Chinese Economic Reform Under Communist Rule
 
 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.
 
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