Chinese Economic Reform (4504 words) Essay

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.

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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.

“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 Reform in China: Problems and Prospects.

Ed. James A. Dorn and Wang Xi. Chicago: University of Chicago Press, 1990.

369-374. Hansell, Saul. “Chinese Stock Markets Bounce Back, Rising
30%.” New York Times: 2 August 1994, D2. Nathan, Andrew J. China’s Crisis.

New York: Columbia University Press, 1990. “Official on Economic
Reform.” Beijing Review: 27 June- 3 July 1994, 11-15. Riboud, Marc.

“China Leaps Upward.” New York Times Magazine: 27 December 1992,
12-15. Shenon, Philip. “A Nail-Biting Ride in Shanghai.” New York
Times: 6 August 1994, 33, 41. Shenon, Philip. “China Halts Listing of New
Stock.” New York Times: 1 August 1994, D1, D4. Shirk, Susan L. The
Political Logic of Economic Reform in China. Berkeley: University of California
Press, 1993. Solinger, Dorothy J. China’s Transition from Socialism: Statist
Legacies and Market Reforms, 1980-1990. Armonk, NY: M. E. Sharpe, 1993.

“Stocks Surge in China As Volume Sets Record.” New York Times: 9
August 1994, D2.


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