FREE ESSAY ON CHINESE ECONOMIC REFORM

CHINESE ECONOMIC REFORM

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 base 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 Chinese
Communist Party (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, Andrew J.
China's Crisis pg. 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, Susan L. The Political Logic of Economic Reform in
China. Berkeley pg. 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. 
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, Zhiming. The Impact of China's Reform and Development on the
Outside World. pg. 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. When, 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, James A. Pricing and
Property: The Chinese Puzzle. pg. 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
retained the dominant power in economic resource allocation and responsible local
officials worked for the interest of the units under their control (Solinger, Dorothy J.
China's Transition from Socialism: Statist Legacies and Market Reforms pg. 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
seemed 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 that,
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, Patrick
E. Economic Focus in Shanghai: Catching Up. sct. 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). China and foreign investors in a
joint venture are also rebuilding the financial district, which will feature a new stock
exchange. 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, Marc. China Leaps Upward. pg. 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 Planning to Invest $100 Million for China Plant. New
York Times sct. 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 Plans Increase In Chinese Investment. New York Times, sct. 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 encouraged the company to expand its business activities (Du Pont
pg. 23). 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, Philip. China Halts Listing
of New Stock. New York Times, sct. 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
in China as Volume Sets Record. New York Times sct. 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, Philip. A Nail-Biting Ride in Shanghai.
New York Times sct. 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 it
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 Is Most
Active. New York Times, sct. 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, Laurence. A Foreign
Offering's Unsure Pedigree. New York Times, sct. 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 of 1999, 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 down on dissent after trade threat lifted, report
says.Hartford Courant, sct. 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, Keith.
Bill to Restrict China's Imports Loses in House. 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, Edward A. U.S. May Thwart China's Trade Goal. New York
Times pg. 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, 'the 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, Steven N.S. Privatization vs.
Special Interests: The Experience of China's Economic Reforms. pg. 32-250). 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 decision making (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 non-price 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 on Economic Reform. Beijing Review: pg.
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, pg. 14). Will China succeeds 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 pg. 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.