

What happens to these workers after theboom already has become a topic of contro-versy. Beijing officials have made it clearthey want to clear them out ahead of theOlympics. But authorities also fear politicalinstability if so many workers are forced toleave because they may have trouble findingjobs back home.

As it is, the construction workers have atenuous standing in the city. Lacking thepapers to stay in Beijing legally, most workoff the books, relying on oral promisesinstead of contracts. When they are sick,

they visit illegal clinics, which are cheap butoften dirty and run by unlicensed doctors.

Mr. Wei speaks proudly of his 18-year-olddaughter Xiaowei, who lives with the rest ofhis family on a farm in Yushu county, innortheastern Jilin province. He says the girlis a good student and obedient. “We’re notthat close. I don’t know what she likes,” hesays, awkwardly fingering a bunch of keyson his belt. A badge of prosperity amongmiddle-age Chinese men, Mr. Wei’s keys area small vanity. He says he picked them upon the street. They are keys to things hedoesn’t have: a car, an apartment.

Like other construction workers, he livesfrugally in the city. In his latest job he earns

about $300 or so a month, but keeps onlyabout $60 of it. The rest he sends home tothe “3861 army”—a term used to describethe women and children left behind inChina’s interior. (March 8 is China’sWomen’s Day, June 1 Children’s Day.)

N EXT TO COAL MINING, con-struction work has the highestnumber of casualties in China, with

2,607 reported fatalities in 2005. Steel- tippedboots are rare. China’s workers clamberaround in thin canvas shoes, often withoutsafety harnesses, and buy their own workgloves. Many of their hard hats are just thinplastic shells, sold for a dollar apiece.

Wang Qishan, the mayor of Beijing, saidin a recent interview that he personallyreviews construction accident statisticsdaily. “I can never be happy when I readsuch reports,” he said. “Beijing can’t dowithout these people.” The city tries toprovide services such as health care forregistered migrant workers, but its re-sources are overstretched, he said.

Like many other construction workers,Mr. Wei entered the trade because therewas little else to do on his family’s farm, asmall plot where corn and soybeans grow.He left home at 17 for a province next toBeijing.

When he was in his 20s, Mr. Wei’s leftlittle finger was sliced off by an electric saw.In 1994, he was hit on the head by a steelrod, landing him in the hospital for morethan a month. He counts himself luckybecause his employer paid for his medicalbills.

Last year, the owner of an art gallery inTongzhou, a Beijing suburb, stiffed Mr. Weiand 76 crew mates, according to the menand a later court ruling. They had been paidhalfway through the project and promisedthe rest of the pay upon completion. Instead,when they finished they say they weredriven from the site by thugs armed withiron staffs and meat cleavers.

China’s state-controlled banks havepoured credit into real estate, where manycompanies are politically connected. Theeasy money often leads to ill-conceivedprojects that quickly go bust. Whenfinancing collapses, construction workers—the ones at the bottom of the totem pole—aren’t paid. They find it difficult to claimrestitution because they often are employedindirectly through subcontractors.

Mr. Wei and his friends say they had nosuccess appealing to authorities inTongzhou. About 20 of the workers driftedhome, defeated. With no money, Mr. Weiand the remaining workers were forced tomake camp in the neighboring province ofHebei, eking out a living with odd jobs. Theysay they lived on steamed buns, mostly, sixfor one yuan, or about 13 cents.

In November 2005, more than 50 of themrose at dawn. They marched for five hoursto central Beijing to appeal to authoritiesthere. They wound up at Beijing’s Legal AidAn injured Chinese migrant worker (top); migrant housing

Reprinted from THE WALL STREET JOURNAL DECEMBER 23, 2006 11

office on Qianmen West Street.Wang Xuefa, the center’s director,

remembers the sight of Mr. Wei and hisfriends kneeling en masse on the officefloor. “It was sad to see men brought solow,” he says.

The Intermediate People’s Court inTongzhou ruled in the group’s favor on Jan.6, ordering the Hong Kong developer LianKa Fu International to pay more than$30,000 in back wages to the workers. Theyhaven’t seen a cent. Lian Ka Fu’s propri-etor, Wang Xiaohu, told the court shedoesn’t have the money, says ChangMingchuan, a lawyer at Beijing Legal Aid.Ms. Wang couldn’t be reached for comment,and her Europe American Art Gallery—agreen low-rise with gold Corinthiancolumns—is now shuttered.

Going home for Chinese New Year,China’s most important holiday, is a ritualfor construction workers. It is the only timein the year they see their families. Likereturning heroes, they are feted and telltales of car-choked streets and the toweringskyscrapers they helped build. “Some of myneighbors have not even taken a train,” Mr.Wei says.

Back home, Mr. Wei is a man of sub-stance. Over the years, his wages, which arehigher than average among construction

workers because of his bricklaying exper-tise, have helped his family enjoy somecomforts. “We’re very well respected in myhome,” he says.

Last January, however, Mr. Wei stayed ina Hebei flophouse instead of returning homefor the new year holiday. Penniless, he andhis friends were too ashamed to go. To cheerup, they went to an airfield and watchedplanes taking off.

“Really, that’s the only time I felt likesuicide. I thought if a car hit me, at least Ican get some compensation,” Mr. Wei says.

Reached by telephone, his wife, DingGuiying, says it is a hard life taking care ofMr. Wei’s aged parents, raising herdaughter alone and tending the crops. Mr.Wei’s wages nowadays go to pay for hisdaughter’s secondary education—which isn’tfree in China, even at public schools. Ms.Ding says the bill comes to around $1,300 ayear.

Ms. Ding, 42, hopes her husband cancome home when their daughter hasfinished school. “We keep being separatedfor such a long time, and I can hardly counthow many days we’ve been together in thepast 19 years,” she says.

Mr. Wei spent most of this year in Hebei,the province surrounding Beijing. In May,he and his friends found a job at a residen-

tial site. Mr. Wei roomed in a wooden shackwith 10 other workers. The floor was a brick-and-dirt mixture. The only running waterwas from a sink in the courtyard. The toiletwas a shed with wooden planks over a hole.In the kitchen, flies clustered thickly.

In Hebei, as is common on such jobs, Mr.Wei paid his employer about 60 cents dailyfor three meals, mostly rice and tofu. Meatwas rare, but he is a vegetarian. Growing uppoor, he never got used to the taste of meat.

One of the crew, Yang Xinguo, 53, injuredhis leg in a traffic accident and had to stopworking in September. After lingering for awhile, hoping to get compensation from theart-gallery job, he decided to go home inmid-November. He had a few dollars earnedbefore the accident and $50 or so that Mr.Wei and other friends gave him.

“We will send your pay to you, once weget it,” promised Mr. Wei, sitting on Mr.Yang’s bed. He offered his departing frienda cigarette. Through the smoke, Mr. Yang’seyes shimmered. “Men don’t want to cry,but we have cried many times,” he said.

By late November, Mr. Wei and his crewhad moved back to Beijing. They foundbetter work building the 28-story, four-starhotel. Conditions are cleaner. Mr. Wei nowlives in barracks perched next to theyawning site. He has 10 roommates,

Construction is under way at more than 10,000 sites in Beijing.

AP

12 Reprinted from THE WALL STREET JOURNAL DECEMBER 23, 2006

including some new ones. There is nocanteen, so they cook in the room, using agas ring attached to a five-foot canister nextto Mr. Wei’s bed.

With no heating, they sleep in theirjackets, and sometimes hats and gloves, too.Temperatures can drop below zero Fahren-heit in Beijing’s winter. Some have electricblankets they bought for about $1.25 each.

They are creative with their limitedspace, rolling back their bedrolls and usingthe boards beneath as makeshift tables. Thecook, Wen Fenglin, adroitly uses the spaceto chop cabbages and peel onions, ladlingwater from an old paint bucket to clean thefood and utensils. The 55-year-old used towork on the crew but now is employed bythe construction company to cook. “Bosssaid I have to learn because I’m too old to doheavy work,” he says, browning onions foran omelet.

There are no washing facilities, so bathsand clean clothes are treats. Mr. Weiremembers taking a bath well more than amonth ago at a bathhouse, paying about 60cents.

With no laundry, Mr. Wei buys second-hand clothes, wearing them until they gettoo dirty. Currently, his favorite is a graycotton shirt he bought for a little more thana dollar, which looks as if it once might have

belonged to a corporate executive. “Inormally throw away the clothes afterwearing, but maybe I’ll sell this. In about 10days,” he says.

Around Beijing’s small alleyways, anunderground economy caters to constructionworkers. Vendors often do their business bybarter because the workers don’t have spaceto keep much and adopt a throwawayculture. One popular item is underwear withzippered pockets, to keep money and valu-ables close.

M R. WEI’S PACE OF WORK is nowfrenetic. The hotel still is just a bighole in the ground. Under city

ordinances, concrete trucks from thehundreds of factories ringing the city areallowed in the city center only after 11 p.m.and on weekends, so he and his friends mustwork long past midnight curing concrete.Once the hotel’s foundation is done, in abouttwo months, Mr. Wei says the plan is tobuild a floor every five days.

On the next-to-last day of November, Mr.Wei and his comrades crowded into a smallpostal outlet, their grimy appearance settingthem apart from other customers. The airsmelled of unwashed clothes, and somepeople edged away.

It was exactly a year since they had made

their long march to the Beijing Legal Aidoffice. Mr. Wei had given up hope of recov-ering his lost wages, but on this day themood was celebratory. It was payday, andthe men wanted to mail their money home.There was a flurry of bewilderment as theyfumbled with forms. Mr. Wei, his eyes red-rimmed after a 24-hour shift, helped some ofthe workers who can’t write well fill out theforms.

Zhang Tao, 20, in a paint-stained bluesweater and matted hair, slowly scrawledthe amount he is sending home: 900 yuan, orabout $115. He said he earns 1,000 yuan, or$128, a month.

On another night, Mr. Wei took a walk,wandering around the city’s glitteringtowers and looming cranes. “I have noregrets,” he said. “I’m the migrant workerwho stays out all year so home is better. I’veseen things my neighbors have never imag-ined—50-story buildings, planes so big theycan carry hundreds.”

He stopped in front of a European five-star hotel near his work site. “I build thesethings, but I have never been inside,” hesaid.

Timidly, he pushed the swing door andwent in.

Reprinted from THE WALL STREET JOURNAL JUNE 13, 2006 13

BEIJING—Nearly 1,000 new cars hit thestreets here every day, crowding a cityalready choked with pollution. Levels ofnitrogen dioxide currently exceed the WorldHealth Organization’s clean-air guidelinesby 78%.

The mayor, Wang Qishan, complains thatthe number of cars flooding the roads makesit “more difficult to run the city.” Local offi-cials are so worried about air quality for the2008 summer Olympic Games that they areconsidering a temporary ban on privatecars.

At the same time, the city owns BeijingAutomotive Industry Corp., a car maker thathas joint ventures with DaimlerChrysler AGand South Korea’s Hyundai Motor Co. Lastyear, the company and its affiliates mademore than 500,000 cars, trucks and buses,employed 48,000 workers and paid more than$500 million in local taxes. By 2008, theyexpect to produce one million vehicles ayear.

After various on-and-off restrictions,Beijing, which hasmore vehicles thanany other Chinesecity, has almost nolimitations on carusage.

“This is somethingof great difficulty forus. The contradictionof population and theenvironment—for usand the whole ofChina,” said Mr.Wang at a Marchmeeting.

The rise of the automobile highlights thewrenching balancing act China faces as ittries to join the ranks of modern consumersocieties: improving living standards andcreating jobs for the country’s 1.3 billionpeople while keeping pollution and oildemand under control.

Officials from China’s central governmentare divided over how to proceed. The coun-try’s powerful economic planners see theauto industry as a “pillar” of the nationaleconomy. Others, including those from theState Environmental Protection Administra-tion, argue that China needs to limit car useand move more quickly to tighten clean-airrules.

Local leaders are also torn. Many city andprovincial governments, like Beijing, have afinancial stake in the industry and are eagerto capitalize on ramped-up production. Butthey also face complaints from citizensabout snarled traffic and dirty air.

China’s car debate stands out because itspopulation is the planet’s largest. Across thecountry, rising incomes and falling autoprices have led to an explosion in car sales,up 54% in the first three months of 2006,compared with the year-earlier period.China’s auto market is now the world’ssecond biggest, and the motor-vehicleindustry employs 1.7 million workers.

The shift is happening so quickly thatMcDonald’s Corp. said last week that itexpects at least half of its new outlets inChina to be drive-throughs.

And the car craze here has just begun.China now has about 25 vehicles—and fewerthan seven cars—for every thousand people,

roughly the same level as the U.S. had in1915. If auto sales continue apace, there willbe more than 130 million vehicles on China’sroads by 2020—up from about 33 milliontoday. That could help double China’sdemand for crude oil and lead to a sharpincrease in greenhouse-gas emissions,according to estimates by the governmentand environmental groups.

“If we follow the current track ofconsumption patterns to develop the automo-bile in China,” says Pan Yue, vice ministerof the State Environmental ProtectionAdministration, “the world will not be ableto support” it.

Complicating matters, Chinese gasolinecontains high levels of sulfur and other cont-aminants. It will take years and billions ofdollars to improve China’s refineries tomake higher-quality, cleaner- burning gas.

So far, calls for stricter car controls havebeen largely muted by the powerful NationalDevelopment and Reform Commission,which sets the country’s economic-develop-ment policies.

The commission has put a priority onexpanding the economy to generate jobs forthe millions streaming into cities fromChina’s countryside. Officials of provincialgovernments and cities—whose performanceis judged largely on their ability to boostgross domestic product—are rushing intoauto-making.

Guangdong, long known as China’s exportcapital for consumer goods, says it wants totriple its auto-making capacity by 2010.

“How many color TV sets and refrigera-tors are equal to one automobile?” askedHuang Huahua, governor of Guangdong onChina’s southern coast, at a governmentconference earlier this year. “You are a foolif you don’t make cars. . . . If we still dependon color TVs and a few similar industries,then Guangdong’s 9% GDP growth can nolonger be assured.”

In 1997, Anhui province, one of the poorestin China, teamed up with the city of Wuhu tostart a government-owned car maker, CheryAutomobile Co. Last year, Chery sold nearly190,000 vehicles, more than double its salesfrom 2004. The company says it has hadtrouble expanding capacity to keep pacewith demand for its cars, which sell from$3,700 up to about $25,000.

In some cases, local governments sharedirectly in car manufacturers’ profits.Shanghai’s government, for example,controls and receives dividend paymentsfrom state-owned Shanghai AutomotiveIndustry Corp., which has joint ventureswith both General Motors Corp. and Volk-swagen AG.

For most of the auto’s history in China,there were few cars and different priorities.After the Communists rose to power in 1949,China’s auto industry focused on buildingmilitary vehicles, buses and trucks. TheCultural Revolution of the mid-1960s to themid-1970s, which led to mass upheavals,hobbled the industry.

AsChina’s AutoMarket Booms,Leaders Clash Over Heavy TollVehicles Foul Air, Jam StreetsBut Plump Local Coffers;Restrictions Remain Few

McDonald’s Targets a Niche

Exhausting RiseChina’s automobile production

Source: China Automotive Industry Yearbook

6.0

4.5

3.0

1.5

0

millions of units

1995 ’96 ’97 ’98 ’99 ’00 ’01 ’02 ’03 ’04 ’05

Total vehiclesPassenger vehicles

Chery Automobile Co. vehicle being assembled in a manufacturing facility in Wuhu, China.

Blo

ombe

rg N

ews/

Land

ov

By GORDON FAIRCLOUGHAnd SHAI OSTER

BEIJING—Nearly 1,000 new cars hitthe streets here every day, crowding acity already choked with pollution. Lev-els of nitrogen dioxide currently exceedthe World Health Organization’s clean-air guidelines by 78%.The mayor, Wang Qishan, complains

that the number of cars flooding theroads makes it “more difficult to run thecity.” Local officials are so worried aboutair quality for the 2008 summer OlympicGames that they are considering a tempo-rary ban on private cars.At the same time, the city owns

Beijing Automotive Industry Corp., a

Bumpy Ride

Wang Qishan

14 Reprinted from THE WALL STREET JOURNAL JUNE 13, 2006

A Shift in the 1980sChina’s modern car market grew slowly

at first, as demand for relatively expensivecars was limited largely to government andCommunist Party officials. After launchingmarket overhauls more than two decadesago, China decided to bring in foreign exper-tise. In 1983, state-run Beijing Automotivesigned the first joint-venture deal withAmerican Motors Corp. to make Jeeps. Soonafter, Shanghai Automotive went into busi-ness with Volkswagen.

By 1994, the government had decided thatcars should play a central role in driving thecountry’s industrial engine. The officialgovernment policy nodded toward environ-mental concerns, saying the government“encourages” the use of “fuel-efficient andlow-polluting” vehicles. At the same time,however, officials also pressed for stepped-up production.

Even then, officials in Beijing and othercities were worried about mounting conges-tion and auto pollution. Beijing put varyingrestrictions on small cars and trucks,limiting where and when they could drive.

Development of mass transit lagged inBeijing and many other cities, creatingmore demand for cars. In the late 1990s,more than a dozen cities wanted subwaysystems. But China’s central governmentdelayed approval, partly due to budgetconstraints. Beijing’s main east-westsubway line was only finished in 2000, andlarge parts of the city are still inaccessibleby rail.

The central government, meanwhile, waslooking to strengthen the car industry bybringing in additional foreign expertise andresources. In 1997, GM won a coveted dealfor a joint venture with Shanghai Automo-tive that now produces Buicks and othermodels. Many other foreign auto makersfollowed.

After China joined the World Trade Orga-nization in 2001, falling prices sparked ajump in car purchases by China’s more-affluent consumers.

Today, demand by middle-class buyers issurging as salaries rise and car prices,driven down by competition, plummet.

Liu Yunzhi, a 25-year-old computer-hard-ware designer, bought his first car, a $5,200Chinese-made hatchback, soon after movinginto an apartment in a Beijing suburb lastyear. He used it to haul furniture to his newhome from Ikea.

“You don’t have to be a rich guy to own acar,” says Mr. Liu. “You can enjoy your lifemore.”

Price wars have heated up as more localmanufacturers have entered the fray. Mr.Liu’s hatchback, for instance, was made byGeely Holding Group, which moved intoautos after making motorcycles. BYD Co., a

producer of cellphone batteries, got into thecar business in 2003 after acquiring aformerly state-run assembly plant.

Rolling StockIn Chongqing, a city in southwest China

that is hoping to become the nation’s carcapital, auto factories spread over morethan 20 million square meters, or around5,000 acres. Metal-stamping plants, paintshops and assembly lines churned out morethan 600,000 cars and other vehicles lastyear—capacity that city officials hope tomore than double by 2010.

Even in Shanghai’s relatively diverseeconomy, the auto industry employed nearly416,000 people, accounting for about 3.4% ofGDP and more than $900 million in taxes in2005, according to government figures.

Li Qisheng is 24 and has spent two yearsworking on assembly lines for Geely inZhejiang province, south of Shanghai. Theson of farmers, Mr. Li now earns about $250a month, or about $1.27 an hour, doingquality-control checks on new vehicles.

Mr. Li, who also receives subsidizedmeals and housing in a company dormitory,says he sends about half of his earningshome every month. “It relieves the pressureon my parents,” he says. Last year, hisfamily used the money to build a new, five-story concrete house to replace an old two-floor wood home. “I’m proud of myself,” Mr.Li says.

The trickle-down of industry benefits hasmade it hard to put on the brakes. In 2000,Shanghai decided to tighten restrictions onnew car registrations, auctioning off alimited number of license plates annually.But it has gradually loosened the strictures.

During the first year of the new program,Shanghai issued 14,000 plates for an averageprice of $1,700. Last year, it issued 67,078 for

an average price of more than $4,000.“Residents have a very strong demand of

car use,” says Zhu Junyi, a researcher atthe Shanghai Information Center, a govern-ment think tank. The government, he adds,“has to try its best to meet the demand.”

High TollThe toll is high. Exhaust from an esti-

mated 2.5 million vehicles has helped makeBeijing one of the most polluted cities inChina, even though it has shuttered many ofthe coal-burning factories that once fouledits air. In 2004, levels of airborne particulatein Beijing were more than six times as highas in New York, and sulfur-dioxide levelswere more than double, according toChinese and U.S. government figures.

It wasn’t until 2000 that China passed itsfirst comprehensive emissions law andmade catalytic converters, which cleanvehicle exhaust, mandatory. China hasmodeled is auto-emissions standards afterthose in Europe. Still, most of the countrystill lags behind Europe, using rules imple-mented there back in 1996. Beijing has astricter standard, in line with regulations setby the European Union in 2000. The entirenation is slated to move to that cleaner stan-dard by 2008.

Emissions testing for cars has beenspotty, and experts complain that little isknown about what comes out of China’stailpipes. Beijing officials say that morethan 60% of the vehicles in the city havesome emissions controls, an acknowledg-ment that up to 40% of them—mostly oldermodels—have none at all.

In 2005, China imposed its first fuel-effi-ciency standards, which some analysts saywill eventually be stricter than in the U.S.Earlier this year, the central governmentcalled on cities like Beijing to lift bans origi-nally imposed on small cars in order toencourage purchases of more energy-effi-cient models. The government also insti-tuted a graduated tax on new cars, designedto discourage purchases of gas guzzlers.

But to really limit cars’ environmental tolland energy consumption, experts such asLee Schipper, director of research at theWorld Resources Institute’s Embarq Centerfor Transportation and the Environment inWashington, D.C., say China needs to levyroad-use fees, lift gas prices and encouragethe use of mass transit, as well as hybridand electric vehicles.

“The rapid rate of growth is more thangovernment institutions are prepared to dealwith,” says Mr. Schipper. When he suggeststo local officials that Chinese cities limit thenumber of cars on the road, he says theyresist. “They say: ‘You can’t restrict cars.’”

—Ellen Zhu and Zhou Yang contributed to this article.

Car CultureChina’s passenger-vehicle sales by segment, in millions

Source: Automotive Resources Asia

*Includes luxury and full-size sedans

Microcars

Sub-compacts

Sedans*

Minivans

20042005

1.241.48

0.80

0.270.18

0.140.11

SUVs 0.170.11

0.63

Reprinted from THE WALL STREET JOURNAL JULY 19, 2006 15

XIPING, China—For the past five years,village doctor Zhang Changjian has ralliedfarmers here against a chemical factorydumping pollutants into a river.

This spring, they won a rare victory. Acourt found the pollution exceeded

acceptable levels andordered the RongpingJoint Chemical Plantto pay damages ofabout $85,000. But thefarmers have yet tosee any of the settle-ment. Mr. Zhang hasbeen the target ofpolice harassment,and the county gov-ernment has closeddown his clinic.

A quiet man with acrop of stubby, gray-

ing hair, Mr. Zhang, 46 years old, refuses tobe cowed. He continues to dispensemedicine and monitor Rongping, oftencircling the factory in plastic slippers, acamera clamped to his belt. “Our food is stillpoisoned,” says Mr. Zhang, pointing out thefactory’s wastewater spilling into the foul-smelling river that eventually flows into theEast China Sea. “The farmers can’t selltheir crops and they’re too poor to move.”

Water pollution is among the mostworrisome byproducts of China’s rapideconomic growth. Factories and cities dumpsome 40 to 60 billion tons of wastewater andsewage into lakes and rivers each year,according to Chinese government estimates.About 30% of China’s rivers are so dirty theyaren’t fit for industrial or agricultural use,according to official statistics. Some 300million Chinese—roughly the size of theentire U.S. population—don’t have access toclean drinking water. The polluted water isbecoming an international issue as it flows

into Russia and other parts of Asia.The government has sent mixed signals

about how it intends to tackle the problem.Governmental bodies have given awards toenvironmental activists, published datastressing the magnitude of the pollution andrelaxed controls on antipollution groups.That has allowed activists to form links andshare notes, often via the Internet. “We allknow each other,” says Wu Lihong, who hasbeen fighting river pollution in hishometown near Shanghai.

But especially at the local level, manyofficials are loath to let activists influencehow factories are run. Provincial, countyand village officials depend on industry toadvance economic growth and their owncareers. By one government estimate, atotal of $125 billion has been invested inChina’s chemical and petrochemicalplants—suggesting the size of the stakes.Even when a factory is shut down, it oftenreopens. The central government hascapped the fines for environment violationsat about $120,000, and provincial authoritiesoften set even lower caps.

Anger over the lack of clean water and airis rising. According to Pan Yue, viceminister of the State EnvironmentalProtection Administration, about 50,000protests last year were due to pollution.

Authorities in Pingnan County, whichincludes Xiping, acknowledged in astatement to The Wall Street Journal thatthe Rongping plant was responsible forexcessive pollution in its early years. Theysaid Rongping has taken steps to rectify theproblem since 2001 and discharge levels arenow within government standards. Mr.Zhang agrees the situation has improved butsays pollution is still excessive.

The plant pays a third of the county’s taxand other revenues and has provided well-paying jobs for peasants in this moun-tainous part of Fujian Province. Officialscite the economic benefits in opposing theplant’s closing.

The Rongping plant opened here in 1994.It had previously been in Fujian’s capital,Fuzhou. Officials relocated it to take ad-vantage of cheap hydroelectric power fromXiping’s mountain streams and promoterural economic development. A state-ownedchemicals company based in Fuzhou is theplant’s majority owner, although thePingnan County government held a 30%stake until 2004.

With the factory’s arrival, Xiping’spopulation quickly doubled to 2,000 people.The plant became Asia’s largest producer ofpotassium chlorate, a chemical widely usedin bleach, fireworks and other goods. But itwas also spewing chromium-6 into the riverand belching chlorine from its smokestacks,according to a later provincial court verdictand the Fujian Province EnvironmentalSupervision Center. The center said asewage sample contained more than 20times the amount of chromium-6 allowed by

national standards. The statement byPingnan County authorities confirms thatchromium and chlorine were discharged butdoesn’t specify the amount or the type ofchromium.

Chromium-6 plays a starring role in themovie “Erin Brockovich.” It’s based on atrue story in which a paralegal (portrayedon screen by Julia Roberts) helped aCalifornia town’s residents win $333 millionfrom a utility that had leaked chromium intotheir water. Breathing chromium-6 has longbeen linked with lung cancer. According toU.S. authorities, ingesting the substance candamage the stomach, kidneys and liver.

Shortly after the Rongping factoryopened, villagers started complaining thatthe emissions into the river were affectingtheir crops. Bamboo groves they harvestedto sell to toy and chopstick makers shriveledand died. Downstream, in the nearby villageof Houlong, Zheng Jiayao says he and hisneighbors noticed fewer fish and shrimp anda strange smell coming from the green slimesometimes coating the water.

The factory offered to pay compensationto a handful of families whose plots abuttedthe factory gates. But it continued fulloperations.

Mr. Zhang is a “barefoot doctor,” some-one trained by the government to administersimple remedies and sent to remote areasthat are too small to attract a doctor with afull medical degree. He arrived in Xiping in1984. Over the years, the father of four builta comfortable practice.

In the late 1990s Mr. Zhang began notic-ing a spike in illnesses including stomachailments, skin rashes and breathing pro-blems. Combing through handwritten notes,he saw the change dated back to thefactory’s opening in 1994. More alarmingwas a rise in cancer cases. The disease ac-counted for just one of 13 deaths in thevillage between 1990 and 1994. Between 1999and 2001, 17 of 24 deaths were cancer-related, Mr. Zhang found. Cancer victimsincluded two 18-year-old girls and a 3-year-old boy.

In 1999, Mr. Zhang and a handful of otherfarmers started a letter- writing campaign.He says he drew inspiration from the ErinBrockovich movie, of which he has a copy athome. “I thought if the leaders only knewwhat was going on, they’d fix it,” he said.

With each unanswered letter, he sent hiscomplaints higher up the chain of command.Liu Xianbin, a former soldier with a gauntframe who had developed cancer, enthusi-astically joined in. Mr. Liu enlisted a friendto write a letter in English to formerPresident Bill Clinton. He didn’t get ananswer, but he says he was questioned bylocal authorities about the letter anddetained for a day.

In 2001, Mr. Zhang appealed to China’stop environmental agency, and finally gotan answer. He was told to organize a formalcomplaint. The doctor canvassed the

Zhang Changjian

In Booming China,A Doctor BattlesA Polluting FactoryFouled Waters Lead to FloodOf Protests Nationwide;Officials’MixedMessages

Inspired byErin Brockovich

By SHAI OSTERAnd MEI FONG

River of Tears

16 Reprinted from THE WALL STREET JOURNAL JULY 19, 2006

villagers seeking signatures on a petitioncalling on the factory to stop polluting. Hestill has the original copy of the petition, onwhich farmers stamped a red thumbprintnext to their signatures in the traditionalChinese manner. Mr. Zhang took soil andwater samples and posted pictures of thedying bamboo groves on his Web site.

By the next year, the efforts started tobear fruit. The village head came out insupport of Mr. Zhang. Villagers held a three-day leafleting campaign outside the countygovernment offices, attracting attentionfrom national newspapers and later apopular investigative segment on state-runnational television. That summer, China’scentral government named Rongping one ofthe worst 55 polluters in China.

The publicity drew the attention ofChina’s only pro-bono environmental lawgroup. The Center for Legal Assistance forPollution Victims in Beijing decided to helpthe villagers bring a lawsuit against thefactory. Villagers chipped in to pay severalthousand dollars for environmental tests.Whenever they spotted acrid liquid beingdumped into the river, they scooped it up inempty plastic water bottles, villagers andlawyers say. Eventually 1,721 villagersjoined the lawsuit, the most in an environ-mental case in Chinese history, lawyers say.

Even as national institutions aided Mr.Zhang’s fight, he faced resistance andharassment at the local level. He says hewas assaulted by a thug while collectingsamples and his wife was punched andshoved to the ground by an assailant whovisited their home. The county governmentshut down his clinic, on the ground floor ofhis house, saying he hadn’t properly re-

newed his license. He denies that and stillinformally helps villagers who seek hismedical help.

A county court initially ruled in favor ofthe farmers but awarded them minimaldamages. Both sides appealed and a pro-vincial court handed down its verdict thisMarch. It raised the award to about $85,000,still far below the $1.7 million in damagesand compensation the plaintiffs had sought.After years of litigation, the average farmerwould get only about $50.

The factory has paid the damages to thecounty court, which says it will disperse themoney when there’s a system for deter-mining who suffered how much damage.

The fight has left factory executivesbitter. He Zhang, vice head of the plant,says the media misled the poorly educatedvillagers and failed to give Rongping creditfor improving its environmental standards.“If you find any violations, please reportthem to us and we’ll harshly punish thoseresponsible,” says Mr. He. “I myself amliving in Pingnan County for more than 20days a month. How could I sacrifice myhealth and move away from a big city just tomake money?”

In their statement to the Journal, thePingnan authorities said the excessivepollution levels in the first few years of the

factory’s operation were due to poorequipment, untrained workers and man-agement failures. More recently, the planthas undergone 35 random tests under thesupervision of the county environmentalprotection bureau and passed all of them,the statement said. Rongping officials saythe plant has spent hundreds of thousands ofdollars to upgrade its wastewater-treatment

and chemical-storage facilities.Zhang Yangtong, who worked until re-

cently in the packing room at Rongping,sees both sides of the debate. His job freedhim from long days in the field and allowedhis son to attend a better school. But he sayshe experienced headaches and other pain.He plans to move far away and return tofarming.

The former worker says farmer neighborssometimes accused him of siding with theentity that was poisoning them. His re-sponse: “It is the factory that is polluting,not us. We are just workers making a livinghere.”

The court victory brought little con-solation to Xu Shilian, one of the plaintiffs,who runs the village store. Ms. Xu hascancer, according to Mr. Zhang, but thevillage doctor and her relatives have keptthe truth from her, fearing she would giveup hope. “Even if we get the money it’s toolate. Not enough for treatment. Not enoughto give me health,” said Ms. Xu, 43, as shelistlessly sold items that attest to Xiping’sgrowing prosperity: packets of Panteneshampoo, phone cards and cola drinks.

Mr. Zhang acknowledges some improve-ments. Cancer rates have dropped off, andsome brush has returned to once-barrenhills. But replanted bamboo comes out

scraggly. Villagers say there is no marketfor their mushroom, cabbage and othervegetables because people fear the produceis tainted.

Mr. Zhang says he is not going to give uphis fight against the plant. “I’m a doctor.This is what I’m supposed to do.”

—Cui Rong in Beijing contributed to this article.

Beijing

Hong Kong

SouthChina Sea

MONGOLIAN. KOREA

S. KOREA

TAIWAN

PHILIPPINES

Shanghai

C H I N A

VIET.

LAOS

THAI.

100 miles

100 km

Fuzhou

Xiping Village,Pingnan County

FUJIANPROVINCE

EastChinaSea

Area of detail

300 km

300 miles

Mei

Fon

g

The Rongping Joint Chemical Plant in Xiping, China.

Reprinted from THE WALL STREET JOURNAL SEPTEMBER 15, 2006 17

ZHENGZHOU, China—The new musicalfountain in this drab provincial capital incentral China demonstrates why authoritiesin Beijing are having so much troublecontrolling the world’s fourth-largesteconomy.

Jets of water dance to the patrioticanthem “Love My China,” while laserbeams shoot into the sky. Soon, the fountainwill be overshadowed by a hotel styled aftera classical Chinese pagoda, which, at 918feet, will be nearly three-quarters as tall asthe Empire State Building. A waterfront artscomplex, almost completed at a cost of $100million, looks like a clutch of enormous duckeggs. Nearby, a newly opened conferencecenter resembles an unfurled umbrella. Anexhibition hall boasts the biggest stretch offree- standing roof in Asia.

Mayor Zhao Jiancai says his vision is totransform backward Zhengzhou into the

“Chicago of theEast”—a gatewaybetween the boomingcoast and the vastinterior—by morethan tripling thecity’s size. Total in-vestment in the areaaround the businessdistrict could hit $35billion. It is a hugeamount of money forthe capital of Henanprovince, one ofChina’s poorest.

“We can only makeachievements with scale,” says the mayor, aformer tractor factory engineer.

A similar dynamic is at work acrossChina. Local governments are encouraginga frenzy of construction to boost theireconomies—even as China’s central govern-ment seeks to throttle back investment thatis producing runaway economic growth.The economy expanded 11.3% in the secondquarter of this year from the same period ayear earlier, far outstripping the govern-

ment’s target of 8% for the whole year.Many developing countries would gladly

trade places with China: Most suffer fromtoo little investment, not too much. And theyworry more about spreading slums thanexpanding skylines.

Nevertheless, hyper-investment keepsroiling the world’s fastest-growing majoreconomy. Concerns are mounting that theboom could cause property bubbles thatweigh down banks with bad debt when theyburst. It also could clog railway lines andports and trigger brown-outs as overloadedpower grids collapse. Already, it is gener-ating outsize demand for energy and rawmaterials, pushing up the cost around theworld.

The International Monetary Fund, whichis meeting Tuesday and Wednesday inSingapore, this week urged China to rein incredit to avoid “tipping off a boom-bustcycle.”

Though inflation remains low at 1.3%,China’s top leaders are worried. Almostevery day, they issue edicts to sloweconomic growth—with little effect. Leaderscan’t even be sure how much municipalitiesare spending because local finances havebecome so murky. According to officialfigures that many economists believe under-state the true total, fixed-asset investment

rose 21.5% in August from a year earlier.While that growth rate was slower than the27.4% of July, total annual investment as apercentage of gross domestic product, thetotal value of all goods and servicesproduced in a nation, still is much higherthan Japan, South Korea or Taiwanmanaged to sustain even during their giddyyears.

If inflation takes hold, as some econo-mists expect, the effects would be felt glob-ally. Since China is the world’s third-largesttrading nation, inflation could ripple to theU.S. and other countries through risingprices for its exports. That would complicatethe efforts of the U.S. Federal Reserve andother major central banks trying to head offrising inflationary pressures.

More than a quarter century of economicoverhauls has produced a striking contrastin China: Politically, the Communist centralgovernment maintains a tight grip over theentire country; economically, it is losingcontrol.

Caught in a TrapChina’s leaders are caught in a trap as

they cast around for ways to rein in invest-ment. The old administrative methods—ordering state banks to stop lending,restricting land sales, halting governmentapprovals for major projects—aren’tworking as well as before, partly becauselocal governments are defying Beijing.

Trying to enforce investment curbs in avast country is a tough challenge: Beijinghas resorted to using satellite images to spotbulldozers working on illegal constructionprojects in far-flung provinces. Theeconomy, says Andy Xie, an economist inHong Kong with Morgan Stanley, is too bigand complicated to manage through fiat.

On the other hand, market-orientedmeasures to slow economic growth, such asraising interest rates, aren’t likely to be aseffective in China as in more sophisticatedeconomies. One reason is that local bankersstill are susceptible to political pressure toextend loans. Also, state-run companiesmake a habit of not repaying loans, so thecost of funds often is irrelevant. Much of thecorporate investment is funded out ofcompany savings.

Already, the big state banks have ignoredBeijing and dished out almost all the loansthey were targeted to extend for the wholeyear. The Ministry of Land Resourcesannounced recently that in some cities asmany as 90% of all government land acquisi-tions are illegal.

To be sure, an economy expanding atdouble-digit rates sooner or later will likelyfind uses for much of the infrastructure—highways, bridges and power plants—thatlocal governments are installing. But whenthe latest investment boom unwinds, thereare concerns that Chinese cities will belittered with white elephant industrialprojects that will stand empty for years.

“It’s mindless,” says Wang Lina, a

By ANDREW BROWNE

ZHENGZHOU, China—The new musi-cal fountain in this drab provincial capi-tal in central China demonstrates whyauthorities in Beijing are having so muchtrouble controlling the world’s fourth-largest economy.Jets of water dance to the patriotic an-

them“LoveMyChina,”while laser beamsshoot into the sky. Soon, the fountain willbe overshadowed by a hotel styled after aclassical Chinese pagoda, which, at 918feet, will be nearly three-quarters as tallas theEmpire StateBuilding.Awaterfrontarts complex, almost completed at a costof $100 million, looks like a clutch of enor-

BoomingMunicipalities DefyChina’s Effort to Cool EconomyHyper-Investment a Worry;A Monumental PagodaForOnce-SleepyZhengzhou

Satellites Spying on BulldozersZhengzhouZhengzhouZhengzhou

24.4% %

Jilin 56.6Shanghai 8.6

Henan 49.9

China total 30.5

Beijing

C H I N A

JAPAN

N. KOREA

S. KOREA

Beijing

Henan

Shanghai

Fujian

YellowSea

Jilin

500 miles

500 km

Hot SpotsPercentage change in 2006 from 2005:

LOCAL GOV.REVENUE1

INVESTMENT INFIXED ASSETS2REGION

Fujian 38.522.6

10.64.5

28.5

20.7

24.5

Source: China Internet Information Center

1 for January through June of each year2 for January through July of each year

Growing Pains

Zhao Jiancai

18 Reprinted from THE WALL STREET JOURNAL SEPTEMBER 15, 2006

researcher at the Chinese Academy of SocialSciences, a leading think tank, who sayslocal governments are generating largeamounts of wasteful investment.

About 10% to 20% of all investment inChina is made by local governments,according to World Bank economist LouisKuijs, who is based in Beijing. That figureunderstates their influence. For instance, itdoesn’t include investment by real-estatedevelopers that are nominally private butoften act as agents for local authorities.

Under China’s former socialist economy,central planners in Beijing doled out invest-ment funds under an annual quotaprogram—so much for the railroads, for thepower industry, for steelmakers. China’scentral government grabbed local revenueand redistributed the cash around thecountry to pay for further investment as wellas government services.

This started changing in 1978, when DengXiaoping launched economic overhauls thatmade local governments responsible fordelivering growth to their own communities.Economic growth has become the path tocareer glory for city mayors, likeZhengzhou’s Mr. Zhao, who now are drivingthe national economy to an unprecedentedextent. Hong Liang, an economist in HongKong with Goldman Sachs, comparesmodern Chinese cities to corporations, andtheir mayors to chief executive officers, allcompeting with each other to expand theirbusiness empires.

There are good reasons why China’s citiesneed to expand. Each year, they have toaccommodate at least 10 million peasantsflooding in from the countryside. Increas-ingly, cities also have been forced to fundtheir own health, education and social-welfare programs.

These financial pressures all feed intohigher rates of investment, which is thequickest way for cities to expand theireconomies and increase their revenue.

Economic GiantsCities in China have ballooned into

economic giants. If Shanghai were acountry, it would be among the 40 largesteconomies in the world. Its economic outputlast year of $114 billion was bigger than thePhilippines or the Czech Republic. Shen-zhen, in southern China, has an economymuch larger than Vietnam’s.

Still, many question whether localspending has become excessive.Zhengzhou’s new conference hall, forinstance, boasts a theater with seats thatcan be individually climate-controlled. Itsvast foyer is clad in shimmering Italianmarble.

Zhengzhou’s drastic makeover is typicalof those under way in cities around China.Shanghai led the way in the early 1990s bysetting out to build a national financial andcommercial hub on a stretch of rice paddy inan area called Pudong.

Over the years, Shanghai’s urban planshave become ever more fanciful. It now isbuilding a series of satellite cities—eachthemed after a European country—to relievepressure on the city center. Anting, whichaspires to be a car-making hub, is re-creating the pastel-colored apartment blocksand Bauhaus offices found in the Germancity of Weimar. It has even splurged on aFormula 1 race track.

Nearby, the emerging college city ofSongjiang turned to a British engineeringconsultancy to construct an English-stylecommunity called Thames Town. There,residents can choose to live in Victorianterraced houses, drink in pubs and marry ina church whose spire rises over cobblestonelanes.

In March, Premier Wen Jiabao unveiled afive-year economic blueprint to steer Chinain a new direction. Instead of go-for-brokegrowth that has blighted the environmentand widened social divisions, China wouldpursue more-balanced development. Still,growth is running at its fastest pace in 12years.

China’s leaders sought to curb credit bypushing through two interest-rate increases.They have taken funds out of the bankingsystem by raising reserve requirements—money that commercial banks must depositwith the central bank rather than lend out—and slapped new taxes on real-estate trans-actions.

The two interest-rate increases this yearhave been too incremental—each only 0.27percentage point—to have a real impact,economists say. Lending rates still are onlyaround 6%, low for an economy expanding14% in nominal terms, not taking intoaccount inflation. By contrast, U.S. rates areat 5.25%—up from 1% more than two yearsago—in an economy now expanding around3%.

Compounding the problem is the waylocal governments are forced to fund theirinvestments. China’s central governmentdoesn’t allow them to raise local taxes or

issue debt. Instead, they are cashing in theirmost valuable asset—land. The sale of landnow accounts for 40% to 60% of all localgovernment revenue, according to Ms.Wang of the Chinese Academy of SocialSciences.

This dynamic adds momentum to thegeographical expansion of cities. To acquiremore land that they can sell, cities simplyredraw their boundaries to engulf thesurrounding farms. The compensation theypay to farmers for the land is far less thanits value to developers. When the city flips

the land, the revenue isn’t part of regularbudgets that can be audited by Beijing.

Zhengzhou, an ancient city on the YellowRiver plains of central China, has long beenan underachiever. Its 1950s-era textile millsare laying off workers. It has shutteredsome of its grimy aluminum works onBeijing’s orders to cut back on overcapacity.One of its few claims to fame is that itmakes a third of all the frozen dumplingssold in China.

With a population of just two million, itconsidered itself too small to drive theeconomy of China’s most populous province,with roughly 100 million people, let alonemake a national impact.

So in 2001, city authorities hired theacclaimed Japanese architect KishoKurokawa to draw up blueprints for the newurban area after an international competi-tion. Zhengdong New District covers 58square miles—somewhat bigger than San

Red HotAnnual percentage change in China’s gross domestic product:

Note: At constant pricesSource: International Monetary Fund, World EconomicOutlook Database, April 2006

10.0

7.5

5.0

2.5

0

%

2000 20052002 2003 20042001

A planned 918-foot-tall hotel inZhengzhou, China, modeled afterShaolin monastery pagodas.

Zhen

gzho

ucity

governmen

t

Reprinted from THE WALL STREET JOURNAL SEPTEMBER 15, 2006 19

Francisco. The plan will double the size ofthe city and add 1.5 million people to theexisting population. It received the blessingof the State Council—China’s cabinet—in1995.

By 2020, Mr. Zhao says, additionalenlargement will turn Zhengzhou into a cityof five million covering 193 square miles.

Most of the investments will be made bycompanies rather than the government, saysMr. Zhao, 50, who sports red ties and slicksback his hair. Bank loans will pay for someinfrastructure as well.

The skyline of the central business districteventually will be populated by 60-oddcommercial and residential towers. The firstare already in place and waiting for tenantsto move in.

Radiating outward will be arrayed theindustries and services of Zhengzhou’sfuture: banking and finance, insurance,logistics, high- technology manufacturingand higher education. “It’s the mostadvanced urban concept in the world,” saysVice Mayor Wang Qinghai, who is directlyresponsible for the construction of theZhengdong New District. Land prices havequadrupled in two years.

Mr. Wang says Beijing has given the go-ahead to projects covering only about 20% ofthe planned new area. That is holding upplans for a man-made island on a lake tohouse dozens of luxury apartments.

Elsewhere, there are few signs buildingmomentum is slowing. The city’s own glossypublicity materials boast that Zhengzhouhas one of the highest densities of construc-tion cranes operating in China.

Does Zhengzhou have a shot at becomingthe “Chicago of China”? True, it sits at arailway crossroads between the main north-south and east-west lines, a major asset in acountry where most goods still are moved bytrain. But there is plenty of competitionfrom other central cities, including Wuhanfarther south, as well as Nanchang, the fastrising capital of Jiangxi province.

Mayor Zhao says he is untroubled by thecompetition. “We all have our strengths,” hesays. “We’ll fly together wing-to-wing.”

20 Reprinted from THE WALL STREET JOURNAL AUGUST 24, 2006

NAGQU, China—China is trying to revivepoor rural regions through economic devel-opment. In Tibet, the plan has hit a snag: NiMa won’t slaughter his yaks.

Duan Xiangzheng, a Chinese CommunistParty official charged with stimulating theeconomy here, is pushing for the systematicslaughtering of yaks to kick-start a meat-

packing industry. Mr.Duan says exportingthe beefy tasting meatand the animals’black wool to marketselsewhere in Chinamakes economicsense and is an“inevitable” develop-ment.

Ni Ma, 45 years old,wants to keep alivehis 70 yaks, his fami-ly’s most valuable andbeloved asset. He sells

yak milk, which is processed into the butter,cheese and yogurt that are the staples ofTibetan diet and Buddhist ritual. Even thedung is used, for fuel. Fingering a cigaretteon his vast ranch, Ni Ma says his familyslaughtered just three of its herd last year,even though “the local governmentrequested that we kill more.”

This remote, mountainous place, knownmostly in the West as a human-rights cause,is feeling the force of China’s economicjuggernaut. The government in Beijing saysit wants to make its 12 western provincesresemble the country’s booming easternseaboard. Lured by this vision, and by anew train connecting Tibet with the rest ofChina, entrepreneurs as well as tourists areflooding into the region known as “the roofof the world.”

Yet Tibet is also still very much a ruralplace—some 80% of its 2.7 million populationis spread out on grasslands that cover

almost a quarter of the country. Tibetansare protective of their distinctive Buddhistculture, which abhors the killing of animals.Many are suspicious of Chinese interferenceand some see the economic integration, partof the government’s six-year-old “Go West”policy, as a form of colonization.

Tibetans already believe that Chinese aretaking over the economy. In the capital,Lhasa, it is difficult to find a local-born taxidriver, waiter or laborer, since Chinese fromother provinces will work for lower wages.Even on the $4.1 billion railway project, onlyabout 10% of the 100,000 constructionworkers hailed from Tibet, according to ZhuZhensheng, a Ministry of Railways official.Now completed, the train promises to deliveran extra 800,000 visitors a year.

Tibet lags behind other Chinese regions inmany areas, including literacy rates, lifeexpectancy and average per-capita income,which is under $250 a year in rural areas.Unlike the U.S. West, where access to thePacific Ocean opened new trade routes,China’s western regions border land-lockedcentral Asia, home to some of the poorestand most remote locations on earth.

Nagqu, which means “Black River,” is acounty situated 15,000 feet above sea level onthe northern steppe of the Tibetan Plateau,about 125 miles north of Lhasa. On a typicalday, the temperature is below freezing. Itsmain town is a military base and truck stop,where garbage is left to smolder in opencontainers on streets that aren’t lit at night,a gritty contrast to Tibet’s legendaryShangri-la reputation.

Beijing’s nationwide goal is to halt twodecades of creeping inequality betweenurban and rural income, a gap the UnitedNations Development Program said lastyear may represent the world’s most-uneven distribution of wealth. The Commu-nist Party recognizes that its future dependson keeping people happy in the countryside,home to more than 80% of Chinese.

Shortly after China’s communists tookpower in 1949, they grabbed control of Tibet,then an independent state. In 1959, theregion’s spiritual leader, the FourteenthDalai Lama, who was 23 at the time, fled onfoot over the Himalayan Mountains, fearingarrest. China’s efforts to discredit the DalaiLama, who in 1989 won the Nobel PeacePrize, have fueled support for one of theworld’s most-celebrated human-rightscauses.

In the 1960s, the government tried insti-tuting communal ranching and otherCommunist economic policies, with thesame disastrous results—such as famine—seen elsewhere. During the next twodecades, Beijing relaxed its supervision ofthe Tibetan economy and later started cele-brating Tibetans as ethnic treasures, one of55 groups distinct from the 93% of China whoare of the Han race. But by the late 1990s,Tibet’s economic semi-autonomy began tolook like neglect as the region fell behind thesizzling east.

In Nagqu, the job of helping Tibet catchup has fallen to Mr. Duan, a 50-year-oldagricultural expert from Beijing. An ethnicHan, Mr. Duan can’t speak Tibetan. Likemost outsiders, he says he struggled withthe effects of its high altitude and thin air.

Still, he can count. The 7.4 million live-stock in Nagqu far outnumber people andgenerate a third of the county’s $400 millionin gross domestic product. Yaks, sheep andcows, which Mr. Duan calls the region’s“pillar industry,” are key to his goal: 50%GDP growth this year and a quadrupling ofthe local economy over five years.

Supporting his quest is the world’shighest-altitude train, the $4.1 billionQinghai-Tibet Railway, that at times travels16,641 feet above sea level. Completed thissummer, it links Tibet with the outsideworld by rail for the first time, includingBeijing 1,572 miles away. Its tracks are setin permafrost and an oxygen system helpsriders combat altitude sickness. It will even-tually run to the Indian border.

Chinese officials compare the rail’s signif-icance with that of America’s transconti-nental railroad. The train has made Tibetmuch more accessible—passengers can ridefrom Beijing for less than $200—and the costof transporting freight is less than half thatcharged by truckers.

The world’s highest-altitude bottlingplant, Hong Kong-based Tibet GlacierMineral Water Co., wants to use the train totransport branded water to Shanghai called“5,100,” as in meters above sea level. TheYulong copper mine in eastern Tibetcontains China’s biggest deposit, with morethan 10 million metric tons of provenreserves. In Nagqu, Canada’s SterlingGroup Ventures Inc. says it has signed aletter of intent with a Beijing company toextract lithium carbonate from a salt-waterlake. The mineral is used to make batteriesand glass.

Wu Yongpan, a 28-year-old entrepreneurfrom south China, bought an $85 ticket for a

China’s Big PushTo Stoke EconomyRattlesRuralTibetMeatpacking ModernizationThreatens Beloved Yaks;NewTrainBringsSuspicion

Ni Ma’s Quiet Resistance

By JAMES T. AREDDY

Western Frontier

500m 1000 2000 3000 4000

C H I N A

MONGOLIA

RUSSIA

INDIABHUTAN

MYANMAR VIET.LAOS

THAI.

SouthChinaSea

Newextension

Trainroute

Meters abovesea level

Tibet

Lhasa

Golmud

Nagqu

Beijing

Shanghai

500 miles500 miles

500 km500 km

500 miles

500 km

Ni Ma

Reprinted from THE WALL STREET JOURNAL AUGUST 24, 2006 21

middle bunk on the first train into Lhasalast month. He figured getting to China’snew western frontier quickly would give hima head start in the wholesale jewelry busi-ness. “Tibet is now opened,” he says.

After nearly a month in Tibet, Mr. Wusays he found business trickier than heimagined, not least of all because, “Tibetansare not very open minded.” Jewelry makerswanted to be paid in cash because theyweren’t comfortable using wire transfers.Jewelry distributors in southern GuangdongProvince said the samples Mr. Wu boughtwere too big and heavy for the Chinesemarket. Mr. Wu says he didn’t like the foodand that his skin felt dry.

He plans to make a second prospectingvisit before the end of this year, perhaps tosell electronics. “The culture question is avery big one . . . but if I do business for awhile, I can learn a little and pass it on tomy friends,” Mr. Wusays.

The culture ques-tion looms large inthe yak business.Where rancher NiMa lives, rocky flat-lands stretch to baldmountains on thehorizon, and brushesof green grass arethe only summer-time vegetation.Three generations ofhis 10-person familysleep in two rooms ofa concrete house with no electricity. Inside,a Buddhist shrine is set on top of a row ofhand-painted Tibetan cabinets, contrastingwith posters of Chinese luminaries such asMao Zedong.

In a bow to tradition, when Ni Ma slaugh-tered his three yaks last fall, he paused for a“crying” rite on behalf of each animalslaughtered, a ceremony he is teaching tohis seven children. Before a rope is fixedaround the neck of a yak to be suffocated—considered the least painful way to kill—Tibetan nomads comfort the animal byputting Buddhist blessing pills and holywater into its mouth, while holding smokybutter candles near its nose.

The term comes from the good wishesread when an animal or person dies, called

bsngo-ba, which is pronounced like the wordfor cry—ngu wa—according to Tibetans andforeign experts.

A decision to slaughter an animal is, “nota simple market transaction,” says GabrielLafitte, a lecturer in Asian civilizations andscience at the University of Melbourne, anda long-time critic of China’s role in Tibet.“It’s a very quiet, simple dignified ritual.”

Mr. Duan, the Communist Party official,dismisses the crying rites. He says emotionis unsuitable for the slaughterhouse industryhe envisages. “The traditional concept hascontained the economic development in ourregion,” Mr. Duan says. “These traditionalconcepts will have to be changed.” The localgovernment also cites a need to fill itsbudget deficit.

Beijing thinks Tibet has too many yaks,which aren’t raised systematically andthreaten the grasslands through over-grazing. The Nagqu government is trying toenforce an edict from the GrasslandsConstruction Authority, the body thatdecides how such land is used, stating thatno more than one yak can be raised per 120mu, a Chinese measure equivalent to abouteight hectares.

Nagqu’s yak herders are trying to breakinto distant markets through a government-funded dairy cooperative. Tibetan butter,cheese and yogurt, all made from yak milk,are slowly becoming specialty products over-seas. Tibetan Ragya Yak Cheese has beenirregularly imported to New York by SlowFood U.S.A., a not-for-profit organization.

After sampling the Ragya Yak Cheesethis year, chef Riccardo Buitoni of theAurora restaurant in Brooklyn, N.Y., devel-oped a pasta incorporating the “amazingcheese.” Mr. Buitoni says he will put thedish on his menu permanently if he can getregular supplies. It reminds him of theunpasteurized cheese he ate as a child inItaly.

Local officials also used the cooperative tolean on yak farmers to slaughter enoughanimals each year to keep the herd fromgrowing.

Yak meat tastes like tough beef. Thewoolly animals are two-thirds the size ofcows but they’re pound-for-pound more valu-able; both sell for about $750. The meat isoften available jerk-dried or as an ingre-dient for dipping into a hot pot consisting of

an oily, spicy soup. At Ba Guo Bu Yi, aSichuan-style restaurant in Shanghai, rawyak meat is a delicacy that sells for $16 aplate compared with a cold beef plate at$3.25.

So far, however, there isn’t much cargoleaving Tibet. About 60 loaded freight cars aday have pulled into Lhasa since freightservices began in March, some of themferrying supplies for China’s military.Railway officials say through July, onlyabout two dozen stocked freight cars leftLhasa for other parts of China.

In the Sichuan town of Manigango lastyear, some 300 ethnic Tibetans rioted andburned down a year-old slaughterhouseoperated by Sichuan Longsheng Group.Ranchers said they faced government pres-sure to sell livestock to the company forslaughter, according to human-rights groupsand an official at the company. The slaugh-terhouse has reopened “but business is notgood,” says a Longsheng official. “Tibetansaren’t willing to kill their yaks. They justkeep them and raise them,” he says.

For Ni Ma, the train had an immediatefinancial impact. As the construction workstretched into Nagqu, he was hired as partof the preparation crew. The work tripledhis $250 yearly herding income.

Now the railroad is complete, Ni Ma sayshe recognizes the potential of a business-likeapproach to slaughtering his yaks. But for“family” reasons, he says he still isn’tcomfortable with it in practice.

China’s plan to overhaul Tibet’seconomy includes slaughtering more yaks(above), then exporting meat, wool anddairy products via a new railway.

Get

ty Im

ages

Duan Xiangzheng

22 Reprinted from THE WALL STREET JOURNAL JUNE 12, 2006

SHENZHEN, China—Zou Tao has becomean unlikely hero in this profit-driven city ofhalf-built apartment complexes and luxuryvillas: He is calling for a boycott of the real-estate market.

It is a daring grass-roots campaign,designed to tamp down overheated propertyprices, that he says has gotten him introuble with police and attracted threats—but also the backing of people across thecountry.

Since he posted an open letter on hisInternet blog in April urging Shenzhen resi-

dents to stop buyingproperty, Mr. Zousays, he has beendeluged with morethan 150,000 pledgesof support nation-wide. The 32- year-oldgolf-equipment dealerhas evidently tappedinto a deep resent-ment against power-ful real-estate devel-opers and their local-government backers.They have helped

push prices so high that many city residentscan’t afford to buy, even while numerousunits held by speculators remain empty.

“Millions of Chinese citizens stand behindyou,” read one message that lit up Mr. Zou’scellphone.

His attack on Shenzhen’s property baronssays much about a mood of defiance, whenit comes to housing, that is sweepingChina’s normally apolitical middle class.Soaring property prices are widening socialdivisions in what is already one of the mostunequal societies on earth. The average costof a new apartment in Shenzhen has shot upto about $125,000, the equal of 10 years’salary for a college-educated professionalthere.

The excesses of a real-estate industry thatis focused on the top end of the market havealso raised the risk of a property bubble insome big cities, from Shenzhen on thesouthern coast of China to Shanghai andBeijing farther north.

Around the country, local governmentssometimes face violent protests from peas-ants whose farms have been gobbled up byvoraciously expanding cities. Tension issimmering among inner-city workers whosehomes are bulldozed to make way for highrises. Now, anger is building among thevery group that stood to benefit most fromChina’s warp-speed development: theaspiring middle class, where so many arebeing priced out.

Behind the surge lie contradictory priori-ties that arose over two decades of fastgrowth. Leaders in Beijing, fearful of thesocial unrest income disparities can cause,are eager to develop affordable masshousing. Yet city governments, competingwith one another to expand their economiesand build infrastructure, rely heavily onland sales to developers and taxes on expen-sive property. Their interest is to maximizeprofits.

The upshot is backing for Mr. Zou’sboycott campaign from people like DavidHuang, a 32-year-old manager at a high-techfactory in Shenzhen.

Mr. Huang and his wife have been savingfor years to buy a home in which to raisetheir son, now 7. At the end of last year,they had enough for a deposit on a three-bedroom apartment. But Mr. Huang says hegot busy at work and put off the paperwork.His delay proved costly. Since January, hesays, pointing a finger toward the ceiling ofa Shenzhen coffee shop, the price haszoomed by 40%.

How could prices keep soaring at thesame time as supply is? “It’s all speculationand manipulation,” says Mr. Huang, whocontinues to rent. “If developers want tomake a reasonable profit, I can take that.But this is out of control.”

Those who do buy include a cross sectionof the affluent, many of whom are evidentlyspeculators. They include prosperous ethnicChinese from Taiwan and Hong Kong,managers at foreign-owned enterprises, andurban yuppies who got in when prices wereaffordable and are borrowing to buy more.Many of these buyers appear confident thatforeign companies will continue to pour intoChina’s big cities, and expatriates will sopup the many still-empty apartments. KennyTse, a real-estate analyst for MorganStanley in Hong Kong, estimates that 25% to40% of the buyers of new urban apartmentspay cash.

But for Mr. Huang to buy, he would haveto spend half of his $800 monthly salary onthe mortgage. That would be impossible, hesays, given how much he must save toprotect himself against medical and otheremergencies in a society that has only a

flimsy social safety net. A mortgage of thesize needed to buy, he says, would “mean Ican’t lose my job. It means I can’t get sick.”

For many years under China’s socialistsystem, private home ownership wasfrowned on. The Communists seized allprivate property, and employers providedworkers with subsidized housing, the rent apittance. But in 1995, China’s leaderslaunched a privatization experiment inGuangdong, the province surrounding Shen-zhen on China’s southern coast. There, theprovincial government authorized individualstate-run enterprises to sell off their housingstock inexpensively to their workers. Thatprogram was later rolled out around thecountry, creating the beginnings of a privatehousing market.

At the same time, Beijing encouraged thegrowth of mortgage lending, which spurredconstruction of more private housing.Besides easing the burden on factories,authorities hoped this program would fuelthe expansion of cities as economic enginesand support an array of industries, fromhome furnishings to financial services.

The ensuing building boom has reverber-ated through the global economy. Partly tofuel its pell-mell real-estate construction,China consumes vast amounts of steel,copper and cement, inflating globalcommodity prices. Meanwhile, its tradesurpluses leave it awash in cash that statebanks are all to eager to lend—further stim-ulating both the building and the buying ofhousing. And if credit weren’t enough tosteer investors into housing, they face apaucity of other places for their cash, whatwith bank deposit rates fixed at 2.25%.

In one gauge of the vigor of the housingmarket, Ikea has opened a superstore inBeijing that is second in size only to its flag-ship store in Sweden.

But it is unclear how sustainable thisboom is. Some economists warn thatChinese cities are becoming so overbuiltthey face a price collapse. The more opti-mistic dismiss the concern, noting thatannual house-price increases have beenroughly tracking double-digit rises in urbansalaries over the past several years.

Making it harder to know who is right:China lacks many of the detailed housingstatistics common in the West, such as ratesof vacancies, inventories and resale prices.The lack of data leaves prospective buyersat loss when faced with a hard sell frombuyers—and may keep the developers,themselves, from sensing the extent of theiroverbuilding.

Vacancy estimates for new residentialbuildings in Shanghai run as high as 25%—yet about 250,000 new apartments flood themarket each year, official figures show. InShanghai’s suburbs, the surplus has begunto cool prices, which after a run-up are off25% in the past year. In Beijing, meanwhile,property prices are soaring ahead of the 2008Olympics. But rents on luxury homes there

Blogger Hits HomeBy Urging BoycottOf Chinese PropertyCampaign Against High PricesGarners Mr. Zou SupportFromMiddle-Class Buyers

A Grilling by Security Agents

By ANDREW BROWNE

Bubbling Anger

Zou Tao

Reprinted from THE WALL STREET JOURNAL JUNE 12, 2006 23

are falling, suggesting that prices aresupported more by speculation than realdemand.

“It’s going to turn bad,” predicts PeterChurchouse, who runs the Lim Asia Alterna-tive Real Estate fund in Hong Kong.

A property bust, potentially far biggerthan one that struck in the late 1990s, couldbatter China’s economy. Investment in realestate is likely to approach 10% of grossdomestic product this year. The World Bankestimates that 20% to 30% of lending byChina’s big state banks goes to real estate.Serious trouble in housing could bury themin bad loans.

The central government has taken stepsto head off such a scenario. Last month, itannounced a ban on new villa develop-ments—walled compoundsof townhouses and free-standing homes—as part ofa slew of directives aimingat forcing local governmentsto build more low-costhousing and at driving outspeculators. For residentialproperty held less than fiveyears, Beijing imposed a20% capital-gains tax onprofit and a 5.5% levy on thetotal sales price. It alsoraised the minimum downpayment (to 30% from 20%)and said developers mustreserve 70% of new projectsfor smaller units. But thenew rules are full of loop-holes, and past efforts byBeijing to rein in priceshave all failed.

Benefits from the prop-erty boom have flowed unevenly. Of the 20wealthiest people on the 2005 “China RichList,” compiled by British accountantRupert Hoogewerf, half are in real estateand all have a net worth of more than $500million.

But in Beijing, 70% of the population fallsbeneath the income level needed to buy ahome, according to a think tank at BeijingNormal University. Take Price Wu, a 32-year-old software engineer who earns $1,000a month. His salary ranks him amongChina’s affluent, but he is still looking for anaffordable place to buy.

Last year, Mr. Wu says, he lost his girl-

friend because he couldn’t bring himself totake the financial risk of buying an apart-ment she insisted they needed beforemarriage. His ambitions are modest. “Idon’t want a villa, just a very ordinaryapartment will do,” he says.

Mr. Wu is weary of the games he saysreal-estate companies play. “They’ll tell youthat they only have five apartments left.They say, ‘Buy now or they’ll all be gone,’”he says.

Mr. Wu doesn’t expect that Mr. Zou’sboycott campaign will collapse propertyprices, but hopes that “it might at leaststabilize them.” He adds: “If the masses gettogether and show their force, nothing canstand in their way.”

In challenging developers, Mr. Zou recog-nizes he has crossedthe line fromconsumer advocacyto political activism.In China, some ofthe biggest devel-opers are backed bylocal governmentsand work closelywith state-ownedbanks.

A former soldier,Mr. Zou was born ina poor village in thecentral province ofHunan. He says hegrew up with apassion fordefending the weakand exploited, andgot into importingand exporting golfequipment simply as

a way to fund his work as a consumer advo-cate.

His activism made him a minor celebrityin his adopted home of Shenzhen. LastSeptember, in a public hearing to discuss acontroversial proposal to raise parking fees,Mr. Zou turned up with the results of hisown online survey showing that 85% of 12,301people he questioned opposed the increase.In the end, the government slashed theproposed increase.

He wasn’t prepared for the resistance tohis latest crusade. He says plainclothessecurity agents seized him at the Shenzhenairport last month as he tried to board a

flight to Beijing to present a letter toPremier Wen Jiabao complaining that urbanresidents have become “house slaves” todevelopers. The agents grilled him overnightbut let him go the next day, he says. Hejumped on the first available plane toBeijing and delivered his petition to theState Council, the equivalent of the Chinesecabinet.

Mr. Zou has also run into trouble fromother quarters. He just laid off the last of his15 employees, he says, because he feared fortheir safety after they received anonymoustelephone threats. His downtown office, oncebursting with samples of Titleist golf ballsand MacGregor sports bags, sits almostempty. A few days ago, he says, somebodyapparently cut fine slits in the rear tires ofhis car. He says a mechanic who noticed thedamage told him the rubber could haveburst open at high speed and caused acrash.

“A lot of people hate me,” Mr. Zou says,slumped in his executive desk chair in ayellow golf shirt and khaki chinos. “Theythink I’m stealing their fortune.”

Li Ning, a marketing manager for Shen-zhen’s newest office tower, the 52-storyTimes Square built by Hong Kong-backedExcellence Group, offers a guarded view ofMr. Zou’s campaign. “I may not agree withwhat he says, but I support his right to sayit,” he says.

Mr. Li puts the blame for Shenzhen’srising property prices in part on the localgovernment, which he says miscalculatedthe explosive growth of the city from astretch of farmland in the 1970s. Today, ithas 12 million people but is short of publictransportation between its heavily built-updowntown and its spacious suburbs. Theresult is a scramble for living space in theinner city. “Extreme price rises and fallsaren’t good for us,” Mr. Li says. “We wantstability.”

Shortly after Mr. Zou posted his blogmessage calling for the boycott, the state-run China Youth Daily newspaper conductedan Internet survey among 9,000 peopleasking for their reaction: 79.1% of intervie-wees offered their support.

—Kersten Zhang in Beijing and Ellen Zhu in Shanghai

contributed to this article.

Source: People’s Bank of China

Heavy BurdenMortgage payments as a proportion of in-come in Chinese cities, as of October 2005

Chengdu

Shenzhen

Chongqing

Guangzhou

Qingdao

Nanjing

Hangzhou

Tianjin

Beijing

Shanghai

22

24

29

32

34

37

38

39

42

45%

24 Reprinted from THE WALL STREET JOURNAL DECEMBER 6, 2006

HUBEI PROVINCE, China—The Swissheir to a trucking fortune and a team ofscientists want to save the Yangtze River’swhite dolphins. But nobody is sure there areany left.

Last month, August Pfluger led a team ofChinese, Japanese, Swiss and Americanscientists in search of the baiji, a shy,nearly blind freshwater mammal known forcenturies in Chinese legend as the Goddessof the Yangtze.

In the early 1990s, scientists estimatedthat there were about 200 baiji left, dodgingthe freighters and fishing boats clogging theriver. By 1997, at the time of the last reliablesighting, scientists estimated that, at most,only about 17 of the 6-foot-long dolphinsremained.

If this dolphin is now deemed to beextinct, scientists say it would be one of thefew large aquatic mammals to be wiped outin 300 years. In the 1950s, the Caribbeanmonk seal was hunted to extinction. Otherspecies have been pushed to the brink buthave crawled back. By most reckonings,China’s baiji has been pushed too far.

“It’s a big thing to have a large mammalgo extinct on our watch,” said Bob Pitman,an ecologist from the U.S., looking for thedolphin through binoculars.

The baiji highlights the costs of China’suntrammeled economic growth, which haspolluted its skies and fouled its waters. The

baiji, known for its chopsticks-like snout anduncanny sonar ability to navigate themuddy Yangtze, appears to have fallenvictim to Chinese government inaction andinsufficient international attention.

“Nobody cares about that damn animal—maybe we are crazy,” said the 42-year-oldMr. Pfluger as he unfurled a banner bearingthe name of his foundation, Swiss-basedbaiji.org, across the rust-streaked boat.

To pull off the expedition, Mr. Pflugerbrought together a group of scientists fromthe East and the West, including Mr.Pitman, a marine ecologist with theNational Oceanic and Atmospheric Adminis-tration of the U.S. Department ofCommerce, and Wang Ding, China’s leadingchampion of the baiji.

Since the late 1970s, China has recordedunprecedented growth of about 10% a year.But the side effects have deeply scarredChina’s landscape. One-third of the countrysuffers from severe acid rain. More than 300million people lack access to clean drinkingwater, and more than half of the country’swaterways are badly polluted. China claimssome 47 critically endangered animalspecies on the Red List of threatenedspecies, kept by the World ConservationUnion, a voluntary organization of con-cerned scientists. Other endangered speciesare the Chinese alligator and the YangtzeRiver sturgeon.

In October, the United Nations Environ-ment Program declared the Yangtze andPearl River estuaries dead zones. The waterdoesn’t have enough oxygen in it to supportfish.

“The baiji is a beautiful mammal, on topof the food chain, close to human beings. Ifthe Yangtze can’t support baiji, then it can’tsupport human beings,” said Mr. Wang, asthe boat sailed past belching factories, somespewing waste.

It wasn’t always so. A few thousand yearsago, the Yangtze was the Amazon of theEast, rich in wildlife like alligators,elephants, giant sturgeons and an unusuallylarge salamander. Scientists believe thebaiji first moved into the area some 20million years ago, making it one of theoldest species of dolphin. It developed innear total isolation from any other species ofdolphin or whale. In the silty waters, itseyes atrophied, and it became nearly blind.

The baiji relies on a highly developedsense of sound to locate food and swimaround obstacles, rather like bats bouncingsound waves off distant objects to judgetheir location. The baiji’s long lower jawworks like a boom microphone to focussound waves that are funneled to earsprotected from distracting noise by a thickpad of fat. Other dolphins use their ownsonar, too, but they also rely on vision.

The first mention of the baiji dates back2,000 years to Guo Po, a Jin dynasty scholarwho described it in the Erya, China’s oldestdictionary. Later, the strange creaturefound its way into a love story, where it

turned into a beautiful woman like amermaid. That’s why fishermen called thebaiji the goddess of the Yangtze and said theanimal could foretell bad weather.

The baiji was unknown in the West until1918, when the 17-year-old son of amissionary shot and killed one while duckhunting. Charles Hoy and his father sent theskull to the Smithsonian Institution, where itwas identified as a new species.

Not much more was known about the baijiuntil a Swiss scientist named Giorgio Pillericame to China and studied the creature inthe late 1970s.

As China’s economy grew, the baijistarted dying off. The sandbanks where theanimals liked to lurk were dredged. Chan-nels were dynamited. Baiji competed withfishermen for food, and were often entan-gled in nets. All the engine noise confusedthe dolphins. During the chaotic years of theCultural Revolution, some hungry fishermeneven took to eating the bitter flesh of thedolphin.

By the time China was slowly opening tothe outside world after decades of self-imposed isolation, the dolphin was introuble. In 1978, the central governmentdecided to set up a special group of scien-tists to study the dying species; the group isnow headed by Mr. Wang.

Known in China as Mr. Baiji, Mr. Wangfirst began to grow fond of the creature in1980 while he was nurturing a badly injuredbaiji brought by some fishermen to the Insti-tute of Hydrobiology in Wuhan, a city on theYangtze.

Mr. Wang and others put the dolphin,which they named Qiqi, in a fishpond,applied a traditional Chinese poultice, andnursed the animal back to health. Mr. Wangand others took care of Qiqi until he died ofold age in July 2002. “It was like losing afamily member,” Mr. Wang says.

Mr. Pfluger met Mr. Wang and wasimpressed with his dedication. Despite thebaiji’s critically endangered status, Mr.Pfluger felt that not enough had been doneto save it. Part of the problem, Mr. Pflugersays, is that Chinese and internationalscientists disagreed on strategy. TheChinese wanted to take baiji out of thepolluted river and relocate them to anisolated reserve, like one created for pandas.Many Western conservationists said thetrauma of removing the dolphins could killthem.

A few finless porpoises—smaller, stoutermammals with blunt noses—were movedinto a reserve, along with one baiji. Theporpoises survived, but the captive baijidied.

By 2004, time was running out. Fewerfishermen were spotting baiji. Mr. Pflugerstepped in to help assemble a team offoreign and international scientists to golooking for them.

Now, and for the next six weeks,researchers will take turns scanning thehorizon for any glint of snout and fin

It May Be Too LateFor China to SaveTheYangtze Goddess

i i i

Scientists Track theDolphins

But Might Have to Settle

ForFindingThemExtinct

By SHAI OSTER

77

Baiji dolphin

Reprinted from THE WALL STREET JOURNAL DECEMBER 6, 2006 25

sticking through the water. If they find morethan 10, they will discuss what to do next.The chances of that don’t seem good. Mostof the scientists on the boat aren’t optimisticthat they will find any.

For years, Mr. Pitman, the U.S. marineecologist, has searched the world’s riversand oceans for rare species of dolphins andwhales. This trip, he says, will be thetoughest. “The chance of seeing the baiji isovershadowed by the foregone conclusionit’s nearly extinct. I’ve come to pay my lastrespects.”

MONGOLIA

VIETNAMLAOS

MYANMAR

INDIA

CHINA

N.KOREA

S. KOREA

J

PHILIPPINES

RUSSIA

Beijing

WuhanShanghai

PhilippineSea

500 miles

500 km

Yangtze R.

Area ofsearchfor baijidolphins

26 Reprinted from THE WALL STREET JOURNAL DECEMBER 18, 2006

Beijing

CHINA’S EMBRACE of market forces inthe past three decades has reshaped

virtually every aspect of its people’s lives.Much of the impact has been positive.Hundreds of millions have escaped dollar-a-day poverty. The average Chinese citizen iswealthier, and enjoys far more economicand political freedom, than when overhaulsbegan in 1978.

But the transformation has also wiped outmuch of a cradle-to-grave safety net—healthcare, education, pensions—that ensuredbasic needs were met for most of the popula-tion. It has severely damaged large parts ofthe country’s environment, and triggered awidening gap between rich and poor.

Indeed, while China’s government stillcalls its system socialist, and still plays a bigrole in the economy, what has developedhere sometimes resembles a sort of nakedcapitalism, where an unfettered pursuit ofprofit governs almost all facets of life, and agrowing share of the population is leftunprotected.

Aware that the social tensions spawnedby these trends could undermine theirauthority, China’s Communist Party leadershave put dealing with social inequities at thetop of their agenda. President Hu Jintao’sadministration has promised a range ofinitiatives as part of his overarching policygoal of creating a “harmonious society.” Thepledges include lowering taxes on farmers,raising the minimum wage, curbing corrup-tion and strengthening environmental safe-guards.

The rest of the world has a big stake inthis race, too: By casting its fortunes withthe global economy, China has entwined itsfate with those of governments and compa-nies spanning the earth. The country nowpowers global economic growth. And it playsa more reliable role in sticky internationalissues, such as how to defang a nuclearNorth Korea. A shock to China’s system, aburst of instability stemming from internalunrest, would reverberate through board-rooms and capitals the world over.

But the party consistently confronts a big,intractable obstacle to achieving its statedaim of defusing social tensions: itself.

Widespread official graft persists despitea multiyear crackdown. In the countryside,local officials frequently conspire with devel-opers to buy land from subsistence farmersat cut rates. Some nominally public schoolscharge prohibitively steep tuition. State-owned companies are among the biggestpolluters. Even upright local officials,knowing that promotions depend on theirsuccess in boosting local economies, oftendefy directives that conflict with the goal ofgrowth at all costs.

The upshot is that a party that projects animage of monolithic unity— at home andabroad—is finding that one of its greatestchallenges lies in bringing to heel the veryofficials it relies on to implement its orders.

FROM SHENZHEN in the south to Beijingin the north, and often in defiance of

Party edicts, developers with close ties tolocal governments are covering cities withluxury real-estate developments, even ashousing prices soar to levels many urbanChinese can’t afford. Meanwhile, under-funded government hospitals turn awaypatients who can’t afford cash upfront fortreatment. Government-backed automobilecompanies churn out the cars that areincreasingly cloaking China’s urban skieswith smog. And state-run tobacco compa-nies, keen for profit, peddle trillions of ciga-rettes a year, though smoking-relateddiseases and health-care costs continue tosoar.

Nowhere are the challenges for China’sgovernment greater than with its deterio-rating environment. The problem is nation-wide. A potassium chlorate factory in thevillage of Xiping in the southeasternprovince of Fujian dumps chemicals foryears in a nearby river, in defiance of courtorders, destroying local crops. A factory thatmakes lead ingots in Gansu in the west spitsout waste that afflicts some 250 children withlead poisoning. A state-owned petrochemicalplant in the northeast spills benzene,making water nearby undrinkable.

“China is dangerously near a crisis point”with its environment, writes Pan Yue, theoutspoken vice minister of China’s StateEnvironmental Protection Administration, ina commentary published last month. A thirdof China’s people drink substandard water,and a third breathe badly polluted air,according to Mr. Pan. “True, China hasmade the kind of economic advances inthree decades that required 100 years inWestern countries. But China has alsosuffered a century’s worth of environmentaldamage in 30 years,” Mr. Pan wrote.

YET WHEN SEPA goes to shutter waste-spilling plants, often at the behest of

nearby residents, it is regularly thwarted bylocal officials intent on keeping localfactories cranking—and often lining theirown pockets.

In many advanced economies, socialtensions find some release in democraticelections that allow the aggrieved to oustunpopular or corrupt leaders. China has sofar steadfastly avoided that approach. It isinstead struggling to find other ways to keepits vast bureaucracy and increasingly unrulybusinesses in line.

Few people think these trends pose animminent threat to the Communist Party’shold on power. But incidents of publicprotest, sometimes violent, are on the rise,officials say. More immediately, there areeconomic costs that result from the disjunc-tures, and these could imperil the continuedprogress of China’s economic reforms. Nolonger able to rely on state health or pensionprograms, many Chinese citizens arebanking large chunks of their income to paytheir own way. That robust savings isslowing China’s shift to a domestic-consumption-led economy, and therefore islikely to keep exports high, and big Chinesetrade surpluses a source of internationaltensions.

SEPA, the environmental agency, mean-while, estimated in a September report thatthe cost to clean up pollution produced in2004 alone would equal about 3% of China’seconomic output that year a hefty price tag.Mr. Pan, the vice minister, believes thenumber is actually much higher.

China’s leaders in the past three decadeshave engineered one of the most remarkableeconomic transformations in human history.And yet today the country faces tests borneof that progress that are in some waystrickier than those it has already overcome.A nation that started out railing againstcapitalism now embodies many of its mostextreme elements. Like other industrializingeconomies, it must find ways to guidenational ambitions, so they don’t ultimatelyundercut the national interest.

—Shai Oster contributed to this article.

Note: Because the underlying household surveys differ in method and in the type of data collected, the distributiondata are not strictly comparable across countries. Data based on surveys taken between 1993 and 2002Source: World Bank

Wealth GapHow China stacks up against selected countries, based on the Gini index, a widely used measure of income equality:

China 44.7

U.S. 40.8

Vietnam 37.0

U.K. 36.0

France 32.7

India 32.5

Japan 24.9

100=Total inequality0=Equality

HowCapitalist Transformation ExposesHoles in China’s Government

THE OUTLOOK 7 By JASON DEAN

JUBAO VILLAGE, China—On the edge ofthis dusty farming hamlet, the massivesmokestack of the half-finished XinfengPower Plant looms as a monument toChina’s out-of-control demand for energy.

Unlike two other power plants nearby,Xinfeng isn’t supposed to exist. China’s elec-tricity regulators never authorized the $362million coal-burning plant. But in 2004, theprovincial government here in northernChina’s Inner Mongolia ignored Beijing’scall to slow down investment and startedbuilding the plant anyway, hoping to ensureenough juice for the region’s superchargedindustrialization by tapping its rich reser-voirs of coal.

Inner Mongolia’s disobedience might haveescaped notice. But in July 2005, in the rushto finish the plant before regulators foundout about it, the housing for a turbinecollapsed, killing six workers. During theyearlong investigation that followed, thecentral government discovered that InnerMongolia had illegally built about 10 powerplants, or 8.6 gigawatts of electricity-gener-ating capacity—equal to about a tenth of theUnited Kingdom’s total capacity.

The illegal plants have had unintended—and detrimental—consequences. By eschew-ing even basic environmental safeguards,they stand out as polluters even in anindustry that is one of China’s leadingsources of emissions, officials say. They alsohave driven up the demand for and price ofcoal, the country’s most abundant source offuel. That, in turn, has spawned thousandsof illegal coal mines that have contributed tomore than 4,000 coal-mining deaths in Chinathis year.

The illegal power plants show how China’seconomic transformation is outpacingBeijing’s ability to manage it. Never beforehas a country with such a big populationgrown as rapidly as China. The country’seconomy has expanded an average 10% ayear since the late 1970s. The process ofeconomic modernization is happening twiceas fast in China as it did in the U.S. orJapan, where it took half a century or more.

One fifth of the power plants in China areillegal, according to government estimates—enough to light up all of the U.K. While theelectricity they supply is essential to powerChina’s growth, the uncontrolled manner inwhich they are multiplying, often under theprotection of local authorities, poses a chal-lenge to Beijing’s authority and its grip onenergy policy.

“It is impossible for our central govern-ment to go everywhere to see, when thesmall power plants start building,” said

Zhang Guobao, vice chairman of theNational Development and Reform Commis-sion, China’s top energy policy planner, inan interview.

The central government is likewisefinding it hard to crack down on illegal coalmines. In past years it has shut down thou-sands of mines—only to see thousands morespring up in their place. The primaryreason: the soaring profits to be made fromselling coal to China’s power plants are apowerful temptation. Many regions haveembraced coal mining to boost their growthrates, including Inner Mongolia, one ofChina’s most coal-rich provinces.

Infuriated by the illegal Xinfeng powerplant, central-government officials earlierthis year demanded that the province’s topleadership present self-criticisms beforeChina’s powerful State Council, or cabinet.Under China’s Communist system, that’s anunusually public form of rebuke, designed tosend a message to others against defyingBeijing’s will.

Even so, construction continues today atthe Xinfeng plant nearly a year after Beijingordered it stopped. Officials at the companybuilding the plant say they expect to getapproval to complete it “sooner or later.”

In China, more power plants almostinvariably mean more coal consumption.The country has been unable to diversifyaway from coal, which is cheaper than alter-native fuels, some of which are imported.

But China’s coal consumption is costly inhuman and environmental terms. Amid thepush to feed the country’s power plants lastyear, 5,938 coal miners were killed in acci-dents, mostly in smaller, illegal mines. Suchaccidents are so commonplace here thatonly the larger ones rank as news.

Coal is one of the biggest pollution sourcesin China, which some experts think is on theverge of an environmental crisis. This year,the central government set a target ofreducing the amount of energy the countryconsumes relative to its economic output.But the soaring demand for coal-fueled elec-tricity has upended Beijing’s efforts to reinin pollution.

“It will be very difficult to realize ourtargets of saving energy and reducing pollu-tion,” Ma Kai, China’s top economic policyplanner, said this fall.

The implications of China’s mushroominghunger for energy go far beyond its ownborders. As incomes rise in China, energyuse per person is starting to catch up withthe richer West. The typical Americanconsumes about eight metric tons of oil ayear, or its equivalent in coal and otherfuels. Japanese consume about half thatsum. In China, per capita energy consump-tion now stands at just 1.2 metric tons.

It would require a doubling of world oilproduction—an impossible feat—for everyChinese to live the energy-intensive lifestyleof an American, as well as more coal thansome believe China could ever dig up.

“We can’t copy the big home and the bigcar” that so many Americans enjoy, saidZhou Dadi, a top researcher with the EnergyResearch Institute, a government-backedthink tank. “It’s just not doable.”

China’s current energy predicament isrooted in the decision it made three decadesago when it began to embrace a marketeconomy. For the first 20 years of its transi-tion, as China shifted from a mostlyagrarian country to light industry, it wasable to quadruple the size of its economywhile only doubling its energy needs.

Throughout the 1990s, however, a new andfaster phase of expansion quietly took holdas the government loosened restrictions oninvestment and the mobility of its citizens,accelerating China’s industrialization andurbanization. Manufacturing accounted fora steadily greater share of the economy.Energy-intensive heavy industries boomed,from petrochemicals to auto production,aided by China’s entry into the World TradeOrganization in 2001.

Low energy prices, made possible in partby government controls, encouragedconsumers to use more. Coal consumptioninitially crept up slowly, to around 1.5 billionmetric tons a year in the mid-1990s, fromjust under one billion metric tons a year adecade earlier. Last year, however, Chinaconsumed about 2.2 billion metric tons ofcoal, one-third of the world’s total and morethan any other country.

Beijing’s efforts to reduce reliance on coalhave largely failed. China has plenty ofcoal—an estimated 114.5 billion metric tonsof recoverable reserves. Only the U.S. andRussia have more. Natural gas, which burnsmore efficiently and causes far less pollu-tion, has proved too expensive to competeeffectively. Planned increases in nuclear-

Reprinted from THE WALL STREET JOURNAL DECEMBER 27, 2006 27

By SHAI OSTER

JUBAO VILLAGE, China—On theedge of this dusty farming hamlet, themassive smokestack of the half-finishedXinfeng Power Plant looms as a monu-ment to China’s out-of-control demandfor energy.Unlike two other power plants

nearby, Xinfeng isn’t supposed to exist.China’s electricity regulators never au-thorized the $362 million coal-burningplant. But in 2004, the provincial govern-ment here in northern China’s InnerMongolia ignored Beijing’s call to slowdown investment and started buildingthe plant anyway, hoping to ensureenough juice for the region’s super-charged industrialization by tapping itsrich reservoirs of coal.Inner Mongolia’s disobedience might

Illegal Power Plants, Coal MinesInChinaPoseChallenge forBeijing

Hydro-electric90.8

Naturalgas42.3

Nuclearenergy11.8

Oil327.3

2005 total: 1.55 billion metric tons

Coal1,081.9

Coal-DependentChina’s 2005 fuel consumption, by type, in millions of metric tons of oil equivalent:

Source: BP Statistical Review of World Energy 2006

power production would fill only a fraction ofChina’s energy demand. Even China’s more-ambitious plans for hydroelectric power andwind farms won’t seriously challenge coal’sdominance.

Coal miners are on the front lines of thebattle to meet China’s energy needs. It isdangerous work. As with power plants,China’s government has had great difficultyregulating coal mines. In the U.S., whichproduces about half as much coal as China,47 miners have been killed so far this year,up from 22 last year. In China, the numberof deaths has declined slightly this year, butit is still enormous: 4,236 dead so far.

The number of casualties goes up in thewinter. More than 400 miners died inNovember alone. “In winter, demand goesup, the market prices go up, and the profitmotive goes up,” said Huang Yi, spokesmanfor the State Administration of WorkerSafety, the agency that investigates mineaccidents.

Smaller, often inefficient, and dangerousmines account for about a third of China’scoal production. They are so important tomeeting its energy needs that the centralgovernment recently delayed plans toimprove safety by shuttering many of them.

Whole regions of China are pockmarkedwith tiny, illegal mines like the one inWangyu in central China’s gritty Shanxiprovince, where an accident in earlyNovember killed 34 miners. Four tons ofdemolition explosives illegally stored in ashaft caught fire and destroyed the smallmine, according to government safety offi-cials. The dead, who had just started thenight shift, were mostly from the samevillage some 250 miles away.

Wang Chenliang, from Sichuan province,had just ended his shift when the explosionoccurred. He rushed back to help withrescue efforts. He and others pulledsurvivors from the wreckage and pumpedair into the mine to aid anyone who wastrapped but still alive.

“This work is tiring and dangerous,” Mr.Wang said a few days after the accident,only moments before police detained a jour-nalist attempting to interview survivors.Like others, he got his job through introduc-tions from fellow villagers. “We came hereto earn money. The money here is muchhigher than back home in Sichuan.”

The mine’s safety certificate and produc-tion permit had both expired, according tocentral-government officials. But the localgovernment was protecting it, they said,because it held a financial interest in themine.

That sort of corruption is common. Lastyear, the central government found thatmore than 4,500 government officials ille-gally held stakes in coal mines andfrequently covered up safety violations.Many of these mines lack basic safety equip-ment. Workers scrabble down narrow pits,where the most modern tools may be thesticks of dynamite used to dislodge the coal.At the accident site in Wangyu, there was norescue equipment on hand, another commonproblem.

Over the past few years, provincial offi-cials in Inner Mongolia have decided to buildpower plants and encourage heavy industryto relocate to the region to take advantage of

its coal resources. The strategy has paid offin economic terms.

Last year, the province’s economy grew21.6%, roughly double the national rate. In2004, it grew 19.4%. Industrial output hasgrown an average 30% a year over the pastfour years. Such unbridled growth caughtChina’s central government off guard.

In 2003 and 2004, massive power shortagesin the south led to rolling blackouts. Localauthorities across China decided to buildpower plants, often illegally, to keep theirlocal economies humming. Around thattime, officials in Inner Mongolia approved aplan to build the Xinfeng Power Plant in the

small town of Fengzhen, in a bid to attractmore factories.

“Inner Mongolia has a lot of coal. Otherparts of China need the electricity. Of courseInner Mongolia should take advantage of itsnatural resources,” said Yan Keji, aconstruction worker at one of the threepower plants near Jubao.

It isn’t just heavy industry that needspower. China’s consumers are using more,too. Mr. Yan’s hometown in the mountainsof Hunan didn’t have electricity until 1990.At first, his house had one light bulb. Now,the money he earns from construction haspaid for a television, washing machine,refrigerator and air conditioning, a patternrepeated in millions of homes across Chinaas people get richer.

China’s sprawling cities are also drivingup power demand. Inner Mongolia nowprovides Beijing with 20% of its electricity,according to Jim Brock, an independentenergy consultant in the Chinese capital.

Nearly two years ago, China’s centralgovernment started cracking down on theunauthorized power plants because theyfeared a surplus of power. In InnerMongolia, local officials ignored orders tostop building the Xingfeng plant, figuringthey could always get retroactive approval,according to the official Xinhua newsagency. But the death of the six workers inJuly 2005 set in motion the investigation thatculminated in the public castigation of theprovincial chief and the order to stop workon Xinfeng.

Some construction work on the plantcontinues. Workers interviewed at the sitesaid the plant would be able to produce elec-tricity next year. They declined to give theirnames.

Na Guiting, an official at Inner MongoliaEnergy Generation Investment Co. Ltd., theplant’s owner, said the company is eager tofinish building and has reapplied forapproval. “Mongolia still has a very seriouspower shortage. If Xinfeng would beapproved, it could be generating in three orfour months,” the official said.

—Kersten Zhang contributed to this article.

Fueledby CoalChina’s energyconsumption, in millions ofmetric tons of oil or oil equivalent

Source: BP Statistical Review of World Energy 2006

200520001995

0

300

600

900

1,200

Naturalgas

Nuclearenergy

Hydro-electricity

OilCoal

One fifth of the power plants in China areillegal, according to governmentestimates—enough to light up all of theUnited Kingdom.

28 Reprinted from THE WALL STREET JOURNAL DECEMBER 27, 2006

One fifth of the power plants in China areillegal, according to governmentestimates—enough to light up all of theUnited Kingdom.

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