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Papers >> Business & Economics >> 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.

WORKS CITED

“Boeing Planning to Invest $100 Million for China Plant.”
New York Times: 9 August 1994, D4.

Bradsher, Keith. “Bill to Restrict China’s Imports Loses in
House.” New York Times: 10 August 1994, A7.

Cheung, Steven N.S. “Privatization vs. Special Interests:
The Experience of China’s Economic 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.” New York Times: 5 August
1994, D5.

Dorn, James A. “Pricing and Property: The Chinese
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: 10 August 1994, D2.

Gargan, Edward A. “U.S. May Thwart China’s Trade Goal.”
New York Times: 24 July 1994, 14.

Gilder, George. “Let a Billion Flowers Bloom.” Economic



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