After spending a few weeks talking about the brief history of post-empire China, here we are at the beginning of the period of modern China.
People call Deng Xiaoping the founder of the modern China. What did he do?
After Mao’s death in 1976, Deng Xiaoping became a rising star among the top officials in the Communist Party. Although he was growing up in a middle-class family and attending schools in China, his father supported him to join a work-study program in France when he was very young. Deng’s father would like his son to learn the advancement of the west in order to come back and save China from the Western power. Deng went to school and worked in France. And he actually did come back to save China. He decided that China was in need of a drastic change. When the central planned economy did not seem to work, why not trying to move toward market economy?
Deng introduced Chinese modern economic policies by open the country to more foreign trade and investment. Since it was under the the communist party but open economy, it is called socialist market economy.
Deng’s rising was at the right time. There were many reason that supported the economic revolution in 1978 under Deng’s ideas. As we know that the Cultural Revolution was very unpopular, and the Communist party and the government had to distance themselves from the old regime and make changes to get support of the people. Chinese government officials understood and had experienced first-hand of the shortcomings of the planning system. They knew that it needed to be changed.
At the same time, China was witnessing the Asian’s “Four Tigers” roaring success. South Korea, Hong Kong, Taiwan, and Singapore were enjoying very fast economic growth from their open-door and industrialization policies since the 1960s. They demonstrated to Chinese government officials and the Chinese people that a market economy can work better than a planned economy. The Chinese people were very ready for and would support the economic reform toward the market economy.
How did Deng reform the Chinese economy? When you want the market mechanism to work, you have to let the prices move by the market forces, not determined from the government. Therefore the reform of price system was a major task of the government. The Chinese government gradually allowed prices of some markets to be determined by market forces. The biggest player in the Chinese economy at that time was the State-Owned Enterprises (SEOs). Deng’s policies started by allowing them to have some autonomy in production decisions, making them more financially independent, and allowing them to keep profits after paying taxes to the state. Some SEOs were restructured into shareholding companies.
After 1978, rural markets began to open. The commune system was also restructured. The commune production was subcontracted to group of families, single families, and individuals. The commune production also engaged in other activities beside farming such as handicraft productions and husbandry. China’s farm economy gradually returned to the private economy. The ownership of land still belonged to the commune or the villages at the beginning period. As time went on, the right to use the assigned land became transferable. The Chinese can now ‘rent’ a piece of land in China from the government for a very long time up to 99 years.
For the banking system, the People’s Bank was transformed into a Central Bank in 1983. Specialized banks for supporting the industrialization were established and were allowed to extend their credit in the early 1980s. This led to a rapid increase in the supply of currency by 50% in 1984 and an inflation rate of 8.8% in 1985. In 1993, the Party decided to give more independence to the central bank and transforming the specialized banks to commercial banks (Chow, 2002).
The most famous policy of Deng Xiaoping was the open door policy. Foreign imports was allowed. The government greatly promoted the export sector. By 1987, the volume of foreign trade increased to 25% (from 7% in 1978), and by 1998 to 37% of GDP. In 1982, the well-known Shenzhen economic zone bordering Hong Kong was created. The foreign investors were welcomed especially in the southern coastal provinces. Foreign direct investment net inflow’s share to GDP increased from nearly 0% before the reform to 6% in 1993.
Deng had no blueprint to model these modern economic policies. They were adopted through experimentation, so-called learning by doing, or ‘crossing the river while feeling for stones’, according to Deng.
The results of the economic reform after 1978 turned out to be tremendous economic growth of China. A Chinese in 1960 made $89 per year. In 1979, per capita income increased to $183 and in 2014 it reached to $7,590 (World Bank, 2016). A lot of Chinese people (and I mean more than 400 million) were lifted out of poverty.
It looks like Chinese economy was following the right path after Deng’s reform. The dragon is now flying high. Was everyone in China happy after the reform? Were the rest of the world happy about that? We will talk about that next week.
Please come back and join me!
Chow, G. C. (2002). China’s economic transformation. Malden, Mass: Blackwell Publishers.
World Bank. (2016). World Development Indicator. Retrieved from: http://databank.worldbank.org/data/reports.aspxCode=NY.GDP.PCAP.CD&id=af3ce82b&report_name=Popular_indicators&populartype=series&ispopular=y