Chinese Economic Reform Essay, Research Paper

China

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.

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