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Monday, May 30, 2011

INTRODUCTION

GDP growing at 10% and foreign trade at 15% per annum for past 2 decades.
Overall living standards increasing
Historian Zhang Wei-Wei asserts that China’s economic reform has largely destroyed the economic and institutional basis of totalitarianism
Also its not economic reform without political reform – there has been political reform but less
14th CCP Congress hoped to achieve a ‘socialist market economy’ – Deng believed that there need not be capitalism to have a market economy

HSTORY

- China has had a long continuous national history (4000 years)
- China suffered economic problems from the period of collectivization
- Great Leap Forward started in 1958
- The Great Leap Forward had led to a fall in output in 1958-1961
- Obsession with self sufficiency in Mao’s time led to the over emphasis of certain strategic crops, like grain even in bad conditions
- Supposedly going to achieve parity with the West within 15 years
- But never achieved
- But per capita grain production changed little from 50s to 70s
- Much worse than industrial production
- Industry was bloated – employing more than needed
- Wages had been frozen at 196 rates and little opportunity for promotion
- Cultural Revolution – dismantled higher education, reduced numbers and morale of intelligentsia
- Scarcity of consumer goods
- During Mao era, bulk of state funds went to heavy industries with little to agriculture and consumer goods
- Also the Great Proletariat Cultural Revolution 1966-1969
- To revitalize the revolution
- Mao had done a tremendous job of rapidly industrializing China but there were problems
- Little aid from abroad; much of the progress was due to the work of the people – contributed to principle of “self-reliance”
- Population was rising – 980m in June 1979, and 1.08b in 1983
- Mao dies in Sep 1976



ROLE OF DENG XIAOPING IN CHINA’S ECONOMIC DEVELOPMENT

- Comes to power by 1978 and stays in power till 1997, when he dies and engages in reforms
- Problems he faced
- 6.5b Yuan deficit
- 20m unemployed
- Socially tried to achieve a one child policy, while not explicitly stated, this was the policy most followed. So by late 1980s, had the lowest birth rate in world
- technology was backward
- 100m were undernourished
- Deng saw the problems and had 2 choices –
o 1. modify the central planning system through administrative centralization
o 2. Increased reliance on the market but this meant integration into world markets and competing against all
o Neither f these were really against socialism
o Had to reform system or CCP and Communism would be untenable

- Came to power after the failure of the Cultural Revolution
- Was actually distrusted by many of Mao’s supporters and the Gang of Four.
- He had support of the military, and even though the four had high positions in the CCP, they were not very trusted
- In 1976, he plotted against Gang of Four with PLA allies in South
- Meanwhile Hua Guafeng who was temporarily in power, was trying to follow “whatever” Moa had laid down
- He was a compromise, as Zhou Enlai was worsening in his condition
- Country disillusioned with Mao’s utopianism
- He picked reformers – Hu Yaobang (General – Secretary) and Zhao Ziyang (Premier)
- Was not uncritical of China. Visited Japan and Nissan and saw “what modernization was.”
- “china suffered from isolation”

Strategic Leader

- Deng became the strategic leader, but appointed Zhao Ziyang as premier who went on to tackle the specific problems
- Zhao even put a tape recorder near his bed to hear himself.
- He also enjoyed talking to experts
- Had to balance between conservatives and radicals
- Long lasting benefits – “1990s seen as the Zhao era without Zhao”
- Deng promoted Jiang Jemin and Zhu Rongji
- Zhu, mayor of Shanghai, streamlined the FDI procedures from many to just one. Made it more efficient.
- In 1979 – Special Economic Zones (SEZs) created
- Explored market learning
- 1982 – Said that what he was doing was “building socialism with Chinese characteristics”
- Deng especially had knowledge of the market economy – visited Japan, Singapore etc – in action
- Also had political breakthrough when he managed to get an announcement on 15 Dec 1978 to get formal US recognition on 1 Jan 1979.


REFORM AND OPENING UP CHINA

- Reform of CCP
- 1982, initiated a plan for to encourage older members to retire
- Appointed younger ones like Zhou Ziyang
- But still maintained Communism as key tenet
- Four Cardinal Principals
- follow socialist road
- Dictatorship of the proletariat
- CCP was leader
- Supremacy of Marxist-Leninist-Maoist thought

Economic Change, Not Political

- There were the beginnings of a Democracy movement, but Deng quick to put this down.
- While he did try to improve things economically, he was not going to go back on the principal tenets of Communism
- Many began to think that the opening up economically meant politically too
- Younger generation approved of changes
- Democracy Wall (southern wall of Forbidden City) began to have posters
- Some started to openly criticize the government
- Some began to claim that “China needed not only Modernization but Westernisation.”
- Government put in new rules like having university students having to serve 2 years of compulsory labour
- Hu Yaobang, a Deng appointee, began to openly disagree with this
- Was dismissed but soon students saw him as a hero
- Even began to see themselves as successors of the May 4th movement and had demonstrations on May 4th 1989.
- Encouraged by what was happening in USSR
- Gorbachev was also scheduled to come to Beijing
But China’s relations with USSR under Deng were never good, as he continued the traditional competition under Mao about fighting for supremacy in the Communist world.
- Started protesting in Tiananmen Square 1989 – hunger strikes, protests
- But by 4th June; troops started shooting at students
- CCP denounced the action of the students as counter revolutionary
- But problem was that it broken cultural links with other states and reduced or stopped foreign investment.
- Even if there had been hope for democratic reform, it died by this time
- By 1991 USSR collapsed under the weight of domestic and economic pressures so China continued, even though after Tiananmen Square some were wary.
- Deng continued reforms, even visited Guangdong at age 88
- Jiang Zemin started coming to prominence
- Had reinvigorated Shanghai
- Jiang also, after Deng’s death, took on an increasingly visible role in foreign affairs.
- could speak English and sent sons to study in USA
- visited USA in 1997

INTRODUCTION OF ‘SOCIALIST MARKET ECONOMY’

- Originally from Zhou Enlai (later 4 Modernisations endorsed by him and Hua Guofeng, his successor) – although many of the economic policies by Hua in 1977-78 had been created by Deng, by 1975. So how far was Deng responsible to China’s economic development even before he assumed power?
- So even that grandiose plan of the 4 modernisations which Hua based his power on, after besting the Gang of 4, came from Deng.
- As did his Ten Year Plan
- "Planning and market forces are not the essential difference between socialism and capitalism. A planned economy is not the definition of socialism, because there is planning under capitalism; the market economy happens under socialism, too. Planning and market forces are both ways of controlling economic activity."
- "What is socialism and what is Marxism? We were not quite clear about this in the past. Marxism attaches utmost importance to developing the productive forces. We have said that socialism is the primary stage of communism and that at the advanced stage the principle of from each according to his ability and to each according to his needs will be applied. This calls for highly developed productive forces and an overwhelming abundance of material wealth. Therefore, the fundamental task for the socialist stage is to develop the productive forces. The superiority of the socialist system is demonstrated, in the final analysis, by faster and greater development of those forces than under the capitalist system. As they develop, the people's material and cultural life will constantly improve. One of our shortcomings after the founding of the People's Republic was that we didn't pay enough attention to developing the productive forces. Socialism means eliminating poverty. Pauperism is not socialism, still less communism."

FOUR MODERNISATIONS
The Four Modernizations were the goals of Deng Xiaoping’s reforms. They were first introduced by Zhou Enlai in 1975 at the Fourth National People's Congress in one of his last public acts. After his death and Mao’s soon thereafter, Deng Xiaoping assumed control of the party in late 1978. In December 1978 at the Third Plenum of the 11th Central Committee, Deng Xiaoping announced the official launch of the Four Modernizations, formally marking the beginning of the reform era. The Four Modernizations were in the fields of:
• Science and Technology
• Agriculture
• Industry
• National Defense
The Four Modernizations were designed to make China a great economic power by the early 21st century. These reforms essentially stressed economic self-reliance
Technology

- 1980s China abandoned importing most of its technology from USSR, which had made things worse
- More selective imports from US and EU
- After Cultural Revolution, there was a lost of intellectuals, and so in 1980s 50,000 students sent abroad, most to USA
- mixed blessing; brought back Western skills but ideas as well
- Managed to import and receive USA and Western technology, especially with improving relations; e.g. US recognition of China in the 1970s.

Agriculture

- From 50s to 70s grain consumption was stagnant per capita, about 300 kg.
- Deng in 1979, increased state grain prices by 20% to reduce the “scissors gap” between agriculture and industry production
- Appointed Zhou Ziyang
In Sichuan, allowed leasing of land to individual farmers (one year, then allowed for more; up to 15 years)
- Some sold to State, the rest allowed on newly formed Free Markets (contract responsibility system) or household responsibility system
- Deng also reduced capital investiture and increase investment in light industry and agriculture
- Allowed up to 15% of cultivated land to be family owned.

Household Responsibility System

- Contract responsibility system; allowed some to open market and
- Became inheritable and so made it more attractive to invest in it.
- Commune system was gone by 1983, but many agricultural products remained under governmental control for a long time
- Many of these communes replaced by TVEs of township governments.
- E.g. grain remained subsidized
- Households would pay a portion, like rent, to meet state tax and quota
- The whole team of farmers would collectively own the tools and animals
- The rest of the produce could be used however they wanted. Usually sold on the open market.
- Contract system was not completely new in socialist state – e.g. happened in Hungary
- Within 3 years, by 1983; 98% were in this system
- Later on, Deng allowed paid labourers, and even said “some must get rich first”
- The economic significance was that now people felt they would not be punished if they got rich - slogans like “to get rich is glorious”
- This meant that innovation and incentive became prominent
- Also allowed to pass on the land. In effect this meant that many began to sell, rent land as if it was a de facto capitalist land market, even though the land was state owned
- 1/5 of rural farms also became specialist farming households
- More lucrative items like cash crops, tea, silk
- Entrepreneurship increased
- Rural income doubled; from 1978 to 1985 sugar went up from 856 to 1760 million tons, grain from 300 to 414 million tons
- But some problems: because no longer communes, public works and irrigation were ignored.
- By mid 1980s, began to stagnate

TVEs
- Slowly, the government removed its monopoly on agricultural products from 43 items in 1983 to 9 in 1984.
- By 1986, it changed from state monopoly of grain to fixed purchase based on contracts.
- Late 1980s, rural industry and Townships and Village Enterprises coming out
- Rural industry employed about 20% of workforce
- Soon began to have wage payments – which seemed to go against the “pay according to work” policy of the socialist
- New rural prosperity – output increased 21% per annum
- Markets flourished
- Some peasants had higher incomes and could own consumer goods like bicycles
- Then again, also had to thank collectivization as things like dams, irrigation all contributed to the rapid development which were built in the 1950s and 60s.
- And by late 1980s the increases in grain could not be kept up
- In 1984 they became a net exporter of grain
- But - in 1985, grain production fell
- One major reason was the mercerization of the economy, as it was more profitable to plant non-grain
- Some unable to pay the contract amount
- What kept rural farmers afloat was the growth of the rural industries
- Between 1984 and 1987, rural industries grew 37.7% annually
- Social inequality also came about. By mid 1980s, income ratios between richest and poorest were 20 or 10 to 1
o 4 levels of peasant –
 a) A rural bourgeoisie that run TVEs hire and run a capitalist “firm.
 b) Those that work the land.
 c) Wage labourers.
 d) poor workers
- CCP – who were the champions of the rural poor now seemed to be supporting the rural elite
- But overall success – living standards etc
- Other moves: 1988, Organic Law of Villages’ Committees; later allowed to get rid of corrupt officials


Industry

- The industry was the major beneficiary of Mao
- By 1980s, however, warned that firms that did not make profit would be closed.
o Reduced complacency
o Post Deng (Jiang)
 By 1995, headway made in dismantling inefficient state run firms
 29% were classified as private
 1 in 12 workers employed by private firms
 state run firms (2/3) produced less than half of economic output
 “socialism with Chinese characteristics” or “authoritarian capitalism”
- Under Mao there was an absence of private ownership in factors of production
- Over planned by state
- Iron rice bowl – over employed, welfare benefits – could not fire them – inefficient
o So profit motive comes in.
o Termination of employment proposed
o Sichuan experiment where firm were given autonomy in marketing their above plan outputs
o Problems of unemployment and inflation
o But the increase in consumer goods went up – more so than heavy industries 12.7% and 8.4% respectively from 1979-1985
o In labour – companies now employing by contracts to eliminate iron rice bowl
 Migrant from farms etc
 All this looks like a capitalist economy
o Free Market
 Price reform
• dual price system
• One price for state
• Another price for open market
 monetary reform
• to reduce bank loans and dependence on banks
• 1994 – Bank of China given more freedom
Bonds sold rather than printing money to finance debt
4 special banks turned into commercial bank, aimed at profit maximizing and encouraged competition
 Principle of enterprise profitability; whether they would survive or not
 Doing away with iron rice bowl

Reform of State Owned Enterprises

- Even in 1990s, these formed the core of the industry
- Half of industrial output, but down from 4/5 in 1978
- Due to increase in collective sector and towns and villages (TVEs)
- About 40% run at a loss
- Under the command economy, especially hard to fire staff (iron rice bowl)
- Therefore had to reform carefully
- Slowly gave power to managers rather than State officials
- Ministries began withdrawing from day to day control
- Managers signed contracts; determining profits. Could be removed if there were no profits
- Tried to reduce the power of the Iron Rice Bowl, especially in SEZs
- Contract to basically replace this, stipulating employment length and benefits
- Tried to create firms that would be able to compete globally
- Western experts saying that progress made is still to slow. WHY?
- Price reform – dual price system: a set price for the state, then another price subject to the open market.
- So in all sectors tried to maintain or reduce the output at the lower state prices so more could be sold at market rates
- Sues account for 1/3 of industrial production and employ 2/3 of workers
But inefficient and loss making. One of the reasons that China can’t reduce trade barriers it would lead to widespread bankruptcy of these firms.
- Banking system regulated by government, they need to provide low.
- Interest loans to SOEs. About 70% of loans go to SOEs.

- Problem for Banks
- Therefore banking is insolvent and so government is also unwilling to open up banking to foreigners.
- Have to make loans to state firms; very little hope they will be repaid
- Lack of rule of law means sometimes foreigners not as willing to invest. USA could be unwilling as laws and rules are not transparent.
- Because they are financed internally; they are not subject to checks.
- Therefore by 1997, - reform of SOEs are a priority
- Jiang Zemin – wanted to privatize (public ownership) - so all but 1000 of the over 300 000 SOEs. Some may be closed or combined with profitable ones.
- Banks would make loans based on commercial decisions.
- March 2 1998, government would issue bonds to banks to help write off “bad loans”

Still State Driven
- China remains a state driven economy.
- Government influence is strong in most areas of society
- Sectors like agriculture, manufacturing still quite backward in terms of technology
- The Market economy operates alongside the state driven economy, which is largely unprofitable
- Possibly – emphasis is on real production rather than profitability which is seen in the banking sector making losses
- And while short term gains seem more with real production, long term sustainability comes from productivity.
- Could it be overtaken by India as India focuses on domestic consumption and productivity
- China’s competitiveness also takes a hit because of corruption and the concern over SOEs
- WTO believes that because China’s growth is based on cheap capital it can’t sustain. Needs household demand and can’t just depend on exports
- Industrial growth is based mainly on FDI and not initiative. Foreign businesses are looked up at more than local firms

- Deng’s trip to South in 1992, after that the Third Plenum of the 14th CCP National Congress
- After that tried to establish modern corporate systems (had to reduce SOEs’ inefficiency
- But hard because there was so much state control
- 4th Plenum of the 15th CCP National Congress – allowed the state to have 4 industries – national security, natural monopoly, important public goods and services and key areas in high technology
- others could have shared ownership
- so targeted at the smaller and medium SOEs (about 90% of total)
- Working on diversifying ownership, so not just state owned

Government support for growth of private sector

- By June 1996, there were 709,000 private firms, employing more than 10m people.
- Wanted the private sector to work on areas that state owned firms had neglected like the service industry.


Opening of China

- Western Literature
- Drugs, discos
- Some claiming that with increasing crime rates, China may have gone too far.
- In 1970s before Deng, China tried to improve Industry by emphasising heavy industry, with government direction
- But poor planning, and low productivity
- Realization they had to abandon this traditional method and look at the East Asian nations
- Can’t have self reliance
- Deng and Zhao Ziyang changed style from heavy, import substitution to light industries and export oriented


Foreign Investment
- FDI in China – from 1979-2004, Hong Kong has been the largest investor; with 43%, USA 8.5% ($48b)
- Provision of tax incentives for foreign investments
- By 1980, got its first loan from IMF
- China also has trade with many states; ASEAN, USA, Japan
- By the 1990s; mainly a BOT surplus (with USA, EU and Hong Kong)
- During the 1997 AFC, it was able to remain stable, not due to its fixed exchange rates with USA but because it could draw on its surpluses.
- Many other Asian countries were running a deficit and could not tide over the crisis period
- Mao had self reliance and self sufficiency
- Had become so especially after the final loan repayment in 1965 to USSR
- Deng criticized this closed door policy and wanted an open door one
- From 1978 – 88 foreign trade quadrupled $20 to $80b
- And again by 1994 $236b
- Although possibly, Moaist autarky helped by protectionist measures and helping to develop local industries so as to better deal with foreign goods later on
- Foreign trade was not so surprising as it even started under Mao, but what was surprising was the opening up to foreign investment
- - esp SEZs

But problems
- Since 1978, the proportion of output from low level manufacturing has dropped, but product quality lags behind.
- And so China depends on imports for high end products.
- In addition, there has been an increase in the number of firms selling lower end goods for mass consumption
- Has caused inflated demand
- And delayed the modernization of industries
- E.g. foreign companies supply 80% of telecoms equipment
- And the lifespan of good is more than 10years rather than 3 years in USA
- Opening up China
o 1st stage SEZs
o 2nd stage was opening up 14 coastal cities (Economic and Technological Development Zones (ETDZs)
 By 1984, Hunan and 13 regions denoted as tax havens
 These were coastal cities, in addition coastal regions along Yangtze River, Minjiang River also given tax benefits
o 3rd stage – reinvigorate Shanghai
 make it a world city – Pudong New Zone
- Soon wanted a WTO seat




Special Economic Zones

- 1979, opened 4 regions (Zhuhai, Xiamen, across from Taiwan, Shantao and Shenzhen, across from Hong Kong). Haina island added as a 5th in the 1980s
Southern coasts in Guangdong and Fujian

- 15% tax waved for first 2 years
- 50% in 3rd and 4th year
- No import duties
- Shenzhen was most profitable (close to Hong Kong)
- By end 1983, 188 joint equity ventures
- These SEZ also were testing grounds for what might happen nationally
- SEZs were given greater decision making power and tax incentives
- By 1986 they accounted for 14% of the China’s land area but 60% of GNP and 79% of foreign trade
- By 1988, Shenzhen succeeded in turning itself into a export oriented economy $1.85b in 1988, up from $11m in 1980
- Not a purely Chinese invention
- Seen in Korea and Taiwan
- Seen as examples or schools to learn from
- However some critics saw them as reminiscent of treaty ports
- But hey were not the same as they were Chinese owned, what was harder to explain was the very capitalist nature of them
- Shenzhen – in 1980 -84; concluded 3000 contracts and agreement worth over $2.3b
- Manufacturing enterprises increased from 26 to 500
- In the region personal income and per capita output were much more than other regions
- Problems
- By 1985 – in seemed that much of these foreign investors “had only signed letters of intent” an more were domestic investment
- Statistics were based on state investment and building
- also it seemed that it was exporting mostly inland and therefore not getting a lot of foreign currency – its main purpose
- SEZs also saw corruption and shady deals
- vices like prostitution
- First bank in Shenzhen was Bank of Credit and Commerce which funded corrupt politicians and drug dealers
- by 1986, government funds to SEZs were reduced
- limits on credit and loans

- foreign investors moved to other port regions – especially old treaty ports
- In addition, China also increased its loans from other countries. In mid 1980s about $30b in debt, mostly to Japan
- But not unmanageable. Because much of it was for making profit


Export oriented production

- Open door policy, but mainly coastal regions
- Interior remained largely underdeveloped and mainly for producing good for domestic consumption
- Coastal regions had ¼ of population.
- Began developing them as SEZs
- Japan also benefited
- Could export oil, coal while Japan had capital, technology and high level manufacturing
- By 1985, China replaced oil producing Saudi Arabia as Japan’s number 1 trading partner.
- Japanese direct investment increase from $100m in 1985 to $2.2b in 1987
- Also with USA
Trade (before 1977 change to export policy) was $375m. by 1980 was $5b
USA also increased FDI.
With USA and Japan, China became 5th largest oil exporter
China also hopes to keep tariffs low, as many states may have high barriers against Chinese good as they are cheaper.
- Must make sure that they remain members of GATT or WTO.

Zhao’s foresight
- Zhao also realized that by 1987 with the October Market crash, the other Asian states were moving up the product cycle, so China could take their place
- Some were wary about subjecting China to the whims of the international market, but Zhao believed that their huge domestic market gave them room to maneuver
- Zhao called on these areas to build up their labour intensive processing industries
- Could use its large workforce, many freed up by agricultural reform
- Zhao also realized that this policy also meant decentralization and gave more power to the local enterprises and authorities, which suited him as he made his career in the provinces
- 1988 – “Draft Plan for the Restructuring of the Foreign Trade System” approved by State Council for Foreign Trade Companies (FTCs)
- However Zhao could not reconcile the disparity in development between the coast and the interior
- Many inland leaders were upset at the rising inequalities
- Even the people on the floor had problems with it, the main problem being that they felt that the Chinese did not have the comparable skill set of the more developed exporting states
- there was also State Directed Export Orientation – tried to find markets
a. established administrative control
b. tariffs and barriers – e.g. Coffee, video games, vacuum cleaners and encouraging domestic production.
c. Industry targeting – some industries were encouraged and were given credits etc, like textiles which was about ¼ of China’s exports in 1988.
d. devalued the currency

Improvements

- International trade has broken China’s isolation but it has also made China overly dependent on it.
- Since mid 1990s, the foreign-market orientation has accelerated
- Marked improvement in manufactured goods
- About 8-10% growth rates
- Slowly starting to export more technology driven equipment and less labour - intensive products


RECAP

1. Role of Deng Xiaoping in China’s Economic Development
2. Introduction of ‘Socialist Market Economy’
- Four Modernisations
- Reform and Opening up
-SEZs
- Tax Incentives for Investors
- Export orientation
- Reform of State Owned Enterprises (SOEs)
- Support for growth of Private Sector
- Agricultural Reforms

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