Chinese economic reform

Chinese economic reform

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Encyclopedia
The Chinese economic reform refers to the program of economic reforms called "Socialism with Chinese characteristics" in the People's Republic of China
People's Republic of China
China , officially the People's Republic of China , is the most populous country in the world, with over 1.3 billion citizens. Located in East Asia, the country covers approximately 9.6 million square kilometres...

 (PRC) that were started in December 1978 by reformists within the Communist Party of China
Communist Party of China
The Communist Party of China , also known as the Chinese Communist Party , is the founding and ruling political party of the People's Republic of China...

 (CPC) led by Deng Xiaoping
Deng Xiaoping
Deng Xiaoping was a Chinese politician, statesman, and diplomat. As leader of the Communist Party of China, Deng was a reformer who led China towards a market economy...

.

China had one of the world's largest and most advanced economies prior to the nineteenth century, while its wealth remained average in global terms. The economy stagnated since the 16th century and even declined in absolute terms in the nineteenth and much of the twentieth century, with a brief recovery in the 1930s. Economic reforms of a capitalist type began in 1978 and occurred in two stages. The first stage, in the late 1970s and early 1980s, involved the decollectivization of agriculture, the opening up of the country to foreign investment, and permission for entrepreneurs to start up businesses. However, most industry remained state-owned. The second stage of reform, in the late 1980s and 1990s, involved the privatization
Privatization
Privatization is the incidence or process of transferring ownership of a business, enterprise, agency or public service from the public sector to the private sector or to private non-profit organizations...

 and contracting out
Chengbao system
In the People's Republic of China, the Chengbao system refers to the private or individual contracted operation of public assets such as bus lines, hospitals, and schools. These operators pay a fee as well as a percentage of profit generated to the state...

 of much state-owned industry and the lifting of price controls, protectionist policies, and regulations, although state monopolies in sectors such as banking and petroleum remained. The private sector grew remarkably, accounting for as much as 70 percent of China GDP by 2005, a figure larger in comparison to many Western nations. From 1978 to 2010, unprecedented growth occurred, with the economy increasing by 9.5% a year. China's economy became the second largest after the United States
Economy of the United States
The economy of the United States is the world's largest national economy. Its nominal GDP was estimated to be nearly $14.5 trillion in 2010, approximately a quarter of nominal global GDP. The European Union has a larger collective economy, but is not a single nation...

. The conservative Hu-Wen Administration
Hu-Wen Administration
The Hu-Wen Administration , or Hu-Wen New Administration is the name given to the Chinese leadership that succeeded Jiang Zemin, Li Peng and Zhu Rongji, whose official start date was 2003...

 more heavily regulated and controlled the economy after 2005, reversing some reforms.

The success of China's economic policies and the manner of their implementation has resulted in immense changes in Chinese society. Poverty was reduced and both wealth and wealth inequality
Economic inequality
Economic inequality comprises all disparities in the distribution of economic assets and income. The term typically refers to inequality among individuals and groups within a society, but can also refer to inequality among countries. The issue of economic inequality is related to the ideas of...

 increased, leading to a backlash led by the Maoist New Left. In the academic scene, scholars have debated the reason for the success of the Chinese 'dual track' economy, and have compared them to attempts to reform socialism in the Eastern Bloc
Eastern bloc
The term Eastern Bloc or Communist Bloc refers to the former communist states of Eastern and Central Europe, generally the Soviet Union and the countries of the Warsaw Pact...

 and the Soviet Union
Soviet Union
The Soviet Union , officially the Union of Soviet Socialist Republics , was a constitutionally socialist state that existed in Eurasia between 1922 and 1991....

, and the growth of other developing economies.

For 2010, China was ranked 140th among 179 countries in Index of Economic Freedom
Index of Economic Freedom
The Index of Economic Freedom is a series of 10 economic measurements created by The Heritage Foundation and The Wall Street Journal. Its stated objective is to measure the degree of economic freedom in the world's nations....

 World Rankings, which is an improvement from the preceding year.

Chinese economy prior to reform


During the 1930s, China developed a modern industrial sector, which stimulated modest but significant economic growth. Before the collapse of international trade that followed the onset of the Great Depression
Great Depression
The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...

, China’s share of world trade and its ratio of foreign trade to GDP achieved levels that were not regained for over sixty years. The economy was heavily disrupted by the war against Japan and the Chinese Civil War
Chinese Civil War
The Chinese Civil War was a civil war fought between the Kuomintang , the governing party of the Republic of China, and the Communist Party of China , for the control of China which eventually led to China's division into two Chinas, Republic of China and People's Republic of...

 from 1937 to 1949, after which the victorious Communists installed a planned economy. Afterwards, the economy largely stagnated and was disrupted by the Great Leap Forward
Great Leap Forward
The Great Leap Forward of the People's Republic of China was an economic and social campaign of the Communist Party of China , reflected in planning decisions from 1958 to 1961, which aimed to use China's vast population to rapidly transform the country from an agrarian economy into a modern...

 famine which killed between 30 and 40 million people, and the purges of the Cultural Revolution
Cultural Revolution
The Great Proletarian Cultural Revolution, commonly known as the Cultural Revolution , was a socio-political movement that took place in the People's Republic of China from 1966 through 1976...

 further disrupted the economy. Urban Chinese citizens experienced virtually no increase in living standards from 1957 onwards, and rural Chinese had no better living standards in the 1970s than the 1930s. Socialist equality had destroyed the incentive to improve; one study noted that average pay levels in the catering sector exceeded wages in higher education.

The economic performance of China was poor in comparison with other East Asian countries, such as Japan
Japan
Japan is an island nation in East Asia. Located in the Pacific Ocean, it lies to the east of the Sea of Japan, China, North Korea, South Korea and Russia, stretching from the Sea of Okhotsk in the north to the East China Sea and Taiwan in the south...

, South Korea
South Korea
The Republic of Korea , , is a sovereign state in East Asia, located on the southern portion of the Korean Peninsula. It is neighbored by the People's Republic of China to the west, Japan to the east, North Korea to the north, and the East China Sea and Republic of China to the south...

, and even rival Chiang Kai-shek
Chiang Kai-shek
Chiang Kai-shek was a political and military leader of 20th century China. He is known as Jiǎng Jièshí or Jiǎng Zhōngzhèng in Mandarin....

's Republic of China
Republic of China
The Republic of China , commonly known as Taiwan , is a unitary sovereign state located in East Asia. Originally based in mainland China, the Republic of China currently governs the island of Taiwan , which forms over 99% of its current territory, as well as Penghu, Kinmen, Matsu and other minor...

. The economy was riddled with huge inefficiencies and malinvestments, and with Mao's death, the Communist Party of China
Communist Party of China
The Communist Party of China , also known as the Chinese Communist Party , is the founding and ruling political party of the People's Republic of China...

 (CPC) leadership turned to market-oriented reforms to salvage the failing economy.

Course of reforms


Economic reforms began after Deng Xiaoping and his reformist allies ousted the Gang of Four Maoist faction. By the time Deng took power, there was widespread support among the elite for economic reforms. As de facto leader, Deng's policies faced opposition from party conservatives but were extremely successful in increasing the country's wealth.

1978–84


Deng's first reforms began in agriculture
History of agriculture in the People's Republic of China
For over 4,000 years, China has been a nation of farmers. By the time the People's Republic of China was established in 1949, virtually all arable land was under cultivation; irrigation and drainage systems constructed centuries earlier and intensive farming practices already produced relatively...

, a sector long neglected by the Communist Party
Communist Party of China
The Communist Party of China , also known as the Chinese Communist Party , is the founding and ruling political party of the People's Republic of China...

. By the late 1970s, food supplies and production had become so deficient that government officials were warning that China was about to repeat the "disaster of 1959" - the famines which killed tens of millions during the Great Leap Forward
Great Leap Forward
The Great Leap Forward of the People's Republic of China was an economic and social campaign of the Communist Party of China , reflected in planning decisions from 1958 to 1961, which aimed to use China's vast population to rapidly transform the country from an agrarian economy into a modern...

. Deng responded by decollectivizing agriculture and emphasizing the Household-responsibility system, which divided the land of the People's commune
People's commune
The people's commune was the highest of three administrative levels in rural areas of the People's Republic of China during the period of 1958 to 1982-85 until they were replaced by townships. Communes, the largest collective units, were divided in turn into production brigades and production teams...

s into private plots. Farmers were able to keep the land's output after paying a share to the state. This move increased agricultural production, increased the living standards of hundreds of millions of farmers and stimulated rural industry.

Reforms were also implemented in urban industry to increase productivity. A dual price system was introduced, in which state-owned industries were allowed to sell any production above the plan quota, and commodities were sold at both plan and market prices, allowing citizens to avoid the shortages of the Maoist era. Private businesses were allowed to operate for the first time since the Communist takeover, and they gradually began to make up a greater percentage of industrial output. Price flexibility was also increased, expanding the service sector.

The country was opened to foreign investment for the first time since the Kuomintang
Kuomintang
The Kuomintang of China , sometimes romanized as Guomindang via the Pinyin transcription system or GMD for short, and translated as the Chinese Nationalist Party is a founding and ruling political party of the Republic of China . Its guiding ideology is the Three Principles of the People, espoused...

 era. Deng created a series of special economic zones for foreign investment that were relatively free of the bureaucratic regulations and interventions that hampered economic growth. These regions became engines of growth for the national economy.

1984–93


During this period, Deng Xiaoping's policies continued beyond the initial reforms. Controls on private businesses and government intervention continued to decrease, and there was small-scale privatization of state enterprises which had become unviable. A notable development was the decentralization
Decentralization
__FORCETOC__Decentralization or decentralisation is the process of dispersing decision-making governance closer to the people and/or citizens. It includes the dispersal of administration or governance in sectors or areas like engineering, management science, political science, political economy,...

 of state control, leaving local provincial leaders to experiment with ways to increase economic growth and privatize the state sector. Township and village enterprises, firms nominally owned by local governments but effectively private, began to gain market share at the expense of the state sector. Conservative elder opposition, led by Chen Yun
Chen Yun
Chen Yun was one of the most influential leaders of the People's Republic of China during the 1980s and 90s, and one of the top leaders of the Communist Party of China for almost its entire history. He was also known as Liao Chengyun ; it's unclear whether this was his original name or a pseudonym...

, prevented many major reforms which would have damaged the interests of special interest groups in the government bureaucracy. Corruption and increased inflation increased discontent, contributing to the Tiananmen Square protests of 1989
Tiananmen Square protests of 1989
The Tiananmen Square protests of 1989, also known as the June Fourth Incident in Chinese , were a series of demonstrations in and near Tiananmen Square in Beijing in the People's Republic of China beginning on 15 April 1989...

 and a conservative backlash after that event which ousted several key reformers and threatened to reverse many of Deng's reforms. However, Deng stood by his reforms and in 1992, he affirmed the need to continue reforms in his southern tour. He also reopened the Shanghai Stock Exchange
Shanghai Stock Exchange
The Shanghai Stock Exchange , abbreviated as 上证所/上證所 or 上交所, is a stock exchange that is based in the city of Shanghai, China. It is one of the two stock exchanges operating independently in the People's Republic of China, the other is the Shenzhen Stock Exchange...

 closed by Mao 40 years earlier.

Although the economy grew quickly during this period, economic troubles in the inefficient state sector increased. Heavy losses had to be made up by state revenues and acted as a drain upon the economy. Inflation became problematic in 1985, 1988 and 1992. Privatizations began to accelerate after 1992, and the private sector
Private sector
In economics, the private sector is that part of the economy, sometimes referred to as the citizen sector, which is run by private individuals or groups, usually as a means of enterprise for profit, and is not controlled by the state...

 surpassed the state sector in share of GDP for the first time in the mid-1990s. China's government slowly expanded recognition of the private economy, first as a "complement" to the state sector (1988) and then as an "important component" (1999) of the socialist market economy
Socialist market economy
The socialist market economy or socialist market economy with Chinese characteristics is the official term used to refer to the economic system of the People's Republic of China after the reforms of Deng Xiaoping. It is also referred to as socialism with Chinese characteristics...

.

1993–2005


In the 1990s, Deng forced many of the conservative elders such as Chen Yun
Chen Yun
Chen Yun was one of the most influential leaders of the People's Republic of China during the 1980s and 90s, and one of the top leaders of the Communist Party of China for almost its entire history. He was also known as Liao Chengyun ; it's unclear whether this was his original name or a pseudonym...

 into retirement, allowing radical reforms to be carried out. Despite Deng's death in 1997, reforms continued under his handpicked successors, Jiang Zemin
Jiang Zemin
Jiang Zemin is a former Chinese politician, who served as General Secretary of the Communist Party of China from 1989 to 2002, as President of the People's Republic of China from 1993 to 2003, and as Chairman of the Central Military Commission from 1989 to 2005...

 and Zhu Rongji
Zhu Rongji
Zhū Róngjī is a prominent Chinese politician who served as the Mayor and Party chief in Shanghai between 1987 and 1991, before serving as Vice-Premier and then the fifth Premier of the People's Republic of China from March 1998 to March 2003.A tough administrator, his time in office saw the...

, who were ardent reformers. In 1997 and 1998, large-scale privatization
Privatization
Privatization is the incidence or process of transferring ownership of a business, enterprise, agency or public service from the public sector to the private sector or to private non-profit organizations...

 occurred, in which all state enterprises, except a few large monopolies, were liquidated and their assets sold to private investors. Between 2001 and 2004, the number of state-owned enterprises decreased by 48 percent. During the same period, Jiang and Zhu also reduced tariffs, trade barriers and regulations, reformed the banking system, dismantled much of the Mao-era social welfare system, forced the PLA to divest itself of military-run businesses, reduced inflation, and joined the World Trade Organization
World Trade Organization
The World Trade Organization is an organization that intends to supervise and liberalize international trade. The organization officially commenced on January 1, 1995 under the Marrakech Agreement, replacing the General Agreement on Tariffs and Trade , which commenced in 1948...

. These moves invoked discontent among some groups, especially laid off workers of state enterprises that had been privatized.

The domestic private sector first exceeded 50% of GDP in 2005 and has further expanded since. However, some state monopolies still remained, such as in petroleum and banking.

2005–present


The conservative Hu-Wen Administration
Hu-Wen Administration
The Hu-Wen Administration , or Hu-Wen New Administration is the name given to the Chinese leadership that succeeded Jiang Zemin, Li Peng and Zhu Rongji, whose official start date was 2003...

 began to reverse some of Deng Xiaoping's reforms in 2005. Observers note that the government adopted more egalitarian and populist policies. It increased subsidies and control over the health care sector, halted privatization, and adopted a loose monetary policy, which lead to the formation of a U.S.-style property bubble in which property prices tripled. The privileged state sector was the primary recipient of government investment, which under the new administration, promoted the rise of large "national champions" which could compete with large foreign corporations.

Economic performance since reform



China's economic growth since the reform has been very rapid, exceeding the East Asian Tigers. Economists estimate China's GDP
Historical GDP of the People's Republic of China
This article includes a list of China's historical gross domestic product values, the market value of all final goods and services produced by a nation in a given year. The GDP dollar estimates presented here are calculated at market or government official exchange rates and derived from...

 growth from 1978 to 2005 at 9.5% a year. Since the beginning of Deng Xiaoping's reforms, China's GDP has risen tenfold. The increase in total factor productivity
Total factor productivity
In economics, total-factor productivity is a variable which accounts for effects in total output not caused by inputs. If all inputs are accounted for, then total factor productivity can be taken as a measure of an economy’s long-term technological change or technological dynamism.If all inputs...

 (TFP) was the most important factor, with productivity accounting for 40.1% of the GDP increase, compared with a decline of 13.2% for the period 1957 to 1978—the height of Maoist policies. For the period 1978–2005, Chinese GDP per capita increased from 2.7% to 15.7% of US GDP per capita, and from 53.7% to 188.5% of Indian GDP per capita. Per capita incomes grew at 6.6% a year. Average wages rose sixfold between 1978 and 2005, while absolute poverty declined from 41% of the population to 5% from 1978 to 2001. Some scholars believed that China's economic growth has been understated, due to large sectors of the economy not being counted.

Impact on world growth


China is widely seen as an engine of world and regional growth. Surges in Chinese demand account for 50, 44 and 66 percent of export growth of Hong Kong, Japan and Taiwan respectively, and China's trade deficit with the rest of East Asia helped to revive the economies of Japan and Southeast Asia. Asian leaders view China's economic growth as an "engine of growth for all Asia".

Reforms in specific sectors


After three decades of reform, China's economy experienced one of the world's biggest booms. Agriculture and light industry have largely been privatized, while the state still retains control over some heavy industries. Despite the dominance of state ownership in finance, telecommunications, petroleum and other important sectors of the economy, private entrepreneurs continue to expand into sectors formerly reserved for public enterprise. Prices have also been liberalized.

Agriculture



During the pre-reform period, Chinese agricultural performance was extremely poor and food shortages were common. After Deng Xiaoping implemented the household responsibility system, agricultural output increased by 8.2 percent a year, compared with 2.7% in the pre-reform period, despite a decrease in the area of land used. Food prices fell nearly 50%, while agricultural incomes rose.

A more fundamental transformation was the economy's growing adoption of cash crops instead of just growing rice and grain. Vegetable and meat production increased to the point that Chinese agricultural production was adding the equivalent
of California’s vegetable industry every two years. Growth in the sector slowed after 1984, with agriculture falling from 40% of GDP to 16%; however, increases in agricultural productivity allowed workers to be released for work in industry and services, while simultaneously increasing agricultural production. Trade in agriculture was also liberalized and China became an exporter of foodstuffs, a great contrast to its previous famines and shortages.

Industry


In the pre-reform period, industry was largely stagnant and the socialist system presented few incentives for improvements in quality and productivity. With the introduction of the dual price system and greater autonomy for enterprise managers, productivity increased greatly in the early 1980s. Foreign enterprises and newly formed Township and Village Enterprises, owned by local government and often de facto private firms, competed successfully with state-owned enterprises. By the 1990s, large-scale privatizations reduced the market share of both the Township and Village Enterprises and state-owned enterprises and increased the private sector's market share. The state sector's share of industrial output dropped from 81 percent in 1980 to 15 percent in 2005. Foreign capital controls much of Chinese industry and plays an important role.

From virtually an industrial backwater in 1978, China is now the world's biggest producer of concrete, steel, ships and textiles, and has the world's largest automobile market
Automobile industry in China
Automotive industry in the People's Republic of China has become the largest automotive market in the world since late 2008. China's automobile industry has been in rapid development since the early 1990s...

. Chinese steel output quadrupled between 1980 and 2000, and from 2000 to 2006 rose from 128.5 million tons to 418.8 million tons, one-third of global production. Labor productivity at some Chinese steel firms exceeds Western productivity. From 1975 to 1992, China's automobile production rose from 139,800 to 1.1 million, rising to 9.35 million in 2008. Light industries such as textiles saw an even greater increase, due to reduced government interference. Chinese textile exports increased from 4.6% of world exports in 1980 to 24.1% in 2005. Textile output increased 18-fold over the same period.

This increase in production is largely the result of the removal of barriers to entry and increased competition; the number of industrial firms rose from 377,300 in 1980 to nearly 8 million in 1990 and 1996; the 2004 economic census, which excluded enterprises with annual sales below RMB5 million, counted 1.33 million manufacturing firms, with Jiangsu
Jiangsu
' is a province of the People's Republic of China, located along the east coast of the country. The name comes from jiang, short for the city of Jiangning , and su, for the city of Suzhou. The abbreviation for this province is "苏" , the second character of its name...

 and Zhejiang
Zhejiang
Zhejiang is an eastern coastal province of the People's Republic of China. The word Zhejiang was the old name of the Qiantang River, which passes through Hangzhou, the provincial capital...

 reporting more firms than the nationwide total for 1980. Compared to other East Asian industrial growth spurts, China's industrial performance exceeded Japan's but remained behind South Korea
South Korea
The Republic of Korea , , is a sovereign state in East Asia, located on the southern portion of the Korean Peninsula. It is neighbored by the People's Republic of China to the west, Japan to the east, North Korea to the north, and the East China Sea and Republic of China to the south...

 and Taiwan
Republic of China
The Republic of China , commonly known as Taiwan , is a unitary sovereign state located in East Asia. Originally based in mainland China, the Republic of China currently governs the island of Taiwan , which forms over 99% of its current territory, as well as Penghu, Kinmen, Matsu and other minor...

's economies.

Trade and foreign investment


Scholars find that China has "...attained a degree of openness that is unprecedented among large and populous nations", with competition from foreign goods in almost every sector of the economy. Foreign investment helped to greatly increase quality, knowledge and standards, especially in heavy industry. China's experience supports the assertion that globalization
Globalization
Globalization refers to the increasingly global relationships of culture, people and economic activity. Most often, it refers to economics: the global distribution of the production of goods and services, through reduction of barriers to international trade such as tariffs, export fees, and import...

 greatly increases wealth for poor countries. Throughout the reform period, the government reduced tariffs and other trade barriers, with the overall tariff rate falling from 56% to 15%. By 2001, less than 40% of imports were subject to tariffs and only 9 percent of import were subject to licensing and import quotas. Even during the early reform era, protectionist policies were often circumvented by smuggling. When China joined the WTO, it agreed to considerably harsher conditions than other developing countries. Trade has increased from under 10% of GDP to 64% of GDP over the same period. China is considered the most open large country; By 2005, China’s average statutory tariff on industrial products was 8.9 percent. For Argentina, Brazil, India, and Indonesia, the respective percentage figures are 30.9, 27.0, 32.4, and 36.9 percent.

China's trade surplus is considered by some in the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...

 as threatening American jobs. In the 2000s, the Bush administration pursued protectionist policies such as tariffs and quotas to limit the import of Chinese goods. Some scholars argue that China's growing trade surplus is the result of industries in more developed Asian countries moving to China, and not a new phenomenon. China's trade policy, which allows producers to avoid paying the Value Added Tax
Value added tax
A value added tax or value-added tax is a form of consumption tax. From the perspective of the buyer, it is a tax on the purchase price. From that of the seller, it is a tax only on the "value added" to a product, material or service, from an accounting point of view, by this stage of its...

 (VAT) for exports and undervaluation of the currency since 2002, has resulted in an overdeveloped export sector and distortion of the economy overall, a result that could hamper future growth.

Foreign investment was also liberalized upon Deng's ascension. Special Economic Zone
Special Economic Zone
A Special Economic Zone is a geographical region that has economic and other laws that are more free-market-oriented than a country's typical or national laws...

s (SEZs) were created in the early 1980s to attract foreign capital by exempting them from taxes and regulations. This experiment was successful and SEZs were expanded to cover the whole Chinese coast. Although FDI fell briefly after the 1989 student protests, it increased again to 160 billion by 2004.

Services



In the 1990s, the financial sector was liberalized. After China joined the World Trade Organization
World Trade Organization
The World Trade Organization is an organization that intends to supervise and liberalize international trade. The organization officially commenced on January 1, 1995 under the Marrakech Agreement, replacing the General Agreement on Tariffs and Trade , which commenced in 1948...

 (WTO), the service sector was considerably liberalized and foreign investment was allowed. Restrictions on retail, wholesale and distribution were ended. Banking, financial services, insurance and telecommunications were also opened up to foreign investment.

China's banking sector is dominated by four large state-owned banks, which are largely inefficient and monopolistic. China's largest bank, ICBC
Industrial and Commercial Bank of China
Industrial and Commercial Bank of China Ltd. is the largest bank in the world by profit and market capitalization. It is one China's 'Big Four' state-owned commercial banks .It was founded as a limited company on January 1, 1984...

, is the largest bank in the world. The financial sector is widely seen as a drag on the economy due to the inefficient state management. Non-performing loans, mostly made to local governments and unprofitable state-owned enterprises for political purposes, are a big drain on the financial system and economy, reaching over 22% of GDP by 2000, with a drop to 6.3% by 2006 due to government recapitalization of these banks. In 2006, the total amount of non-performing loans was estimated at 160 billion USD. Observers recommend privatization of the banking system to solve this problem, a move that was partially carried out when the four banks were floated on the stock market. China's financial markets, the Shanghai Stock Exchange
Shanghai Stock Exchange
The Shanghai Stock Exchange , abbreviated as 上证所/上證所 or 上交所, is a stock exchange that is based in the city of Shanghai, China. It is one of the two stock exchanges operating independently in the People's Republic of China, the other is the Shenzhen Stock Exchange...

 and Shenzhen Stock Exchange
Shenzhen Stock Exchange
The Shenzhen Stock Exchange is one of the People's Republic of China's two stock exchanges, alongside the Shanghai Stock Exchange. It is based in Shenzhen, China...

, are relatively ineffective at raising capital, as they comprise only 11 percent of GDP.

Due to the weakness of the banks, firms raise most of their capital through an informal, nonstandard financial sector developed during the 1980s and 1990s, consisting largely of underground businesses and private banks. Internal finance is the most important method successful firms use to fund their activities.

Government finances



In the pre-reform era, government was funded by profits from state-owned enterprises, much like the Soviet Union
Soviet Union
The Soviet Union , officially the Union of Soviet Socialist Republics , was a constitutionally socialist state that existed in Eurasia between 1922 and 1991....

. As the state sector fell in importance and profitability, government revenues, especially that of the central government in Beijing, fell substantially and the government relied on a confused system of inventory taxes. Government revenues fell from 35% of GDP to 11% of GDP in the mid-1990s, excluding revenue from state-owned enterprises, with the central government's budget at just 3% of GDP. The tax system was reformed in 1994 when inventory taxes were unified into a single VAT of 17% on all manufacturing, repair, and assembly activities and an excise tax on 11 items, with the VAT becoming the main income source, accounting for half of government revenue. The 1994 reform also increased the central government's share of revenues, increasing it to 9 percent of GDP.

Reasons for success


Scholars have proposed a number of theories to explain the success of China's economic reforms in its move from a planned economy to a socialist market economy
Socialist market economy
The socialist market economy or socialist market economy with Chinese characteristics is the official term used to refer to the economic system of the People's Republic of China after the reforms of Deng Xiaoping. It is also referred to as socialism with Chinese characteristics...

 despite unfavorable factors such as the troublesome legacies of socialism, considerable erosion of the work ethic, decades of anti-market propaganda, and the "lost generation
Lost Generation
The "Lost Generation" is a term used to refer to the generation, actually a cohort, that came of age during World War I. The term was popularized by Ernest Hemingway who used it as one of two contrasting epigraphs for his novel, The Sun Also Rises. In that volume Hemingway credits the phrase to...

" whose education disintegrated amid the disruption of the Cultural Revolution. One notable theory is that decentralization of state authority allowed local leaders to experiment with various ways to privatize the state sector and energize the economy. Although Deng was not the originator of many of the reforms, he gave approval to them. Another theory focuses on internal incentives within the Chinese government, in which officials presiding over areas of high economic growth were more likely to be promoted. Scholars have noted that local and provincial governments in China were "...hungry for investment" and competed to reduce regulations and barriers
Barriers
Barriers is a British children's television series, created and written by William Corlett, and made by Tyne Tees Television for ITV between 1981 and 1982....

 to investment to boost economic growth and the officials' own careers. A third explanation believes that the success of the reformists are attributable to Deng's cultivation of his own followers in the government. Herman Kahn explained the rise of Asian economic power saying the Confucian ethic was playing a "similar but more spectacular role in the modernization of East Asia than the Protestant ethic played in Europe".

China's success is also due to the export-led growth
Export-led growth
Export-led growth is an economic strategy used by some developing countries. This strategy seeks to find a niche in the world economy for a certain type of export. Industries producing this export may receive governmental subsidies and better access to the local markets...

 strategy used successfully by the Four Asian Tigers beginning with Japan in the 1960s - 1970s
Japanese post-war economic miracle
The Japanese post-war economic miracle is the name given to the historical phenomenon of Japan's record period of economic growth following World War II, spurred mainly by Japanese economic policy, in particular through the Ministry of International Trade and Industry...

 and other Newly industrialized counties.

The collapse of the Soviet Bloc and centrally planned economies in 1989 renewed impetus in the China to further reform its economy in a different course to avoid the same fate. China also wanted to avoid the Russia under Boris Yeltsin with ad-hoc experiment with market capitalism which resulted in the rise of powerful oligarchs, corruption and loss of state revenue which exacerbated economic disparity
Economic inequality
Economic inequality comprises all disparities in the distribution of economic assets and income. The term typically refers to inequality among individuals and groups within a society, but can also refer to inequality among countries. The issue of economic inequality is related to the ideas of...

.

Effect on inequality


The economic reforms have increased inequality dramatically within China. Despite rapid economic growth which has virtually eliminated poverty in urban China and reduced it greatly in rural regions and the fact that living standards for everyone in China have drastically increased in comparison to the pre-reform era, the Gini coefficient
Gini coefficient
The Gini coefficient is a measure of statistical dispersion developed by the Italian statistician and sociologist Corrado Gini and published in his 1912 paper "Variability and Mutability" ....

 of China is estimated to be above 0.45, comparable to many South American countries.

Increased inequality is attributed to the disappearance of the welfare state
Welfare state
A welfare state is a "concept of government in which the state plays a key role in the protection and promotion of the economic and social well-being of its citizens. It is based on the principles of equality of opportunity, equitable distribution of wealth, and public responsibility for those...

 and differences between coastal and interior provinces, the latter being burdened by a larger state sector. Some Western scholars have suggested that reviving the welfare state and instituting a re-distributive income tax
Income tax
An income tax is a tax levied on the income of individuals or businesses . Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate...

 system is needed to relieve inequality, while some Chinese economists have suggested that privatizing state monopolies and distributing the proceeds to the population can reduce inequality.

Comparison to other developing economies



China's transition from socialism
Socialism
Socialism is an economic system characterized by social ownership of the means of production and cooperative management of the economy; or a political philosophy advocating such a system. "Social ownership" may refer to any one of, or a combination of, the following: cooperative enterprises,...

 to a socialist market economy
Socialist market economy
The socialist market economy or socialist market economy with Chinese characteristics is the official term used to refer to the economic system of the People's Republic of China after the reforms of Deng Xiaoping. It is also referred to as socialism with Chinese characteristics...

 has often been compared with economies in Eastern Europe that are undergoing a similar transition. China's performance has been praised for avoiding the major shocks and inflation that plagued the Eastern Bloc
Eastern bloc
The term Eastern Bloc or Communist Bloc refers to the former communist states of Eastern and Central Europe, generally the Soviet Union and the countries of the Warsaw Pact...

. The Eastern bloc economies saw declines of 13 to 65% in GDP at the beginning of reforms, while Chinese growth has been very strong since the beginning of reform. China also managed to avoid the hyperinflation of 200 to 1,000% that Eastern Europe experienced. This success is attributed to the gradualist and decentralized approach of the Chinese government, which allowed market institutions to develop to the point where they could replace state planning. This contrasts with the "big bang" approach of Eastern Europe, where the state-owned sector was rapidly privatized with employee buyouts, but retained much of the earlier, inefficient management. Other factors thought to account for the differences are the greater urbanization of the CIS
CIS
CIS usually refers to the Commonwealth of Independent States, a modern political entity consisting of eleven former Soviet Union republics.The acronym CIS may also refer to:-Organizations:...

 economies and differences in social welfare and other institutions. Another argument is that, in the Eastern European economies, political change is sometimes seen to have made gradualist reforms impossible, so the shocks and inflation were unavoidable.

China's economic growth has been compared with other developing countries, such as Brazil
Brazil
Brazil , officially the Federative Republic of Brazil , is the largest country in South America. It is the world's fifth largest country, both by geographical area and by population with over 192 million people...

, Mexico
Mexico
The United Mexican States , commonly known as Mexico , is a federal constitutional republic in North America. It is bordered on the north by the United States; on the south and west by the Pacific Ocean; on the southeast by Guatemala, Belize, and the Caribbean Sea; and on the east by the Gulf of...

, and India
India
India , officially the Republic of India , is a country in South Asia. It is the seventh-largest country by geographical area, the second-most populous country with over 1.2 billion people, and the most populous democracy in the world...

. GDP growth in China outstrips all other developing countries, with only India after 1990 coming close to China's experience. Scholars believes that high rates of investments, especially increases in capital invested per worker, have contributed to China's superior economic performance. China's relatively free economy, with less government intervention and regulation, is cited by scholars as an important factor in China's superior performance compared to other developing countries.

Legacy and criticism


The government retains monopolies in several sectors, such as petroleum and banking;, the inefficient state banking system has a large number of non-performing loans and loose monetary policy has caused an asset bubble
Chinese property bubble
The Chinese property bubble is an alleged ongoing real estate bubble in residential and/or commercial real estate in the People's Republic of China...

 which threatens economic stability. The recent reversal of some reforms have left some observers dubbing 2008 the "...third anniversary of the end of reforms".
Nevertheless, observers believe that China's economy can continue growing at rates of 6–8 percent until 2025, though a reduction in state intervention is considered necessary for sustained growth by some.

Despite reducing poverty and increasing China's wealth, Deng's reforms have been criticized by the Chinese New Left for increasing inequality and allowing private entrepreneurs to purchase state assets at reduced prices. These accusations were especially intense during the Lang-Gu dispute
Lang-Gu dispute
The Lang-Gu dispute was a dispute in China about the privatization process adopted during Deng Xiaoping's reforms. New Left academic Larry Lang, a critic of the reforms, accused a private entrepreneur, Gu Sujung, of having usurped state assets. Gu was later imprisoned. This incidence had an effect...

, in which New Left academic Larry Lang accused entrepreneur Gu Sujung of usurping state assets, after which Gu was imprisoned. The Hu-Wen Administration
Hu-Wen Administration
The Hu-Wen Administration , or Hu-Wen New Administration is the name given to the Chinese leadership that succeeded Jiang Zemin, Li Peng and Zhu Rongji, whose official start date was 2003...

 has adopted some New Left policies, such as halting privatizations and increasing the state sector's importance in the economy, Keynesian policies
Keynesian economics
Keynesian economics is a school of macroeconomic thought based on the ideas of 20th-century English economist John Maynard Keynes.Keynesian economics argues that private sector decisions sometimes lead to inefficient macroeconomic outcomes and, therefore, advocates active policy responses by the...

 that have been criticized by many Chinese economists who advocate a policy of deregulation, tax cuts, and privatization.

Other criticisms focus on the effects of industrialization on public health and the environment. Scholars believe that public health issues are unlikely to become major obstacles to the growth of China’s economy during the coming decades, and studies have shown that air quality and other environmental measures in China are better than those in developed countries, such as the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...

 and Japan
Japan
Japan is an island nation in East Asia. Located in the Pacific Ocean, it lies to the east of the Sea of Japan, China, North Korea, South Korea and Russia, stretching from the Sea of Okhotsk in the north to the East China Sea and Taiwan in the south...

, at the same level of development.

See also

  • Economic history of China (pre-1911)
  • Economic history of modern China
    Economic history of modern China
    The economic history of modern China began with the fall of the Qing Dynasty in 1911. Following the Qing, China underwent a period of instability and disrupted economic activity. Under the Nanjing decade , China advanced several industries, in particular those related to the military, in an effort...

  • Deng Xiaoping Theory
    Deng Xiaoping Theory
    Deng Xiaoping Theory , also known as Dengism, is the series of political and economic ideologies first developed by Chinese leader Deng Xiaoping. In theory, it does not reject Marxism or Mao Zedong Thought but instead seeks to adapt them to the existing socio-economic conditions of China.Since the...

  • Great Divergence
    Great divergence
    The Great Divergence, a term coined by Samuel Huntington , refers to the process by which the Western world The Great Divergence, a term coined by Samuel Huntington (also known as the European miracle, a term coined by Eric Jones in 1981), refers to the process by which the Western world The Great...

  • Doi Moi
  • Horasis
    Horasis
    Horasis is an independent think tank based in Zurich, Switzerland, which was established in 2005 by Frank-Jürgen Richter, its Chairman. Its stated mission is to "enact visions for a sustainable future" through new platforms for cooperation and knowledge-sharing, particularly between developed...

     Global China Business Meeting

External links