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 evolution 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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