When China Rules the World (27 page)

The process of reform began in 1978 with the creation of a handful of special economic zones along the south-eastern seaboard, including Guangdong province, in which the rural communes were dismantled and the peasants were given control of the land on long-term leases and encouraged to market their own produce. It was based on a step-by-step, piecemeal and experimental approach. If a reform worked it was extended to new areas; if it failed then it was abandoned. Such down-to-earth pragmatism stood in sharp contrast to the grand ideological flourishes that informed the Cultural Revolution era and the Maoist period more generally. As Deng put it, in the time-honoured tradition of pithy and popular quotes by Chinese leaders from Confucius onwards: ‘Seek truth from the facts’; ‘Truth is to be found in practice’; and ‘Cross the river by feeling for the stones’. The new economic approach involved a new kind of mindset and way of thinking in the Party and government, which necessitated a massive change of personnel, starting at the top and working rapidly downwards. In 1978 Deng declared: ‘To make revolution and build socialism we need large numbers of path-breakers who dare to think, explore new ways and generate new ideas.’
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The
People’s Daily
later commented that political reform was:

a gigantic social systems engineering project, which involves straightening out the relationships between the Party and the government, power and judicial organs, mass organizations, enterprises and institutions, and between central, local and grassroots organizations; it concerns hundreds of millions of people. This is an arduous and protracted task.
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The reform project has usually been seen in narrowly economic terms, as if it had few political implications. In fact Deng’s project involved not just an economic revolution, but also a largely unrecognized political revolution, which entailed a complete overhaul of the state, both in its modus operandi and its personnel, with the universalist, ideological model of the Maoist era being replaced by something closer to the developmental model of the East Asian tigers. An essential element in this transformation was the decentralization of the state, which was seen as a precondition for the reform of the economic system and economic growth. Decision-making, including the granting of de facto property rights and fiscal power, was decentralized to different levels of local government.
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As a consequence the central government budget, as a share of GDP, shrank considerably.
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Almost from the outset, economic growth rates were transformed from the 4-5 per cent of the Mao period to an annual growth rate of 9.5 per cent between 1978 and 1992.
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The momentum of reform, however, was seriously disrupted in 1989, little more than a decade after it began, by a massive student demonstration in Tiananmen Square that was brutally suppressed by the army. With the Party leadership seriously divided, it seemed likely that the reform process would be derailed, perhaps indefinitely. In the event, there was only a short hiatus before, in the grand style of Chinese emperors, and to coincide with the Chinese New Year in 1992, Deng made a ‘Southern Expedition’ to the coastal heartland of China’s economic revolution, during which he made a statement in Shenzhen - a brand-new city neighbouring Hong Kong - that not only reaffirmed the central importance of the market reforms but made a clarion call for the process to be intensified and accelerated, suggesting, in a famous passage, that there was nothing wrong in allowing the rich to get richer (and then eventually paying higher taxes to help the poor).
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Until this point the reform process had largely been concentrated in the south, but now it began to move to the interior provinces and, most crucially of all, to Shanghai and the Yangzi Delta, China’s former economic powerhouse. There was a further wave of foreign investment, largely from the Chinese diaspora based in Hong Kong and Taiwan (which to this day remains the largest single source of foreign inward investment), while Chinese exports, mainly to the United States, increased rapidly. An economic fever began to grip the country, encouraged by Deng’s call to embrace the market economy and fuelled by the annual double-digit growth rate. Nothing more graphically symbolized the ‘new frontier’ economic spirit than the tens of millions of rural migrants, China’s reserve army of labour, who left their farms and villages in search of the work and glitz of the city.
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The Red Guards were now but a distant memory. There was barely a Mao suit in sight.

From the outset, Japan and the Asian tigers had been an important influence on China’s economic reform.
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These countries shared with Deng a pragmatic and non-doctrinal view of how to conduct economic policy. It was recognized, however, that none of them could, in themselves, provide a suitable model: the conditions, especially those flowing from China’s enormous size and diversity, were simply too different. In the era of globalization that began around 1980, moreover, it was no longer possible for China, unlike Japan and the Asian tigers earlier, to grow its industries and companies behind a wall of tariffs until they were ready to compete in the international market. A further complicating factor was that China, as a Communist country, was still viewed with a certain amount of suspicion by the United States: as a result, its entry into the WTO took fifteen years and was the subject of the most detailed agreement ever made with any country - contrasting strongly, for example, with the far less demanding terms required of India a few years earlier. China, for a variety of reasons, had to invent its own way.
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Although China enjoyed nothing like the intimacy of South Korea and Taiwan’s relationship with the United States, it recognized the crucial importance of winning American support and cooperation in its pursuit of economic growth. Just as its approach to economic reform was informed by pragmatism, so too was its attitude towards the United States. The Mao-Nixon accord of 1972 marked a profound change in their relationship, with the establishment of formal diplomatic relations in 1979, the settlement of property claims, the unfreezing of assets and the granting to China of most-favoured nation treatment. These steps created the conditions for China subsequently to join the IMF and the World Bank in 1986 and be granted observer status to GATT in 1982. The value of the United States to China was increasingly evident during the 1980s: it became the most important destination for Chinese exports; growing numbers of Chinese students went to study there, including many sons and daughters of the Party elite; while the US model of capitalism came to exercise a growing influence. The collapse of the Soviet Union only served to accentuate that influence, and the US’s prestige was further enhanced by the economic dynamism associated with Silicon Valley and the internet. Increasingly during the nineties, however, there was a rising tide of nationalist sentiment directed against the US, which found expression in the bestseller
The China That Can Say No
and the demonstrations against the US bombing of the Chinese embassy in Belgrade.
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American influence on China’s modernization, nonetheless, remained considerable. Even China’s own economic path and popular mood was to bear some of the signs of neo-liberalism: the worship of wealth, the embrace of entrepreneurs, acquiescence in growing inequality, the retreat of the state from the provision of public goods such as education and health, the rapid lowering of tariff barriers and the adoption of an extremely open trade regime
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- all of which were closely associated with the reign of Deng’s pro tégé and successor, Jiang Zemin.

The approach of the Chinese leadership, following Deng’s emergence as the paramount leader, had been built on caution and pragmatism, notwithstanding the obvious radicalism of the reform process. They eschewed shock treatment and grand gestures. Although drawing on elements of neo-liberalism, they resisted the Washington orthodoxy and instead pursued a very home-grown approach.
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They were painstakingly meticulous in the way that they sought to introduce reforms by a gradual process of constant testing and trial and error. The state, in the time-honoured Chinese fashion, remained at the heart of this process of reform, even though the latter was to involve a drastic contraction in its economic role, with the share of government revenue decreasing from around one-third of GDP in 1978 to 17 per cent in 2005.
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For the Chinese leadership, the objective of economic reform was never Westernization, but rather a desire to restore the Party’s legitimacy after Mao through economic growth,
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and thereby to build a strong nation and state.
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Political stability was accorded the highest priority. ‘[China’s] modernization,’ Deng stated, ‘needs two prerequisites. One is international peace, and the other is domestic political stability.’
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The disintegration of the Soviet Union after 1989 only served to reinforce Deng’s belief in the vital importance of economic reform, an area in which the Soviet Union had palpably failed, and the need to avoid destabilizing political reforms, a trap which they saw Gorbachev as having fallen into.
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The Asian financial crisis in 1997-8 similarly confirmed the Chinese leadership in its aversion to shock treatment: that China should move with great caution in its financial reform and resist any premature liberalization of the capital account that would allow the free movement of capital into and out of China, and consequent floating of the Chinese currency, the renminbi (also called the yuan), which might lead to speculative attacks on the currency and the consequent destabilization of the economy, as happened to South Korea, Thailand and Indonesia - to their great cost - during the Asian crisis.
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(As a consequence, the renminbi remains, unlike the dollar, yen and euro, for example, a non-tradeable currency.)

In response to the challenge posed by an increasingly globalized economy, the Chinese leadership, mindful of the need to accelerate the process of reform, did, however, opt for one important element of shock treatment. During the nineties, by dismantling tariff barriers and allowing huge flows of foreign direct investment - in contrast to the economic strategy pursued by Japan, South Korea and Taiwan - they created a brutal competitive environment in which domestic companies desperately sought to survive against far richer and more advanced Western and Japanese rivals. This rapid opening up enabled the Chinese economy to take advantage of enormous flows of foreign capital and had the merit of forcing Chinese companies to learn from the outside world,
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but the cost was high, with many struggling to survive. While their North-East Asian neighbours enjoyed a prolonged period of protection from external competition, during which their companies were given time to develop, China, in comparison, had none. Chinese companies were obliged to sink or swim, and the conditions attached to China’s subsequent membership of the WTO meant the state faced various restrictions on the extent to which it was permitted to help state-owned enterprises, although it found various ways of circumnavigating some of them.
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Although the earlier phase of reform concentrated on stimulating the growth of the rural economy, by the end of the eighties the centre of gravity had decisively shifted to the cities and the industrial economy. Already, during the eighties, the Guangdong economy became a microcosm of the future shape and comparative advantage of the fast-changing Chinese economy, with Hong Kong entrepreneurs moving their manufacturing operations out of the city-state to neighbouring Guangdong province in order to take advantage of far cheaper labour; as a result, Guangdong rapidly became Hong Kong’s manufacturing base. This process quickly spread north and east-wards during the course of the nineties, its magnitude transformed by the flood of Western and Japanese direct investment at the end of that decade in anticipation of China’s membership of the WTO in 2001. Just as China pursued an open policy on trade, it adopted a similar approach towards inward investment. Since 1978 China has received $500 billion in foreign direct investment, ten times the total accumulated by Japan between 1945 and 2000. In 2003 China became the world’s largest recipient of foreign direct investment, overtaking the United States.
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The inward investment was mainly ploughed into the local subsidiaries of foreign multinationals with the purpose, following the example of Hong Kong, of exploiting the huge resources of cheap labour in order to make exports as globally competitive as possible. Foreign firms are now responsible for up to 60 per cent of all Chinese exports, and dominate high-tech exports with a share of around 85 per cent.
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China, in the process, has become the ‘workshop of the world’, by far the cheapest national base for low-and medium-end manufacturing on the planet.