This book was written in order to explain the recent changes in Chinese economic policy, foreign economic relations, and trade. It was also the intention to provide information of value to those who deal with China professionally, in areas such as trade, aid, and investment, so as to improve performance. The book is therefore not just an academic analysis of China, nor does it stick to one discipline. Instead, it makes use of whatever seems useful, including the occasional provision of advice of a practical nature. It is aimed at the university student, businessman, government official, and the interested layman.
Since the death of Chairman Mao Zedong on 9 September 1976, and the rapid overthrow of the Gang of Four on 6 October that year, China has made considerable changes in its economic policies. As a result, China now presents a very different image to the world from that which it projected during the preceding period of the Cultural Revolution. China has always been a complex country and difficult to understand, even for those who live and work there. Because of its size, history, geography, and culture, much happens that is not known to outsiders or to many inside the country. A perennial problem for the old emperors in governing the country was to hold it together, to know what was happening, and to get the different regions to comply with central policy. Despite modern communications technology, this problem still exists today. For those dealing with China as government officials or businessmen, it is important to understand the recent changes and to learn from the experiences of others, thereby saving time and money, as well as avoiding needless frustrations. This book tries to make a contribution in this area.
The main focus is on China’s open door policy, dating from 1978. In order to understand the recent period, we begin by examining the period since 1970, when China began to take its first steps back into the international community. The reasons for the changes in and after 1978 lie in the past, often in the period since 1966, the start of the Cultural Revolution.
Much of the book is based on my understanding of China, a country that has interested me for some 20 years. Sources used are Chinese language journals and books, English language materials and books published in China, secondary sources such as books, journals and newspapers published in the West and in Asia and interviews with Chinese officials and businessmen and their counterparts in the West. This is not a dissertation and the footnotes have been kept to a minimum in order to enhance the readability. They have been restricted to indicating the sources for data supplied and to justify some statements that may be unusual or new.
The initial work that led to this book was undertaken whilst I was Academic in Residence at the Department of Foreign Affairs, Canberra in 1984-85, and I am grateful for the chance to acknowledge my gratitude to the department for the help given and for making my stay a pleasant one.
The award of an exchange grant by the Academy of Social Sciences in Australia, which allowed me to accept an invitation from the Chinese Academy of Social Sciences to spend three weeks in China in 1986, was valuable in gaining information and developing a greater understanding of how the changes were being implemented. It allowed me to interview many officials and businessmen who were deeply involved.
Special thanks must go to colleagues at Griffith University: Edmund S. K. Fung, who helped with both content and style suggestions, and Paul Ivory who read part of the manuscript and made helpful comments. Ms Anne Platt did extremely well at the difficult task of editing the original draft of the text, for which I am very thankful.
Many other people, colleagues in academia, journalists, businessmen and the public service in several countries have assisted unknowingly. I thank them all. I alone bear responsibility for the views expressed or any errors.
Appendix 40 first appeared in the author’s “Problems and Policies in China’s Economy Since the Death of Chairman Mao” in W. E. Willmott (ed.) China Since Mao, Christchurch: NZASIA Occasional Paper 5, 1983, pp. 37-55 and is reproduced by kind permission of the publishers.
Unless otherwise stated, all dollar figures refer to United States dollars.
For this E-book edition, a few minor changes were made from the original paperback, including a little tidying up of the punctuation, switching to American spelling, correcting any inadvertent misspellings, and occasionally improving the text by altering any infelicitous words.
One Appendix that appeared in the original (Appendix 42 “The Meaning of Full Communism”) has been removed.
China’s open door policy officially began in 1978, when the decision was taken to increase contacts with the rest of the world, to expand the amount of foreign trade and to accept foreign capital in the form of loans, direct foreign investment, and economic aid. However, the door had slowly been opening since 1970, when China began to move back into the world by increasing foreign trade and joining the United Nations (25 October 1971). Thus ended a period of self-imposed isolation during the early Cultural Revolution, with its more extreme version of selfreliance.1 Since then China has developed friendly relations with many countries, including the United Statesin Chinese eyes the number one capitalist country in the world and for many years a detested enemy.
In an effort to stimulate development, striking changes have been made in domestic and foreign economic policies since 1976. Domestically, China has moved away from total reliance on Soviet-style central planning and has partially introduced the price mechanism. This has happened notably in agriculture, where communes have been disbanded, old administrative bodies have been re-established and economic decision-making has been passed down to the household level. The system of compulsory quotas for agricultural produce, which had to be delivered at low prices to the state, had existed since the early co-operatives were established during the first half of the 1950s. This has now ended. Peasant farmers now sign contracts with the state for a specified quantity to be delivered at a set price, and any surplus can be disposed of freely in the case of most produce and fairly freely for the rest. Free markets widely exist in which produce can be sold at a fixed price, a free price, or at a price that can be negotiated between a set floor and ceiling. In industry, an attempt has been made to change the nature of the Chinese factory from being a workshop producing for the state to becoming an independent firm taking responsibility for its own decisions and actions. In order to achieve this, factory managers have been given more power, the pursuit of profit is being encouraged, and firms can now keep a portion of profit made. Many prices have been adjusted, which usually means they have been raised when they were either set too low to encourage production or were fixed below cost, which meant losses to the seller. Firms are encouraged to try to meet market demand rather than to produce what is easiest for them in light of what the planners specify. Investment funds were once given to the firm at no real cost, but now firms may borrow from banks for investment and repay the loan out of profits. In short, to revitalize the economy China is copying many of the practices commonly used in capitalist countries.
On the external side, reliance on foreign trade has increased. Contracts for China to process foreign materials for re-export were first proposed by the Chinese at the Guangzhou Trade Fair in Autumn 1987, more than a year before the Third Plenum of the Eleventh Central Committee formally adopted the new open policies. Until 1960 China accepted loans from the Soviet Union and Eastern Europe, but thereafter refused to consider them. Foreign loans are now not only acceptable to China but are actively solicited. Foreign investment is allowed into China, and again is actively sought. Solely foreign-owned firms with no Chinese participation in ownership are permitted. This represents a massive about-face that could not have been an easy decision to make, in view of recent history. After a series of humiliating defeats at the hands of foreigners during the nineteenth century, foreign firms were imposed on Chinese soil. Special Economic Zones (SEZs) have been established, in which foreign firms can receive preferential treatment: to some Chinese they bear a strong resemblance to the foreign concession areas of the hated Qing dynasty of the nineteenth century. The issue is sensitive and a steady stream of reports has appeared, pointing out the crucial differences between the SEZs and the old foreign concessions or settlements, in order to allay unease and opposition. Other areas that bear strong resemblances to SEZs have also been allowed: such zone clones are becoming increasingly common.
China is a difficult country to study and the economic area is no exception. Among the many problems, three stand out: the problem of statistics and their reliability, the applicability to China of economic theory developed in the West, and the problem of predictions based on past events when the parameters themselves have a habit of constantly changing.
Until recently, the last reasonably reliable statistics on China were for 1957; the 1958 and 1959 figures were exaggerated and rather meaningless. However, in 1981 China began to release collected sets of data again and the missing figures from 1960 onward were supplied, usually based on estimates. Yet only some of the exaggerated data of the Great Leap Forward (1958-60) were adjusted; for example, for 1958 the figures for steel output were reduced but those for pig iron, coal and electricity were not. For much of the period between 1958 and 1976 the State Statistical Bureau was often under political pressure to produce figures that the leaders wanted, faced political restriction on its activities or was effectively hampered in its work. As a result, the data from this time are not exact but the degree of reliability is unknown. The years 1967-69 were particularly unsatisfactory in that statistics were uncollected; the situation began to improve in 1970. The data for 1954-57 and 1978 onward are reasonably good; that is to say, they are comparable with data produced in most developing countries, perhaps not as good as those from India, Hong Kong, Taiwan or Singapore, to name some developing Asian areas or countries, but better than those from some Middle Eastern and African countries. It is not always clear what actually is included in the Chinese data, and the method of obtaining them is often something of a mystery.
With the adoption of more market-oriented policies, there has also been a change in the degree of reliability between categories: statistics relating to the output and supply of goods that have increasingly been subject to free marketing, and less to unified purchase and sale by the state, have reduced in accuracy. This means that statistics on agricultural goods have become less accurate since 1979, and especially since 1985. Similarly, the accuracy of statistics about small service trades and production by individual or small co-operative enterprises is in doubt. In the foreign trade area, decentralization has meant that it has become harder for the Ministry of Foreign Economic Relations and Trade (MOFERT) to produce accurate statistics, and an increasing number of institutions is involved. The work of the customs authorities involves more traded goods but has fewer institutional complexities, so that the figures produced by customs gain in accuracy, relative to MOFERT figures, as the years progress.
A second difficulty in studying Chinese development and trade is that it is difficult to apply Western economic theories, such as the theory of international trade, to the People’s Republic of China without due care. Firstly, there is the absence of much of the needed data, such as the cost of production, the wages paid, the amount of labor and capital used, and how they are priced. As far as can be understood, land is not costed, except for firms in SEZs and firms with some foreign capital involved.
Secondly, there are great institutional differences between China and the West, so that many of the assumptions of trade theory are violated. For example, labor is not mobile in China. Until recently all workers were allocated to a job by the state and kept it for life: they were not allowed to choose their job or workplace, nor were they able to obtain a transfer to a more satisfactory position. Although there has been some improvement here, essentially this position remains for most regular Chinese workers. A worker can apply for a transfer but the firm in which he or she is employed must approve the release and the firm will often refuse to do this. Recent attempts to allow workers to transfer without approval are likely to prove difficult to enforce. Labor turnover is low because of the institutional system, attitudes, and the general problem of surplus labor and few job opportunities. Those born peasants have virtually all remained peasants and they are not normally allowed to move to a different area. Recently, changes have been occurring in this area and peasants are now encouraged to become small tradesmen, handicrafts-people and the like, because of the great under-employment in agriculture and the need to raise the level of production.
Other violated assumptions exist: until recently capital was centrally allocated and, although firms may now borrow to invest, the rates of interest seem much too low relative to the scarcity of capital. The previous system of supplying capital without charge and the current charging of low interest rates is one reason why firms tend to be very capital-intensive when the large labor supply available in China is considered. Foreign capital was not allowed into China between 1960 and about 1978, and now that it is encouraged it tends to be used for providing services such as hotels, restaurants and taxis to other foreigners. It is rational for the foreign investor to do this, as foreign exchange can easily be obtained and hence profits can be repatriated relatively easily; however, the investment is not well allocated for China’s economic development. A related problem is that prices still do not reflect the marginal use of resources and are not market clearing prices; that is to say, many prices are still rather arbitrarily set and cannot act as signals for where best to invest. With such prices, where those set arbitrarily high mean spuriously large profits, attempts to maximize profit mean that investment is attracted to areas that falsely return high profit. Investment, be it foreign or domestic, is then misallocated.
The adoption of three types of prices (fixed, fluctuating between a stipulated floor and ceiling, and free) has improved the position, at least ignoring the theory of second best which says that what appears to be a desirable movement from one sub-optimal position to another need not necessarily be so. Wages are also out of line with supply and demand and do not reflect marginal situations. Despite the low wages paid, wages in industry are generally too high relative to capital availability. In addition, skilled or highly productive workers often receive too little relative to unskilled, inefficient, or lazy workers. Wages for most workers are set by the state, and not much adjustment is made. A wage reform began in 1985, and this has helped, but it has not solved the problem. Promotion for achievement has not been common in the Chinese system.
Western trade theory also assumes that factors are fully employed, as they can be if their prices are allowed to adjust freely. No country actually has such a situation, but China is further away than most. For many years unemployment was serious; this improved after 1978, when make-work endeavors and forcing institutions to employ more workers than they needed reduced the degree of unemployment. As has been fairly said, this really transferred the problem of unemployment from the streets to the firms. With the number of employed staff and workers in China standing at 118.9 million at the end of 1983, and a net increase in employment of 39 million between 1979-83 inclusive,2 some 49 percent of the total staff and workers were newly employed. As about 30 percent of state-run factories steadily made losses, it suggests that make-work led to a high under-employment rate. If the loss-making enterprises had closed down and released 30 percent of the 60 million employed in industry, 18 million more would have been unemployed. If released in this fashion, these alone would have constituted an unemployment rate of 15 percent.
Capital has also been badly allocated as a result of poor planning decisions, poor pricing, not charging any rate of interest on capital given for investment purposes until the 1980s, and investment allocation ignoring consumer demand. Some improvement has occurred in the 1980s but capital is still badly allocated. According to the Chinese press, land was badly allocated for decades by commune cadres, as they often failed to understand or correctly apply central policy on what to grow. Central decisions were in any case often not correctly formulated. For example, after 1960 land suitable for purposes such as growing apple trees was very often turned to growing grain for which it was not suitable. Since the reintroduction of family farming, the peasants allocate land as they think best. The result is a better allocation than under the previous system, but the state sets the price in the contracts signed for the major agricultural products. This means that unless the prices are set correctly, the land will still be misallocated. As the output of some crops (e.g. cotton) rises or falls up to 30 percent a year because of the prices set, we can readily conclude that the state does not in fact manage to set prices correctly.
Another problem in applying trade theory is that information is not widely available in China. This is the result of two main factors. Since the early 1950s, China has built up an administrative and planning system that is vertical, within which all units report upwards, and instructions are passed downwards. As a consequence, lateral communications are rare. The other reason for restricted information is that control over all the media is tight and much does not get printed in the press. Although improvements have recently occurred, so far they amount to little more than a widening of the guidelines that must not be breached. For an enterprise, it means that it often lacks information that exists elsewhere. Trade theory assumes such knowledge is present. Until recently, China had little knowledge of what international advanced technology existed, and worse, many areas seemed to be totally unaware of what was already in existence in China. This occurred despite decades of emulation campaigns and the theoretical sharing of such information.
A final problem in applying Western trade theory is that it assumes that trade is freely undertaken. As both partners enter freely into trade, then both must feel that they gain something. In China a firm did not have the ability to enter freely into trade until 1978. Foreign trade was a state monopoly: all produce had to be delivered to a state purchasing authority, or to the state trading corporations, which would try to export it. Imports had to be requested as a specified item from the state, which might refuse the request, or else find a local but inadequate substitute and supply that instead. The total level of trade was decided administratively, usually by guessing the export earnings for the year and importing that amount or a little less. The commodity composition of exports was set by what was available, that of imports by administrative decision.
Much relaxation of this system has taken place since 1978. Most foreign trade is still in the hands of the state but other entities can now export and import. The two southern provinces of Guangdong and Fujian have the power to import and export reasonably freely and about a thousand new foreign trade entities have been established at lower levels. A variety of groups have some restricted power to trade abroad, including the firms in the original four SEZs, the 14 open cities, Hainan Island, the joint ventures and other firms with foreign capital.
A third problem when investigating China’s economic development concerns the reliability of projections and predictions. Projections in the social sciences tend to be weakmany changes may occur that can negate the projection. Out of a myriad of possible outcomes, only one will eventuate. It is not easy to have faith in projections for China: the database is weak, the country does not fit easily into Western theoretical models, economic policy changes are rapid, important institutional changes can occur abruptly and the authoritarian system means that a small shuffling in the power balance at the center can result in great changes in policy. As China is going through an experimental period, attempting to boost the economy by adopting methods novel to China, and sometimes to any socialist country, it is even more difficult. The nature of an experiment is to try something, learn what works and what does not, and then make a change.3 In such a situation, parameters are shifting constantly. In recent years, for example, China has introduced foreign capital, bought modern technology, and shifted from importing complete plant towards preferring know-how and urgently needed individual items of technology. It has improved its energy and transport capacity and modified its entire agricultural system. Further, it has attempted to alter its industrial management system, flirted with the setting up of stock exchanges at which some bonds can be traded and deliberately reallocated its resources from heavy industry towards light industry. Last but not least, China has begun to reform the wage system and has changed the method of capital allocation. In short, many variables and parameters are undergoing rapid change, and the common practice in a model of assuming all relevant variables to be fixed and then changing one in order to investigate the results does not work well.
Despite such caveats, there has been a recent improvement in our ability to apply Western theory to China, as a result of changes that have taken place there. China is both a socialist country and a developing one of the Third World. Before 1978 the socialist element predominated, as it had since the 1950s. This meant that much Western theory applied badly if at all. Since 1978, however, China has begun to adopt some Western or capitalist methods and has reduced some elements of socialist practice and ended others. This means that China is increasingly coming to resemble a Third World country and is a little less like a socialist one. In turn this means that economic theory developed for non-socialist countries applies rather better to China than it once did. To assist our understanding, Western theory can and should be applied, but this must not be done in an automatic or inflexible fashion that takes no account of conditions in China.
Chapter 1 examines the Cultural Revolution as it impinged on the economy and considers the need for changes, arguing that a mixture of domestic and international politics, and domestic economics provides the reasons for change of some kind being necessary. Chapter 2 presents an overview of economic achievements between 1970 and 1985, comparing two periods, 1970-78 and 1979 on. Chapter 3 discusses the question of why the market mechanism and open door policy were selected as the appropriate response. Chapter 4 looks at the pattern of trade between 1970 and 1978 and Chapter 5 does the same for the period after 1978. Chapter 6 considers the use of foreign investment, foreign aid, and joint ventures in China, while Chapter 7 discusses the SEZs and similar regions specially selected for development. The final chapter provides a summary and considers the future.
In the text, a billion refers to a thousand millions and, unless indicated otherwise, all dollar figures refer to United States dollars.