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Chinese economic reform under communist rule

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.


"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,


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,


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.

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