Rise of China

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1 | Page HWA CHONG INSTITUTION (COLLEGE) HISTORY DEPARTMENT LAVINIA SELVAKUMAR & MARISSA YEE HWA CHONG INSTITUTION (COLLEGE) H1 HISTORY INTERNATIONAL HISTORY: 1945-2000 THE DEVELOPMENT OF THE GLOBAL ECONOMY LECTURE 5: RISE OF CHINA AS AN ECONOMIC POWER I. INTRODUCTION THIS LECTURE AIMS TO: Examine and evaluate both the internal and external reasons for China’s economic rise in the post-Mao era. Examine the problems encountered by China as it rose economically and the measures taken to counter them. Identify the reasons for China’s continual economic rise in the 1990s. Highlight the impact of China’s economic rise on the global economic order. II. THE CHINESE ECONOMY UNDER MAO ZE DONG Prior to the historic economic reforms that broke China from its near 30-year isolation from the world economy, the Chinese economy was founded on an intensive programme of industrial growth and socialisation very much like the Soviet model of economic growth (state ownership of the industrial sector, collectivisation of agriculture with economic planning being controlled entirely by the state). Adopting the Soviet model was challenging for the Chinese context because of its limited expertise in building up the industrial sector. Moreover, 90% of the population in post-1949 People’s Republic of China was employed in the agricultural sector. The agricultural sector, however, proved to be quite successful in the initial years. Through collectivisation of agriculture and compulsory grain

Transcript of Rise of China

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HWA CHONG INSTITUTION (COLLEGE)

H1 HISTORY

INTERNATIONAL HISTORY: 1945-2000

THE DEVELOPMENT OF THE GLOBAL ECONOMY

LECTURE 5:

RISE OF CHINA AS AN ECONOMIC POWER

I. INTRODUCTION THIS LECTURE AIMS TO:

• Examine and evaluate both the internal and external reasons for China’s economic

rise in the post-Mao era.

• Examine the problems encountered by China as it rose economically and the

measures taken to counter them.

• Identify the reasons for China’s continual economic rise in the 1990s.

• Highlight the impact of China’s economic rise on the global economic order.

II. THE CHINESE ECONOMY UNDER MAO ZE DONG

• Prior to the historic economic reforms that broke China from its near 30-year isolation from the world economy, the Chinese economy was founded on an intensive programme of industrial growth and socialisation very much like the Soviet model of economic growth (state ownership of the industrial sector, collectivisation of agriculture with economic planning being controlled entirely by the state).

• Adopting the Soviet model was challenging for the Chinese context because of its limited expertise in building up the industrial sector. Moreover, 90% of the population in post-1949 People’s Republic of China was employed in the agricultural sector. The agricultural sector, however, proved to be quite successful in the initial years. Through collectivisation of agriculture and compulsory grain

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procurement policy in 1953, agriculture became the main foreign exchange earner for China.

• In 1956, motivated by international political ambitions and personal economic whims, Mao Zedong would embark on a different economic direction which emphasised that industrial development could be further intensified and boosted through the rural areas. Better known as the Great Leap Forward, People’s Communes were established in 1958 to speed up the rate of grain cultivation, the building of dams, canals and other infrastructure through revolutionary mass effort.

• This change in economic direction resulted in the stagnation of the Chinese economy. While there were initial successes in 1958, the following years soon witnessed a decline in agricultural cultivation and industrial production as the Chinese population became caught up in the revolutionary fervour through the Great Proletariat Cultural Revolution. By 1960, the grain yield had decreased to 143.5 million tonnes, which was lower than the 143.7 million tonnes in early 1951 and by 1978; over 30 million had died of starvation in China. Although official statistics claimed that the country’s GDP had increased by more than 100% from 1966 to 1978 and per capita income had risen by more than 70%, the country was a poor, rural and predominantly agricultural economy with 60% of China’s one billion people surviving on less than US$1 a day (based on international poverty standards).

THE FIRST DECADE (1949-1958)

• The first half of the decade (1942 to 1952) saw a period of economic recovery and

rehabilitation.

i. Agrarian reform (June 1950 to 1953)

ii. Dispossess landlord class and large landholders

iii. formed agricultural (farming) co-operatives (90%) in 1955

iv. Government ownership of transportation and all industries

• This was followed by “The Period of Fastest Growth”1 from 1952-59 which included

the Great Leap Forward (1958-59).

i. The Great Leap Forward was an economic and social plan used from

1958 to 1961 which ostensibly aimed to use China's vast population

to rapidly transform the country from an agrarian economy into a

modern communist society through the process of agriculturalization,

industrialization, and collectivization.

• Economic recovery was led by agrarian reforms that saw land

and assets distributed from the landlords to the peasants,

1 Christopher Howe, China’s Economy – A Basic Guide, p. xxiii

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Soviet aid and industrialisation. Although the impact of these policies, particularly

that of agricultural collectivisation2, were dramatic, growth was still too slow and

relations between China and the Soviet Union were cooling.

• As such, Mao launched ‘the most extraordinary economic adventure that the world

[had] ever seen’. The Great Leap Forward saw a surge in economic output due to

new plants constructed with Soviet assistance, exceptionally intensive efforts made

by the workforce, rapid industrialisation and mass collectivisation.

i. 1ST 5 YEAR PLANS (1952-1956)

• Modelled after Soviet model with emphasis on state control of heavy industry (e.g. coal, steel, petro-chemicals)

• Emphasis on heavy rapid industrialization programme. At first, economic growth appeared successful. Heavy industries grew more five times more than agriculture.

• Sino Soviet aid was minimal. Foreign assistance was not forthcoming. Only 3% from SU total investment. In fact, the PRC had to pay 10,000 Soviet advisers with interest loans. But China wanted to learn from Soviet technology.

• Soon, problems emerged. The economic growth became lop sided and unbalanced. Too much stress on heavy industries, neglecting rural agricultural sectors, light industries and the hinterland.

• China soon parted ways with USSR. This was the infamous Sino Soviet split, which led to China’s self reliance.

ii. 2ND 5 YEAR PLANS (1956-1962): GREAT LEAP FORWARD

• Effects went beyond 1958

• Mao hoped to match USSR and Capitalist West in industrial output within a short period of time. Wanted to catch up or surpass Britain in 15 years by 1972.

• Mao had a multi-pronged approach here:

• Light and middle industries

• together with emphasis on heavy industries

• Emphasis on agriculture.

• Agriculture: Social equality through People’s Communes

• Communes were developed out of collective farms. Land given to peasants after seizure from landlords. Mass collectivization ended private ownership.

• Industries: Backyard furnaces

2 Forced collectivization was intensified during the Great Leap. Agricultural operations were organised in the

production-team system. Each team consisted of about 20-30 neighbouring households.

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o This required China to draw supplies of iron and steel not from large foundries but to use primitive smelting devices.

o Everyone regardless of background made to participate. By 1958, 600,000 backyard furnaces had sprung up all over the country. Instead of improving technology, these enterprises were highly labour intensive.

o This resulted in massive inflation and negative growth of income.

� E.g.: National income : 1953: 14% growth to 1961: -29.7%

� Inflation: 1953: 3.4% inflation to 1961: 16.2% inflation

• However, as the Leap progressed into 1959 it ran into a host of problems:

administrative confusion, the misuse of resources and human exhaustion, coupled

with the withdrawal of Soviet assistance and a slew of natural disasters, all of which

saw the first decade end in disaster.

� Unrealistic quotas � Party Cadres pushed workers even though resources and energy was

stretched and depleted � Over emphasis on labour intensive approach rather than advanced

technology � Backyard furnaces a waste of labour, steel of low quality. Primitive

and inefficient. Steel products not internationally competitive. � Confusion in Communes: No proper planning and coordination &

senseless division of labour � Collectivization Failed: Peasants saw no need to expand beyond

immediate needs. � Natural disasters: Bad harvests and food shortages � Population explosion: Birth control viewed as capitalist selfishness +

strained resources insufficient for growing population. � Party split

• Mao got rid of officials who criticized his policies. (EG: Peng Dehuai, the then Minister of Defence)

• In the end Mao lost prestige and relinquished position as the Chairman of the party in 1959.

THE GREAT DEPRESSION (1959-1961)

• This period saw the decline of the Chinese economy, with the Gross National

Product at -12.4% per annum, compared to 6.69% in the previous stage.

• Documents acquired by American and Taiwanese intelligence describe the closure

of factories, the collapse of agricultural organisation and a population ‘stupefied

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with malnutrition and searching desperately for edible roots, tree barks, and natural

life of any kind.’3

• Mao and the CCP made fundamental changes in China’s economic policy, trying to

retreat from the Great Leap Forward by advocating policies that were complete

reversals.

READJUSTMENT AND CULTURAL REVOLUTION (1961-1970)

• As disenchantment grew with Mao’s Great Leap Forward, technocrats Liu Shaoqi

and Deng Xiao Ping embarked on New Economic Policies that saw the Chinese

economy improve slowly but surely.

• By mid-1966 the economy had improved sufficiently for Mao to stage a comeback

against his political enemies, Liu Shaoqi and Deng Xiao Ping, without risking

disastrous economic consequences.

▪ Restored Capitalist market ▪ Realistic and Efficient planning ▪ Production and growth revived quickly. ▪ Technological progress was swift as economy became more mechanised. ▪ Light industries and private plots of land ownership allowed ▪ Incentive to produce surplus crops increased but the gap between the rich

and poor widened.

• Mao thus launched the Cultural Revolution (1966-1976) to campaign against his

enemies in the Party and State administration apparatus. It had two economic

consequences – First the general dislocation that ensued led to a decline in

industrial output and halted the tentative revival of foreign trade.

REVIVAL OF GROWTH WITH TRADE (1970-1977)

• The Cultural Revolution has drastic effect on the economy.

i. PHASE 1: 1965-1968

▪ Formation of Red Guards; mostly students who were rebels and were unhappy with establishment, but few had solutions to the problems. Red Guard allowed to run free by Mao.

▪ This led to violent terror campaigns against teachers, principals and parents. Going against traditional Confucian societal structure.

▪ Economy: o Military industrial development hastily relocated to interior of country

from coastal area; safe from foreign invasion o Even though the programme was badly managed, there was dramatic

industrial growth (13.5%) between 1969 -76.

3 Ibid., p. xxix

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o Country was closed to foreign trade. Red Guards burned down British legation and attacked other foreign embassies in Beijing. As a result, foreign nations severed their ties to China.

ii. Phase 2: 1969 to 1976 ▪ Rise of Lin Biao, military dominance and Gang of Four ▪ Red Guards were replaced by the People’s Liberation Army. This resulted in

conflict between two groups. ▪ Industrial production dropped drastically. Basic education and research

came to a standstill. ▪ Closure of schools and political curriculum; left a generation without

education. This was known as the “Lost Generation”. ▪ Lin Biao, second in command to Mao, disagreed with Mao over foreign policy

and favoured relations with Soviet Union. Staged failed military coup.

• Zhou Enlai and Deng Xiao Ping proposed that China should pursue the ‘Four

Modernisations’, of which foreign trade formed an important part.

• In 1972 China launched a diplomatic offensive which saw it renew links with the

USA and open full diplomatic relations with Japan and various other countries.

• This strategy also called for the reimposition of central planning and policies for

training which led to the revival of the universities, all of which had been closed

during the Cultural Revolution.

• While these proposals were formally approved, Zhou and Deng faced strong political

opposition by an opposing faction and were criticised for using foreign trade to

develop industries. Such political strife saw the deterioration of the domestic

organisation of the economy.

• Both Mao and Zhou died in 1976 and Hua Guofeng took over as China’s Premier but

was largely unpopular. Although he disposed of the Gang of Four, Hua was demoted

in 1978.

• Deng then made use of this opportunity and consolidated his hold on power and

was the dominant voice in China’s affairs even though he never was the Prime

Minister or the General Secretary4 of the CCP.

• In 1978, Deng Xiaoping became the paramount leader of the Chinese state. He

became the architect of a new socialist transformation that promised to lift China

out of its poverty and stagnation. However, these changes which were instituted to

lift Chinese Socialism out of crisis, would also sow the seeds to further crisis.

III. OVERVIEW OF CHINA’S ECONOMY AFTER 1978

ECONOMIC REFORM BEFORE 1978

4 Synonymous with being the President of China.

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• While the notion of economic reform in China is often associated with the post-1978 developments, economic reform was initiated as early as 1956 when the Economic Management System reform was launched at the Eighth National Congress of the Chinese Communist Party (CCP). Since then to support the Great Leap Forward, reform was implemented through administrative decentralisation where power was delegated to lower levels of local government to manage resource allocation, launch building projects, recruit workers and rally peasants. The policy had disastrous implications as many of the local governments suffered from the lack of capacity and ability to be responsible and independent units. Thus, they were unable to effectively shoulder the expectations and power that the state had bestowed on them.

• Consequently, awareness of the historical context of economic reform in China is useful for understanding the evolution of China’s economy from planned to market-based.

FROM 1978 TO 1993

• According to prominent Chinese economist, Wu Jinglian, the economic development of China in the two decades following 1978 was based on the strategy of incremental reform. While this contention is debatable since China’s economic transformation was not progressive as there were different factors that distorted market mechanisms and allocation of resources, China made an economic leap in this period.

• From the late 1970s, the changing winds in the Chinese national leadership signalled the beginnings of economic transformation in China. The advent of change came when Deng launched the Four Modernisations: the modernisation of agriculture, industry, science and technology as well as national defence. The Four Modernisations was the umbrella of reforms that would open up China’s economy for development vis-à-vis a decentralised economy and participation in international trade. Key to the Four Modernisations was the modernisation of science and technology, since the latter would usher in the development of agriculture, industry and the military.

• Since 1978, China’s economic development has led to the country’s growth from strength to strength. In 1978, when Deng Xiaopeng announced the move towards economic reform and open-door policy at the historic Third Party Plenum, the Chinese GDP stood at 362.4 billion yuan. In 1999, with its 1.25 billion people but a GDP of just $3,800 per capita (PPP), China became the second largest economy in the world after the US. By 2000 the GDP grew officially at 8.0%, and had quadrupled since 1978.

• Deng set the goal of $1 trillion for the gross GNP of China by the end of the century. Hence, Deng initiated the reformation of China’s economic structure; ushering in an Open door policy.

• Deng was careful to assure the people that the Open Door policy would not threaten Communism in China and that the economic system would remain Communist.

� E.g. Socialist principle of distribution to remain, the state will control basic economic structures; foreign investments would not undermine Chinese

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interests as joint ventures with foreigners would be at least 50% Chinese, and not lead to Capitalist revival.

IV. POLITICS UNDER DENG XIAOPING

▪ Retained aspects of Maoism to facilitate economic rise

� Lack of significant political changes

� Limited political liberalisation

� Retained Chinese authoritarian, dictatorial tradition & political

conservatism

� Reasserted and restated the absolute and unchallenged right &

authority of the CCP to govern China

▪ 1981 Resolution

� Declared Mao as “70% right and 30% wrong (only at the end of his

life) to repair extensive damage done to Mao’s legacy and CCP. “It is true that Mao made gross mistakes during the Cultural Revolution,

but, if we judge his activities as a whole, his contribution to the Chinese

Revolution far outweighs his mistakes.”

▪ Reshuffled personnel at 13th Party Congress (1987)

� Handpicked Politburo from younger generation so that they would be

loyal to Deng & his team and contribute new and fresh ideas

� Established the new for a stable China to emerge

� Gang of Four still wielded power behind the scenes

This careful manoeuvring of CCP politics enabled Deng to create political stability in

China and redirect the nation’s focus towards advancing economically.

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V. REASONS FOR THE RISE OF CHINA

1. DENG’S ECONOMIC REFORMS • The “four modernisations’ were a visionary

programme that was designed by Zhou Enlai in 1965

that formed the second stage of a two-stage, long-

term development plan.

• The “four modernisations” largely involved China

emerging from isolation to begin a period of

accelerated growth as it opened its doors to the world

economy. Zhou revived this programme in 1975 after

the Cultural Revolution, a programme which Deng

seized and made one of his major themes in the same

year.

• The goals of the programme were to develop these

four sectors as quickly as possible: agriculture,

industry, science and technology and defence.

AGRICULTURAL REFORMS

• Agricultural reforms under Deng saw a process of decollectivisation in the countryside, the encouragement of private initiative and the emphasis on production for a market.

• Deng managed to address the most basic problem of all- the lack of incentive for the farmer to produce; a problem which started because of Mao’s collectivization programme

• The collective farming system previously established during Mao’s era was changed

to an individual household-based farming system called the Household

Responsibility System (HRS) in 1979.

i. Under the HRS, collectively-owned land was divided into equal

portions based on size and quality for each village household with

contracts of up to 15 years. This gave peasants the initiative needed to

raise productivity by making them responsible for their own profits

and losses.

ii. The 15-year contracts also provided the peasants with the incentive

for greater investment and promoted intensive farming while

simultaneously conserving soil fertility.

iii. Moreover, contracts were made with the households such that once

the specified taxes and quotas required of each household was paid to

the state and collective, the left over produce could be disposed of at

will by the household.

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• This meant that peasant households were able to sell their leftover produce directly

to the public at free market prices, thus encouraging the peasants to increase

productivity for greater profit.

• The success of the agricultural reforms were seen in the sharp increase in the

average annual agricultural growth rates, which was at 2.8% from 1952-1978 but

jumped to 7.7% from 1978-1984. Rice and wheat yields had risen 50% over by

1987 since 1978, than under the previous Commune system.

INDUSTRIAL REFORMS

• MAIN INDUSTRIES: IRON AND STEEL, COAL, MACHINE BUILDING, ARMAMENTS TEXTILES AND

APPAREL PETROLEUM, CEMENT, CHEMICAL FERTILIZERS, FOOTWEAR, TOYS, FOOD PROCESSING,

AUTOMOBILES, CONSUMER ELECTRONICS, TELECOMMUNICATIONS, ELECTRONIC

INFORMATION.

• While Mao’s focus on heavy industry did bring about rapid growth initially, these

industries soon became inefficient due to the creation of new technologies. Deng

therefore introduced various industrial reforms to boost China’s competitiveness.

• When the strategy of incremental reform was first operationalised, China sought

economic growth through expanding enterprise autonomy in the state sector. This

became the backbone of the Chinese economy. After all, State Owned Enterprises

(SOEs) made up 80.8% of the total industrial output.

• Enterprises once owned and controlled by the state were given market-like

incentives. State-owned enterprises were allowed to keep a fraction of their profits

when before all profits went to the state.

• Naughton notes that “Enterprises began to sell some of their outputs and buy some of their inputs in free markets, rather than selling and procuring everything at state-controlled prices. Managers were given monetary rewards explicitly based on their firm's performance, and the right to decide what to produce, how much to produce, and how to produce it was shifted from the state to the enterprise.” (Refer to VII, point 1 for the overall effectiveness of the SOE reforms)

i. SOE was rife with numerous problems of little initiative, unsupervised staff, financial problems, lack of technology, poor decision making etc.

ii. SOEs were reduced but remained the basic form of industrial organisation. It was retained but reformed and made to work in sync with TVEs.

• Deng’s industrial policies also included relaxing the restrictions on rural industrialisation. Rural industries, named “township village enterprises” (or TVEs), were allowed to process rural raw materials and supply consumer goods to cities.

• Since most TVEs were set up and managed by rural local governments, they were given the autonomy to operate outside the state-planned economy and thus became the most dynamic sector of China’s rural economy.

• This saw a proliferation of the TVEs, which were able to thrive economically due to various factors:

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• Their public ownership status and link to rural governments which allowed them to

make use of collective assets in townships and villages and secure access to bank

loans

• The huge population reserve in rural areas provided ample cheap labour to the

TVEs

• They were a market-oriented sector and thus had a competitive edge over the SOEs.

• From 1985 to 1996, the share of TVEs in gross industrial output expanded from

14.6% to 27.8%, whereas that of state-owned enterprises (SOEs) shrank from 65%

to 28.5% in the same time period. The growth rates of the TVEs were averaging 20-

30%.

• Moreover, the growth of TVEs laid the groundwork for the subsequent acceleration

in privatisation. It accumulated capital for peasant entrepreneurs who later

launched their own businesses or even bought out SOEs, nourishing the ranks of

entrepreneurs that China had been devoid of under Mao.

However,

▪ After initial growth spurt, new TVEs began to become too large and financially

problematic

▪ Uncontrolled development of TVEs: shortage of raw materials & production of

lack lustre goods

▪ Regional Disparity as 1/3 of TVEs prospered, 1/3 broke even and 1/3 were

loosing money.

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LEGAL REFORMS

• Development of new rational body of laws and carefully codified judicial system for the first time. Laws were in sync with international standards.

• This fostered a favourable investment climate.

SCIENCE AND TECHNOLOGY

• Funding was needed to facilitate much industrial Research and Development in China and these funds were obtained through improving diplomatic relations with the USA.

• Sino-Soviet rivalry led PRC to cultivate better relations with the West. Zhou Enlai, PRC’s new foreign secretary, played an important role in improving China’s diplomatic contacts since 1972. Deng continued this policy. (For more information, look at improvement in point on Diplomatic Relations)

• This then led to the USA recognizing and establishing full diplomatic relations with China in 1979 and in 1980, China was admitted to the IMF and World Bank. This then led to an exchange in Science and technology and improvement of trade relations

• Direct trade with West increased significantly from $1100m in (1978) to $4500m in 1983.

• (Refer to factor 3: SEZs)

2. SPECIAL ECONOMIC ZONES (SEZS) • As science and technology formed one of the “four modernisations”, China’s leaders

came to realise the necessity of opening up to the outside world in order to facilitate capital and technological transfers. As such, Special Economic Zones (SEZs) were established as “windows to the west” and as foci of a new phase of industrialisation in China.

• China established four SEZs in Shenzhen, Zhuhai, Shantou and Xiamen, all of which were located along the coast of Guangdong and Fujian so as to be accessible to overseas Chinese entrepreneurs. Shenzhen and Zhuhai in particularly share borders with Hong Kong and Macao, both of which are centres for trade.

• The aims of setting up SEZs were to absorb advanced technology and management to improve productivity, to modernise existing Chinese enterprises, to boost exports and obtain foreign exchange, to attract foreign investment, and to train local personnel in the technical, scientific and managerial aspects.

• In exchange, the Chinese government established the SEZs as specially designated free trade areas that provided special tax concessions, flexible wage systems, enjoyed special infrastructural facilities created by the government, and provided preferential treatment such as favourable land-lease rates and minimal red tape and bribery to foreign firms to encourage them to invest in China.

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EFFECTS

• The SEZs served as focal points for technological transfers both tangible and intangible, such as the transfer of information, people, material and administrative and communication ties.

• One of the most obvious effects of material transfers can be seen in the Chinese government importing more than 20 000 sets of machines and equipment, including microwave telecommunications, colour printing equipment, technology for a marine paint plant and a continuous-casting machine for steel.

• According to Wang and Bradbury, the greatest linkage developed so far for such transfers was that of processing, which refers to the movement of goods between the different stages of manufacturing.

• A good example is the Shenzhen Development Corporation that served to facilitate the procurement of domestic and foreign capital. In 1984 alone, it established ‘ties’ with 186 consortia, financial groups and foreign corporations.

• Joint ventures between Chinese and foreign enterprises also formed a mechanism for such transfers. The foreign firms would finance, in part, the investment necessary for the production of goods, goods which would then be exported in exchange for foreign currency.

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• The Sar Hoe Overseas Electronic Works in the Shenzhen SEZ was established with the US Concord group in 1982. By 1985 the factory was manufacturing 160 000 electronic watches, 70 percent of which were marketed in the US, Canada, Western Europe, Japan and Hong Kong.

• By 1986 there were more than 6,200 foreign-funded businesses in China, including thousands of joint ventures with Chinese companies. In 1996 China gained nearly $40 billion in capital from abroad, the highest amount of foreign investment in any developing nation. By the beginning of 1997, joint ventures accounted for 38 percent of China's economy.

• China’s exports grew from $16 billion to more than hundred billion in 1991. Between 1981 and 1991, Chinese exports grew by over 500% as foreign investment quadrupled, thus bringing into China valuable foreign currencies

3. ROLE OF EDUCATION

“Education must serve socialist construction, which must in turn rely on education. Our massive socialist modernisation programme requires us not only to give full rein to the skilled

people now available and to further enhance their capabilities, but also to train, on a large scale, people with new types of skills who are dedicated to the socialist cause and to the nation’s economic and social progress into the 1990s and into the early days of the next

century.” - The CCP, 1985

• As China embarked on Deng’s reforms that advocated de-centralisation, the Chinese economy became ‘increasingly characterised by volatility, competitiveness, openness and information network.’5 As such, it required a large supply of trained professionals and technical personnel who are practical, flexible, versatile, international and innovative.

• By 1980s, literacy rate grew to 75% from 20%. This was due to: i. Industrial growth and scientific education: direct knowledge of

western technology and industrial methods. The government wanted to train one million technical students to become the managers and administration of the new economy.

ii. Crash programme of schooling was initiated.

• Thousands of Chinese students went abroad to study Science, technology and business management techniques, including about 40,000 who went to the United States.

• They were expected to return to China and apply their knowledge learnt to modernizing industrial approaches.

• The first set of economic reforms launched in the 1980s saw the tertiary industry (the service sector) increasingly outpace the primary industry (agriculture), and further saw the rapid growth knowledge-intensive and technology-intensive jobs. This growing demand for trained personnel forced the quick formulation of education policy to deliver new types of human resources.

5 Agelasto & Adamson, Higher Education in post-Mao China, p. 1

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• During the era of Mao Zedong, the central government kept a tight control over the provision and management of education as part of its centralisation policy. However, in the post-Mao era, the decentralisation policy of Deng Xiaoping allowed local governments, local communities, individuals and various non-state actors to create more educational opportunities.

• The reformation of education in China led to a diversification of education services as the CCP encouraged ‘all democratic parties, people bodies, social organisations, retired cadres and intellectuals, collective economic organisations and individuals...[to] actively and voluntarily contribute to developing education by various forms and methods.’6

• China inaugurated its first minban (non-state run) higher education institution, the Zhonghua Zhehui Daxue, in 1982 in Beijing. This period saw the proliferation of various minban schools, colleges and universities that rose to meet the needs of the labour market – providing the trained and skilled personnel that were essential for the growth of the market-oriented Chinese economy.

• This also brought teachers into institutes of higher education from overseas to provide Chinese staff and students with access to foreign learning, while thousands of Chinese students went overseas to study for higher degrees in science, technology, business and management techniques.

• The success of the education reforms is evident from the increase in student enrolment.

i. By 1994, total student enrolment in regular, full-time higher education institutions had reached 2.51 million from the 1.02 million in 1980.

• The education reforms spurred economic growth as the labour force was thus well-equipped to meet the needs of the economy and to further become drivers of China’s economic growth with their technical and managerial know-how.

• However along with the economic merit that these new educated individuals lent this new educated class were extremely influenced by Western values and ideas like democracy and freedom and began to make demands for political participation and civil liberties.

4. EXTERNAL FACTORS: IMPROVED DIPLOMATIC TIES

CHINA’S OPEN-DOOR POLICY

(Link this point to the SEZs)

• China’s open-door policy involve decentralising decision-making regarding foreign trade to local governments, the opening of SEZs, and the replacing of administrative restrictions on trade with tariffs, quotas and licensing. This, coupled with its improved diplomatic ties, greatly boosted its unprecedented economic growth.

• Improved relations with the USA and entry into IMF and the World Bank were cardinal to China’s economic growth.

• Shang-Jin Wei notes the degree to which China opened its economy to the world in the 1980s, seen from the doubling of its share of world trade between 1978 and

6 Mok, K. H., Compartive Education Vol. 41, p. 224

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1989 as it jumped from being 32nd largest exporter in the world to being the 13th. Moreover, between 1978 and 1990, its annual average rate of trade expansion was 15%, more than three times higher than that of world trade.

• China’s reintegration into the world economy can also be seen from the flow of foreign direct investment (FDI), which increased from a mere US$1.7billion in 1983, to $5.3billion in 1988 and $11.4billion in 1991.

SINO-US RELATIONS

(Refer to China Reading and note China’s improving relations with the US from the Mao

Zedong era into the Deng Xiaoping era)

1972: Zhou Enlai & Nixon’s Ping Pong Diplomacy

1972-1979: Shanghai Communique: One China trade policy that promoted a

bilateral trade agreement

1972 & 1975: Deadlock due to Watergate and Cultural Revolution

1979: Full Normalisation of Sino-US relations as China was recognised as

legal government. Ended China’s isolation

USA & China sign the Most-Favoured Nation trading status leading

trade to rise from $1100 million (1978) to $4500 million (1983)

CHINA’S IMPROVED RELATIONS WITH VARIOUS COUNTRIES

(Refer to China Reading and pay particular attention to its relations with Japan and the

EU)

1972: China’s trade with Japan grew rapidly after normalisation from $1

billion (1972) to 4.3billition (1979)

1980: China joined IMF & World Bank and increased borrowing. It has a

debt of $154 billion as of 2000.

1985-1989: Sino-Soviet Split

2001: Entry into WTO

CHINA’S REINTEGRATION INTO THE WORLD ECONOMY

(Refer to China Reading – China’s entry into the IMF and GATT/WTO)

VI. PROBLEMS OF THE CHINESE ECONOMY

1. REGIONAL DISPARITIES

• Economic progress in China, substantial as it has been, is uneven and concentrated in urban and coastal regions.

• Economic progress in some parts of China was stagnant throughout the high-growth years of the 1990s and these areas continued to show little sign of becoming part of the country’s modernised economy. Growing gap in both the income levels and

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growth rates between the coastal provinces and the inland provinces has become one of the most serious problems for CCP.

Evidence of disparity

• The 1994 UNDP’s Human Development Report listed China as one of the countries where regional gaps had become excessively large.

• Between 1996 and 2000, the GDP share of the western region increased slightly by 0.8% points and reached a share of 14.8% in 2002, while the eastern region increased a robust 6.4% points and reached a share of 64.6% in 2000. In terms of GDP per capita, the gap between the western and the eastern regions increased from 378 yuan in 1978 to 4895 yuan in 1998.

• In 2001, of the 30 provinces in China, the 3 metropolitan cities of Shanghai, Beijing and Tianjin, had the highest per capita GDP in current prices followed by 4 coastal provinces of Zhejiang, Guangdong, Jiangsu and Fujian. In contrast, 4 western provinces namely, Guizhou, Gansu, Guangxi and Yunnan had low GDP.

- Some explanations given for the growing divergence between regions include: o The implementation of preferential policies in coastal provinces as early as the

beginning of the 1980s has led to a rapid integration into the world markets, huge inflows of FDI and the development of modern industrial sectors in these provinces; and

o Geographic reasons: coastal provinces benefit from a higher percentage of arable land; better conditions for developing infrastructure, and easy access to sea. A coastal location is certainly more convenient for export-oriented processing industries, which have been developing very rapidly during the last 20 years.

o According to United Nations Food and Agriculture Organization estimates for 2000-02, 11% of the population of the People’s Republic of China was undernourished.

o The WFP says hunger is concentrated in rural, resource-poor areas of northern, northwestern, and southwestern China.

2. RURAL-URBAN MIGRATION

• Huge numbers of migrants are estimated at more than 100 million and increasing at the rate of 20 million per year.

• While massive population flows from rural to urban areas not only constitute “the phenomenon of the century” for China, they also constitute the largest flow of labour out of agriculture in world history.

• Why the increase in migrant population?

• With the advance in farming technology, the need for labour is reduced and this leads to surplus population.

• Expansion of urban areas results in the reduction of farmlands and translates into a surplus population in the countryside.

• For many people, getting rich through farming is not only an unpopular concept but an unrealistic one, given the regulated prices for agricultural products.

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• Slogans promoted by Deng such as Getting Rich is Glorious and Poverty Does not Belong to Socialism ignited everybody/s dream has given rise to an eagerness to migrate to cities and enjoy urban life.

• There is a relaxation on population mobility control.

• From 1979 onwards, the introduction of local markets in the rural areas and the official adoption of market oriented economy increased labour demand. Coastal provinces became large magnets for rural labour.

• Mobility was enhanced by the household responsibility system (1982) which solved China’s food shortage problem and efficient use of labour to produce agricultural output. Ration coupons were abandoned in 1990s and food was available in the free market. The marketisation of food made it possible for temporary migrants to live in cities.

• Furthermore, rural reforms gave freedom to peasants in terms of labour. They no longer had to report to the collectives for daily work. Pressure for urban-bound movement of labour continued.

• However, the government was unwilling to let rural people to move into cities. Thus it relaxed restrictions on non–farm activities and in 1984 announced “leaving the land but not the village” and encouraged the development of enterprises in rural areas.

• Responding to these demands, tens of millions of peasants migrated to coastal cities in search of work.

• In line with the government policy to keep peasants in the rural areas, these peasants were channelled to TVEs but TVEs were not able to absorb surplus labour for very long.

• In the 1980s and 1990s, there was a relaxation of the system. Labour mobility was accepted and encouraged, especially in smaller urban areas. The Central Government introduced temporary resident permit for all urban centres. This resulted in an influx of rural migrants who acquired a temporary residence permit but who maintained their rural registration.

• As the old apparatuses of migration control have become less effective, rural people began to spontaneously migrate to urban areas without obtaining government approval. However, the government continued to deny permanent residency to rural people.

3. ENVIRONMENTAL PROBLEMS

• China’s rapid economic growth and the pervasive mindset that economic development precedes concerns for the environment have led to a host of environmental problems.

• With the ‘Four Modernisations’ as their overarching objective, Deng and his supporters initiated a wholesale reform of the country’s economic and political system. Greater degrees of freedom were granted for local officials and local Environmental Protection Bureaus (EPBs) to develop environmental priorities, strategies, financial models and institutional arrangements. Although decentralisation and greater flexibility may result in environmental policies better

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adapted to the local physical and socio-economic situations, officials typically prefer economic growth and investments over the progressive development of environmental policies and stringent enforcement of environmental regulation and standards.

• The relentless drive of China’s leaders to amass power, consolidate territory, develop the economy and support a burgeoning population has led to the plundering of forests and mineral resources, constructing river diversion and leading to poor water management projects. There is a clear absence of ethos for conservation. Attitudes, institutions and policies evolved from traditional folk and philosophy such as Confucianism, which promoted man’s need to use nature for his own benefit.

• In China, the bulk of the pollution has been caused by state-owned rather than private sector industries. The government would then have to pay for the fines. Most domestic Chinese companies have yet to realise the economic benefits of good environmental practices. Small-scale town and village industrial enterprises (TVEs) that have fuelled much of China’s growth are difficult to regulate.

AIR POLLUTION

• Coal is the main domestic energy resource. Not only does it have low average levels of energy efficiency, it is also palliative in nature. China is the factory to the world. Many factories are set up there. In addition, large state-owned enterprises (SOEs) often utilise antiquated equipment, causing greater pollution. Furthermore, SOEs, collective enterprises and township-village enterprises (TVEs) often lack adequate funds for clean production.

• A 1998 World Health Organization report on air quality in 272 cities worldwide concluded that seven of the 10 most-polluted cities were in China.

• Respiratory and heart diseases related to air pollution are the leading causes of death in China.

LAND DEGRADATION AND DEFORESTATION

• It was estimated that in the 1990s, 16.98% of China’s land area was affected by soil erosion, 34.55% by desertification and 19.79% degraded due to overgrazing in China. Soil lost to erosion amounted to 5,190 mil tonnes a year in China.

• Poor waste disposal of domestic and industrial waste in the countryside, especially in peri-urban areas has contaminated the land. Even soils in “green-field” sites (previously used for farming) are polluted due to the use of organic pesticides and herbicides. The excessive content of heavy metals has been the cause of rejection of some Chinese food exports.

• Almost all of the nation's rivers are considered polluted to some degree and half of the population lacks access to clean water. 90% of urban water bodies are severely polluted.

4. INFLATION AND BUDGET DEFICITS

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• Another main hurdle in the Chinese economy is actually the rapid growth that has occurred in the last 10 years. Some economists fear that China's economy is over-heating which means that inflation will become a serious issue in the Chinese economy and that due to China's global economic expansion an over-heating could have major repercussions among other nations.

• This affected the standard of living of the people. There were high inflation rates of 12.5% in 1985, 7% in 1986.

• State budgetary deficits between 1978 and 1985 came to 100 billion yuan.

• In addition, the government also stopped subsidizing many basic necessities like fuel and food and this led to prices rising phenomenally.

• Chinese officials deny that the economy is over-heating, although they do admit that certain economic areas are "heating up" in that they have weak infrastructures that contribute to the lack of economic control.

5. CORRUPTION • There was widespread cronyism and corruption among the party cadres. Their

children also exploited their positions and party leaders practiced favouritism. • The rising inflation also saw many cadres’ children engaging in Black marketing. • The people were not happy with such partiality and nepotism.

6. FACTIONALISM

• Not all members of the Chinese leadership were supportive of the economic reforms and the open door policy. This led to splits and factions in the CCP which saw the ousting of some moderate reformists Hu Yaobang in 1986 and later Zhao Ziyang in 1989.

• The hardliners were shocked by openness to Western influences, which they regarded as decadent and a disturbing influence in China. They feared that if this was left unchecked, Western influence would erode respect for the CCP and this would lead to a loss of political legitimacy. This group, which had gone through the Long March, had a huge stake in the existing Socialist order and would not want to compromise their lives, positions and privileges because of the reforms.

• The reformists urged for the retirement of the hardliners, much to the dismay of the latter. The latter only agreed to retire after their favorite Li Peng was appointed to a high position. They also pressured Deng to remove Hu Yaobang, who was groomed to be the future successor of Deng. Thus Li Peng was appointed Assistant Premier in 1987 and in 1988, was confirmed as Premier.

7. LIABILITIES

• Large state-owned enterprises (SOEs) are liabilities, most of which had not participated in the vigorous expansion of the economy and many of which had been losing the ability to pay full wages and pensions.

• About 50 to 100 million surplus rural workers are adrift between the villages and the cities, many subsisting through part-time low-paying jobs.

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• In 1979, there were 20 million unemployed people that were partly due to the supernormal population increase and partly due to poor economic co-ordination.

• This led to much popular resistance against changes in central policy as the Chinese people no longer were sure of the government’s astuteness in solving the country’s problems. This led to a loss of authority by rural cadres have weakened the PRC's population control program.

8. DOMESTIC UNREST

• When Deng denounced the Cultural Revolution, the status of the intellectuals were reinstated. Deng announced that intellectuals were part of the proletariat and deserved both respect and good treatment.

• Emboldened by this new status and influenced by foreign ideas, many of the intellectuals began to speak up on social and political issues. Writers and artists also demanded greater freedom in their artistic works. Some of the intellectuals pressed for a ‘fifth modernization’.

• The Chinese youth, in particular, started to feel that anything deviating from the ideals of Western democracies was backward and authoritarian and out of synch with the modern age. With increasing economic reforms, there were other social side effects such as corruption and inflation. Seeing themselves as the conscience of the younger generation, they felt a social responsibility to speak out against the moral degeneration. The youths wanted a Fifth modernization- political democracy.

• Students began to launch demonstrations in 1986 in 15 cities. They began to demand freedom and democracy. This caught the authorities by surprise. In December 1986, gigantic student demonstrations broke out in 15 cities including Wuhan and Shanghai too.

• Tiananmen Square Incident of 1989 was a key example of civil unrest and the CCP’s brutal handling of the crisis led to much international criticism but no affirmative action was taken against China. The CCP handled the incident in the knowledge of the decline of Communism globally and decided to take a stronger stance towards maintaining its foothold in China and to ensure continued economic prosperity, so as to minimize domestic conflict.

9. AUSTERITY PROGRAMMES

• On the darker side, the leadership has often experienced in its hybrid system the worst results of

o socialism (bureaucracy, political corruption, disrespect of personal property) o Capitalism (windfall gains, a huge and widening gap between rich and poor,

stepped-up inflation). o Beijing thus has periodically backtracked, retightening central controls at

intervals. o At the end of 1988, in reaction to a surge of inflation caused by accelerated

price reforms, the leadership introduced an austerity program to cut government expenditure on social welfare programmes and people’s infrastructure.

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� In 1989, Li Peng cut back on medical benefits for workers in SOEs and government and subsidies for medical facilities in China, in an attempt to help prop up ailing SOEs.

o Critics of the austerity program approach suggest that the working class and poor bear most of the brunt of government cutbacks in spending, and tax-paying citizens are often forced to bear the costs of government’s initiative. It called for a very frugal way of live to counteract these budgetary cuts.

o This system however as become a main stay in Chinese society in order to cut back on the effects of inflations or poor government investments.

VII. CHINA’S CONTINUAL RISE IN THE 1990S

1. CONTINUED INDUSTRIAL REFORMS • Despite a decade of reform, the changes within the SOEs have remained the least

successful among the post-Mao reforms. Due to the state’s inability to implement the reform of hundreds of thousands of SOEs, the Party decided to restructure only the largest SOEs.

• In 1995, the CCP adopted the policy of ‘grasp the large, let the small go’ (zhua da fang xiao) by only channelling resources into thee 1000 or so largest SOEs by reorganising them into conglomerates.

• The smaller, debt-ridden and inefficient SOEs were then sold, leased out or allowed to go bankrupt.

• This policy accelerated the privatisation of the SOEs, and by early 1997, over 70% of the SOEs in the Liaoning, Shandong, Guangdong and Fujian provinces had been privatised, and over 50% in Sichuan. Various local governments further announced that no small SOEs would be set up in future.

• Hence, after almost two decades of reform, the SOEs’ share in the total economy dropped at the end of the 1990s from 78% in 1978 to a mere 19% in 1998, greatly increasing the efficiency and the productivity of the Chinese economy.

2. CONTINUED REFORMS IN EDUCATION

• The CCP continued to implement reforms in the education sector. In 1993, the CCP endorsed “The Programme for Reform and the Development of China’s Education”, which reaffirmed its commitment and support to the decentralisation policy and the diversification of educational services.

• This Programme further states that “the national policy is to actively encourage and fully support social institutions and citizens to establish schools according to laws and to provide right guidelines and to strengthen administration” and that the government would “change its function from direct control to managing schools through legislation, funding, planning, advice on policies and other necessary means.”

“Given such constitution provision, local initiatives, particularly with the support of local

government, have become a crucial force in educational development. In order to fulfill

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the need for professional knowledge and trained personnel for China's modernization, the

state has allowed different types of educational institutions to flourish so as to create

more educational opportunities. In Article 16 of the "Programme" issued in 1993, the CCP

further encouraged "people in all walks of life" to run schools and even invited

"international cooperation” to provide more educational opportunities for Chinese

citizens.”

3. CAPABLE LEADERS

• Zhu Rongji, Jiang Zemin & Li Peng was active in meting out timely measures to solve China’s problems.

• 1980s: Li Peng

• Introduced macroeconomic control measures like tight money policy, reduced inflation, austerity programmes, price controls and higher interest rates

• Centralised control over economy to halt price deregulation.

• 1990s: Jiang Zemin

• Socialist Market Economy of 1993 to describe market economy

• Moved Chinese vision of “protection of peasantry-workers” to “overwhelming majority of the people.”

• 1990s: Zhu Rongji

• Solved deep seated structural problems like uneven development and inefficient forms and banks with bad loans

4. EXPANSION OF THE SEZ

• The CCP continued setting up new zones to attract foreign investment and trade. These included the setting up of:

• An additional eighteen Economic and Technological Development Zones (ETDZs)7 after 1992

• The establishment of thirteen Customs-Free Zones (CFZs) from 1990 to 1993 in Lioning, Tianjin, Shanghai, Jiangsu, Zhejiang, Fujian, Shandong, Hainan and Guangdong.

• Shanghai’s Pudong was granted similar special privileges as that enjoyed by the SEZs in 1990.

5. BANK REFORM

BACKGROUND

7 Twelve ETDZs were originally set up between 1984 and 1988 near certain coastal cities.

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• Before reforms, China’s financial system was typical of that of other planned economies – the People’s Bank of China (PBC) was the only bank in the system, and functioned as the central bank, commercial bank and the state treasurer simultaneously.

• Reforms in 1978 initially focused on breaking up the monobank system, creating four specialised banks (called the state-owned commercial banks, SOCB) from the PBC: - The Agricultural Bank of China which specialised in rural finance - The People’s Construction Bank of China which specialised in investment

banking - The Bank of China which specialised in international finance transactions - The Industrial and Commercial Bank of China which focused on capital financing

• Banks were also given limited autonomy to extend loans (very much akin to decentralisation) and steps were taken to reduce governmental intervention in the banking sector.

BANK REFORMS OF 1994

• These resulted in the creation of the state-owned policy banks, the Agricultural Development Bank of China, China Development Bank and Export-Import Bank, which served to relieve the SOCB from their policy function. This thus separated policy and commercial lending activities, giving the banks more autonomy.

• The governments also passed the Banking Law in 1994 which removed credit allocation - banks were now, in principle, free to lend to whomever they wanted. Monetary policy began playing a role in China’s economy after the passing of this law, as the government could now use interest rates and bank lending to control the economy.

• The 1994 reforms also included the unification of the exchange rate. Before 1994, a dual exchange rate system was used, particularly in the SEZs, to attract foreign investment. This meant that there were two exchange rates, the official rate, and the trading rate which was higher than the official one. The official exchange rate was unified with the trade rate in 1994 at RMB 8.6 to USD$1. The exchange rate remained remarkably stable since, providing a stability that attracted both foreign investment and local exporters.

CHINA IN THE 1990S • China's economy regained momentum in the early 1990s. Deng Xiaoping's Chinese

New Year's visit to southern China in 1992 gave economic reforms new impetus. The 14th Communist Party Congress later in the year backed up Deng Xiaoping's renewed push for market reforms, stating that the PRC's key task in the 1990s was to create a "socialist market economy." Continuity in the political system but bolder reforms in the economic system were announced as the hallmarks of the 10-year development plan for the 1990s.

• During 1993, output and prices were accelerating, investment outside the state budget was soaring, and economic expansion was fuelled by the introduction of

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more than 2,000 Special Economic Zones (SEZs) and the influx of foreign capital that the SEZs facilitated.

o Preferential Tax Treatment to encourage foreigners to buy shares in SEZ based companies without any ownership rights were a success.

o $39billion of FDI comes from this policy

• The economy slowed in the late 1990s, influenced in part by the Asian Financial Crisis of 1998-99, with official growth of 7.8% in 1998, and 7.1% for 1999, under the expert hand of Zhu Rongji.

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VIII. CHINA’S RISE – HOW IT AFFECTED THE GLOBAL ECONOMY

• The number of foreign-invested enterprises, which grew at an explosive rate, was an important factor for the growth of China’s foreign trade. In 1981, the export volume of foreign-invested enterprises made up 0.1 percent of China’s total export volume, and 0.5 percent of the import volume. By 1999, the export volume of foreign-invested enterprises made up 45.5 percent of China’s total, and the import volume, 51.8 percent. This reflects China’s integration into global production networks.

• Trade patterns have also shown China to be regarded as a crucial “integrator” of global and regional production as China is the base for many regional and global production networks. In fact, China not only exports primary commodities but parts, technology, and financial and economic services. The pioneering manufacturing hubs in the Pearl River Delta and Yangtze-River Delta serve as these integrating points because they transform products that are “made in Asia” to “made in China” for world exports.

• Impact of China’s growth on Asian economies was crucial e.g. in 1995, China accounted for only 2.6 percent of ASEAN five exports. By 2003, that figure had risen to 6.7 percent. In 2004, two-way trade between China and ASEAN countries reached US$100 billion, with the figure increasing to US$130.4 billion in 2005.

CHINA’S WTO MEMBERSHIP AND HOW THAT AFFECTED THE G.E.

• Joining the WTO was a gradual process for China

Phase 1: Smooth progress (1986- May 1989) o GATT was on China’s side and even decided to start negotiations for China. GATT

members, consisting of Japan, European Community (EC), Australia, New Zealand and Canada backed China’s attempt to join the WTO.

o China did not have to make a significant policy change to accommodate GATT requirements.

Phase 2: Withdrawal of support for China’s bid (June 1989- February 1992) o It was largely due to China’s crackdown in the Tiananmen Incident that caused

many GATT members to call for China to reform more economically and politically so that it could rejoin GATT.

o Ties with USA were worsened when USA accused China of not abiding by Intellectual Property Rights (IPR) and human rights. Also China’s sale of military technology to Third World countries was another issue of contention.

o China then turned to Third World countries for trade. In 1991, smaller countries like Belgium, Brazil and Argentina began to back China up.

o China did its part by setting up research institutes and think-tanks to try to explore ways to abide with GATT principles and also to study international trade rules more closely.

Phase 3: Accelerated bid to join WTO (Feb 1992- Dec 1994)

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o From February 1992 to December 1994, China and USA carried out intensive negotiations. USA and other countries wanted China to give concessions in many areas.

o China made attempts to win over USA. � E.g. China gave a list of products that no longer needed import licensing

and had named 50 import categories whose tariffs were to be reduced. o However, all these efforts did not see much fruit because in 1994, USA raised

China’s poor human records and lack of Intellectual Property laws as reasons that prevented China from being granted Most favored Nation status (MFN)

Phase 4: China’s changed stance (1995- March 1996)

• China changed its position; choosing economic stability instead of WTO membership.

• In spite of that, USA continued to take a tough stance against China. USA was still upset over the copyrights issue and its huge trade deficit with China. By the end of January 1995, there was a trade war between the two countries after the collapse of the Sino US talks on Copyright.

• China wanted to be recognized as a developing country but USA argued that China

should be regarded as a developed country because of its huge economic size and fast economic growth.

• However, EU was more conciliatory with China, accepting its developing country status and tried to urge other WTO members to resume talk with China on the WTO membership issue.

Phase 5: Step forward (Mar 1996- 1999) • On 22 March 1996, the EU, Canada and Japan called for China’s accession to WTO. • However relations between USA and China were still tense because of the

copyrights issue again and USA called for economic sanctions against China. • In 1997, China scored negotiation success with New Zealand, South Korea and even

Japan. In September 1997, Japan completed a framework agreement on trade in goods with China.

• In 1998, China came up with a package to placate the western countries by offering to reduce its tariff to 10.8% by 2005; and to eliminate import restrictions on 285 kinds of Commodities over the next ten years. China also provided concessions in the telecommunications and services sector.

• In May 1999, USA was accused of deliberately bombing the Chinese embassy. However, in November 1999, the Sino USA protocol was finally reached.

• In 2000, China and India signed a bilateral agreement on China’s entry into the WTO on February 22. In May, EU and China signed a bilateral agreement too. In September, China and Switzerland followed likewise.

• By 2001, China finally became a full fledged member of the WTO.

• Joining WTO in 2001 provided another strong push for a new wave of investments into China. The Immediate impact may have been small but the increase in the share

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of world trade was expected for the long term. The institutional implications of China joining WTO were as follows:

o China joined as the 7th largest exporter and 8th largest importer of merchandise trade and the 12th leading exporter and 10th leading importer of commercial services, and

o It has the largest population and largest potential market than any WTO member.

• Joining WTO has ensured permanent ‘normal trade relations’ status with member countries. It has also allowed China the right to use the WTO dispute settlement mechanism and benefits the Chinese textile industry from the phasing out of the quota restrictions of the Multi-Fibre Agreement (MFA) in 2006. Joining WTO has also led to a shift in China’s export structure as prior to her accession in WTO traditional labour-intensive manufacturing goods like textiles, clothing and footwear used to dominate China’s export structure. Now manufactured exports experience a radical change in composition, marked by the rise of capital machinery items like electronics, computers, IT components and other high-technology products.

• Although some economists have pointed out that the reduction of tariffs on technology imports would put some pressure on Chinese domestic producers, they noted that this should also increase Chinese competitiveness in the global high-technology supply chain. Others have highlighted that WTO accession is key to the restructuring of the Chinese economy. It allows the government to impose unpopular reforms, remove local protectionism and introduce competition to improve production efficiency. These further legitimise the role of private enterprises and accelerate domestic restructuring in banking, insurance, SOEs, telecommunications and other service sectors.

• China’s membership to WTO has certainly been impactful. While the economic growth and influx of foreign goods and services have enhanced the lifestyle of the Chinese people, the economic move is an irreversible trend that has led to outcomes that were not always advantageous to the Chinese economy. For example, from big issues like being a target of foreign anti-dumping measures to issues that lead to individual outcomes like competition for Chinese farmers in the form of foreign agricultural imports.

CONCLUSION • The Economy of the People's Republic of China is the second largest in the world

with a GDP (PPP) of US $8.158 trillion in 2005.

• It is the world's largest developing economy, and its continued growth is critical to the overall health of the world economy and to the welfare of its population of 1.3 billion.

• Its per capita GDP was approximately US$1,703 in 2005.

• Since 1978 the People's Republic of China (PRC) government has been reforming its economy from a Soviet-style centrally planned economy to a more market-oriented economy but still within the political framework, provided by the Communist Party

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of China. This system has been called "Socialism with Chinese characteristics" and is one type of mixed economy.

• Other more developed Asian countries, like Japan and the Four Dragons of Asia also became sources of inspiration. Taiwan’s development, in particular, became a threat because it had prospered under an alternative mode of development.

• China’s Trade profile

• Trade revenue: o China's global trade exceeded $1 trillion ($1.15 trillion) in 2004, more than

doubling from 2001.

• Trading partners: o China's primary trading partners include Japan, U.S., South Korea,

Germany, Singapore, Malaysia, Russia, and the Netherlands.

• China’s economic position in the world: o Out of the 5 busiest ports in the world, 3 are in China o In November 1991, the PRC joined the Asia-Pacific Economic Cooperation

(APEC) group, which promotes free trade and cooperation in economic, trade, investment, and technology issues. In 2001, China served as APEC chair, and Shanghai hosted the annual APEC leaders meeting.