Chinese Economic ReformTwoyears after the death of Mao Zedong in 1976, it became apparent to many ofChina’s leaders that economic reform was necessary. During his tenure as China’spremier, Mao had encouraged social movements such as the Great Leap Forward andthe Cultural Revolution which had had as their bases ideologies such as servingthe people and maintaining the class struggle. By 1978 “Chinese leaderswere searching for a solution to serious economic problems produced by HuaGuofeng, the man who had succeeded Mao Zedong as CCP leader after Mao’sdeath” (Shirk 35). Hua had demonstrated a desire to continue theideologically based movements of Mao. Unfortunately, these movements had leftChina in a state where “agriculture was stagnant, industrial production waslow, and the people’s living standards had not increased in twenty years”(Nathan 200).
This last area was particularly troubling. While “the grossoutput value of industry and agriculture increased by 810 percent and nationalincome grew by 420 percent [between 1952 and 1980] . . .
average individual incomeincreased by only 100 percent” (Ma Hong quoted in Shirk 28). However,attempts at economic reform in China were introduced not only due to some kindof generosity on the part of the Chinese Communist Party to increase thepopulace’s living standards. It had become clear to members of the CCP thateconomic 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 inChina, restoring the CCP’s prestige required improving economic performance andraising living standards. The traumatic experience of the Cultural Revolutionhad eroded popular trust in the moral and political virtue of the CCP.
Theparty’s leaders decided to shift the base of party legitimacy from virtue tocompetence, and to do that they had to demonstrate that they could deliver thegoods. (23) This movement “from virtue to competence” seemed to mark aserious departure from orthodox Chinese political theory. Confucius himself hadposited in the fifth century BCE that those individuals who best demonstratedwhat he referred to as moral force should lead the nation. Using this principleas a guide, China had for centuries attempted to choose at least itsbureaucratic leaders by administering a test to determine their moral force. After the Communist takeover of the country, Mao continued this emphasis onmoral force by demanding that Chinese citizens demonstrate what he referred toas “correct consciousness.
” This correct consciousness could beexhibited, Mao believed, by the way people lived. Needless to say, that whichconstituted correct consciousness was often determined and assessed by Mao. Nevertheless, the ideal of moral force was still a potent one in China evenafter the Communist takeover. It is noteworthy that Shirk feels that the ChineseCommunist Party leaders saw economic reform as a way to regain their and theirparty’s moral virtue even after Mao’s death.
Thus, paradoxically, bydemonstrating their expertise in a more practical area of competence, theleaders 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 theleadership’s perception of the factors that affect China’s national security andsocial stability” (Xu 247). But Shirk feels that, in those pre-Tienenmendays, such a move came about also as a result of an attempt by CCP leaders todemonstrate, in a more practical and thus less obviously ideological manner thanMao had done, their moral force. This is not to say that the idea of economicreform was embraced enthusiastically by all members of the leadership of theChinese Communist Party in 1978.
To a great extent, the issue of economic reformbecame politicized as the issue was used as a means by Deng Xiaoping to attainthe 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 themantle of Maoist tradition. His approach to economic development was orthodoxMaoism with an up-to-date, international twist” (Shirk 35). This approachwas tied heavily to the development of China’s oil reserves. “[W]hen [in1978] estimates of the oil reserves were revised downward[,] commitments toimport plants and expand heavy industry could not be sustained” (Shirk 35). Deng took advantage of this economic crisis to discredit Hua and aim forleadership of the party.
“Reform policies became Deng’s platform againstHua for post-Mao leadership” (Shirk 36). Given this history of economicreform, it is evident that “under the present system economic questions arenecessarily political questions” (Dorn 43). Once Deng and his faction hadprevailed, it was necessary for some sort of economic reform to evolve. Theinitial form the new economy took was not a radical one.
China was “still astate in which the central government retain[ed] the dominant power in economicresource allocation and responsible local officials work[ed] for the interest ofthe units under their control” (Solinger 103). However, as time passed,some basic aspects of the old system were altered either by design or via theprocess of what might be called benign neglect. As Shirk points out, in ruralareas, decollectivization was occurring: “decision making power [was beingtransferred] from collective production units (communes, brigades, and teams) tothe family” (38); purchase prices for major farm products were increased(39). In 1985, further reforms were introduced.
For example, long-term salescontracts between farmers and the government were established. In addition, inan effort to allow the market to determine prices, “city prices of fruitand vegetables, fish, meat, and eggs, were freed from government controls sothey could respond to market demand” (Shirk 39). Most importantly, “asurge of private and collective industry and commerce in the countryside”(Shirk 39) occurred. This allowed a great percentage of the populace to becomeinvolved in private enterprise and investment in family or group ventures. Theconditions also allowed rural Chinese to leave the villages and become involvedin industry in urban centers (Shirk 40). The economy grew so quickly thatinflation occurred and the government had to reinstitute price controls.
China’seconomy retains these characteristics of potential for growth–and inflation–tothis day. Another important aspect of Chinese economic reform was the decisionof China to join the world economy. Deng Xiaoping and his allies hoped to effectthis 1979 resolution in two ways: by expanding foreign trade, and by encouragingforeign companies to invest in Chinese enterprises. This policy–denoted the”Open Policy” (Shirk 47)–was a drastic removal from the policies ofMao Zedong and, in fact, from centuries of Chinese political culture. The OpenPolicy, which designated limited areas in China “as places withpreferential conditions for foreign investment and bases for the development ofexports” (Nathan 99), was extremely successful in the areas where it wasimplemented (Shirk 47). However, it was looked upon by many Chinese as nothingless than an avenue to “economic dependency” (Nathan 50).
Indeed, whenthe policy was first implemented, many Chinese seem[ed] to fear that Deng’spolicies [were] drawing China back toward its former semi-colonial status as a”market where the imperialist countries dump their goods, a raw materialbase, a repair and assembly workshop, and an investment center. ” (Nathan51) It is interesting to note the symptoms of a national character that wouldsubscribe to the above sentiment. In an article written in 1981, just two yearsafter the Open Policy was first proposed, Andrew J. Nathan noted the almostpathological resistance to foreign intervention in the Chinese economy:”Some Chinese fear that reliance on imported technology will encourage adependent psychology . . .
[Many] Chinese perceive joint ventures as a costly formof acquisition. ‘Some people worry: Won’t we be suffering losses by lettingforeigners make profits in our country?'” (52). The Chinese were asvociferous about issues of sovereignty. Nathan maintained that the Mao-ledrevolution, which culminated in victory in 1949, had been fueled by “anintense patriotism: . .
. once China had ‘stood up,’ no infringement on itssovereignty, no matter how small, should be permitted” (53). These feelingswere manifested in denying foreign businessmen long-term, multiple entry visas,resisting “increased foreign economic contacts” and alteration ofcurrent ways of doing things, and disinclination to become involved ingovernment-to-government loans and joint ventures lest Chinese become exploitedin some way (Nathan 53-55). Given these hesitancies on the part of the Chinesesociety vis-a-vis foreign relations, it is impressive that Deng and his allieswere able initially to create and implement the Open Policy since many membersof the society at large were resistant to becoming involved in a policy soantithetical to the Chinese national character. However, once the successes ofthe Open Policy were apparent, resistance to the plan by the populace waned. Moreover, given the confluence of politics and economics in China, it seemsapparent 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 thesuccess of the burgeoning Chinese economy. The implementation of the Open Policywas so successful that by 1988 the leaders of the CCP were encouraged to createa new program called the “coastal development strategy. ” In thisprogram, even more of the country was opened up to foreign investment–an areawhich, at the time, included nearly 200 million people. Moreover, by involvingmore overseas investors, “importing both capital and raw materials,”and “exporting China’s cheap excess labor power,” the new policy wasone of “‘export-led growth’ or ‘export-oriented industrialization.
‘ It[was] explicitly modeled on the experiences of Taiwan and the other Asian ‘smalldragons'” (Nathan 99). One analyst has maintained that “China nowstands at the threshold of the greatest opportunity in human history: a neweconomic era promising greater wealth and achievement than any previousepoch” (Gilder 369). Illustrative of this optimistic feeling is Shanghai,an area that was designated for preferential conditions for foreign investmentand as a base for the development of exports in 1988. This city and environs inthe Yangtze Delta area have a population of approximately 400 million people andthe city has become the nation’s financial hub for international and nationalinvestors.
For political reasons, this area was excluded from the original OpenPolicy designation in 1978, but is currently in the process of catching up withother areas so designated. Indeed, the increase in foreign investments in thelast two years is striking. The area received 3. 3 billion dollars in foreigninvestments during the 1980s. The area received the same amount from foreigninvestments in 1992 alone. In only the first ten months of 1993, the area hadreceived over six billion dollars worth of foreign investments (Tyler A8).
Western analysts have asserted that the Open Policy and the coastal developmentstrategy have allowed Deng to entrench his political power (Shirk 47) and willallow his power to be sustained even after death. If this is true, Deng shouldbe very popular in Shanghai. With its new designation, and with the billions offoreign dollars coming into the area, it has become necessary to improve thecity’s facilities. To that end forty billion dollars worth of public worksprojects have been allocated by the central government for Shanghai within thelast year (Tyler A1). These public works projects include new sewers, a newwater system, new gas lines, a new bridge, and extensive roadwork.
Future plansinclude the construction of a second international airport, a container port, anew subway system, and more roads and bridges (Tyler A8). The financialdistrict, which will feature a new stock exchange, is also being rebuilt byChina and foreign investors in a joint venture. By being designated forpreferential conditions, Shanghai received from the central government taxexemptions for enterprises doing business with foreign companies, tax holidaysfor new factories set up with foreign investments, and a bonded zone–thelargest in China–for duty free imports of raw materials. Shanghai now has allthe trappings of a modern city: discos, construction projects, and conspicuousconsumption. In short, where “revered monuments and golden arches existside by side” (Riboud 12), the appearance of the new Shanghai does nothingless than signal “the end of the ideological debate over China’s freemarket experiments” (Tyler A8).
Shanghai has joined the ranks of the modernmetropolis. However, this is not necessarily a beneficial development. Inflationis rampant: prices have doubled in the industrial zones in the last five years. Nevertheless, the fact that Shanghai currently possesses the fifth mostexpensive office space in the world demonstrates that demand is high and thatthe prospects for future growth are promising (Tyler A8). Indeed, Pudong, a freeexport manufacturing zone described as “the future sight of Shanghai’sManhattan” (Tyler A8), boasts more than twenty factories built or beingbuilt with names like Siemens and Hitachi prominent.
This area has becomeparticularly attractive to foreign investors and companies because of its taxconcessions, duty free imports of raw materials, and cheap labor. Shanghaistands to benefit, too, as it receives ancillary technology and discretionaryspending from the workers and executives of the companies represented (TylerA8). It is conditions like these that have caused at least one analyst topredict that China will be “the richest economy in the world within thenext 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 737jetliners” (“Boeing” D4). In addition, E. I.
du Pont recentlypredicted “that its investments and business in China could increase asmuch as ten times by the end of the century” (“Du Pont” D2). Tellingly, du Pont’s chairman attributed the company’s negotiations of “asmany as 28 new projects in China” to the fact “that the country’sfinancial changes, improved infrastructure and rising disposable income has[sic] encouraged the company to expand its business activities” (“DuPont” D2). The Chinese government has made conscientious attempts topromote 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 growingmajor economy” (Shenon “China Halts” D1). However, after doingso, China’s Securities Regulatory Commission was forced to stop the issuing ofnew issues on the Shanghai and Shenzhen Stock Exchanges because the value of themarkets had decreased so greatly.
This latter move was “meant to calmmillions of first-time Chinese investors who evidently went into the marketbelieving that stock prices could only go up” (Shenon “ChinaHalts” 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 somekind 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 totake control over what could have been a bad economic situation. Indeed, afterthese measures were instituted, China’s trade deficit decreased (Hansell D2) andthe 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 controlinflation, Philip J.
Suttle, head of emerging markets research at the investmentfirm of J. P. Morgan, has predicted that “[i]t looks as though the Chineseare going to have the soft landing they are aiming for” (quoted in HansellD2). China’s interest in stock markets is no longer restricted to within its ownboundaries. This month, Shandong Huaneng Power Development Company, “thefirst mainland Chinese company to have its primary listing on the New York StockExchange” (“China Stock” D5), began trading shares. The stockshould be an attractive one to investors: Chinese electrical “demand .
. . isexpected to grow by a whopping 17 million kilowatts a year until the turn of thecentury” (Zuckerman D6). Moreover, China stands to gain from the issue’ssales.
“The company plans to use the $311 million dollars it received fromthe offering to retire $83 million in loans from . . . Chinese state entities. Italso plans to expand its overall generating capacity” (Zuckerman D6). Nordoes this signify the only Chinese attempt of raising capital from foreignsources on foreign soil.
“Three more power companies are expected to belisted 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 worksprojects, extensive foreign investments, participation in the world economy, anda generally higher standard of living by the populace, it would appear thatChina is now ready to join the world as a modern capitalistic and democraticsociety. However, this is not quite the case. The CCP retains vestiges of thosecharacteristics of insularity and intransigence as discussed by Nathan. Becauseof its human rights record, the country’s economic growth is being impeded.
Thatis, the politics of China, which have always been allied with its economics, arenow restricting international growth. The United States, especially, has beenconcerned with China’s treatment of political dissidents. In May, PresidentClinton decided to end linking China’s trade status with the United States withits record on human rights. The president has been criticized for this becauseof situations like the following: trials for “‘counterrevolutionaryactivities’ [including] . .
. plans to use a remote-controlled airplane to droppro-democracy leaflets over . . .
Tienenmen Square” (“China cracks”A13) have recently begun for fifteen dissidents and labor organizers who wereinvolved in the Tienenmen Square protests. These trials have “been delayedtwice, first to avoid negative international reaction just before the decisionlast September on China’s failed bid to host the 2000 Olympics and then thisspring to avoid influencing Clinton’s trade decision” (“Chinacracks” A13). In addition, China has instituted “new laws effective inJune [which] give sweeping powers to China’s State Security Bureau to clamp downon dissidents” (“China cracks” A13). China is fully aware ofUnited States’ concerns about its human rights record.
Given the fact that theUnited States has made it clear to China that that record will be allied withtrade status, China’s timing of such restrictive activities has caused UnitedStates legislators and administrators to question China’s sincerity in itsdesire to have a favored trade status with the United States. Indeed, just inthe past few days, it took a last-minute lobbying campaign by President Clintonand his Cabinet [to head off a] potentially embarrassing vote by the House ofRepresentatives to restrict trade with China as a way to punish Beijing forreported human rights violations. (Bradsher A7) But China’s problems in joiningthe community of the world market have more to do than with its political ethosand practices. China appears not to understand or to be able to follow throughon fundamental modern economic practices. For example, the United States hasrecently complained that “China has not complied with international ruleson access to its markets and protection of copyrights and patents” (Gargan14). Such non-compliance could make it difficult for China to become a foundingmember of the World Trade Organization, the successor to the General Agreementon Tariffs and Trade and the body that is intended to promote global free tradeby lowering tariffs and other barriers, [which] will be formally constituted onJanuary 1, 1994.
(Gargan 14) The specific nature of the United States’ complainthas to do with China’s pirating of musical compact disks, video laser disks andcomputer software. In fact, it is estimated that such pirating costs Americancompanies a billion dollars a year. This phenomenon seems to have to do with theChinese psychology as described by Nathan. In his 1981 essay he noted that Chinadid not wish to become a “technological client of the west.
The preferredsolution is to buy one item and copy it” (Nathan 52). Clearly, this is notthe way trade works today. It is the United States’ position that China mustadhere 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, butparticularly 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 marketeconomy work.
In discussing the status of the Shanghai Stock Market, forexample, one stock dealer referred to it as “crazy” (“StocksSurge” D2). Moreover, American analysts have been amazed to discover in theShanghai market “the lack of regulation and the poor disclosurerequirements. Some companies have been listed for two or three years and havenot issued an annual report” (Hansell D2). It is no wonder that Chineseinvestors become anxious about their investments. The issuance of shares in theShandong Huaneng Power Development Company also demonstrates the lack ofexpertise on the part of the Chinese in the modern world market.
In fact,according to one Hong Kong investment analyst, “‘[t]he company wasn’treally a company. It was just a bunch of discrete plants that they tied a bowaround and wrote a prospectus on'” (Zuckerman D6). The prospectusguaranteed a fifteen percent annual return on investments. In fact, the returnwill no doubt be less than that because of prevailing currency exchange ratesand debt that the company will have to assume.
To be sure, the problems of theShandong Huaneng Power Development Company and the Shanghai Stock Exchange maydemonstrate only the problems of an immature economy. Nevertheless, if Chinawishes to become a viable member of the world economic community, suchshortcomings will have to be eliminated quickly. These apparent problems mayalso 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 whileretaining a state controlled system.
This structure may be possible but it doeshave its critics. Steven N. S. Cheung, in an essay written in 1989, argued forthe “creation of private property by mandate” (31), feeling thatprivatization in China would lead to necessary additional investment in thesociety’s infrastructure and the establishment of a “judicial system thatis based firmly on the principle of equality before the law” (Cheung 32). Echoing Cheung’s sentiments, James Dorn saw problems in the areas of Chinesebanking and finance.
In this arrangement, Dorn argued, “the state controlsthe bulk of investment resources. The lack of a private capital market hashandicapped economic development in China and hampered rational investmentdecisionmaking” (43). In order to become a modern economic state Dornargued for the necessity of circumventing “China’s ruling elite who opposethe dismantling of state monopolies and who benefit from price fixing andnonprice rationing” (51). Xu Zhiming also saw the necessity for a revampingof the Chinese system: “We must throw off the traditional systemcompletely” (249) in order for economic reform to thrive. Communist Partymembers, of course, articulate a different position. In a recent interview thatappeared in the Beijing Review, Feng Bing, Deputy Secretary General of the StateCommission for Restructuring the Economic System, spoke to the issue of economicreform in China.
It is striking that Feng spoke of the benefits that thepopulace has received as a result of the economic reform now occurring in China. That is, his comments appeared to demonstrate the beneficence, or the moralforce, of the Chinese Communist Party vis-a-vis economic reform. He noted thatsuch reform involves the essence of socialism: “to liberate and developproductive forces; to eradicate exploitation; to remove polarization; and . .
. toattain the goal of common prosperity” (“Official” 12). Thus, CCPleaders still appear to see their roles as representatives of a moral force. CCPmembers and leaders wish economic reform not to be judged on just its practicalmerits, but also as an effect of the moral force of the leadership. Economicreform, then, becomes nothing less than a moral crusade and it is thus easy tosee why, for example, China “has staked its national prestige on becoming afounding member of the World Trade Organization” (Gargan 14). Will Chinasucceed in taking its place among the nations of the world market? Will the CCPsucceed in retaining its political power given the drastic changes in thesocietal makeup of China that are occurring due to the changing economicrealities? I would suggest that the chances are better for the former than forthe latter.
Once the Chinese attain more sophistication relative tointernational and national markets, institute a more manageable banking system,and make a good faith effort to insure acceptable human rights, the country maywell become “the richest economy in the world within the next 25years” (Gilder 372). However, whether or not these conditions can occurwithout a weakening of the state controlled system is problematic. The mostimpressive and far-reaching display of moral force by the CCP may well have tobe a voluntary reduction of its power over the people. Paradoxically, byweakening itself politically, the party may demonstrate its true moral force byliberating, politically and economically, one billion Chinese citizens. Bibliography”Boeing Planning to Invest $100 Million for China Plant.
” New YorkTimes: 9 August 1994, D4. Bradsher, Keith. “Bill to Restrict China’sImports Loses in House. ” New York Times: 10 August 1994, A7. Cheung, StevenN.
S. “Privatization vs. Special Interests: The Experience of China’sEconomic Reforms. ” Economic Reform in China: Problems and Prospects. Ed.
James A. Dorn and Wang Xi. Chicago: University of Chicago Press, 1990. 21-32. “China cracks down on dissent after trade threat lifted, report says. “Hartford Courant: 29 July 1994, A13.
“China Stock Is Most Active. ” NewYork Times: 5 August 1994, D5. Dorn, James A. “Pricing and Property: TheChinese Puzzle. ” Economic Reform in China: Problems and Prospects. Ed.
James A. Dorn and Wang Xi. Chicago: University of Chicago Press, 1990. 39-61. “Du Pont Plans Increase In Chinese Investment. ” New York Times: 10August 1994, D2.
Gargan, Edward A. “U. S. May Thwart China’s TradeGoal. ” New York Times: 24 July 1994, 14. Gilder, George.
“Let aBillion Flowers Bloom.” Economic
