Sunday, June 11, 2006

Few Thoughts About China's Development

What’s the background of China’s reform at the end of 1970’s?

  • After 10 years of political campaign (the disastrous “culture revolution” period), China’s economy run into deep trouble, with slow growth, low productivity, huge economical chaos and very limited capital.
  • People had been in poverty and underdevelopment for many years, hoping for change, while did not know which way to go and which model to adopt (SU’s model did not work after 30 years of trail, Japan’s model seemed unsuitable for China since China lacked its strong education and technology foundation while burdened with huge population, and south east Asian countries’ model might only applied to small countries)
  • Dengxiaoping visited U.S. and Japan around 1977-1978, and talked with Li
    Guangyao about Singapore’s boom in Beijing. Finally, he realized this was nearly the last chance for China to catch up and decided to launch the reform and opening policy to lead China out of poverty.

Why China could achieve such dramatic and continuous growth and development? What are the logics, features, differences of China’s reform and development?

  • Liberate mindset and create sense of urgency (abandon the old communism-centered ideology, accept reality and focus on economy development):
    • “Poverty is not communism”
    • “As long as the cat could catch the mouse, who cares it is black or white”
    • “Practice is the sole criteria for evaluating right or wrong”
    • “Stop arguing which is right, or which is real communism, just try it”
    • China could not wait any more, or we will lag behind the world for-ever”
    • “Time is money, efficiency is life”
  • Make incentive right and make systems effective
    • Adopted “Household Responsibility System” to release rural productivity, motivate peasants and bolster agriculture and country’s development (critical given China’s huge population)
    • Developed “Town and Village Enterprises” to absorb idle countryside labors and establish industrial manufacturing capability in rural area
    • Tried various ways on SOE reform and transformation, abandoned the “iron rice bowl” and encouraged people to innovate, sparing no efforts to boost large conglomerates
    • Invested tons of capital to develop heavy, chemical industries like Automobile, Machinery, Airline, Petro, Power etc.
    • Gradually allowed private ownership and encouraged private sector’s development.
    • Attracted FDI to supplement capital input by opening the market and preferable tax policy, and then learnt the technology, knowledge, management expertise of western companies.
    • Emphasized on regional economy development’s importance and used it as key promotion criteria for local officials.
  • Be creative and flexible, while retain control
    • Horizontally, absorbed western’s best practice and other Asian countries’ proved experience. Focused on tailoring them to China’s specific situation, but not just copying rigidly.
    • Vertically, all policies, principles and even the system could change over time, according to the new situation or dealing with the new issues.
    • Kept control of the critical industries and large conglomerates, making sure state dominates the most strategic industries and large companies – “Retaining the commanding heights”
    • Improved central government’s monetary and fiscal policy authority.
  • Adopt a gradual, step by step reform and transformation program, contrary to Russia’s Shock Therapy (most unique part as I understand)
    • Whole country: Economy reform first; political reform second
    • Geographically: Bottom up pilot in some regions first; (such as special zones in several southern provinces) nationwide top down roll-out second (if proved valid or successful)
    • Economy: Rural, agriculture and peasants first; city, industry and workers second
    • Economy: Industrial sector first; financial sector second
    • Industry: Labor intensive industries first (to build up capital and create employment); capital and tech intensive industries second (to improve economy structure and utilize the capital and tech resources piled)
    • Trade and Investment: Current account control deregulation first; capital account second. (Still not fully release now).
    • Trade and Investment: Attract foreign direct investment first; invest in other countries second (now becomes a hot topic).
    • Financial sector: Insurance first, banking and securities second (more important in China’s financial sector and much weaker than insurance).

What Zhurongji did?

  • Adopted expansionary fiscal policy and relatively cautious monetary policy to boost internal demand and whole economy
  • Continued SOE reform and privatization (highly debatable)
  • Transformed and improved the financial sector especially the huge state banks by inserting capital
  • Negotiated with U.S. and Europe and finally lead China enter WTO (huge impact and implication to China, make China return to the mainstream and almost impossible to return to its old track)
  • Further encouraged private sector
  • Tried all means to provide more employment (private sector, increase college entry rate etc.)

What are the key challenges China faces now?

  • How to maintain the sustainable growth? (previously high cost, inefficient use of energy and huge environment damage will not work any more)?
  • How to allocate the wealth fairly and keep social stability?
  • How to further improve economical structure for the next several decades’ growth?
  • How to further control the population and unemployment?
  • How to ensure a relatively peaceful period and friendly international environment? (acting as a responsible large country and playing a key role in the world)
  • How to deal with the belief system collapse?
  • How to deal with the severe government corruption?
Author: Jia Sun