How has the chinese economy changed?

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China's economy since the 1970s has changed from a closed, centrally planned system to a more market-oriented one that plays a major role in the global economy - in 2010 China became the world's largest exporter. Reforms began with the phasing out of collectivized agriculture, and expanded to include the gradual liberalization of prices, fiscal decentralization, increased autonomy for state enterprises, creation of a diversified banking system, development of stock markets, rapid growth of the private sector, and opening to foreign trade and investment. China generally has implemented reforms in a gradualist fashion. In recent years, China has renewed its support for state-owned enterprises in sectors it considers important to "economic security," explicitly looking to foster globally competitive national champions. After keeping its currency tightly linked to the US dollar for years, in July 2005 China revalued its currency by 2.1% against the US dollar and moved to an exchange rate system that references a basket of currencies. From mid 2005 to late 2008 cumulative appreciation of the renminbi against the US dollar was more than 20%, but the exchange rate remained virtually pegged to the dollar from the onset of the global financial crisis until June 2010, when Beijing allowed resumption of a gradual appreciation. The restructuring of the economy and resulting efficiency gains have contributed to a more than tenfold increase in GDP since 1978. Measured on a purchasing power parity (PPP) basis that adjusts for price differences, China in 2010 stood as the second-largest economy in the world after the US, although in per capita terms the country is still lower middle-income. The dollar values of China's agricultural and industrial output each exceeded those of the US, although China was second to the US in the value of services it produced. The Chinese government faces numerous economic development challenges, including: (a) reducing its high domestic savings rate and correspondingly low domestic demand; (b) sustaining adequate job growth for tens of millions of migrants and new entrants to the work force; (c) reducing corruption and other economic crimes; and (d) containing environmental damage and social strife related to the economy's rapid transformation. Economic development has progressed further in coastal provinces than in the interior, and approximately 200 million rural laborers and their dependents have relocated to urban areas to find work. One demographic consequence of the "one child" policy is that China is now one of the most rapidly aging countries in the world. Deterioration in the environment - notably air pollution, soil erosion, and the steady fall of the water table, especially in the north - is another long-term problem. China continues to lose arable land because of erosion and economic development. The Chinese government is seeking to add energy production capacity from sources other than coal and oil, focusing on nuclear and alternative energy development. In 2009, the global economic downturn reduced foreign demand for Chinese exports for the first time in many years, but China rebounded quickly, outperforming all other major economies in 2010 with GDP growth around 10%. The economy appears set to remain on a strong growth trajectory in 2011, lending credibility to the stimulus policies the regime rolled out during the global financial crisis. The government vows to continue reforming the economy and emphasizes the need to increase domestic consumption in order to make the economy less dependent on exports for GDP growth in the future, but China likely will make only marginal progress toward these rebalancing goals in 2011. Two economic problems China currently faces are inflation - which, late in 2010, surpassed the government's target of 3% - and local government debt, which swelled as a result of stimulus policies, and is largely off-the-books and potentially low-quality.

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Thayer Watkins

Silicon Valley

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Economic Development in China After Mao

The Four Modernizations

Although the Four Modernizations are associated with Deng Xiaoping this program was articulated by Zhou Enlai in 1975. The Communist Party from Lenin was committed to industrialization but Maoism took a different attitude, that modernization was a "road to capitalistic restoration." Zhou Enlai was suffering from cancer and was politically too weak to confront Mao's wife, Jiang Qing, on this issue. But Deng Xiaoping was more combative. In the fall of 1975 he published three documents which were to be the basis for the Four Modernizations. The Gang of Four labeled these documents "Three Poisonous Weeds" and made Deng the target of the "Antirightist Deviationist Wind Campaign." In his New Year's Message of 1976 Mao warned against emphasizing material progress. By April Deng had been dismissed for all his official posts.

By October of 1976 Mao was dead and the Gang of Four under arrest. Deng was rehabilitated and the Four Modernizations promoted. By August 1977 Deng was reinstated and he delivered a speech to the Eleventh Party Congrees stressing the Four Modernizations of :

* Agricuture

* Industry

* Science and Technology

* National Defense

In practical terms this meant "electricity in the rural areas, industrial automation, a new economic outlook, and greatly enhanced defense strength."

The Ten Year Plan

In February of 1978 Chairman Hua Guofeng revealed a ten year plan for the period 1976-1985. The Plan involved 120 projects consisting of:

Sector Plan

Iron and Steel 10 complexes

Nonferrous Metals 9 complexes

Oil and Gas 10 fields

Coal 8 mines

Electricity 30 power stations

Railroad 7 trunk lines

Water Transportation 5 harbors

The Ten Year Plan

The turmoil that Mao and the Maoists imposed upon China can be seen reflected in the statistics on iron and steel production. In 1960 steel production was almost 19 million tons, up from 1.35 tons in 1952. But the Great Leap Forward caused production to fall back to 8 million tons in 1961. After recovering and reaching a peak of 25.5 million tons in 1973, leadership of the Gang of Four during the Cultural Revolution brought a fall to 21 million tons in 1976, a net gain of only 10 percent over the 1960 figure.

The Ten-Year Plan called for an increase in steel production to 60 million tons per year by 1985 and to 180 million by 1999. The leadership didn't expect to achieve such gains by homegrown development, instead they entered into a $14 billion contract with a German steel company to build a major steel complex in eastern Hebei province and a $2 billion contract with a Japanese firm to build another on the outskirts of Shanghai. Other plants were also to be built.

Major petroleum discoveries were made in the 1960s and the Ten-Year Plan called for investing $60 billion in ten new oil and gas fields. China relies very heavily on coal for energy and the Ten-Year Plan called for doubling coal production to 900 million tons per year through the creation of eight new mines. China at the time of the formulation of the Ten-Year P;an was relatively weak in the use of electrical power. The Ten-Year P;an called for the development of 20 hydoelectric power plants and 10 other types of power plants.

In 1977 China was still a predominantly agricultureal economy but the government had not supported institutional and technological measures to increase productivity and, as a consequence, per capita production of grains had remained at 1955 levels. The Ten-Year Plan called for a $33 billion investment in the mechanization of agriculture and improvement of irrigation. One important side-effect of this program is that if it worked there would be 100 million workers who would be released from farming and for whom the government would have to make proviisions for in other sectors. The institutional structure was modified to encourage higher production through individual initiative and more flexible production arrangements. Commune farmers were encouraged to pursue sidelines of production on small plots.

The Ten-Year Plan called for the modernization of its military but with China already spending 7 to 10 percent of its GDP on the military in 1978 a modernization called for in the Plan would cost an enormous $300 billion.

Capital was definitely scarce at the beginning of the Ten-Year Plan. It was estimated that the Ten-Year Plan goals would cost between $350 billion and $630 billion in 1978 prices. The government had been relying very heavily upon the revenue it gained by requiring the sale of agricultural products to the Stae at artificially low prices and selling them at a higher price. But this policy did not encourage productivity in agriculture and agricultural development stagnated. The percapita output of grains, as stated previously, was not any higher in 1977 than it was in 1955. The State Enterprises, instead of being a source of profit for the State, required large subsidies necessitating the milking of agriculture.

For the Ten-Year Plan the government sought other sources of revenues. One source it tried to develop was tourism. Hotels and other tourist facilities were built and there was some success, but notably the vast majority of the tourists were overseas Chinese.

In desperation China turned to encouraging foreign investment as a way of financing the development projects. German and Japanese companies provided the capital for major projects in return for a share of the benefits.

China also reversed its policy concerning foreign loans. In December of 1978 China arranged a $1.2 billion loan from a consortium of British banks and by mid-April China had received or arranged for $10 billion in foreign loans.

China in 1978 had a serious shortage of technical personnel. The Cultural Revolution had disrupted the system of higher education for about twelve years. Estimates of the total size of the technical and scientific workforce in China in the 1970's were in the neighborhood of sixty thousand. For a nation of one billion people sixty thousand is a miniscule amount. By the early 1980's the scientific and technical workforce had grown to about 400,000, a substantial increase but still a quite small amount for a nation of over one billion people. There is even more of a shortage of middle level technicians and skilled workers.

Problems of Implementation of the Ten-Year Plan

In the first year of the Ten-Year Plan the government began 100,000 projects which would cost in total $40 billion. The total investment the government committed itself to in 1978 was about 36 percent of China's GDP. It was not possible to sustain this level of investment financially or technically.

The $2 billion steel complex that a Japanese company was to built in the vicinity of Shanghai ran into major difficulties. The site chosen by the Chinese government planners was in swamp land on the edge of the Chang Jiang (Yangtze River). The swampy character of the land required hundreds of thousands of steel pilings be driven into the ground before the steel complex could be built. After construction started in 1979 it was discovered that the electrical power supply in the area was inadequate for the steel plant and the site was not accessible by the ships that were to bring iron ore from Australia and Brazil. The first stage of the projected $2 billion complex cost $5 billion. The government stopped construction on the second stage leaving the Japanese firm which had agreed to build the steel plant in financial difficulty.

The bigger ($14 billion) steel complex the Chinese government contracted to be built in Hebei by a German company was also in difficulty. The site was found to be at risk for earthquakes. Another planned development was located in the city of Wuhan. It was to process raw steel into a higher quality steel but it was found to require so much electricity that if it operated there would be no power left for anything else in the province. But even if there had been adequate power the area could not supply an adequate amount of the raw steel for its operation.

Revision/Retrenchment of the Ten Year Plan

By 1979 even official government sources like the newspaper Renmin Ribao (People's Daily) acknowledged that the initial phase of the Ten Year Plan was seriously flawed by lack of proper preparation which led to enormous wastes. Hua Guofeng announced in June of 1979 a period of adjustment, reconstruction, consolidation and improvement for the economy. Priorities were shifted, away from heavy industry toward agriculture and light industry. Planned investment in agriculture was increased from $26 billion to $59 billion. The Ten-Year Plan target for steel production was cut from 60 million tons to 45 million. Light manufacturing industries, particularly those that could earn foreign currency, were to be encouraged. Construction as well as heavy industry was cut back. But the cuts were not uniform, across-the-board cuts. The production goals for several key sectors were as follows:

Sector Output 1985 Targets

1979 Original Revised

Steel

(million tons) 34.5 60 45

Coal

(million tons) 635 900 800

Petroleum

(million tons) 106 500 300

Cement

(million tons) 74 100 100

The Ten Year Plan Revisions

Altogether 348 major projects in heavy industry were halted, including specifically projects in steel, machine production and chemicals. Over four thousand smaller such projects were also stopped. China's shortage of investment capital was worsened by the high cost of its 1979 invasion of Viet Nam.

Institutional and Structural Reorganization

Generally the 1980's brought a relaxation of control by the Communist Party. Communes and enterprises were allowed to sell over-quota production at prices above the government-set prices. Workers were allowed more freedom in making decisions concerning their own welfare. Enterprises were allowed to borrow funds and in special area seek foreign joint-venture partners. Five Special Economic Zones (Guangdong and Fujian in the south and Beijin, Tianjin in the north, and Shanghai) with power to negotiate arrangements with foreign businesses.were created China tried to model this institutional change on the Yugoslavian and Romanian experiences which were thought to have successfully melded socialist and capitalist systems.

With a new awareness of the productivity of capital rates of return became a concern. The figures differed considerably among industries. The profit margin is not the same as the rate of return on capital but profit margins give some indication of the variation among industries. In petroleum the profit margin was 40 percent while in coal minimig it was only one percent.

With relaxed control more internal migration has developed and China began to experience an overt unemployment problem. Previously any surplus labor in the cities was forced to go to the countryside. This may have solved the problem of people being without a job but to put people in unproductive or underproductive jobs may simply have hidden the unemployment.

Based upon China Without Mao by Immanuel C-Y Hsu 1983

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