Chinese Economic Reform

Two years after the death of Mao Zedong in 1976, it became apparent to many of China's leaders that economic reform was necessary. During his tenure as China's premier, Mao had encouraged social movements such as the Great Leap Forward and the Cultural Revolution which had had as their bases ideologies such as serving the people and maintaining the class struggle. By 1978 "Chinese leaders were searching for a solution to serious economic problems produced by Hua Guofeng, the man who had succeeded Mao Zedong as CCP leader after Mao's death" (Shirk 35). Hua had demonstrated a desire to continue the ideologically based movements of Mao. Unfortunately, these movements had left China in a state where "agriculture was stagnant, industrial production was low, and the people's living standards had not increased in twenty years" (Nathan 200). This last area was particularly troubling. While "the gross output value of industry and agriculture increased by 810 percent and national income grew by 420 percent [between 1952 and 1980] ... average individual income increased by only 100 percent" (Ma Hong quoted in Shirk 28). However, attempts at economic reform in China were introduced not only due to some kind of generosity on the part of the Chinese Communist Party to increase the populace's living standards. It had become clear to members of the CCP that economic reform would fulfill a political purpose as well since the party felt, properly it would seem, that it had suffered a loss of support. As Susan L. Shirk describes the situation in The Political Logic of Economic Reform in China, restoring the CCP's prestige required improving economic performance and raising living standards. The traumatic experience of the Cultural Revolution had eroded popular trust in the moral and political virtue of the CCP. The party's leaders decided to shift the base of party legitimacy from virtue to competence, and to do that they had to demonstrate that they could deliver the goods. (23) This movement "from virtue to competence" seemed to mark a serious departure from orthodox Chinese political theory. Confucius himself had posited in the fifth century BCE that those individuals who best demonstrated what he referred to as moral force should lead the nation. Using this principle as a guide, China had for centuries attempted to choose at least its bureaucratic leaders by administering a test to determine their moral force. After the Communist takeover of the country, Mao continued this emphasis on moral force by demanding that Chinese citizens demonstrate what he referred to as "correct consciousness." This correct consciousness could be exhibited, Mao believed, by the way people lived. Needless to say, that which constituted correct consciousness was often determined and assessed by Mao. Nevertheless, the ideal of moral force was still a potent one in China even after the Communist takeover. It is noteworthy that Shirk feels that the Chinese Communist Party leaders saw economic reform as a way to regain their and their party's moral virtue even after Mao's death. Thus, paradoxically, by demonstrating their expertise in a more practical area of competence, the leaders of the CCP felt they could demonstrate how they were serving the people. To be sure, the move toward economic reform came about as a result of a "changed domestic and international environment, which altered the leadership's perception of the factors that affect China's national security and social stability" (Xu 247). But Shirk feels that, in those pre-Tienenmen days, such a move came about also as a result of an attempt by CCP leaders to demonstrate, in a more practical and thus less obviously ideological manner than Mao had done, their moral force. This is not to say that the idea of economic reform was embraced enthusiastically by all members of the leadership of the Chinese Communist Party in 1978. To a great extent, the issue of economic reform became politicized as the issue was used as a means by Deng Xiaoping to attain the leadership of the Chinese Communist Party. Mao's successor, Hua Guofeng, had "tried to prove himself a worthy successor to Mao by draping himself in the mantle of Maoist tradition. His approach to economic development was orthodox Maoism with an up-to-date, international twist" (Shirk 35). This approach was tied heavily to the development of China's oil reserves. "[W]hen [in 1978] estimates of the oil reserves were revised downward[,] commitments to import plants and expand heavy industry could not be sustained" (Shirk 35). Deng took advantage of this economic crisis to discredit Hua and aim for leadership of the party. "Reform policies became Deng's platform against Hua for post-Mao leadership" (Shirk 36). Given this history of economic reform, it is evident that "under the present system economic questions are necessarily political questions" (Dorn 43). Once Deng and his faction had prevailed, it was necessary for some sort of economic reform to evolve. The initial form the new economy took was not a radical one. China was "still a state in which the central government retain[ed] the dominant power in economic resource allocation and responsible local officials work[ed] for the interest of the units under their control" (Solinger 103). However, as time passed, some basic aspects of the old system were altered either by design or via the process of what might be called benign neglect. As Shirk points out, in rural areas, decollectivization was occurring: "decision making power [was being transferred] from collective production units (communes, brigades, and teams) to the family" (38); purchase prices for major farm products were increased (39). In 1985, further reforms were introduced. For example, long-term sales contracts between farmers and the government were established. In addition, in an effort to allow the market to determine prices, "city prices of fruit and vegetables, fish, meat, and eggs, were freed from government controls so they could respond to market demand" (Shirk 39). Most importantly, "a surge of private and collective industry and commerce in the countryside" (Shirk 39) occurred. This allowed a great percentage of the populace to become involved in private enterprise and investment in family or group ventures. The conditions also allowed rural Chinese to leave the villages and become involved in industry in urban centers (Shirk 40). The economy grew so quickly that inflation occurred and the government had to reinstitute price controls. China's economy retains these characteristics of potential for growth--and inflation--to this day. Another important aspect of Chinese economic reform was the decision of China to join the world economy. Deng Xiaoping and his allies hoped to effect this 1979 resolution in two ways: by expanding foreign trade, and by encouraging foreign companies to invest in Chinese enterprises. This policy--denoted the "Open Policy" (Shirk 47)--was a drastic removal from the policies of Mao Zedong and, in fact, from centuries of Chinese political culture. The Open Policy, which designated limited areas in China "as places with preferential conditions for foreign investment and bases for the development of exports" (Nathan 99), was extremely successful in the areas where it was implemented (Shirk 47). However, it was looked upon by many Chinese as nothing less than an avenue to "economic dependency" (Nathan 50). Indeed, when the policy was first implemented, many Chinese seem[ed] to fear that Deng's policies [were] drawing China back toward its former semi-colonial status as a "market where the imperialist countries dump their goods, a raw material base, a repair and assembly workshop, and an investment center." (Nathan 51) It is interesting to note the symptoms of a national character that would subscribe to the above sentiment. In an article written in 1981, just two years after the Open Policy was first proposed, Andrew J. Nathan noted the almost pathological resistance to foreign intervention in the Chinese economy: "Some Chinese fear that reliance on imported technology will encourage a dependent psychology ... [Many] Chinese perceive joint ventures as a costly form of acquisition. 'Some people worry: Won't we be suffering losses by letting foreigners make profits in our country?'" (52). The Chinese were as vociferous about issues of sovereignty. Nathan maintained that the Mao-led revolution, which culminated in victory in 1949, had been fueled by "an intense patriotism: ... once China had 'stood up,' no infringement on its sovereignty, no matter how small, should be permitted" (53). These feelings were manifested in denying foreign businessmen long-term, multiple entry visas, resisting "increased foreign economic contacts" and alteration of current ways of doing things, and disinclination to become involved in government-to-government loans and joint ventures lest Chinese become exploited in some way (Nathan 53-55). Given these hesitancies on the part of the Chinese society vis-a-vis foreign relations, it is impressive that Deng and his allies were able initially to create and implement the Open Policy since many members of the society at large were resistant to becoming involved in a policy so antithetical to the Chinese national character. However, once the successes of the Open Policy were apparent, resistance to the plan by the populace waned. Moreover, given the confluence of politics and economics in China, it seems apparent that some members of the CCP would also not be in favor of the plan. Nevertheless, the Open Policy was implemented and has become instrumental in the success of the burgeoning Chinese economy. The implementation of the Open Policy was so successful that by 1988 the leaders of the CCP were encouraged to create a new program called the "coastal development strategy." In this program, even more of the country was opened up to foreign investment--an area which, at the time, included nearly 200 million people. Moreover, by involving more overseas investors, "importing both capital and raw materials," and "exporting China's cheap excess labor power," the new policy was one of "'export-led growth' or 'export-oriented industrialization.' It [was] explicitly modeled on the experiences of Taiwan and the other Asian 'small dragons'" (Nathan 99). One analyst has maintained that "China now stands at the threshold of the greatest opportunity in human history: a new economic era promising greater wealth and achievement than any previous epoch" (Gilder 369). Illustrative of this optimistic feeling is Shanghai, an area that was designated for preferential conditions for foreign investment and as a base for the development of exports in 1988. This city and environs in the Yangtze Delta area have a population of approximately 400 million people and the city has become the nation's financial hub for international and national investors. For political reasons, this area was excluded from the original Open Policy designation in 1978, but is currently in the process of catching up with other areas so designated. Indeed, the increase in foreign investments in the last two years is striking. The area received 3.3 billion dollars in foreign investments during the 1980s. The area received the same amount from foreign investments in 1992 alone. In only the first ten months of 1993, the area had received over six billion dollars worth of foreign investments (Tyler A8). Western analysts have asserted that the Open Policy and the coastal development strategy have allowed Deng to entrench his political power (Shirk 47) and will allow his power to be sustained even after death. If this is true, Deng should be very popular in Shanghai. With its new designation, and with the billions of foreign dollars coming into the area, it has become necessary to improve the city's facilities. To that end forty billion dollars worth of public works projects have been allocated by the central government for Shanghai within the last year (Tyler A1). These public works projects include new sewers, a new water system, new gas lines, a new bridge, and extensive roadwork. Future plans include the construction of a second international airport, a container port, a new subway system, and more roads and bridges (Tyler A8). The financial district, which will feature a new stock exchange, is also being rebuilt by China and foreign investors in a joint venture. By being designated for preferential conditions, Shanghai received from the central government tax exemptions for enterprises doing business with foreign companies, tax holidays for new factories set up with foreign investments, and a bonded zone--the largest in China--for duty free imports of raw materials. Shanghai now has all the trappings of a modern city: discos, construction projects, and conspicuous consumption. In short, where "revered monuments and golden arches exist side by side" (Riboud 12), the appearance of the new Shanghai does nothing less than signal "the end of the ideological debate over China's free market experiments" (Tyler A8). Shanghai has joined the ranks of the modern metropolis. However, this is not necessarily a beneficial development. Inflation is rampant: prices have doubled in the industrial zones in the last five years. Nevertheless, the fact that Shanghai currently possesses the fifth most expensive office space in the world demonstrates that demand is high and that the prospects for future growth are promising (Tyler A8). Indeed, Pudong, a free export manufacturing zone described as "the future sight of Shanghai's Manhattan" (Tyler A8), boasts more than twenty factories built or being built with names like Siemens and Hitachi prominent. This area has become particularly attractive to foreign investors and companies because of its tax concessions, duty free imports of raw materials, and cheap labor. Shanghai stands to benefit, too, as it receives ancillary technology and discretionary spending from the workers and executives of the companies represented (Tyler A8). It is conditions like these that have caused at least one analyst to predict that China will be "the richest economy in the world within the next 25 years" (Gilder 372). Shanghai is by no means unique to this growth. Additional foreign investments have continued to pour into other areas of China. For example, the Boeing Company recently announced its intention to "invest $100 million in a plant in [Xian] China to make tail sections for 737 jetliners" ("Boeing" D4). In addition, E.I. du Pont recently predicted "that its investments and business in China could increase as much as ten times by the end of the century" ("Du Pont" D2). Tellingly, du Pont's chairman attributed the company's negotiations of "as many as 28 new projects in China" to the fact "that the country's financial changes, improved infrastructure and rising disposable income has [sic] encouraged the company to expand its business activities" ("Du Pont" D2). The Chinese government has made conscientious attempts to promote the strength of the country's economy while protecting its citizens. Just a few weeks ago, the government instituted "tight-money policies, intended to control inflation and slow what has been the world's fastest growing major economy" (Shenon "China Halts" D1). However, after doing so, China's Securities Regulatory Commission was forced to stop the issuing of new issues on the Shanghai and Shenzhen Stock Exchanges because the value of the markets had decreased so greatly. This latter move was "meant to calm millions of first-time Chinese investors who evidently went into the market believing that stock prices could only go up" (Shenon "China Halts" D1). Might this policy show a union of economic and moral concern? If so, it demonstrates the desire on the part of the government to show some kind of responsibility, some moral force, to its citizenry. At the very least, the strategy appears to show a practical desire on the part of the government to take control over what could have been a bad economic situation. Indeed, after these measures were instituted, China's trade deficit decreased (Hansell D2) and the stock markets' volume attained record highs ("Stocks Surge" D2). To be sure, Chinese investors remain somewhat wary about the stock market and, ironically enough, more control of the stock markets appears to be necessary (Shenon "A Nail-Biting" D1). But, in discussing Chinese attempts to control inflation, Philip J. Suttle, head of emerging markets research at the investment firm of J.P. Morgan, has predicted that "[i]t looks as though the Chinese are going to have the soft landing they are aiming for" (quoted in Hansell D2). China's interest in stock markets is no longer restricted to within its own boundaries. This month, Shandong Huaneng Power Development Company, "the first mainland Chinese company to have its primary listing on the New York Stock Exchange" ("China Stock" D5), began trading shares. The stock should be an attractive one to investors: Chinese electrical "demand ... is expected to grow by a whopping 17 million kilowatts a year until the turn of the century" (Zuckerman D6). Moreover, China stands to gain from the issue's sales. "The company plans to use the $311 million dollars it received from the offering to retire $83 million in loans from ... Chinese state entities. It also plans to expand its overall generating capacity" (Zuckerman D6). Nor does this signify the only Chinese attempt of raising capital from foreign sources on foreign soil. "Three more power companies are expected to be listed in New York and Hong Kong in the coming months" (Zuckerman D6). Given the apparent strength of the Chinese economy as shown by huge public works projects, extensive foreign investments, participation in the world economy, and a generally higher standard of living by the populace, it would appear that China is now ready to join the world as a modern capitalistic and democratic society. However, this is not quite the case. The CCP retains vestiges of those characteristics of insularity and intransigence as discussed by Nathan. Because of its human rights record, the country's economic growth is being impeded. That is, the politics of China, which have always been allied with its economics, are now restricting international growth. The United States, especially, has been concerned with China's treatment of political dissidents. In May, President Clinton decided to end linking China's trade status with the United States with its record on human rights. The president has been criticized for this because of situations like the following: trials for "'counterrevolutionary activities' [including] ... plans to use a remote-controlled airplane to drop pro-democracy leaflets over ... Tienenmen Square" ("China cracks" A13) have recently begun for fifteen dissidents and labor organizers who were involved in the Tienenmen Square protests. These trials have "been delayed twice, first to avoid negative international reaction just before the decision last September on China's failed bid to host the 2000 Olympics and then this spring to avoid influencing Clinton's trade decision" ("China cracks" A13). In addition, China has instituted "new laws effective in June [which] give sweeping powers to China's State Security Bureau to clamp down on dissidents" ("China cracks" A13). China is fully aware of United States' concerns about its human rights record. Given the fact that the United States has made it clear to China that that record will be allied with trade status, China's timing of such restrictive activities has caused United States legislators and administrators to question China's sincerity in its desire to have a favored trade status with the United States. Indeed, just in the past few days, it took a last-minute lobbying campaign by President Clinton and his Cabinet [to head off a] potentially embarrassing vote by the House of Representatives to restrict trade with China as a way to punish Beijing for reported human rights violations. (Bradsher A7) But China's problems in joining the community of the world market have more to do than with its political ethos and practices. China appears not to understand or to be able to follow through on fundamental modern economic practices. For example, the United States has recently complained that "China has not complied with international rules on access to its markets and protection of copyrights and patents" (Gargan 14). Such non-compliance could make it difficult for China to become a founding member of the World Trade Organization, the successor to the General Agreement on Tariffs and Trade and the body that is intended to promote global free trade by lowering tariffs and other barriers, [which] will be formally constituted on January 1, 1994. (Gargan 14) The specific nature of the United States' complaint has to do with China's pirating of musical compact disks, video laser disks and computer software. In fact, it is estimated that such pirating costs American companies a billion dollars a year. This phenomenon seems to have to do with the Chinese psychology as described by Nathan. In his 1981 essay he noted that China did not wish to become a "technological client of the west. The preferred solution is to buy one item and copy it" (Nathan 52). Clearly, this is not the way trade works today. It is the United States' position that China must adhere to the rules of trade before it can be included in a trade organization. Needless to say, exclusion from WTO would be disastrous for any country, but particularly for an emerging market such as China. Even on a day to day basis, China's economic leaders seem unable to understand how some aspects of a market economy work. In discussing the status of the Shanghai Stock Market, for example, one stock dealer referred to it as "crazy" ("Stocks Surge" D2). Moreover, American analysts have been amazed to discover in the Shanghai market "the lack of regulation and the poor disclosure requirements. Some companies have been listed for two or three years and have not issued an annual report" (Hansell D2). It is no wonder that Chinese investors become anxious about their investments. The issuance of shares in the Shandong Huaneng Power Development Company also demonstrates the lack of expertise on the part of the Chinese in the modern world market. In fact, according to one Hong Kong investment analyst, "'[t]he company wasn't really a company. It was just a bunch of discrete plants that they tied a bow around and wrote a prospectus on'" (Zuckerman D6). The prospectus guaranteed a fifteen percent annual return on investments. In fact, the return will no doubt be less than that because of prevailing currency exchange rates and debt that the company will have to assume. To be sure, the problems of the Shandong Huaneng Power Development Company and the Shanghai Stock Exchange may demonstrate only the problems of an immature economy. Nevertheless, if China wishes to become a viable member of the world economic community, such shortcomings will have to be eliminated quickly. These apparent problems may also be the result of an economic system that is run by the state. Certainly, one thing that the CCP has attempted to do is create a market economy while retaining a state controlled system. This structure may be possible but it does have its critics. Steven N.S. Cheung, in an essay written in 1989, argued for the "creation of private property by mandate" (31), feeling that privatization in China would lead to necessary additional investment in the society's infrastructure and the establishment of a "judicial system that is based firmly on the principle of equality before the law" (Cheung 32). Echoing Cheung's sentiments, James Dorn saw problems in the areas of Chinese banking and finance. In this arrangement, Dorn argued, "the state controls the bulk of investment resources. The lack of a private capital market has handicapped economic development in China and hampered rational investment decisionmaking" (43). In order to become a modern economic state Dorn argued for the necessity of circumventing "China's ruling elite who oppose the dismantling of state monopolies and who benefit from price fixing and nonprice rationing" (51). Xu Zhiming also saw the necessity for a revamping of the Chinese system: "We must throw off the traditional system completely" (249) in order for economic reform to thrive. Communist Party members, of course, articulate a different position. In a recent interview that appeared in the Beijing Review, Feng Bing, Deputy Secretary General of the State Commission for Restructuring the Economic System, spoke to the issue of economic reform in China. It is striking that Feng spoke of the benefits that the populace has received as a result of the economic reform now occurring in China. That is, his comments appeared to demonstrate the beneficence, or the moral force, of the Chinese Communist Party vis-a-vis economic reform. He noted that such reform involves the essence of socialism: "to liberate and develop productive forces; to eradicate exploitation; to remove polarization; and ... to attain the goal of common prosperity" ("Official" 12). Thus, CCP leaders still appear to see their roles as representatives of a moral force. CCP members and leaders wish economic reform not to be judged on just its practical merits, but also as an effect of the moral force of the leadership. Economic reform, then, becomes nothing less than a moral crusade and it is thus easy to see why, for example, China "has staked its national prestige on becoming a founding member of the World Trade Organization" (Gargan 14). Will China succeed in taking its place among the nations of the world market? Will the CCP succeed in retaining its political power given the drastic changes in the societal makeup of China that are occurring due to the changing economic realities? I would suggest that the chances are better for the former than for the latter. Once the Chinese attain more sophistication relative to international and national markets, institute a more manageable banking system, and make a good faith effort to insure acceptable human rights, the country may well become "the richest economy in the world within the next 25 years" (Gilder 372). However, whether or not these conditions can occur without a weakening of the state controlled system is problematic. The most impressive and far-reaching display of moral force by the CCP may well have to be a voluntary reduction of its power over the people. Paradoxically, by weakening itself politically, the party may demonstrate its true moral force by liberating, politically and economically, one billion Chinese citizens. --- WORKS CITED "Boeing Planning to Invest $100 Million for China Plant." New York Times: 9 August 1994, D4. Bradsher, Keith. "Bill to Restrict China's Imports Loses in House." 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