Deng Xiaoping and the Transformation of China (74 page)

In his talk with Xi Zhongxun, Deng agreed that both Guangdong and Fujian should be given the flexibility to attract investments from the ethnic Chinese now outside mainland China whose ancestors hailed from these areas. On July 15, Guangdong's proposal was accepted and became Central Committee Document No. 50, granting Guangdong and Fujian a “special policy, with flexible measures” (
teshu zhengce linghuo cuoshi
) to attract foreign investment.
¹²
The zones were called “special districts,” as Deng had suggested.
¹³
The four special zones were officially established on August 26, 1979. Considering the complexities of the national plans and the resistance of planning officials, it is a tribute to the determination of Deng Xiaoping, Hua Guofeng, Gu Mu, Xi Zhongxun, and other officials that the arrangements were completed only seven months after the Third Plenum.

Deng's Experiment and Its Enemies

For two decades, China had been collecting materials about the export processing zones that had already been established in some eighty countries. They had been designed to get around complex import and export rules by establishing zones where materials needed for production would come in, where local low-cost labor would produce goods that would then be exported without going through any of the usual formal import-export procedures. In China, until 1978, all efforts to establish export processing zones failed to receive the necessary political support. Beginning in 1979, the areas in Guangdong near the border with Hong Kong in effect became processing zones.

But Deng had a broader vision for the special zones in Guangdong and Fujian than merely export processing. He sought to build comprehensive metropolitan centers complete with industry, commerce, agriculture, livestock, residential housing, and tourist industries.
¹⁴
The zones would be given the flexibility to experiment with different ways of doing things. Modern management systems would not only improve Chinese enterprises, but also could be adopted by government and party units so they would become more efficient. Circular No. 41 of May 16, 1980, issued by the party center and the State Council, explained that the four special zones would “carry on systems and policies that are different from other places. The SEZs will be regulated primarily by the market.”
¹⁵

Deng could not have gotten the support to introduce such changes for the
entire country, but it was far harder for conservatives to oppose experiments, for the idea of trying experiments in one locality and extending what worked had become part of the party's conventional wisdom.
¹⁶
Industrial management reforms were being tried, for example, in Sichuan, Jiangsu, and Zhejiang. But in Guangdong and Fujian, Deng allowed foreign companies to use their own labor and management systems, experiments that went far beyond those attempted elsewhere. In Shekou, experiments in voting were tried long before village elections were held elsewhere. No place was more of a laboratory than Guangdong. In the SEZs Deng encouraged experiments with markets, industry, construction, labor, finance, and foreign currency.
¹⁷
Because Guangdong was at the cutting edge, it became the target for opponents who worried that China would become capitalist, that foreign imperialists were returning, and that the socialist planning system would be destroyed. It also became the target of provinces in inner China that opposed the flow of resources to the coast.

Westerners and even some Chinese critics claimed that Deng was experimenting with capitalism without using the name, but that is not how Deng saw it. He was determined to expand markets and he personally had no ideological objections to private enterprise; he accepted competition as a driving force in commerce. But he aimed as well to keep the Chinese Communist Party firmly in control, to constrain the markets to ensure that they served public purposes, to prevent capitalists from dominating Chinese politics, to retain public ownership of land, to keep a large role for state-owned enterprises, and to maintain state economic planning. Deng said that China would not become capitalist; money, he said, would not flow into his own pockets or to those of Hua Guofeng.
¹⁸

Even leaders too young to remember foreign “imperialists” but had learned about them from party propaganda were frightened by what powerful foreign capitalists might do. Why should China, after three decades free from foreign imperialism, now invite back the imperialists? Leaders of state and collective businesses who knew how Chinese companies had been displaced by the expansion of foreign businesses during the 1930s worried that Chinese enterprises could not compete with the better-financed and more modern foreign enterprises. Officials feared that foreign capitalists experienced in international trade harbored hidden agendas and would use international law to trick Chinese businesses and gain monopoly control in China. Deng was careful in the way he presented his ideas to the public. He joined in the criticism of those who slavishly imitated foreign systems. He was careful not
to imply that foreign culture was superior, and instead expressed what Chinese could learn in a more limited way: China could study foreign “modern management.” But the study of “modern management” was inclusive enough that ideas and systems could in fact be studied on a broad scale without overly upsetting patriots who believed in the superiority of Chinese culture or the “Chinese spirit.”

The decision to open up Guangdong, Fujian, and other coastal provinces soon led to a fundamental shift in the location of industry from inner China to the coast. From 1966 to 1975, under Mao's policy of avoiding national security risks near China's borders, over one-half of China's investment funds had been spent in the “third front,” bringing goods and people to remote areas with poor infrastructure.
¹⁹
After the attack on Vietnam in February–March 1979, however, Deng believed that the risk of foreign attack was minimal. Chinese planners were well aware that for both industrial development and international trade, the coastal areas had all the advantages of convenient transportation, a more developed infrastructure, a critical mass of specialists, and lower costs. In 1979, 12 percent of China's exports originated in Guangdong, but from the late 1980s as exports grew, roughly one-third or more of all Chinese exports each year came from Guangdong alone.
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Deng acknowledged that people in Guangdong and Fujian might well get rich first, before other Chinese, but he proclaimed that areas that got rich first would then help other areas get rich.

Officials in Beijing who tried to keep an orderly, highly detailed national planning system faced a nightmare from Guangdong's new flexibility as they tried to keep control over the flow of goods into and out of Guangdong. As Guangdong earned more income from abroad, it could afford to pay higher prices for goods, giving incentives to localities in other provinces to pass on to Guangdong some goods needed to fulfill plans in their own province. By one calculation, no fewer than sixty-four central government units were involved in the decision to give Guangdong and Fujian more flexibility. Among the officials trying to guide local adjustments in planning in Guangdong were officials from the State Planning Commission, the Ministry of Foreign Affairs, the Ministry of Finance, the State Construction Commission, and the Ministry of Goods and Materials (
wuzibu
).
²¹
In 1979, Guangdong officials persuaded Beijing leaders to agree that provincial agreements with foreign companies did not require prior permission from Beijing, even if Guangdong would have to report all such agreements to the center. Any increase in the quantity of state goods shipped to Guangdong, however, did require
approval by the relevant ministries in Beijing.
²²
Because the markets were constantly changing, calculation of the different types of taxes eventually became so complicated that Beijing agreed that Guangdong would make an annual lump sum payment of taxes.

To ensure that the SEZs not try political experiments, Chen Yun insisted that the term “special zones” be changed to “special economic zones.” In March 1980, under pressure, Deng approved the name change.
²³
Deng reassured his conservative comrades that “these are special economic districts, not special political districts.”
²⁴
But Deng did not abandon the idea that the zones would conduct broad experiments with new management techniques. In typical Deng fashion, he accepted the name change and avoided arguments, but in fact he barged ahead; he did not stop Guangdong from continuing its broad experiments.

China's Southern Gate

One possible site for a special zone was Shanghai, a city that in the 1930s was bustling with enterprises and some 300,000 foreigners, making it the most cosmopolitan city in Asia. It was then the leading center of Asian banking and commerce, far ahead of Hong Kong. As an Asian industrial center, too, only a few Japanese cities surpassed it. But in 1978, Chinese planners worried that allowing Shanghai to become an experimental zone was too risky: it was a major Chinese industrial center and contributed more revenue to the national budget than any other locality, so it would be disastrous for China if Shanghai's industry and revenue streams were to be adversely affected. Chen Yun, a native of the Shanghai area, worried that the “comprador mentality,” of bending to the will of foreigners, remained alive and well in Shanghai; he opposed making Shanghai an experimental area and his view carried the day.

Guangdong and Fujian, unlike Shanghai, had very little industry that could be at risk if their experiments went awry. Because the coastal areas near Southeast Asia and Hong Kong had been considered security risks in the decades after 1949, before 1978 Beijing had limited their industrial and commercial development. In addition, if contact with the foreign capitalists were to cause spiritual pollution, the two provinces were far enough away so as to insulate the party center in Beijing. Above all, the Chinese emigrants who had settled in Southeast Asia and elsewhere overwhelmingly had come from Guangdong and Fujian and spoke the local dialects. Many still
maintained close personal relations with the area and some could be prevailed upon to help with funding for the new ventures.

When Deng visited Japan in October 1978 he joked that he had come looking for the magic potion to modernize China. If there were a single magic potion for a Chinese economic takeoff, it was Hong Kong. Roughly two-thirds of the direct investment in China between 1979 and 1995 came from Hong Kong, or at least through the “southern gate” between Hong Kong and mainland China.
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Beijing sought investments from “overseas Chinese” who lived in Southeast Asia, the United States, and elsewhere, but even more from “brethren” (
tongbao
, literally, those from the same womb), those living in territories claimed by China—Taiwan, Macao, and Hong Kong. At the time, not counting Taiwan, officials estimated that some 8.2 million descendants of Guangdong natives and some 5 million descendants of Fujian natives lived outside mainland China.
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As the two provinces sought investment funds, these descendants would be the primary targets of money-raising efforts, although investments from elsewhere would also be welcome. Those returning to China to visit in the years after 1978 overwhelmingly came through the “southern gate” to their ancestral homes in Guangdong and Fujian. At the time, there was no direct trade between Taiwan and the mainland, and it would be almost a decade before Taiwan would allow its residents to travel there.

Once Deng allowed Guangdong to open its doors, Hong Kong became a source of investment capital, entrepreneurial dynamism, and knowledge about the outside world. Hong Kong was full of entrepreneurs, including tens of thousands who had fled there after 1948 when the Chinese Communist armies began taking over the mainland. Until 1949, Hong Kong had remained a trading center linking China and the outside world, and its economy suffered greatly when the border to China was closed after the Communist takeover. When the Communists took over China, some industrialists from Shanghai and Ningbo fled to Hong Kong where they helped build up the Hong Kong textile industry and global shipping sector. By the 1960s Hong Kong was becoming a leading international financial center. And in the 1970s talented youth who had spent their early years in Hong Kong and then gone abroad to study in England, the United States, Canada, and Australia began returning to the colony with a sophisticated understanding of modern finance, high technology, and international markets. Hong Kong in the late 1970s thus offered China something that the Soviet Union sorely
lacked—a treasure trove of entrepreneurs thoroughly knowledgeable about the latest developments in the West who shared the same language and culture as their motherland, and stood ready to help.

In the early years of Deng's reforms, the door between Hong Kong and China was opened only partially and passage through the gate did not always proceed smoothly. Border checks continued and for a long time most Chinese residents had difficulty securing visas to cross the border. Many people in Hong Kong who had escaped illegally to Hong Kong, or who had left behind relatives on the mainland who had suffered miserably under the Communist regime, were simply not prepared to pass through the gate. The social differences that had grown between the mainland and rapidly changing Hong Kong in the three decades after 1949 were not easy to bridge. In the early 1980s, Hong Kong businesspeople speaking among themselves would pass on stories of the country bumpkins on the Chinese side of the gate who lived poor simple lives and knew little about the ways of the modern world. Meanwhile, those in Guangdong and Fujian who met relatives or fellow villagers visiting from Hong Kong resented their superior airs and the power that flowed from their wealth, given that they, the poorer mainland cousins, had remained in the motherland where they had suffered and sacrificed. Even mainland Chinese officials, who then were living not far above subsistence levels, were wary of the proud, well-dressed Hong Kong businesspeople, with their efficient staffs, modern equipment, and global connections. Yet many Hong Kong entrepreneurs remained eager to help their homeland and to take advantage of the nearly limitless Chinese market. Within two or three years the trickle of people, trucks, and funds passing through the southern gate became a steady stream and then a flood.