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How China rises
As Hu Jintau remarked at the 17th Congress of the Chinese Communist Party, the period since the previous Congress five years ago has been extraordinary. China's economic achievements have been arousing not only astonishment and admiration but also some anxiety.
In the past twelve months alone, The People's Republic of China (PRC) has overtaken Canada as the biggest source of imports to the USA, and overtaken the USA as the biggest source of imports to the European Union. Concern about the low level of investment in Africa has been displaced by concern about the effects of the high level of Chinese investment in Africa; there is now even anxiety about the effects of investment by Chinese state-owned firms into the Western economies.
The Chinese Communist Party is also expressing concerns. The themes of its 2007 Congress included protection of the environment and the achievement of social harmony. According to some estimates, China has displaced the USA as the world's biggest source of greenhouse gases. Inequality is rising as fast as pollution: China now has over 800 individuals with a personal wealth of more than a hundred million US dollars each, up from 500 in 2006; while the average income in rural areas of China is 480 dollars per year.
Made in China.
How China achieved its status as the world's fastest-growing major economy is a matter, not just of academic curiosity, but of practical interest. The Cuban government, for instance, is being urged from within and outside the island to follow China's example in order, supposedly, to generate greater prosperity. So far, the official position of the Cuban Communist Party is that they will not take this path.
The dominant explanation for China's progress towards industrial superpower status is that the country's growth was, until the late 1970s, held back by socialist institutions: state and collective ownership, and central planning; it is the incremental replacement of these by private ownership, the competitive market and other capitalist institutions which has propelled China's rapid and sustained development.
This position was put succinctly in the section on the Chinese economy in the CIA's 2005 World Factbook:
Reforms started in the late 1970s with the phasing out of collectivized agriculture, and expanded to include the gradual liberalization of prices, fiscal decentralization, increased autonomy for state enterprises, the foundation of a diversified banking system, the development of stock markets, the rapid growth of the non-state sector, and the opening to foreign trade and investment. China has generally implemented reforms in a gradualist or piecemeal fashion, including the sale of equity in China's largest state banks to foreign investors and refinements in foreign exchange and bond markets in 2005. The restructuring of the economy and resulting efficiency gains have contributed to a more than tenfold increase in GDP since 1978.
Some experts have argued that this is a one-sided picture. As Professor Dani Rodrik of Harvard University remarks:
China is not a straightforward story of export growth achieved through trade openness and free market forces.
Dani Rodrik notes a curious feature- not only have reforms been slow whereas growth has been fast, but major economic reforms followed the increase in the growth rate, rather than preceding it:
The standard list of recommendations for countries pursuing this goal [of successful integration in the global market] includes: dismantling quantitative restrictions on imports, reducing import tariffs and their dispersion, making the currency convertible for current account transactions, eliminating bureacratic red tape and other impediments to direct foreign investment, improving customs procedures, and establishing the rule of law. Measured by these guidelines, China’s policies resemble more those of a country that messed up big time than those of a country that became a formidable competitive threat in world markets to rich and poor countries alike. In brief, China opened up very gradually, and significant reforms lagged behind growth (in exports and overall incomes) by at least a decade or more. While monopoly state trading was liberalized relatively early (starting in the late 1970s), what took its place was a complex and highly restrictive set of tariffs, non-tariff barriers, and licenses. These were not substantially relaxed until the early 1990s.
Another critic of what is aptly described as the 'market fundamentalist' position is Dr Peter Nolan of Cambridge University. In his book Transforming China, Nolan shows that China has retained much of the active, guiding and proprietorial role of the state in the economy; even today, most of banking, heavy industry, extraction and much of the export-manufacturing sector still in national and local government ownership; many of the most important foreign direct investment projects take the form of joint ventures involving the Chinese state; all land is, at least notionally, publicly owned; and, of course, the Chinese Communist Party has remained in power. Dr Nolan contrasts the successes of China's gradual and controlled marketisation with the economic and social catastrophe which overwhelmed the countries of the former USSR when they abandoned socialism and were embraced by ‘free market’ capitalism.
While noting some of the PRC's developmental problems, including the country's failure (at the time of the book's publication in 2004) to build any major home-grown transnational companies, Peter Nolan concludes that China is succeeding because it has found a way between the extremes, on the one hand of the 'Stalinist' model of full public ownership and state planning, and on the other, the rampant capitalist market:
Neither Stalinism nor free-market capitalism can be enduring political-economic philosophies because both will be, or have already come to be, seen by the mass of the population in different countries to be inadequate in providing them with a better quality of life. Some form of market socialism is the only viable long-term basis for meeting most people’s aspirations.
The terms 'market socialism' and 'socialism with Chinese characteristics' are used by the Chinese Communist Party to define the country's economic and social system. But one might ask whether a more accurate term for a system in which the state takes a very active and dominant economic role, but in which there are multimillionaires and paupers, stock exchanges and high unemployment, and in which people even have to pay upfront for their medical care and their children's schooling, might not in fact be 'state capitalism'.
Either way, we are still left with the assumption that market forces, managed to a greater or lesser degree by the state, release special capacities for efficiency and productivity which non-market arrangements cannot facilitate. Is this proved by China's economic history since the mid-Twentieth Century?
To guage this, we must take into account three matters.
The first is that economic development depends on the introduction of more advanced machinery and production-related knowledge - that is, technology. For all less developed economies, that means importing technology from the industrially advanced countries and applying it successfully in local conditions. Even the most advanced countries rely hugely on importing technological developments from each other, by means which include cross-investment, purchase of technology licences and buying foreign machinery.
Secondly, countries in which workers are paid lower wages have a big potential advantage in competitive world trade, because, other things being equal, they can produce cheaper goods. But other things are not equal. Aspects which restict the less developed countries from benefiting in global trade from their relatively lower wages stem from the very fact that they are less developed- not only do they have generally lower levels of technology, but they have lower levels of infrastructure, education, and health.
Third and by no means least: national economies exist within a global context which is dominated militarily and politically by the USA and economically by the advanced capitalist countries of North America, Western Europe and Japan; is regulated by international institutions controlled by those countries; and in which transnational corporations which are almost exclusively based in those countries own and control hugely important resources including the most up-to-date technology. The People's Republic of China was and still is a Third World nation. Its per-capita GDP, even when measured by purchasing-power parity, is $7,600 per person, considerably less than one-fifth that of the United States.
As we shall see, moving away from full public ownership and implementing market reforms has indeed been crucial for China in overcoming barriers to more rapid development; but these measures have been necessary in a very different way from that given in the usual explanations. It is acknowledged by all that the increase in China's foreign trade, especially trade with the West, has been an indispensible factor in the country's increased economic growth since the late 1970s. Yet the conventional economic analysts never make a connection with the obviously relevant fact: that China was enabled to increase its trade with the USA and other Western countries, including both its imports of technology and its exports of manufactured goods, because Western economic restrictions against China were relaxed during this period.
Let us begin by confronting the assumption that only by increasing the role of market forces can a country develop rapidly and dynamically. There are many counter-examples for this, but one in particular stands out in its relevance.
On 6th April 1960, Colonel Wilfred J. Smith (PhD), Member of the American Academy of Political and Social Sciences, delivered a lecture on China’s astounding economic growth to the Industrial College of the US Armed Forces:
Looking at Red China this morning, I’d like to indicate that we can’t appreciate the present unless we have some understanding of the past. And the fact that Red China has developed any economic potential, that she has made the strides which she has made, is a phenomenon of history. Actually, just a few short years ago, within the lifetime of many of us living today, China was purely an agrarian country…
Colonel Smith informed his audience that during its first five year plan, 'Red China' had enormously increased its output of coal, petroleum, cement, steel and other metals; greatly extended its railway network; erected new bridges; built plants to produce trucks and tractors; and was rapidly developing its light industries. The Chinese had even built an atomic reactor. He also remarked that since the communists had taken power there had been an almost seven-fold increase in the number of higher education students, of whom a growing number were women:
Women used to be rather conspicuous by their absence in Chinese colleges and universities. Today there are over 100,000 Chinese women in colleges and universities. Forty percent of these young women are studying science - - either medicine, engineering, physics, or some other brand of science.
Colonel Smith predicted:
There will be a utilisation of every possible resource, be it human, be it mechanical or be it scientific. China is trying to develop a great industrial economy today and yet utilise her manpower, of which she has such an excess… And, gentlemen, there can be little doubt that China is making enormous strides industrially – unbelievable strides.
The Chinese communists had been piloting socialist methods of economic organization in territory under their control, even before they took national state power. In June 1949, US Ambassador to China John Leighton Stuart telegraphed Secretary of State Dean Acheson in almost hysterical terms about developments in Manchuria, North East China:
…Chinese Commies have adopted as their own, in Manchuria more than anywhere else, such Soviet tools as: Planned economy, socialist competition, production quotas, heroes Chinese labour, high pressure enthusiasm in press, self-criticism, participation workers in factory management, use trade unions and workers organizations as instruments state administration.
Stuart added that the Chinese Communists announced their accomplishments in the North East with pride, reflecting “to some extent satisfaction” with the Soviet model of development.
'Study the advanced production experience of the Soviet Union. Struggle for the industrialisation of our country.' Artist: Li Zongjin
The People’s Republic of China was established in circumstances not dissimilar to those pertaining at the founding of most of the other communist regimes in the 20th Century. The country, very poor and backward and with minimal industry, had been torn by colonial rule, foreign invasions and years of civil war.
A study published by the United Nations University summarises the developments that followed the adoption of socialist planning in the whole of mainland China:
Following the three years of economic rehabilitation from 1949 to 1952, China initiated and established a relatively flexible central planning system. The first Five-Year Plan for national economic development was carried out between 1953 and 1957. An initial basis for socialist industrialization, involving the construction of 694 ‘above-norm’ projects (including 153 major ones), was planned and completed.
Between 1953 and 1956, the annual average increase in the gross output value of industry was 19.6 per cent and of agriculture 4.8 per cent. During that period, more than 110 large industrial enterprises were completed, mostly in heavy industry. This laid the groundwork for Chinese socialist industrialization. The value of the industrial output of the state-owned enterprises reached around 53 per cent, and that of the collectively owned 19 per cent, in the year 1957. The remaining industrial enterprises were in the category of either joint state/ private ownership or private ownership…
From 1953 to 1959, while state ownership of industry was rapidly increasing, China's average annual growth in GDP was 10.59%, a rate very similar to current figures. There is another similarity: both in the 1950s and since the late 1970s, industrial growth was based on state-led programmes to import foriegn machinery and expertise, and to develop and apply this technology in Chinese conditions. The technology transfers of the 1950s came from the USSR, Czechoslovakia and other new socialist countries of Eastern and Central Europe.
It was in this period that China founded its motor vehicle production industry. As Walter Arnold for the Japan Policy Research Institute notes, it was in 1953 that:
… the First Auto Works, FAW, was formed in a Sino-USSR cooperative effort that led to the production of the first Chinese truck that rolled off the assembly line on July 15, 1956. Two years later China’s first domestically made passenger car, [the] Hongqi, was launched and the first cross-country motor vehicle went into production. It appeared that following the Soviet model, China was now on track to produce a larger mix of motor vehicles...
Yang Yao of the Centre for Economic Development at Beijing University, although a critic of socialist planning, concedes that China’s technological development during its period of co-operation with the Soviet Union brought benefits which lasted many years. The joint projects:
…laid the foundation of China’s modern industry, their impacts can still be felt even today… The imported technologies not only brought industry to China, but also brought new knowledge and skills. Thanks to the more than 3000 Soviet experts and many others from the Eastern European countries, China quickly gained necessary skills and trained a capable workforce. In addition, more than 20,000 people were sent to Soviet Union and Eastern European countries to take formal education or training. These people had become the backbone of China’s technological capacities in the subsequent years until very recently when the new generation of college graduates after the Cultural Revolution matured in the late 1980s and early 1990s. Thanks to meticulous plans aided by the Soviets, the imported projects were allocated in a way to level the regional disparities of industrial development in the country.
Right-wing critics frequently make two allegations against the socialist planned economies of the 20th Century. These are, firstly, that industrialisation was carried out for its own sake, without a corresponding improvement in the conditions of the population; and, secondly, that economic development was autarkic, ie that trade was deliberately restricted and self-sufficiency was promoted. Autarky is regarded as inimical to economic growth because it does not allow scope for nations to specialize in what they can do best and to economise by importing what is difficult to produce at home.
Neither of these allegations can be substantiated by reference to China.
From the onset of the Cold War in the late 1940s, the USA pursued a policy aimed at depriving the Soviet Union of goods which would help it develop economically and militarily, (‘strategic materials and equipment’) including all high-technology products. When these selective sanctions were formalized in 1949 through CoCom, the economic arm of NATO, China and the other newly socialist countries were also targeted. In 1950, sanctions against China were intensified. Chinese assets in the USA were frozen and a complete ban on US trade with China was instituted; using the pretext of the Korean War, the USA succeeded in winning the United Nations in 1951 to a policy of a total embargo against the PRC. The majority of countries followed the embargo in whole or part. After the end of the Korean War in 1953 the sanctions were maintained, though with diminishing enthusiasm on the part of the allies of the USA.
Given that from 1946 to 1948, between 48% and 57% of China’s import trade, and 20% to 30% of its export trade, was with the USA, China was regarded as highly vulnerable to trade sanctions. More aggressive measures were also considered. A 1951 CIA memo suggested that the interruption of China’s foreign trade:
…by economic warfare measures and by naval blockade would create unemployment and unrest, hinder industrial production and development, and create serious financial and administrative problems.
The memo also gave a positive estimate of the likely effectiveness of:
…a campaign of aerial and naval bombardment against selected ports, rail systems, industrial capacity and storage bases.
The response of China’s communist leaders to these considerations was twofold. Industry, hitherto sited mainly on and near the coastline where it was vulnerable to blockades and bombardment, was re-sited deeper into the country. In reaction to the US-imposed sanctions there was at first, not 'autarky' but a switching of economic relations towards the other socialist countries; China also sought to engage with those capitalist countries, including Britain, which increasingly resisted US pressure and became willing to engage in some trade with the PRC; and it used the European colonies of Hong Kong and Macao as routes to further trade with the West (Hong Kong became very rich as a result). While in its period of close alliance with the USSR and full membership of the new ‘socialist camp’ of nations, China flowered as a trading nation, diversifying in its export products and trade partners:
Trade between China and selected countries (millions of US dollars)
1950 1952 1959
USA 238.12 0.05 0.00
UK 73.51 25.81 197.00
Hong Kong 163.66 303.84 211.50
USSR 338.44 1064.21 2097.00
Romania 0.27 1.39 58.42
Czechoslovakia 10.36 97.74 210.39
Total of all imports 582.78 1,118.25 2,119.99
Total of all exports 552.36 822.94 2,261.35
Total foreign trade 1,134.14 1,941.19 4,381.34
Categories of China’s exports (millions of US dollars)
Farm produce 278.57 725.04
Textiles 32.80 626.19
Local products 180.94 351.69
Metal materials 44.03 276.94
Handicrafts - - 42.80
Machinery 0.63 94.79
Source: China Today: Foreign Trade, via Shu Gang Zhang
Divided we fall
However, in the late 1950s the bond between the Soviet Union and China came under increasing strain. The USSR’s leadership under Kruschev expressed grave doubts about Chinese preparations for what Mao called the ‘Great Leap Forwards’, a scheme which the Soviet side regarded as a foolhardy attempt to jump over necessary stages in the maturing of economic and social developments. The results of the first Five Year Plan had exceeded expectations and this convinced the Chinese Communist Party that almost anything was possible given the political will.
'Study the Soviet Union, to advance to the world level of science.'
Artist: Li Lang
Of greater importance for the alliance was an increasingly public disagreement on how to respond to the pressure and threats from the USA, which successfully pursued a ‘divide and conquer’ strategy in respect of the two communist powers. The US, while continuing to discipline its allies to prevent the export of technology to both China and the USSR, took a much harder political, military and economic line against the PRC; this included a continued trade embargo, refusal of diplomatic recognition and using its veto to prevent China having a seat in the United Nations; there was also the threat of atomic war against the Chinese should they attempt to re-take the island of Taiwan, still occupied by the US-sponsored 'Nationalist' forces who had been defeated on the mainland in 1949. To the Communist Party of China, the USA was not merely the imperialist enemy in an abstract sense but was engaged in diplomatic and economic warfare, backed up by open nuclear blackmail against their country’s territorial integrity. Having (with the assistance of Soviet military equipment) fought US forces directly and quite successfully in Korea in the early 1950s, the Chinese did not regard the Americans as invincible.
The Chinese communist leadership saw the USSR’s policy of seeking ‘peaceful co-existence’ with the USA, and the Soviet refusal to provide China with the technology to develop its own nuclear weapons, as treacherous and disrespectful; the USSR viewed the Chinese policy as extremely risky in the face of a United States which had demonstrated its eagerness to engage in foreign imperialist wars – eg Korea, and even to use its nuclear weapons, as it had on Hiroshima and Nagasaki.
The resultant Chinese-Soviet split of 1960 entailed a withdrawal of the Soviet technical advisors, the end of technical training programmes and other technology transfers from the USSR to China, and a steep reduction in China’s trade with the USSR and Eastern Europe. The continued US-led embargo made it impossible for the PRC to source many essential inputs from the capitalist countries.
The negative effects of this for China’s industrial modernisation can be gauged from the following figures:
Selected industrially significant imports to China (millions of US dollars)
1950 1959 1963
Complete sets of equipment 0.40 688.94 54.60
Instruments / tools 67.59 450.70 76.36
Industrial chemicals 140.31 430.72 238.92
Source: China Today: Foreign Trade, via Shu Gang Zhang
As one example of the severe industrial crisis which this precipitated, China's output of motor vehicles fell from over 22,000 in 1960 to 4,000 in 1961.
The industrial setback was coincidental with the consequences of very poor climatic conditions for agriculture, described by Col. Wilfred J. Smith as follows:
Nineteen hundred and fifty nine, gentlemen, was one of the most disastrous years as far as farming is concerned in Red China. Eighty percent of their best agricultural area was just damaged with everything - - from rain, drought, pests. If you name it, they had it. They had all kinds of disasters. It was the worst year in a century, in my opinion.
In this context, the reforms of the Great Leap Forward, in which people moved into large communes and some heavy industry was decentralized to the countryside, were not generally successful. Together, these events were disastrous, but not disastrous enough for anti-communist commentators today, who use a fraudulent statistical method to exaggerate the numbers of deaths from food shortages, and claim furthermore that these deaths were purely due to policies pursued by the Chinese Communist Party. Ignoring the sharp decrease in the birth rate which accompanied the harvest failures and the social upheaval of the reforms, they make a projection that China’s population ‘should have' increased by 30 million more than it actually did in the early 1960s; following this,they attribute the full difference to deaths by famine. Professor Utsa Patnaik of Jawaharlal Nehru University, New Delhi, disputes these bogus claims:
In this initial period of the ‘Great Leap’, household activities like cooking and child minding were also briefly socialised with the establishment of communal kitchens and crèches to free women for labour, and mobility increased greatly as women moved to project work. With such a reversal of the old patterns of life and work amounting virtually to social dislocation, it would not be surprising if the decision to have children was postponed, reflected in a fall in the birth rate… The exaggerated figures of 30 million or more ‘famine deaths’ in China are arrived at after including the missing millions because they were not born and, indeed, were not conceived at all…
More responsible estimates place excess mortality in China between 10 to 13 million during the 1959-61 period if the increased crude death rate during these years is compared to the level of 1958. The excess toll of this order is bad and is a permanent blot on the otherwise impressive record of welfare gains in the Maoist era. The highest level of the crude death rate in China's famine in 1960 which was 25.43 per 1,000 was incidentally, lower than the 'normal' average crude death rate during 1955-60 in eighteen developing countries; while the ‘normal’ Indian crude death rate was very close at 24.6 per 1,000 during the same period, 1955-60. Needless to say, no one talks of ‘famine’ in these developing countries or even in India -a good example of academic inconsistency.” [My emphasis]
After three years of traumatic economic contraction, China made a strong recovery and resumed its economic development, though at a less rapid pace. Yang Yao cites the following figures for the PRC’s average annual GDP growth:
1953-59 (socialist planning in alliance with the USSR) 10.59%
1960-62 (‘Great Leap Forward’, end of joint projects with USSR) minus 8.79%
1963-78 (socialist planning in international isolation) 8.60%
1979-95 (access to Western technology and trade, ‘market socialism’) 10.09%
In keeping with the threats to China by the USA, and China’s worsening hostility with the Soviet Union, a very large proportion of the fruits of the PRC’s industrial development from 1963 to 1978 was used for military purposes. The proportion of GDP allocated for defence in this period has been estimated as approximating 20%. Without foreign assistance, China created an arsenal of atomic and then hydrogen warheads in the 1960s, putting it ahead of France in nuclear weapons development; China’s first space satellite launch in 1970 proved its capacity to deliver these warheads. The impressive welfare gains to which Professor Patnaik refers continued despite this enormous diversion of resources.
The fruits of China’s socialist industrialisation were used to undertake some very important tasks which beneficially transformed the lives of hundreds of millions of people. Electric power and lighting was brought to most of the country. Clean water and sewage systems were established in the towns. Isolated districts were connected by new transport links. The progress in modernisation of farming, alleviating the toil of life in the countryside, is illustrated by the following figures:
(percentage of arable land) 24.5% 45.2%
Mechanically irrigated area 1.1% 25.0%
Mechanically ploughed area 2.3% 40.7%
Large / medium tractors (thousands) 14.7 557.4
Combine harvesters (thousands) 1.8 19.0
One of the most stunning achievements of China following the communist revolution was the improvement in the health of the people. This was enabled by a two-pronged approach, described in a US Library of Congress Country Studies article:
An emphasis on public health and preventive treatment characterized health policy from the beginning of the 1950s. At that time the party began to mobilize the population to engage in mass ‘patriotic health campaigns’ aimed at improving the low level of environmental sanitation and hygiene and attacking certain diseases. One of the best examples of this approach was the mass assaults on the ‘four pests’--rats, sparrows, flies, and mosquitoes--and on schistosoma-carrying snails. Particular efforts were devoted in the health campaigns to improving water quality through such measures as deep-well construction and human-waste treatment. Only in the larger cities had human waste been centrally disposed. In the countryside, where ‘night soil’ has always been collected and applied to the fields as fertilizer, it was a major source of disease. Since the 1950s, rudimentary treatments such as storage in pits, composting, and mixture with chemicals have been implemented.
As a result of preventive efforts, such epidemic diseases as cholera, plague, typhoid, and scarlet fever have almost been eradicated.
Curative treatments, previously available only to the privileged, became available without charge; a network of national, provincial and local facilities was developed by the Ministry of Public Health. Health workers were trained in both traditional and Western medicine:
In 1949 only 33,000 nurses and 363,000 physicians were practicing; by 1985 the numbers had risen dramatically to 637,000 nurses and 1.4 million physicians.
On all measures of health, China not only improved greatly but exceeded the performance of the capitalist countries with comparable incomes. Average life expectancy in China was 32 in 1949. Under socialism it more than doubled, rising to 67 in 1981. This figure of 67 compares to 52 in India and an average of 50 for low income countries in 1981.
In this period, the People's Republic of China also achieved relatively good educational results in comparison to other Third World countries. The following figures are for 1978:
% of age group % of age group % Adult
in primary school in secondary school literacy
Low income 74 20 43
Middle income 95 41 72
India 79 28 36
China 93 51 66
*Excluding China and India
Source – World Bank, World development report 1981, via Nolan
The historic compromise
China’s economic and social progress in the 1960s and 1970s can hardly be regarded as sluggish, particularly given the country's external circumstances. Yet in terms of their strategic ambitions, the leaders of the Chinese Communist Party (CCP) faced increasingly problematic prospects. Within the global communist movement, the Soviet Communist Party defeated the CCP's challenge for influence in the 1960s; during the 1970s, the new communist-led states in the Third World - Cuba, Vietnam, Angola, Mozambique, Ethiopia and Afghanistan - aligned themselves increasingly with the USSR rather than China. Even North Korea refused to remain a specific ally of China, instead maintaining diplomatic equidistance between both the socialist giants.
Further, in respect of regional economic power: the People's Republic of China, although its growth rate was better than the Third World average, was falling behind some other states: first Japan, then South Korea and Taiwan, emerged as dynamic, very rapidly growing economies by importing and assimilating Western technology and orienting their economies towards exports.
When Mao met Nixon. 1972
While the past decade of Sino-American relations have been largely constructive, the ten years have not been on a steady incline; rather there have been two strong forward spurts, from Spring 1971 through May 1973 and from May 1978 through early 1980.
US Secretary of State Henry Kissinger visited China secretly in July 1971, and in October of that year the USA lifted its UN veto - China replaced the Taiwan regime in the United Nations and took its place on the Security Council; Oksenburg notes that although there was unhappiness within sections of the Chinese Communist Party about being used as a pawn to weaken the international bargaining position of the Soviet Union, this was offset by a softening of the US embargo against China. China’s total trade with the USA, which had been non-existent from 1953 to 1971, rose to $475 million in 1975.
The subsequent improvement in US-China relations, for which US imperial strategist Zbigniew Brzezinski had been pushing strongly, had powerful economic motivations from the Chinese side. As Oksenburg notes:
In February  the National People’s Congress placed economic development at the top of China’s agenda. This significantly enhanced the attractiveness of a closer relationship with the United States for the technology and capital it could offer.
For the USA, the strategy was that of playing China off against the more potent communist enemy, the USSR. Though both of their economies were negatively affected by the US-imposed trade sanctions implemented though CoCom, also known as the 'economic arm of NATO', the PRC and the Soviet Union had been on unfriendly terms since 1960.
Jeffrey T. Richelson of the National Security Archive notes the close links between the economic-technological and the military-political in US-China relations:
Both the United States and China perceived that significant economic and political benefits could result from an opening of the other's markets. For the United States, China represented a market of unprecedented size — hundreds of millions of potential individual consumers. It also has come to represent a country with a government that could commit billions of dollars to purchases of airplanes and other equipment. U.S. policymakers have also viewed trade as a means by which to influence Chinese foreign and military policy. Thus, Zbigniew Brzezinski, the assistant to the president for national security affairs in the Carter administration, supported the transfer of technology to China as a means of developing a strategic relationship...
In May 1978, Morton Abramowitz, deputy assistant secretary of defense for international security affairs, accompanied National Security Adviser Zbigniew Brzezinski to Beijing. In a meeting with a senior Chinese defense official, Abramowitz gave a highly classified briefing on the deployment of Soviet forces along the Chinese border and pulled out of his briefcase satellite photographs of Soviet military installations and armor facing China. China continued to receive such photography.
Discussions at top leader level included the subject of military action against countries considered to be too close to the USSR. As Terry McCarthy in TimeAsia recalls:
The decision [by China] to send what amounted to nearly 250,000 troops into [ie, to invade] Vietnam had been taken seven months before and was well-telegraphed to those who cared to listen. When [Chinese President] Deng Xiaoping went to Washington in January 1979 to cement the normalization of China's relations with the United States, he told President Jimmy Carter in a private meeting what China was about to do--and why. Not only did Beijing feel Vietnam was acting ungratefully after all the assistance it had received during its war against the U.S., but in 1978 Hanoi had begun expelling Vietnamese of Chinese descent. Worst of all--it was cozying up to Moscow.
Simultaneously, the US allowed a major reduction of its restrictions on trade. According to Oksenburg, in 1979:
…the President [Carter] supported MFN [Most Favored Nation status] for China and went further. He supported Vice President Mondale’s recommendation that the United States clearly differentiate between China and the Soviet Union [in China’s favour] on a whole range of bilateral issues: export controls, eligibility for Export-Import Bank financing, MFN, and so on. Mondale informed the Chinese of this basic decision during his August 1979 trip.
MFN, without which a normal trading relationship with the USA is impossible due to tariff barriers, was granted to China on February 1st 1980.
President Reagan continued this policy. In 1981, his Secretary of State Alexander Haig made a visit to China:
Haig informed the Chinese that the President was willing to consider the sale of weapons to China and was relaxing export controls on high technology items to China.
Under Reagan, there were further US-China covert actions against two other countries which were then allied with the USSR - Afghanistan and Cambodia:
By fall 1981 the United States was involved with China, Pakistan, Egypt, and Saudi Arabia in a covert aid program. Saudi Arabia provided the money, Egypt provided training, China provided weapons, and the United States provided Kalashnikov rifles, antitank missiles, and other weapons from U.S. and Egyptian stocks. The program would continue and expand until and beyond the Soviet withdrawal [from Afghanistan] in 1988. In 1980 the two nations worked jointly to deny the new pro-Vietnamese government in Phnom Penh a seat in the United Nations. They also began discussions on ways of supporting the Cambodian resistance to the Vietnamese intervention.
Those discussions produced both Chinese and U.S. covert action programs to support elements of the Cambodian resistance, all of whose elements were encompassed by the Government of Democratic Kampuchea (CGDK). The U.S. dealt exclusively with the two non-Communist factions led by Prince Sihanouk and Son Sann. The PRC, on the other hand, provided aid to all three CGDK factions and was most closely associated with the Khmer Rouge and Pol Pot, who were responsible for the deaths of 700,000 to 1,000,000 Cambodians. China was willing to exert pressure on the Khmer Rouge to allow the U.N. Transitional Authority in Cambodia (UNTAC) access to Khmer Rouge-controlled areas to undertake reconnaissance of cantonment sites.
The gains from the point of view of US imperialist strategy from this mutual somersault in the relationship with Beijing were immense. With China now an uneasy but active ally rather than an adversary, the USA under Reagan was able to concentrate on its ultimately successful policy of isolating the USSR internationally and ‘spending it into the ground’ in the arms race.
From the Chinese point of view, the granting of MFN trade status and the relaxing of technology sanctions was a major step forward. In 1980, China exported $981million worth of goods to the USA and imported $3,830 million from the USA, a total trade of $4,811 million. This was a five-fold increase since 1978.
But the PRC has had to do much more in order to advance toward its current status as an industrial and trading superpower.
Technology is fertile
At the beginning of the 'reform and opening up' process, the structure of China's economy was almost fully socialist- that is to say, nearly all legally conducted productive activity took place under conditions of collective ownership and of national and local state ownership. Most of the population (71% in 1980) worked in collective farms. State owned enterprises (ie, nationally owned production units) produced the vast majority of products in all industrial sectors. Units owned by local communities and controlled by local government, known as township-village enterprises, contributed 9% of overall industrial production in 1978.
In the conventional analyses, the changes to this socialist structure are seen as creating success through their effects on the economic behaviour of individuals and institutions within China, the assumption being that markets and private ownership enhance efficiency and engender entrepreneurial dynamism. The dominance of these abstract neo-liberal concepts, allied with the blinkered failure to consider the international political context, the role of advanced technology and the way in which access to global markets has been gained, has obscured two very concrete effects of China's reforms:-
A) By progressively moving from socialist to capitalist economic arrangements, and thus ceasing to pose an ideological threat to the West, China was enabled to progressively reduce the politically inspired barriers to trading and investment relationships with the rich capitalist countries; further, it has striven to carry out sufficient privatisation and de-regulation to meet the conditions required by international institutions: eg, for membership of the World Trade Organisation and the recognition of 'Market Economy Status' by the European Union (the EU imposes discriminatory terms of trade against countries which are not deemed to be 'market economies').
B) By moving towards capitalism, China has become a highly profitable place for transnational companies to invest in and sell to. The Chinese state has been able to use both inward investment and negotiations on imports as means of aquiring foreign-developed technology.
An early and well-publicised reform, the ending in 1981 of China’s collective farming system, is often credited for a big increase in the country’s food production: suggesting that private farming is, by its nature, more productive than systems in which the land is owned and worked in common. The facts give little support for this assertion.
By using fertilizers, irrigation, mechanical methods and other inputs, the Chinese were already increasing the productivity of the land in the decade before de-collectivisation. Taking grains for example:
Year Fertilizer application per hectare, kg Yield per hectare, kg
1969 97.6 1,794
1979 166.6 2,785
1989 268.8 3,632
The productivity increase from 1969 to 1979, under the collective system, is 55%, as against only a 30% rise over the subsequent ten years. Of course, agricultural yields vary from year to year due to climatic factors. Line graphs of overall annual agricultural production in China between 1961 and 2000  show fluctuations around the trend which is a rising straight line; among the variations is an increase in the rate of improvement in production in the early 80s, followed by stagnation in the second half of the decade. While the general trend then continues to rise until the late '90s, there is no long-term gain apparent from de-collectivisation.
It is important to note that China has not so far privatised or even fully individualised its agriculture. Land, which is leased to families on a roughly egalitarian basis, remains collectively owned and cannot yet be bought or sold; local government has retained responsibility for projects (including irrigation) and large machinery.
When other factors are considered, the case for the attribution of improvements in Chinese farm production to the positive effect of de-collectivisation and markets is not impressive. Firstly, the remuneration of farmers by the state needs to be taken into account. The nationwide introduction of the ‘household responsibility system’, replacing collective farming in 1981, was preceded in 1979 by big rises in state procurement prices paid to farmers (an average 21% price increase, with the bonus for above-quota production raised from 30% to 50%), thus vastly increasing both incentives and the resources available for investment. The further agricultural reforms in 1985, which increased the role of the market and reduced that of the state, were followed by stagnation rather than increases in production. The rising output of the 1990s was accompanied by a series of further very substantial increases in state procurement prices.
Then there is the matter of continuing improvements in agricultural technology. Since 1979, new higher-yield crop varieties were introduced by central and local government initiative; machinery and artificial fertilizers became more widely available. There was also a further extension of irrigation.
The move to individual family farming in China did have very real significance. It was crucial internationally as a demonstration of China’s seriousness in abandoning communism - thus assisting China in overcoming the politically motivated trade barriers; also, it ended the guarantee of agricultural employment – thus causing displaced agricultural workers to enter the emerging labour markets in both the countryside and the urbanised areas, and ensuring that industrial wages did not increase too quickly.
The socialist enterprise paradox
During the first phase of reform, from 1978 to 1993, there was no privatisation of state owned enterprises (SOEs) and workers were not made redundant from these firms. Although formal autonomy of enterprises from the state was somewhat increased as was the role of profit as an incentive, the state retained control of the appointment of senior managers and the financing of the firms. The SOEs expanded their production in absolute terms; although those in light industry, which require lower levels of investment in fixed assets, lost much of their market share, mainly to the local government-owned firms known as township-village enterprses (TVEs).
From the point of view of pro-market theory and practice, SOEs are an anathema. If they cannot all be fully privatised or forced into bankruptcy, those that remain must at least be reformed into companies which resemble capitalist firms in every way, except that the state retains a majority shareholding. As Dr Zhengxu Wang of the National University of Singapore has remarked:
Of all the problems China is facing in its transforming from a command economy to a market economy, none is more formidable than the reform of SOEs, or State-Owned Enterprises. This legacy of the old command economy system, designed and established with both technical and financial help from the Soviets in the early 50s, became the main target of Chinese reform policy makers as early as the early 80s, shortly after the reform began. After two decades of experiments, while other former socialist countries have technically privatized all their previous SOEs, China is still struggling to find a way to reinvent and reengineer these economic establishments...
Pressures for the reform of China's publicly owned firms have come from inside and outside the country. Peter Nolan observes:
It is no longer practically feasible to benefit fully from trade with and investment from the developed countries without agreeing to extensive economic liberalisation of international economic relations, especially those implemented by the WTO (including TRIPS and World Telecoms Agreement).
To succeed in its aim of joining the World Trade Organisation, China had to accept during protracted negotiations with the United States that there would be further liberalisations, not merely of its international economic relations, but of the internal structures of its economy. As Nolan's account indicates, China's ambition of becoming a WTO member provided the USA with the means to insist on thorough and extensive changes:
The WTO agreement with the US is 250 pages long, with a detailed account of the steps that China agrees to take in order to implement the WTO rules... It is the most detailed agreement yet signed by any country on its entry to the WTO - far more specific than that signed by India, for example. Under the terms of the agreement, China must cease to provide special support for large state-owned enterprises. Within China, the WTO rules require the whole country to become an internal free trade area. China has been granted only a five-year adjustment period before it must implement in full the rules of the WTO.
China's entry to the WTO was finally approved in November 2001. The required reforms, which included a commitment to open up the domestic banking market, had to be completed by November 2006.
As we shall see, it is quite true that without 'special support', forbidden by the terms of China's WTO membership, enterprises which continue to operate in the same way as they had done under the socialist system have a disadvantage in competition with capitalist-type firms within a 'free trade area'. This in no way means that socialist-type enterprises are inherently less productive, or more expensive, in their contributions and costs to the overall national ecomomy, than are capitalist firms; or that a country in which a high proportion of production takes place within socialist-type units will fail in economic competition with other countries- as is demonstrated by the first fifteen years of China's reform process.
From 1978 to 1992, the growth of output in the heavy industrial sectors, which were almost fully state-owned, was almost 11% per year on average, providing the intermediate products- electricity, steel, cement, chemical fibres, fertilizers, etc- which were needed by the rest of the economy. The largest SOEs increased their share of total industrial output, and the nationally owned enterprises as a whole continued to be the biggest category of firms in the economy, producing 48% of China's industrial output in 1992. In first phase of reform, the pivately owned enterprises accounted for only a small proportion of China's GDP, producing less than 15% of China's industrial output even by 1993. In this period, China's overall GDP grew at annual rates of around 10%.
How is it that socialist-type production units can clearly make a very valuable contribution to overall economic development, while it is accepted that many of them will 'fail' in competition with capitalist-type companies in an economy organised on a purely 'free trade' basis? Zhengxu Wang notes that economic enterprises under China's socialist system performed two crucial functions:
In the command economy era, the SOEs served as production organs where raw materials are turned into industrial products. The planning commissions in national or local governments decide for each SOE what needs to be produced and how much. In such a system, the government agencies plan what to produce, supply resources, and distribute the products...
An SOE is a social unit in that, besides providing life long employment to its employees, it also provides all the necessary social services to its employees and their family: housing, healthcare, child care, education, grocery, to name a few. In some sense, a unit takes care of its employees 'from the cradle to the grave'. At a certain point of time, SOEs in China provided such services for more than 112 million workers and their families. This social service function became a huge difficulty when it comes for the policy makers to change SOEs into market competition oriented firms.
Clearly, there can be no 'level playing field' of competition between on the one hand these socialist-type enterprises, whose responsibilities include both contributing to overall economic development on the basis of central and local plans, as well as providing for a broad range of the needs of employees and their families; and on the other hand capitalist firms, whose only objective is to make profits. The capitalist firms appear to operate at lower costs- whereas in fact the costs which they are not obliged to meet must still be borne by the rest of society.
But the pro-market analysts do not consider that much of the alleged efficiency of privately owned firms is simply the externalisation of costs; rather, they complain that it is the state owned enterprises which operate unfairly, because their investments are financed by state owned banks without full regard to the rules of the market. This offence against capitalist morality is known as the 'soft budget constraint', a term coined by János Kornai, a guru of anti-socialist economics.
Accepting that China refuses simply to privatise all its nationally owned firms, Professor Dwight H. Perkins of Harvard University sets out a second best solution:
There is no secret as to what needs to be done. State-owned enterprises must be made fully autonomous and responsive primarily to market forces...
Firstly, these enterprises must stand on their own feet financially and face a hard budget constraint. Money borrowed should be paid back at market interest rates, and the failure to do so should lead to bankruptcy... Inputs should be paid for at market prices. Outputs should be sold on competitive markets where market entry is as easy as scale and financing requrements allow...
Secondly, management of state enterprises must be chosen by people whose sole or primary concern is with the profitability of the enterprise.
Writing in 2000 as China approached its accession to the WTO, Perkins noted that the Chinese had gone a considerable way to meeting these conditions, although he complained that:
*Managers are picked... by government and party officials who apply a wide range of criteria, only one of which is profits.
Propping-up, guiding and bringing along
In 1994, 1999 and again in 2003, pro-market government decisions triggered rounds of layoffs of millions of workers and of full and part-privatisations, first of the small and then many of the larger SOEs. The fact of the mass redundancies of workers from state-owned industry in the second phase of China's reform process is used by pro-market analysts to suggest that the SOEs had previously been over-staffed and that this amounted to a form of 'concealed unemployment'; with the implicit lesson that the discipline of market forces is required to ensure that enterprises employ only the necessary number of workers.
But no such conclusion needs to be drawn from the millions of dismissals of workers from China's SOEs since the mid-1990s. Two processes were taking place which, as we know from Western capitalist experience, result in workforce 'downsizing': the loss of market share by many enterprises in competition with firms which were allowed to operate (at the level of the company) with lower costs, and the rapid introduction of new machinery, allowing greatly increased output by fewer workers.
Oil tanker 'Xingchi' launched at the Guangzhou Shipyard. Shares in Guangzhou Shipyard International are owned 42.61% by the State, 25.57% by domestic holders and 31.82% by overseas share holders.
Public ownership, as the foundation of the socialist economic system, is a basic force of the state to guide and promote economic and social development and a major guarantee for realizing the fundamental interests and the common prosperity of the majority of the people… The state owned economy has taken a dominant place in major trades that have a close bearing on the country’s economic lifeline and key areas, and has propped-up, guided and brought along the development of the entire socio-economy.
Pointing out that the revenues, profits and output of the state sector had in the period of 1989 to 2001 increased greatly, Li listed the proportion of state ownership (in terms of sales revenue) in several key industries which remain mainly publicly owned – petrochemicals 69.3%; oil 92.1%; power 90.6%; auto industry 72%; metallurgical industry 64.4%; railway sector 83.1%; ordnance 99.5%; shipbuilding, aeronautical and astronautical industries 84.5%. Thus he claimed:
The influence and control capacity of SOEs have further increased. State owned economy has played an irreplaceable role in China’s socialist modernisation drive.
Industries where national public ownership is still predominant are performing extremely well. In shipbuilding, for example, China is now in a strong third place and appears to be on its way to fulfilling the target set by Premier Zhu Rongji of becoming the world’s number one shipbuilder by 2015. As the North China news service DailanNews reported in March 2005:
China's rise in market share has come at the expense of such publicly traded shipbuilders as South Korea's Hyundai Heavy Industries Co. and Japan's Mitsui Engineering & Shipbuilding Co. China, the world's No. 3 shipbuilder, raised its share of new orders by 2 percent to 17 percent last year and won its first contract to build liquefied gas tankers.
'In volume, China can overtake the Koreans by 2015,’ says Aled Smith, 36, who helps manage $300 million at M&G Ltd. in London, including shares of Hyundai Heavy. ‘They are building very aggressively.’
China's 600 shipyards, mostly state-owned, charge about 10 percent less than competitors and are more flexible in building to specifications, according to Clarkson Plc, the world's largest shipbroker.
In August 2006, China announced a further large rise in ship production under state direction:
China's shipbuilding industry continues to grow rapidly with shipbuilders getting new orders totaling 16.08 million deadweight tons in the first half of the year, a 113-percent rise over the same period last year, the National Development and Reform Commission (NDRC) said in Beijing on August 31.
The NDRC said shipbuilders hold total orders of 50.92 million deadweight tons in the first half of the year with an increase of 43 percent, accounting for 20 percent of the world's market share.
The national Medium-and Long-Term Plan of the Shipbuilding Industry, which was approved in August by the State Council, the country's cabinet, said the industry should accelerate its restructuring and upgrading to become strong enough to drive the growth of related sectors…
The plan stated that China needs to break the bottleneck of insufficient production capacity of auxiliary sectors and develop the ability to independently design high-technology ships and ocean engineering equipment.
The plan said the production of the country's shipbuilding industry was expected to take more than 25 percent of the world market.
The TVEs and state-led modernisation
A change which is credited for much of the rapid expansion of the Chinese economy during the first phase of economic reform was the growth of the township-village enterprises. The TVEs, which are mainly rural community-owned firms, run on a commercial basis and whose profits contribute to local government revenues, increased their production from 9% to 27% of overall industrial output between 1978 and 1993. Some of the TVEs became quite large operations, eating into the market-share of many of the nationally state-owned enterprises. Alongside, there was also the emergence of a small domestically-initiated private sector. Since 1993, a rising proportion of the TVEs have been privatised.
These developments have been cited to support the claim that SOEs are comparatively less efficient and flexible, with the implication that independence from national planning and the primacy of the profit motive are special factors which liberate forces for growth.
Two crucial factors need to be considered when evaluating this suggestion. The first is that workers in the SOEs work shorter hours and have much better wages, working conditions and other employee benefits than in the TVEs and the domestic private sector. This is confirmed by all studies, including that of Xiao-Yuan Dong of the University of Winnipeg, who also found that in the period of 1994 to 2001:
…the mean labour productivity of the urban workers increased by 96.7 percent and their real wages rose by 64 percent. By contrast, the labour productivity of the rural workers increased by 2.08 fold but their wages rose only 47%.
Chinese-owned firms outside national state control have been able in several sectors to gain market share simply because their workforce receives less in pay and benefits from the company, and also works longer hours: thus making production costs- for the firm, not for society as a whole- much cheaper.
The most significant event in the 1980s might be the emergence of the rural industrial sector and technical transfers from urban industry to this sector. The rural industrial sector is characterized by high labor intensity and has become a major engine for China’s economic growth. Entering the 1990s, two events are worth mentioning. One is the emergence of private firms and their absorbing of technologies from the state sector.
The Chinese state has taken a leading role in ensuring that technical advances are spread to and utilized by the different sectors of Chinese industry. One of its initiatives is the Star Project, aimed at improving the technological capacity of small and medium-sized firms, especially in the countryside. The government spent 8.22 billion yuan (990 million US dollars) on the Star Project in a single year, 1997. Other processes are also at work:
First, large firms are more likely to innovate their own technologies, small firms are more likely to buy ready technologies. This of course is related to small firms’ relatively weak innovation capacities. Second, small firms seldom buy foreign technologies while large firms do. Third, the most effective channel for small firms to get new technologies is to cooperate with large firms to form joint ventures or to become a large firm’s subcontractor. In this way, small firms can quickly obtain large firms’ more advanced technologies as well as improve their efficiency by specializing. Fourth, rural firms rely on the city to provide them with technicians. Many urban retirees are hired by rural firms and a considerable number of urban technicians work in rural firms as a second job.
So alongside the state initiatives, there has been a considerable informal technological subsidy within China's economy from the larger, mainly state-owned firms to the smaller collectively-owned and private firms. However, as is the case in nearly all countries, China has aquired the great majority of its new production-related knowledge from abroad.
Made in Taiwan
Third World countries have in their lower labour costs a big potential advantage in inter-country competitive trade, but for most poor nations this is offset by much lower levels of general education, health, and infrastructure. On these aspects China was in a rather better position than most other low-income countries. Following the relaxation of US-imposed trade barriers, the People’s Republic of China was able to enter into the practical and commercial process of engagement in the world market; in other words, it could engage in trading competition with other countries. But it still faced the global control of resources, including up-to-date technology, by the transnational companies and financial centres based in the richest nations.
For pathways to economic growth in this circumstance, the Chinese People’s Republic had some successful examples available nearby in the close US allies Japan and South Korea, each of which had utilized technology transfers, central guidance of the economy and promotion of exports in order to exploit their lower average wages (as compared to the USA and Western Europe), thus gaining international market share in key sectors. A model followed with interest by the Chinese planners lay within their own historical and internationally recognized territory – the state-managed capitalist economy of Taiwan.
The US-backed ‘Republic of China’ regime, which had retreated to the island of Taiwan in 1949 during the victory of the Chinese Communist revolution, applied the advertised principles of capitalist ‘freedom’ neither in its economic nor in its political structures (contested presidential elections were not held until 1996). While heavily subsidized by US aid, all of Taiwan’s banks and much of its industry were state-owned. Strictly controlling imports, the government assisted and instructed firms in producing manufactures for export. In the mid-1960s, this already successful strategy was supplemented by an additional means:
…three export-processing zones (EPZs) were constructed to attract multinational corporations to move their production bases to Taiwan. For those foreign firms located in the EPZs, import and export procedures were kept as simple as possible to reduce the administrative costs of producing in Taiwan. No duties were levied on the imported machinery and goods for reprocessing in the zone areas. The first such export-processing zone was established in 1966 in Kaohsiung and two more were added in 1971. Foreign capital poured into Taiwan to take advantage of ample supply and relatively inexpensive labor and favorable tax incentives provided by the government. These foreign investments not only created a lot of job opportunity and earned much needed foreign exchanges for Taiwan, but also brought much needed technology into Taiwan… these technologies and well-trained engineers and labors were quickly spread to other parts of Taiwan as people moved around or started their own business. Since big multinational electronic firms were the largest investment at that time, the transferred technologies did give Taiwan a healthy start when the government decided to develop the information industry in Taiwan.”
The People’s Republic of China established the first of its own ‘Special Economic Zones’ in 1980. The paperback writers of neo-liberal globalisation, Yergin and Stanislaw, enthuse:
Three were established in Guangdong province, including Shenzhen, across from Hong Kong, and in Fujian province across from Taiwan. Their whole orientation was outward; they were export-processing zones, and they were the magnet by which to draw in foreign investment. Beijing gave local authorities in the SEZs unprecedented autonomy in trade and investment decisions. The concept was expanded to a number of cities in the mid-1980s. From then on, the coastal cities drove the economy forward.
It does not assist the narrative of Yergin and Stanislaw’s tall tale, in which market forces are the dynamic, creative hero and socialism is the lethargic villain, to remark the significance of the geographical positioning of the SEZs. By the late 1970s, workers in Taiwan and Hong Kong had gained some benefit from their employers’ world market successes in the form of increased wages. The mainland Chinese could undercut these rates of pay, and the Taiwanese and Hong Kong capitalists therefore began investing in the very nearby SEZs of the People’s Republic. SEZs were ‘magnetic’ for a further reason – by absolving the foreign entrepreneurs of tax, the PRC gave them a huge de-facto state subsidy by providing workers whose education and health care, and infrastructure whose building and maintenance, was paid for by the public sector.
There followed a massive exodus of industry from Hong Kong and Taiwan to mainland China. In Hong Kong, the share of manufacturing in GDP contracted from 22% in 1980 to 4.4% in 2002. The Taiwanese and Hong Kong firms were followed into the Chinese mainland by firms from the USA, Japan, and other countries.
Investment as technology transfer
Beside its lower wages, mainland China has advantages which most developing countries do not possess. For the big US, Japanese and European-owned transnationals, one of China’s particularly attractive features as an investment destination is the huge size of its potential home market, an aspect which has given Chinese planners considerable power both in attracting and controlling foreign investment, using as a means of acquiring and assimilating technology. The report on the implementation of the 1993 plan for national economic and social development explained official policy as follows:
We shall guide the orientation of foreign investment in accordance with the state's industrial policies, directing foreign investment towards infrastructure and basic industry construction, key projects and upgrading technology in existing enterprises, in particular towards projects to increase the export of foreign currency earning projects.
The Fifteen Year Programme for Technical Transfer (1981-1996) of the Chinese power equipment industry exemplifies this policy. Through this programme, the State Council and the Ministry of Machine Building, with the intermediation of the China National Import-Export Corporation, negotiated with the Western transnational firms Combustion Engineering (later ABB) and Westinghouse for transfers of technology to China's two leading power equipment companies, Harbin Power Equipment Company (HPEC) and Shanghai Electrical Company. Peter Nolan remarks:
During the 1980s the technical transfer program raised the unit production capability at Shanghai from 125 to 300 MW and at HPEC from 200 to 600 MW. The program was a calculated risk for the MNCs [multinational companies]. They felt that if they assisted the upgrading of the Chinese power equipment industry, then they might be able to use this as leverage with the Chinese government to gain access to the potentially vast Chinese market.
Another example is the motor industry. Walter Arnold of the Japan Policy Research Institute notes that:
During... [the 1960s and 1970s], China’s automotive sector was nearly cut off from international interchange. Thus, China was unable to keep up with the development of new automotive technologies and production methods that revolutionized the world motor vehicle industry in the late1960s and during the 1970s.
Immediately following China’s re-admission to the world market, Volkswagen was one of the first Western companies to enter the People’s Republic:
After long and difficult negotiations that began in 1978, Germany’s Volkswagen entered a joint venture with Shanghai Automotive Corporation [SAIC], and Shanghai-VW was set up to produce the Santana model in 1984. After initial equipment set up, Shanghai-Volkswagen began trial production began in 1985.
The Chinese government was fully involved in this process:
The forays into China by Western motor vehicle companies were remarkable as the Central government insisted on strict 50 per cent or better Chinese ownership and control of all Sino-foreign automotive joint venture and cooperative arrangements. Clearly, China aimed to develop its automotive sector independently with foreign automotive enterprises relegated to supply capital and provide technological assistance, and ownership on a limited ownership basis…
In the early 1980s, China’s central authorities helped dispatch numerous technical delegations to the world’s leading automotive producers who were eager to induce foreign investment and technology transfer to revitalize China’s ailing motor vehicle plants. For the automotive sector and its advocates in the central government, revitalizing China’s motor vehicle industry became synonymous with China’s ‘Open Door’ to acquire advanced foreign automotive technology and management methods.
The advantages gained by Volkswagen and the other early entrants were seen by other transnational producers. By 1994, GM, Ford, Citroen, Fiat, Honda, Nissan, and Toyota were in negotiations with the Chinese authorities.
On October 31, 1995, after a most arduous process, Shanghai Automotive Industry Corporation [SAIC] and GM signed a basic joint venture agreement for US $1.57 Billion to construct a Greenfield plant on a site in Shanghai’s Jinqiao Export Processing Zone in Pudong. The new automotive plant was designed to produce 100,000 sedans per year, and it was decided to produce two Buick models modified for China. GM-Shanghai’s Pudong facility became equipped with the latest automotive machinery and robotics and was furnished with process technology transferred from GM’s world wide operations.
The major Japanese producers are now also involved in joint-venture operations in China. In the biggest ‘tie-up’ so far, in 2002, Nissan concluded negations with the state-owned Dongfeng Motor Group to create a jointly-owned firm which is now producing trucks, coaches and cars.
Walter Arnold concludes that China has learned from the experience of other industrialising Third World countries, and will maintain a degree of national control of its development:
Chinese analysts leave no doubt that the automotive sector will not be allowed to be ‘colonized’ similar to Brazil or Mexico where the global giants largely dominate the production arrangements. Moreover, China long aspired to establish a viable domestic motor vehicle industry, a goal that is attained by forging strategic links to foreign technology and capital that eventually empower some of the Chinese producers to attain world level competitiveness.
However, the continuing inward investment into China is now being accompanied by a reverse flow. China’s foreign currency holdings, now second only to those of Japan, are being employed in an international corporate buying spree. Among hundreds of foreign acquisitions, Chinese firms have bought Korean car maker Ssanyong, Japanese pharmaceutical company Toa Seiyaku and IBM’s PC manufacturing division; in February 2007, China’s state-owned car manufacturer SAIC launched a saloon car which was the fruit of its acquisition of Britain’s former car-maker Rover. Mototorque reported:
The Roewe 750 went on sale in Beijing and Shanghai today and is aimed at China’s emerging monied classes, stressing luxury and comfort.The 750 saloon will use design work undertaken by Rover MG prior to its collapse and work with British engineers Ricardo 2010 Consultants, whose workforce includes many erstwhile RMG Rover employees.
China's foreign investment surge includes not only acquisitions of companies with production expertise, but of strategic mineral resources. The PRC also purchases increasing amounts of advanced machinery and technology licenses; currently, the biggest source of these imports is the countries of the European Union. Of the $22.02 billion in value of foriegn technology imported by China in 2006, $11.3 billion went to foreign-invested enterprises and $8.99 billion to the SOEs.
Media reports on social conditions in China present a contradictory picture. The cliche that hundreds of millions of people have been 'lifted out of poverty' is repeated endlessly, alongside lurid accounts of worsening social problems which threaten to engulf the country in conflict. Both of these claims have a basis in fact. Most people, not merely the rising class of millionaires, have gained materially as a result of China's huge increase in GDP. However, because of the increased role of market forces and the breakdown of socialist institutions, this additional wealth has been accompanied - to name only three out of many issues - by mass unemployment, inhumane and dangerous working conditions, and inadequate health care.
That there have been, since the mid-1990s, substantial numbers of people out of work in China is clear disproof of the notion that economic growth under market conditions is the cure for unemployment. In fact the rapid technological changes which are enabling China's economy to grow are resulting in workforce 'downsizing' in existing industries; and, in a competitive market, some companies always go bankrupt. New industries develop and new companies are started up; but in the absence of central planning there is no reason why these should require similar numbers of people as have been expelled from the workforce of other industries and firms, or that the new enterprises will be sited in places where unemployment is high, or that their skill requirements will match the skills of the unemployed.
Because there is not a universal benefits system, estimates of the number of unemployed in China are unlikely to be very accurate; another cause of uncertainty is the fact that workers laid off by SOEs continue for extended periods to receive a fraction of their former wage from their previous employer and are not counted in the official urban unemployment figures, which have been at around 4% in recent years. A paper published by the University of Michigan Population studies Center calculated that:
... for China as a whole, from January 1996 to September 2002, the unemployment rate of urban permanent residents increased from 6.1% to 11.1%, and that of all urban residents, including temporary residents (e.g., migrants), increased from 4.0% to 7.3%.
The CIA's estimate is roughly similar:
Unemployment- 9.8% in urban areas; [there is] substantial unemployment and underemployment in rural areas; an official Chinese journal estimated overall unemployment (including rural areas) for 2003 at 20% (2004 est.)
From 100 to 150 million surplus rural workers are adrift between the villages and the cities, many subsisting through part-time, low-paying jobs.
While exact numbers may be unclear, there is no doubt that dozens of millions of people have no regular job and are without a fixed abode, and scores of millions more no longer have job security. Thus many of those who do have employment have no choice but to work in appalling conditions. In August 2007, a survey was published which looked at eight toy factories, suppliers to transnational toy corporations including Disney and Hasbro. It found that:
All eight factories investigated in-depth violate Chinese labor law by failing to comply with contract details...
Among the factories investigated, compulsory overtime with inadequate, illegally low compensation is prevalent. Many workers say that they are penalized or would lose their jobs if they decline overtime work. At some of these factories, workers put in 10 to 14 hours daily during the peak season. Workers are often not provided with a legally mandated rest time, not even one day off per week or time off during holidays. In some cases, workers are not given a single day off for a month straight.
Factories fail to provide sufficient information and adequate training to workers using chemicals at work posts. Hundreds of workers worry that they are subjected to harmful chemical substances, and could be in danger of lead poisoning, plastic poisoning, or welding accidents. Many investigated factories have poor ventilation systems and issue face masks that have no purpose other than show. One worker explained that wearing a mask or any other safety equipments is only required when clients are present.
Workers are not offered insurance as mandated by the law. Surveys reveal that when workers are hospitalized they sometimes do not receive any salary and might be fired after injuries.
Market socialism with a human face.
As China achieves spectacular rates of economic growth during the last decades of the 20th century, its health and safety record has made nearly as sensational a leap, but in the opposite direction. Industrial and mining injuries, fatalities and occupational diseases have all risen at a rate surpassing the near double-digit annual growth rate in the economy. It is during the same period that China has become more deeply integrated into the international community and global economy. China at the start of the 21st century is the largest manufacturing center of the world. It is also the deadliest… The International Labour Organization (ILO) estimates that annual workplace fatality rate in China is 11.1 per 100,000 workers, compared to the rate of 2.19 per 100,000 in the US…
Fewer than 30 percent of workers who are exposed to dusty environments received health checks for pneumoconiosis. Pneumoconiosis, chemical poisoning and leukaemia are the leading causes of early loss of working ability in China. The high-risk industries for occupational illnesses are coal production, metallurgy, building materials, non-ferrous metals, machinery and chemicals.
Increasing private ownership is part, but not all, of the problem:
In general SOEs are subject to relatively fewer commercial pressures and hence are under less pressure to skimp on H&S [health and safety] provisions and implement a mean and lean labour regime. Presence of the official machinery, such as the party organs (including the official union), is usually stronger in SOEs, which should help with H&S enforcement. Most workers are employed on a relatively more long-term contract basis and hence have more leverage on the enterprises. Despite all this, however, it is not a rosy picture at the SOEs. Numerous non-implementation, negligence and outright violation of regulations still plague their H&S records…
But the situation is many times worse in the private sector. Most enterprises are small and medium sized and are situated in towns, villages and suburban counties... Such factories form the back bone of the export-processing industries; many serve as sub-contractors and suppliers to the major MNCs [multi-national companies] around the world. The plants are set up with minimum planning and investment, for the pursuit of maximised, short-term returns. Nearly all the workers are employed on short-term contracts; many of them are very young migrants from nearby or from the remote countryside. An extremely exploitative and repressive, and often illegal, labour regime is imposed on the workforce. Workers commonly suffer from long working hours, forced overtime, deprivation of rest days and sick leave, low wages (nearly always on piece-rate), arbitrary penalties and dismissals, and denial of collective bargaining rights. H&S features very low in the investment and management priorities of these enterprises, if at all. The local law enforcement officials are usually willing to turn a blind eye to the situation, either because they are bought off or because they see it in their interests to keep the entrepreneurs and investors happy.
According to the government, about 74 per cent of serious accidents in industrial and mining enterprises occurred in the private sector.
Other aspects of public health are also being affected. Under socialism, China's universal healthcare system produced excellent results. However, as a research paper presented to the American Public Health Association in November 2004 concluded:
Since the reforms of the past two decades, China’s medical and health care system has shifted from a highly bureaucratic controlled system to a market-based system…
The major findings suggest that China is undergoing two major changes: 1) the organization and financing of health care is moving away from government controlled and funded systems to privatized medical practice and a market-based system; 2) the focus and resources of health care is being steered away from low-cost prevention to expensive high-tech equipment and medical procedures.
The impact: In rural areas, where 70% of Chinese live and most are poor, basic medical care becomes an expensive commercial product that is beyond the reach of many. In urban areas, the high-tech and advanced medical procedures are almost exclusively utilized by the wealthy and the big urban hospitals. The high-tech medical equipment and procedures come with escalated medical costs that prevent more people from entering the system. These changes have further contributed to the rise of infectious diseases, such as hepatitis, TB, sexually transmitted diseases, and SARS.
Despite recent government recognition that lack of health care coverage is a serious issue, and the launch of an insurance scheme to address the problem, the situation is not yet improving. Reuters reported in November 2007:
Health in parts of rural China is deteriorating despite rising incomes, and commercialised care has ratcheted up costs for those who can least afford them, the head of the World Health Organisation said on Thursday.
Hong Kong-born Margaret Chan said the cost of health care in China was outstripping income growth and that poor health was a major cause of poverty among China's hundreds of millions of rural residents.
"The payment of providers and fees charged for services has commercialised health care, compelling providers of care to focus on profit rather than the most efficient health services," she told a conference in Beijing.
"Health education and preventive services are neglected. Why? Because these activities do not guarantee income. As a result, simple conditions are often treated at very high cost."
The costs of seeing a doctor or staying in hospital are out of reach for many in the world's fourth-largest economy, and the lack of access combined with corruption has made the issue a source of social unrest...
"When ability to pay determines access, many rural residents will not seek care until a disease has reached an advanced stage when treatment is more complex and costly, if not impossible," she said...
That could undermine China's efforts to expand care through its Rural Cooperative Medical Scheme, a plan under which subscribers are funded at a level of 50 yuan per person -- 20 yuan from the central government, 20 from the local government and a 10 yuan contribution from the individual.
Chinese Vice-Minister of Health Chen Xiaohong said nearly 85 percent of counties in China were participating in the plan but the funding level paled to that of wealthy coastal cities.
While the hopes of the Chinese Communist Party under General Secretary Hu Jintau to achieve a more harmonious society do not yet appear to be yielding results within the country, the Chinese leadership's international posture must be evaluated as highly successful thus far in terms of its stated objectives. Professor Sujian Guo, Director of the Center for US-China Policy Studies at San Francisco State University, explains Hu Jintau's slogan of 'peaceful development' as follows:
The adoption of 'peaceful development' foreign policy strategy is a continuity of Deng Xiaoping’s concept 'taoguang yanghui' (keep a low profile and never take the lead) but a break away from Jiang Zemin’s 'duoji shijie' (multipolar world). Under Jiang, building a multipolar world implies to 'multipolarize' the American unipolarity and counterbalance the U.S. hegemony. This 'peaceful development' foreign policy strategy is, in fact, to accept the unipolar structure of international system and that the U.S. will continue to be the hegemonic power in the long term. It proposes that China must avoid direct confrontation with the U.S. in order to secure a favorable external environment for its rise, although China can adopt a multilateral and bilateral diplomatic approach in the unipolar world dominated by a single hegemony.
'Peaceful development' thus seeks to reassure the U.S. and other countries that China’s rise will not be a threat to peace and stability in the region and the world and that the U.S. and other countries can benefit from China’s peaceful development.
While the Chinese leadership- like most people outside the USA- regards the present US domination of the world as a far from perfect situation, to mount any open challenge to this would threaten the global conditions which are enabling China to build up its economic strength and, consequent on this, its potential to become, in the not so distant future, a great power in a non-unipolar world. Sujian Guo recognises this:
If China were to find its access to U.S. and its Western allies’ markets, capital, and technology, worsened Sino-U.S. relations would have a negative effect on China’s economic and military modernization.
China was the victim of US-imposed trade and technology sanctions for thirty years, and was not permitted full access to the world trading and investment system until after another two decades, when it was allowed into the WTO. A lesson has been well-learned. Deng Xiaoping’s concept: 'keep a low profile and never take the lead' was illustrated as the US invasion of Iraq loomed in early 2003. China dared not use its UN Security Council veto against the USA unless it could shelter in the shadow of France, a country 20 times smaller in population.
…fears that the country will inevitably tilt global trade and technology balances in its favor, ultimately becoming an economic, technological, and military threat to the United States. These reactions, however, are... mistaken: they overlook both important weaknesses in China's economic ‘miracle’ and the strategic benefits the United States is reaping from the particular way in which China has joined the global economy.
Gilboy emphasised the usefulness of China's path of development for the continuation of US global dominance:
In fact, the United States and China are developing precisely the type of economic relationship that U.S. strategy has long sought to create. China now has a stake in the liberal, rules-based global economic system that the United States worked to establish over the past half-century. Beijing has opened its economy to foreign direct investment (FDI), welcomed large-scale imports, and joined the World Trade Organization (WTO), spurring prosperity and liberalization within China and across the region.
China's own choices along the road to global economic integration have reinforced trends that favor the continued industrial and technological preeminence of the United States and other advanced industrialized democracies. “
All well and fine, although George J. Gilboy did not assist his case by relying on a theory which is rarely heard any more, precisely because China has so thoroughly disproved it - the idea that sustained economic growth is only possible within 'pluralist democracies' modelled on Western systems:
The paradox of China's technological and economic power is that China must implement structural political reforms, not simply freer markets or greater investment, before it can unlock its potential as a global competitor.
Consider this from another aspect. The fact that China's Communist Party shows no sign of interest in reforming itself out of office is one of the main reasons why the US elite is worried that, unlike Japan, the EU and India, the People's Republic of China could within decades become a competitor for global power.
What can we learn from China's last several decades, and what can we expect in the future? While the complexities of the history defy straightforward conclusions, the ‘free’ world market cannot be comprehended without an understanding of the political and military dimension of domination by the USA. The example of China also shows the importance for this supremacy of the continuing technology lag faced by poorer countries.
These first two phases of the development of the Chinese People’s Republic – the tremendous economic strides achieved when combining socialist planning with access to relatively modern technology and international trade; and then the continued improvements in farming, industry and especially in health and education, despite enforced isolation and political upheavals – suggest that socialism and planning have more power than capitalism and markets to solve social problems, and (other things being equal) at least as much power for rapid economic development. But other things are never equal.
In a world where up-to-date production technology is mainly the property of profit-hungry transnational corporations based in the rich countries, a developing country is faced with difficult choices. Those who do not allow themselves to be exploited for profit will not get access to modern means of economic development. Those who do will only be permitted to develop in the capitalist way, enriching the rich and denying or greatly reducing the benefits of development to those who need it most. The United States acts as the guardian of this order, mobilising economic as well as political power to suppress dissidence and distribute rewards to allies.
While China's modern economic history proves this fact, it is a open question as to whether China's further development may change this fact. China thrives by refusing to make an open challenge to the economic and political structure of the world. But China's rise may subvert and weaken that structure.
Will China continue to rise? This mainly depends on whether wages in China remain significantly lower than in the West, whether China can continue to import technology, energy and raw materials, and whether it is allowed to continue to export manufactured products. As long as these basic conditions remain, possible scenarios such as a major recession affecting both the USA and Western Europe; or in China itself, uncontrollable inflation or the implosion of speculative stockmarket and property bubbles, may dent the graph of China's increasing GDP but would not alter the long term trend.
Skeptics point to the example of Japan, whose very rapid growth ground to a halt in the 1990s. But Japan had already by that time lost its main advantage in competitive world trade: the wages of its workers had caught up with Western levels. It will be many years before the pay of Chinese workers begins to approach that of workers in the USA, Western Europe and Japan.
China's growth is already having major global political effects. The resurgence of Russia and its renewed independence from the West has been largely consequent on the rise in world energy and mineral prices in the wake of Chinese industrial expansion. In Africa and Latin America, countries are discovering that it is no longer completely necessary to submit to orders written in Washington and Brussels in order to trade and attract investment. Thus, countries which seek to challenge the capitalist order, or merely wish to have an independent economic or political policy, have some possibilities of development.
Business is usual. Fidel Castro with Politburo member Wu Guanzheng, April 2007
The example of China's twentieth century history indicates that countries which opt for socialism can develop successfully if they can find adequate partners for trade and investment. China is becoming such a partner. The survival of socialist Cuba and the success- so far- of the revolutions in Venezuela and other Latin American countries would have been inconceivable without China. Thus, although Hu Jintau rightly insists that China threatens nobody, US political hegemony is already being undermined by the consequences of China's rise.
Further, while Chinese leaders have so far skilfully avoided any direct confrontation with the USA, this is not a matter over which they have full control. While US capitalism is reliant on China economically, it is difficult to imagine that the USA will tolerate the emergence of a multi-polar or bi-polar future. As Professor John J. Mearsheimer, a leading figure within the 'realist school' of international relations, asserts:
The United States does not tolerate peer competitors. As it demonstrated in the 20th century, it is determined to remain the world’s only regional hegemon. Therefore, the United States will seek to contain China and ultimately weaken it to the point where it is no longer capable of dominating Asia. In essence, the United States is likely to behave toward China much the way it behaved toward the Soviet Union during the Cold War.
In the same issue of Foreign Affairs in which George J. Gilboy sought to accentuate the positive and eliminate the negative in US-China relations, James F. Hoge, the editor of the magazine, noted that:
…some Bush officials remain convinced that the United States and China will ultimately end up rivals. For them, the strategic reality is one of incompatible vital interests.
'Hedging its bets' against this likelihood, the USA is currently pursuing a double-edged strategy for the containment of China. One aspect is to seek to manipulate India as a pawn against China:
Washington is thus eager to use India, which appears set to grow in economic and military strength, as a counterbalance to China as well as a strong proponent of democracy in its own right.
In addition there is the direct military threat:
… with the most extensive realignment of U.S. power in half a century. Part of this realignment is the opening of a second front in Asia. No longer is the United States poised with several large, toehold bases on the Pacific rim of the Asian continent; today, it has made significant moves into the heart of Asia itself, building a network of smaller, jumping-off bases in Central Asia. The ostensible rationale for these bases is the war on terrorism. But Chinese analysts suspect that the unannounced intention behind these new U.S. positions, particularly when coupled with Washington's newly intensified military cooperation with India, is the soft containment of China.
For its part, China is modernizing its military forces, both to improve its ability to win a conflict over Taiwan and to deter U.S. aggression. Chinese military doctrine now focuses on countering U.S. high-tech capabilities -- information networks, stealth aircraft, cruise missiles, and precision-guided bombs.
And then there is the USA's post-star wars National Missile Defense programme; nobody except the public believes the cover story that the main purpose of NMD is to protect against Iran and North Korea.
Chinese diplomacy has been highly successful in countering 'soft containment': improving its relationship with India, and developing its political and military co-operation with Russia and the Central Asian republics through a regional security body called the Shanghai Co-operation Organisation. The SCO has refused the USA's application to become a member.
In March 2007, China announced an annual increase of 17% in military spending.
One prediction can be made with absolute certainty: do not expect events as the 21st Century unfolds to follow the path of harmonious development.
Peter Nolan, Transforming China, Anthem Press 2004
Heilig, G.K. (1999): ChinaFood. Can China Feed Itself? IIASA, Laxenburg (CD-ROM Vers. 1.1) From Wang, Q. / Halbrendt, C. / Johnson, S.R. (1995): Grain Production and Environmental Management in China's Fertilizer Economy. In: Journal of Environmental Management, Vol. 47, 283-296. And: China Statistical Yearbook, 1998. State Statistical Bureau, People's Republic of China, Beijing. p.393
Joseph E. Stiglitz and Shahid Yusuf (eds), Rethinking the East Asian Miracle, World Bank / OUP, 2001
Li Rongrong, Joint Development of China’s Public and Non-Public Enterprises, China News and Report, July 2003
Daniel Yergin and Joseph Stanislaw, The Commanding Heights, Simon and Shuster 2002
Shu Gang Zhang, Economic Cold War, Woodrow Wilson Center Press, Stanford University Press, 2001
Michel Oksenburg, A Decade of US-China Relations, Foreign Affairs, Fall 1982
Jeffrey T. Richelson, China and the United States, From Hostility to Engagement 1960-1998, National Security Archive
George J. Gilboy, The Myth Behind China’s Miracle, Foreign Affairs, July/August 2004
James F. Hoge , A Global Power Shift in the Making, Foreign Affairs, July/August 2004