Reform and Opening up in China

Nic Peterson

Economic Globalization

Reiter

6 February 2018

China’s Reform and Opening Up

        By the mid 1970s, the People’s Republic of China was facing a dire moment in its political and economic history. Although the Cultural Revolution seemed to be nearing its end, the communist party was split between radical groups who promoted hardline communism and moderate leaders who promoted rapid modernization. Both sought to dominate political and economic policy. Following the death of party leader Mao Zedong and the imprisonment of radical groups in 1977, Deng Xiaoping arose to the top of the party as the dominant political and economic power, ushering in an era of reform and opening up for the Chinese economy. Due to multiple years of inward reform and opening up to foreign direct investment, China was able to take advantage of its major competitive advantage, its massive labor force, and combine it with foreign investment to rise to the global economic superpower it is today. Although China’s Reform and Opening Up period extends to present day, in this paper I will be reviewing the performance of the Chinese economy from 1975 to 2000, focusing largely on the effects of the period after initial reform in 1978.

        At the Third Plenum in 1978, the communist party leaders decided it was time for change. The Maoist centrally planned economy had failed to produce efficient economic growth, causing China to not only fall economically behind the Asian Tigers, but also forced Chinese citizens to continually suffer at low living standards that had not improved for a century.^[1] During this era, China pursued achieving self-sufficiency, resulting in the combined values of imports and exports before economic reform totaling less than 10% of national income. In order to counteract this, the Party decided to pursue a socialist market economy (socialism with Chinese characteristics) by increasing the role of market mechanisms by introducing capitalist principles and reducing, but not eliminating government planning and direct control.^[2]

Through this new system, the Party would reform inward to overcome key deficiencies in agriculture, communications, transportation, metals manufacturing, and open itself to foreign investment to increase exports. In order to accomplish all of this growth, China had to rely heavily on its largest comparative advantage, the world’s largest manufacturing workforce: 104 million people. At the time, this workforce was twice the amount of manufacturing workers in the US, Canada, Japan, France, Germany, Italy and the UK combined.^[3]

At the beginning of reform era, China’s population was four-fifths rural. Further compounding the problem, China possessed a relatively small percentage of arable land, 10% of China’s total area as compared with the US’s 22%. Rather than pursuing the top-down policies of Perestroika that their Communist brother the Soviet Union pursued targeting industry first, the Chinese opted for a bottom-up approach and targeted agricultural reform as the first and most important measure to improve the quality of life for the majority of the population. In the initial phases, the Party decollectivized agriculture and emphasized the household-responsibility system, i.e. reintroduction of private land holdings. This divided communes into private plots and allowing peasants to exercise control over their land as long as they sold a contracted portion of their crops to the government. As a result, agricultural production increased by 22% in 1979 and real income of the average Chinese farm family doubled from 1979-84.^[4] [5] Agricultural privatization proved successful and by the early 2000s, China became the world’s number one producer in rice, cotton, wheat, pork, vegetables and more. At this point China was a major exporter and importer of agricultural products, accounting for more than $50 billion per year.^[6]

Next, the Party targeted urban industry reform. The Party introduced a dual-price system that allowed state-owned enterprises (SOEs) to sell any production above their plan quota at market prices, allowing citizens to avoid shortages in production seen in the Maoist era and additional profits to SOEs. The Industrial Responsibility System of the 1980s further promoted the development of SOEs by allowing individuals or groups to contract with the party to manage the enterprise. The Party also promoted private businesses for the first time since taking power in 1949.^[7] Following the 1980s reforms, Deng continued to decrease controls and government intervention on private businesses and allowed inefficient SOEs to fail rather than prop them up as the government had done in the past. Although industry and manufacturing grew quickly during this period, state controlled sectors faced economic troubles, reporting heavy losses. By the late 1990s, the number of SOEs had decreased by 48% and few existed besides large monopolies. ^[8] Increased production and success of private companies began to drive the Chinese economy and paved the way for future economic innovation.

With the seeds of inward reform set in the early 1980s, Deng changed foreign direct investment laws and policies. His reforms lifted the longstanding ban on foreign direct investment projects and instituted new laws on joint ventures. These provided a basic framework for these foreign firms to operate in China, relaxed foreign debt and equity financing regulations and restrictions on foreign trade quotas. However, the most influential change Deng instituted was the introduction of four special economic zones (SEZs), which provided foreign firms with preferential tax rates and administrative treatment. The first three of these SEZs, Shenzhen, Zhuhai, and Shantou, were located in coastal cities of the Guangdong Province near Hong Kong. The fourth, Xiamen, was directly across the strait of Taiwan. Theses zones were strategically picked to promote foreign investment out of Hong Kong and Taiwan.

In 1984, the government granted similar exemptions from taxes and administrative procedures to 14 new “Open Cities” and “Export and Technology Development Zones”. These granted these new coastal cities the authority to approve FDI projects under $30M at the local level rather than rely on the approval of the central government. The Party continued it foreign liberalization in 1986 with the implementation of the “22 Regulations”. This policy enabled “foreign invested enterprises” to be eligible for reduced business tax income and lifted controls on the remittance of profits from foreign currencies. In order to attain these new special benefits, companies had to be classified as one of the following: “export oriented projects” (projects designed to export 50% or more of their overall production) or “technologically advanced projects” (projects designed to upgrade domestic production capacity through the use of advanced technology). (Source) The 22 Regulations allowed for a massive shift of foreign investors from Hong Kong and Taiwan to target the relatively cheap labor of mainland China through the new “Open Cities”, “Export and Technology Development Zones”, and SEZs. ^[9]