Economics in China

We are in the middle of a series covering China in depth—we will not bring you the latest “flash in the pan” news about China but rather reveal the undercurrents that have dictated the path of China’s meteoric rise. With that in mind, we continue with part two of our series in which we will explore how capitalism has changed China and what its future holds.

China’s door to the West was opened with a handshake between President Richard Nixon and Chou enLai at the Peking airport in Beijing on February 21, 1972. In the two years following the death of Chairman Mao Zedong on September 9, 1976, Chinese leaders began to openly acknowledge that the years of personal regimentation, ideological campaigns, forced labor and torture, and mass starvation had done little to enhance economic progress.

Although Chairman Hua Guofeng was named Mao’s successor, during a period of transition from 1976 to 1978, Deng Xiaoping and his group were able to put forth their program of “Four Modernizations” in agriculture, industry, technology, and the military.

These Four Modernizations were written into the Party constitution in August 1977 and were made part of the state constitution of the National People’s Congress in March 1978. Deng said that China would have “economics in command” instead of Mao’s “politics in command.” To implement the Four Modernizations, the Party would subscribe to the credo “practice is the sole criterion of truth” and to “seek the truth from facts.”

This represented the major shift from Mao’s political platform to the economic pragmatism Deng had previously sought in the early 1960s. By the December 1978 Party conference, Deng was ratified as the principal Communist leader of China.

Deng often assured the Party that the open door to foreign capitalism would not erode the Communist regime because the state would continue to own most of the means of production and distribution.

Ventures funded with foreign capital would continue to be at least 50 percent Chinese owned. To avoid conflict, the new model was never referred to as “capitalism.” Euphemisms like “market socialism” and Deng’s famous phrase, “socialism with Chinese characteristics” were used instead.

Deng understood well that different regions would develop at different rates. His plan was to have the successful regions serve as examples for the others. The East Asian “Tigers” (Japan, South Korea, Taiwan, Hong Kong, and Singapore) served as international examples to develop an export-led economy.

The United States was known as a major market for export and capital investment for these East Asian countries. By 1978, both China and the United States were ready to take steps forward in the normalization of relations that began in 1972 and further open the door.

A severe drought in China in 1978 added another dimension to the modernization process. China’s authorities were forced to loosen the tight government controls. The farmers flourished with their newly granted rights to keep and consume or sell most of their produce. This was called the “responsibility system.” Additional deregulation followed.

By 1984, nearly all farming households were independent producers. By 1987, farmers spent an average of 60 days on crops versus the 250-300 days required previously, and the production of crops increased 50 percent. By 1999, China was moving to agricultural self-sufficiency.

In the years following, China continued its “march to market.” With the full support of then-President Bill Clinton and Alan Greenspan, China joined the World Trade Organization (WTO) in 2001. Chinese central bankers now play important roles in the Bank for International Settlements (BIS) in Switzerland and in the International Monetary Fund (IMF).

Alan Greenspan once noted that China’s central bankers, “just a few years removed from isolated central planning, have become major players in operating the global financial system.”

China has become a manufacturing workshop. Chinese factories turn out two-thirds of the world’s photocopiers, micro-waves, DVD players, and shoes. Americans purchase 40 percent of their consumer goods from Chinese facilities.

China has overtaken the United States in the export of information and communication technology products like cell phones, laptop computers, and digital cameras. Because of China’s growing technological talent, every international high-tech communication company has established an R & D site there. China is definitely reclaiming its heritage of technological inventiveness.

Following its entrance in the WTO, China offered free trade agreements to its neighbors in East and Southeast Asia, creating an economically interdependent Asian region. China is now the number one trading partner of South Korea, Vietnam, and Japan.

In recent years, China also expanded its global reach in search of supplies of oil, natural gas, iron ore, copper and other natural resources to supply its meteoric economic growth. Additionally, China is looking to expand its export market from the United States, Europe and Japan to countries in Africa, Latin America and the Middle East. These relationships include: 1) building factories close to raw materials; 2) friendship agreements, foreign aid, and infrastructure construction; and 3) the sale of military equipment. As an example, China’s foreign investment in Africa has grown from $1.5 million in 1991 to $1.2 billion in 2005.

This outreach of unconditional aid and favors is hindering the efforts of Western countries to link financial incentives to improvements in human rights and environmental protection. Officials from “undemocratic” governments prefer China’s uncritical friendship to Western intimidation.

By the time China came into the international energy market, most of the oil and gas assets in stable countries were already owned by Western oil companies. China adopted a policy of “energy security,” in which it takes control over its oil and gas supplies by buying up equity stakes or long-term supply contracts in producing countries. These are usually the countries where U.S. sanctions forbid American companies from doing business.

Rising oil prices and the high demand for raw materials adversely impact manufacturing countries. China’s priority is to look for partners to ensure its economic stability regardless of world opinion.

As China continues its economic growth through its version of capitalism, it faces serious challenges, including:

1) The broadening gap developing between the lavish life-styles of the urban rich and the struggles of poor farmers and urban migrants; 2) the increase in the number of educated young adults versus the number of illiterate farmers still residing in rural areas; and, 3) the corruption of officials in all areas of local, regional, and central government positions and the rules of law. All of these conditions are adding tensions to local pockets of civil unrest.

As time passes, the government currently under President Hu Jintao is finding it more difficult to maintain centralized control over the economy. He has repeatedly called for a shift from the current focus on raw economic growth to the creation of a “harmonious society.” His plan is actually a redistribution of wealth from the rich to the poor.

In the years since 1972, Western leaders anxious to be a part of China’s economic rise have put forth the philosophy that “China’s economic development will lead inexorably to an opening of China’s political system.” A 2007 report by the Council on Foreign Relations indicated there was “no evidence to suggest that China is planning to pursue significant democratic reforms in the near term.”

It has been the intent of the Western mindset to use capitalism to integrate China into democratic reform. China has continued its economic rise without change. Who is integrating who? China’s economy continues to be a topic of daily surveillance.

We will continue our series next month with “Communism in China,” where we will explore the current regime and the struggles it faces in a changing China.