China: The Continuing Revolution

I.    History and Environment

A.  Resources -- About 1.3 billion people, more than one-fifth of the world's population, but only 10 percent of land suitable for cultivation. Average farmer works less than one acre, compared with 2 in India and 100 in U.S.

B.  Early History - Chinese civilization arose between 3000 and 2000 B.C. in Yellow River basin, and environment required central institutions. Feudal states under Shang dynasty, and empire was established during Qin (which built Great Wall). Cultural unification under Han.

C.  Technological Achievements - Imperial China was most technologically advanced and literate culture in the world. Had bronze weapons and tools, gunpowder, movable type, hemp-spinning machines, agricultural and medical techniques, algebra, and trigonometry long (often hundreds of years) before the West.

Update.  "The Great Divergence" - When did Europe pull ahead of China and the rest of Asia in economic development?  The "traditional" view is that this happened quite early, and started widening in the 16th century. A more recent "revisionist" view, promoted by scholars such as Kenneth Pomeranz, suggests that living standards were still similar in parts of China and the West until the 19th century. However, in a 2012 article in the Journal of Economic History, Li and Van Zanden estimate that Dutch GDP was roughly double the level of the relatively prosperous Yangtze area in the 1820s.  The debate continues.

D.  Causes of Stagnation

1.   High-Level Equilibrium Trap --Mark Elvin argued that early development of agricultural and medical technology, limited urbanization, and preference for early marriages and large families caused excessive population growth, strained raw material base, reduced value of labor, and reduced demand for labor-saving technology. Doesn’t explain why stagnation started before 16th century.

2.   Nature of Discovery - China didn’t develop scientific method (Lin Yifu)

3.   Mongol Domination - Harsh taxation and servitude during 1234-1368, but the economy was temporarily opened to foreign trade and technology.

4.   Opium and Colonialism - Opium addiction reached crisis pro­por­tions by 1700s. Efforts to prevent imports from India led to Opium Wars with Britain during 1839-1842.

5.    (Update) In Spring 2006 Journal of Economic Perspectives, economic historian David Landes explained the absence of a Chinese Industrial Revolution in terms of excessive government and market inefficiency: "The Chinese state was always stepping in to interfere with private enterprise..."
On the other hand, Perkins found that around 1800, there was one government worker for every 32,000 people in China or for every 700 people in Europe.  Insufficient expansion of infrastructure.

5.    (Update) In Cliometrica (2015), Dobado-Gonzales and others suggest, based on  price  movements and other market data, that long-distance agricultual markets failed to integrate in East Asia, as compared to Europe, and this contributed to the Divergence, from "at least" the 18th century: "Despite the geographical proximity and ease of transportation between China and Japan, no statistical evidence of grain market integration between the two countries is found during the eighteenth and nineteenth centuries." So the closed nature of Asian societies may have been a major contributor to the Divergence.

E.   Republic

F.   Yenan

 II. Importing the Soviet Model, 1949-1957

III. The Great Leap Forward, 1958-1960

IV. Readjustment and Recovery, 1961-1965

  V. The Cultural Revolution 1966-1976

VI. Transition of Power: 1976-1978

VII. Socialism with Chinese Characteristics (1979-Present)

A.  Ideology of Pragmatism

1962    Deng Xiaoping proverb: "Yellow cat, black cat, as long as it catches mice, it is a good cat." Deng was known as a pragmatic leader.

1978    Deng restated his philosophy in two compact slogans: "Practice is the sole criterion of truth" and "Seek truth from facts."

1979 Democracy Wall movement crushed. Deng issued new ideological decree—truth sought from facts, but only within Four Cardinal Principles: follow the "socialist road," the "dictatorship of the proletariat," the Communist Party, and Marxist-Leninist and Mao Zedong thought.

1983 Deng declared that Taiwan (later added Hong Kong) could remain autonomous and capitalist when reunited with China—one country, two systems.

1984  Professor Li Yining developed a Marxian rationale for market reforms—China is still operating at the primary stage of socialism.
UPDATE: In 2007, Wen Jiabao declared that China still is at the primary stage of socialism, and "will remain so for a long time to come."

1987  Premier Zhao Ziyang adopted primary stage thesis at 13th Party Congress; China should develop socialism with Chinese characteristics

1989  Hu Yaobang died; students held memorial service in Tienanmen Square. Demonstrators remained 6 weeks, until troops entered the square on June 4. Recentralization of authority.

1992  Deng Xiaoping visited special economic zones in southern China, promoting reform.

1997                Deng Xiaoping died; successors declared allegiance to his pragmatic line.

2000  President Jiang Zemin introduced the 'Three Represents'. “The CPC will remain successful…so long as the Party represents the requirements of developing China's advanced social productive forces, the progressive course of China's advanced culture, and the fundamental interests of the Chinese people.” Party membership open to entrepreneurs.

2002 - Hu Jintao became President and Communist Party chief

2003 - Wen Jiabao became Prime Minister. Hu and Wen used a lot of socialist rhetoric, promising to take care of the poorest people in society. At the same time, they supported approval of a new Property Law, which stabilized the condition of the wealthy.

2004 - The Chinese constitution was amended to say that private property was “not to be encroached upon”.

2005 - The government published a draft of a new property law, inviting discussion.

2007 - New property law finally adopted. Hu and Wen tried to take a centrist position, protecting property rights for the rising middle class and farmers, while promoting a "harmonious society" that strives to distribute wealth more equitably, to increase social expenditures on health and education, and to alleviate some of the excesses of pollution and corruption that have accompanied rapid growth.
Read more about it here:

2012-2013 -  November 2012, Xi Jinping elected General Secretary of Communist Party and Chairman of Military Commission; March 2013, also elected President of the People's Republic. Consolidation of power and a renewed "cult of personality."

November 2013, announced "deepening reforms" that would allow "market forces" to play a "decisive" role in allocating resources. The state would gradually reduce its involvement in the distribution of capital, and restructure state-owned enterprises to allow further competition. 

2015-2016 -  Summer stock market crash that destroyed a third of value in one month, and has led to capital flight. In 2015, Chinese nationals who expected the yuan to fall moved about $550 billion out of the country into foreign currencies.  The government has responded by buying yuan, trying to burning the short-sellers. "The nation’s stockpile of foreign exchange reserves has dwindled to about $3.3 trillion. The cushion is shrinking. 'Considering China’s foreign debt, trade, and exchange rate management, it needs around $3 trillion in foreign exchange reserves to be comfortable,' says Hao Hong, chief China strategist at Bocom International Holdings."

B.  Agriculture

1.   Traditional system—small-scale subsistence farming.

2.   During 1953-1957, small farms merged into Soviet-style collectives.

3.   In 1958, collectives merged into people's communes, with production brigades and production teams evidently.

4.   During 1961-1965, policy of "Agriculture First."

a.   Communes reduced in size.

b.   Incomes linked to performance of production teams and individuals according to work-point system.

c.   Families allowed to operate small private plots.

5.   During 1966-1978, progress prevented by Cultural Revolution and the post-Mao succession crisis.

6.   Late 1978, return to reforms of early 1960s, and experimentation with system of contracting land and output quotas to individual households.

7.   Household Responsibility System actively promoted by government, beginning in 1981. Covered 98% of rural population within 3 years.

a.   Communal fields were divided into small family plots.

b.   Households contracted with production team to cultivate a tract of land in exchange for fixed quotas of certain agricultural products to the team at fixed prices.

c.   System modified in 1984-1985: communes abolished; land ownership transferred local villages and townships; allowable terms of the contracts extended to 15 years (30 years after 1995); household could transfer its contracted land to another household.

d.   System was big initial success, based on stronger incentives and more even distribution of labor effort over the land. 

e.   By 1985, grain production returned to lower trend growth and then  declined from 1998-2003. Largely caused by diversion of land from agriculture and from grain  acreage to fruit and high-value crops (same happened in Japan and other heavily populated countries during industrialization). Since 2003, recovery of grain production explained largely by heavy investments in agriculture -- 6 trillion yuan ($930 billion) during 2003-2012, the highest level in China's history.

China Rice Production (1000 MT), 1960-2012

China Rice Production

C.  Industrial Reform

1.   In 1978, Sichuan profit retention experiment  leading to industrial responsibility system, whereby state enterprises negotiate "profit and loss contract" agreements with supervisory officials. Some 6,600 enterprises covered by 1990; all covered by the end of 1992.

2.   New draft of constitution in 1978 legalized small-scale private enterprise. During 1978-1983, number of private businesses grew from 100,000 to 5.8 million.

3.   In 1984, ownership of rural commune industrial holdings transferred to the new units of local government, creating township and village enterprises (TVEs). These grew rapidly in output and efficiency:

a.   Kinship links and implicit property rights.

b.   Public finance decentralized since 1984.

c.   Communities with TVEs compete for investors.

d.   TVEs supply goods and services neglected by old system.

e.   Supply and technology alliances with state industries and foreign investors.

4.   Proportion of unprofitable state-owned enterprises (SOEs) increased from 10 percent in 1985 to 28 percent in 1990, to nearly 50 percent in 1995. Subsidies contributed to acceleration of inflation.  9th  Five-Year Plan (1996-2000) promised financial support to only 1,000 of the 13,000 large and medium-sized enterprises. UPDATE: Since 1994, SOEs have been allowed to convert to worker-owned producer cooperatives (76% have done so in Sichuan).  Workers do not have portable ownership rights.
UPDATE: 1999 reform allowed indebted SOEs, in cooperation with their lenders (state-owned banks), to convert part of their debt to equity, held by the lending bank or by an asset management company.  The latter has authority, as an owner, to restructure the enterprise.

D.  Financial Reform

E.   Population Growth and Employment

F.   Open Door Policy

1.   International contacts between people—officials, tourists, students, scholars, etc.

2.   Foreign trade and investment rights, especially in Special Economic Zones.
China is largest recipient of foreign investment in Asia, and second largest in the world.

VIII.    How Far Can One Leg Go?

A.  Chinese advantages in the coming century:

1.   Long and stable cultural heritage.

2.   Strong momentum of self-sustained growth.

3.   Untapped natural resources.

B.  Major challenges:

1.   Breaking the cycle of rising and falling inflation.

2.   Coping with unemployment arising from industrial restructuring and displacement of surplus rural labor.

3.   Completing transition to a competitive market economy, relying on comparative advantage.

4.   Strengthening the "one leg" of economic reform with political reforms

UPDATE: Competing views of the global future:
Charles Kupchan,  "No One's World" -- Chinese movement toward democracy will continue to be slow, because the Party has successfully co-opted the new elite groups and has delivered success to much of the population.

Ruchir Sharma,  "Breakout Nations" -- Current rates of investment are unsustainable (fiscal balances and saving rates), rising fear of inflation, and "The Fountain of Youth Runs Dry."

      Daniel Altman,  "Outrageous Fortunes" -- The groupism and authoritarianism of Chinese Confucianism will set a limit on economic growth that will set a relatively low convergence target for living standards. Within 40 years, its growth rate may fall below that of the U.S., crippled by an aging population (working-age share of population is currently higher in China than in U.S., but will be lower by 2050).

IX. UPDATE: China’s Accession to the WTO

A.  Sequence—

1986    China began negotiations to rejoin the GATT, the WTO’s precursor.

11/99   China reached bilateral agreement on the terms of WTO entry with U.S.

9/00  U.S. Congress granted permanent normal trading relations (PNTR) to China.

12/01   Chinese official accession to the WTO.

B.  Commitments Under U.S.-China Agreement
1.   TARIFFS—China will cut tariffs from an average of 24.6% to 9.4 percent overall, eliminating all tariffs on computers, telecommunications equipment, and other high-tech products.

2.   AGRICULTURE—China will eliminate export subsidies, cut average tariffs on U.S. agricultural products from 31% to 17.5% in 2004, and eliminate health barriers not based on scientific evidence.

3.   QUOTAS AND LICENSES--China will eliminate these restrictions with phase-ins limited to five years.

4.   TRADE/DISTRIBUTION—Over three years, foreign companies will gain rights to handle their own foreign trade transactions in China and to own and operate distribution networks.

5.   SERVICES--China will phase out most restrictions banking, insurance, telecommunications, professional services such as accountancy and legal consulting, business and computer related services, motion pictures, etc.

6.   STATE-OWNED ENTERPRISES--China will ensure that state-owned enterprises will make purchases and sales based on commercial considerations, such as price, quality, availability and marketability, allowing U.S. firms to compete for sales.

C.          Impact of China's entry

China's GDP and quadrupled and raw material exporters have clearly benefitted. cording to Brad Setser's recent analysis, the "shock" in the U.S. after China's entry was much larger than initially expected, but some of this was caused not by China, but by the strength of the dollar and by technology. Accession opened other markets to China's goods and attracted investment into China, but state controls still made it a difficult market to sell manufactured goods. The U.S. could have made more use of section 201 of the WTO rules, limiting import surges. Setser: "In no small part, this is because U.S. and European firms benefited from making use of Chinese production to meet global demand. The interests of U.S. firms and U.S. labor were not always aligned."

D.  Record of implementation:
According to its 2016 Report to Congress, China agressively worked toward compliance with its obligations during 2002, but a new government came to power in 2003, and "while the Chinese government continued to take steps to implement China’s outstanding WTO commitments, it generally did not pursue economic reforms as aggressively as before. Instead, the Chinese government increasingly emphasized the state’s role in the economy... By 2013, when China’s next leadership transition was complete, some positive signs of a renewed commitment to economic reform in China began to emerge... [However], to date, the promise of the developments in 2013 has not been realized. The pronouncements of the Third Plenum have faced strong resistance from entrenched interests..." The Report goes on to criticize China's performance in protection of intellectual property rights and trade secrets, and limits on market access for services and agricultural goods.