Essay/Term paper: Chinese economic reform under communist rule

Essay, term paper, research paper:  Economics

Chinese Economic Reform under Communist Rule

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 [between1952 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 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.

Tyler, Patrick E. "Economic Focus in Shanghai: Catching Up." New York Times: 22
December 1993, A1, A8.

Xu, Zhiming. "The Impact of China's Reform and Development on the Outside
World." Economic Reform in China: Problems and Prospects. Ed. James A. Dorn and
Wang Xi. Chicago: University of Chicago Press, 1990. 247-253.

Zuckerman, Laurence. "A Foreign Offering's Unsure Pedigree." New York Times: 11
August 1994, D6.