Modern China. A Very Short Introduction (17 page)

The economy under Mao suffered grievously in many ways, of which the Great Leap Forward is the most notorious. However, 108

in its own terms, it also succeeded in its immediate goals. Unlike Nationalist China, the PRC did not collapse under the weight of its own economic problems. The features for which the PRC

economy under Mao has been criticized – import substitution, trying to become self-suffi cient, low production of consumer goods – were also factors in a variety of other countries during the era from the 1950s to the 1980s, including India and New Zealand. These countries, like China, began to take a different path in the 1980s.

China in the global economy

Economic reform started in the countryside, with farmers given freedom to sell their crops on the free market, and individuals encouraged to set up enterprises (see Chapter 3). In the early
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1980s, Deng Xiaoping established the Special Economic Zones

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(SEZs) in port cities on China’s southern coast. This signalled his
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desire to lay down the fi rst phase of economic growth: it would start with manufacturing and light industry, and would be fuelled
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by foreign investment which would be tempted in by highly preferential tax rates and labour laws. The opening up of Shanghai in the 1990s provided further impetus to this policy (up to that point, the city had been heavily restricted in the amount of foreign direct investment it was allowed to attract). There was excellent precedent for this strategy, as Deng knew. In the late 19th century, Meiji Japan, forced into breakneck modernization, fi nanced its economic growth by developing export-led growth in areas such as textiles, and only later developing heavy industry. In the aftermath of World War II, Japan and its ‘dragon’ counterparts, Taiwan, South Korea and Hong Kong, also rose to economic prosperity on light industry and consumer goods, heavily encouraged by their governments. During the same period, of course, Mao’s China had been turning inward.

The export-oriented strategy has been spectacularly successful so far. There were danger points: one of the economic factors that 109

fuelled urban protests in 1988–9 was the rapidly growing infl ation rate, which severely reduced the purchasing power of state employees (a situation, had it gone out of control, that would have been frighteningly reminiscent of the hyperinfl ation that doomed the Nationalists in 1948–9). Yet the situation was brought under control, and at the turn of the 21st century, infl ation is generally in single digits, even as consumer spending rises with the creation of a new middle class.

However, although China is developing a legally protected concept of private property (a law enshrining this was passed in 2007), and state ownership of industries and enterprises is clearly declining, the state and the CCP are still heavily entwined with business. Party offi cials have frequently switched from taking a political role to an entrepreneurial one, and good relations with the CCP are often essential to win licences to do business, or to raise capital to set one up. The state and the party have changed
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form immeasurably since the era of Mao, but neither has retreated from society; they have merely found new ways to interact with
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and control it.

The other ‘dragons’ eventually gave up manufacturing cheap goods, as the countries became richer, wages became higher, and ultimately it became cheaper to move manufacturing to other countries (usually China, in fact). The Chinese labour force is far larger and poorer than that in any other Asian country except India, and it will therefore take much longer for its labour costs to price China out of the market, although there are signs that this is beginning to happen in some parts of the richer southeast of the country. However, the leadership’s plans are already developing for the stage that follows their dominance of the manufacturing market.

For the ultimate ambition of the Chinese leadership is not to be the workshop of the world, producing toys and clothes. From the start of the Four Modernizations, ‘science and technology’ was 110

one of the key targets for reform, and China’s leaders have been well aware that Japan, Taiwan and Korea soon moved away from becoming manufacturing hubs to providing high value-added goods to the world. In particular, China covets the quality and reputation of Japan’s technological expertise. Investment in science, technology, and innovation is now one of the government’s top priorities, and total domestic spending on it in 2005 was nearly US$30 billion, or 1.3% of GDP. However, this is still low compared to the rate in the US (2.7%), and China’s State Council has pledged to spend 2.5% by 2025. Some multinationals are also investing in Chinese research: Microsoft and IBM both have signifi cant basic research laboratories in Beijing.

The greatest challenge for Chinese policy makers has been to maintain very high levels of growth (around 10% per year in
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the early 2000s) at the same time as curbing infl ation, which

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has become visible as more money is available in the economy
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(as with the rapid infl ation that helped trigger the 1989

demonstrations). In the period from 2004, the government
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has stressed consumption, trying to encourage the Chinese to spend more on consumer goods and services (for instance, by inventing new public holidays that would encourage leisure travel and visits to restaurants and theme parks). As the government pledges to spend more on essentials such as health care, the state provision of which was largely eliminated during the reform period, consumers may be more willing to spend on non-essentials. Yet it is proving a hard task to encourage the Chinese to take their savings from under the mattress and spend them: after all, there have been a large number of rainy days in recent Chinese history.

China’s economy has a central role in the global economy, something that was simply not true at the start of the reform era. For a start, its role as a manufacturing base is clear. In 2006, China’s trade surplus with the rest of the world was US$ 177.47

billion, and it was clear that although the surplus would reduce 111

year by year, China would still export more than it imports for years to come. China also protects its currency, keeping its value low against other currencies to make sure that Chinese exports are cheap in global terms, and that imported goods remain costly. Under repeated pressure from the US and EU, China has gradually allowed the renminbi to appreciate in value, but the People’s Bank of China continues to maintain control over the level of that appreciation. However, China has not closed itself behind a protectionist wall. In 2001, it succeeded in a long campaign to join the World Trade Organization (WTO), even though WTO entry would force China to open up its markets for goods and services, and to crack down on intellectual property rights violations, such as the huge illegal pirate DVD industry.

China has observed the path taken by Japan, South Korea, and Taiwan in the postwar era, and has made calculations about how far and how quickly to open its economy.

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In recent years, China’s current account surplus has encouraged the country to invest actively overseas. In 2007, the China
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Development Bank bought a $3 billion stake in the American buyout fi rm Blackstone, as well as sharing a £2.4 billion stake in the British bank Barclays. The country’s foreign currency reserves rose from less than $200 billion to over $1,200 billion between 2000 and 2007, and the world’s fi nancial markets strongly expect that there will be strong Chinese purchasing power able to bid for services such as utility, energy, and property companies in the West, with signifi cant consequences for global asset prices and interest rates (as more Chinese cash is injected into other countries).

Internationally, China is becoming ever-more concerned about its own image, because it is making its presence more prominent in Africa and Latin America, where it is becoming an exporter of fi nance capital (in sharp contrast with its desire to import FDI). In Africa in particular, it has used its infl uence to invest in 112

countries such as Zambia, Zimbabwe, Nigeria, and South Africa, where minerals, uranium, and oil are found. Chinese investment has often been welcomed in countries such as Zimbabwe with bad human rights records, since that investment has not tended to come with demands on human rights standards (although Western observation of these demands has also been patchy, to say the least). Yet China has already begun to change its position on this question. In the Zambian presidential elections of 2006, one candidate stirred up popular anti-Chinese anger as a means of gaining votes. Although he lost, the Chinese government was alarmed at the popularity of his message that Chinese-run mines were run in a way that risked Zambian miners’ lives, and that overall, China’s presence in the country was exploitative rather than supportive. As governments change in Africa, the Chinese may fi nd that having backed a previous unpopular government
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has made them vulnerable with the new regime. This has led

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to a greater effort to use public diplomacy to suggest to African
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populations, as well as leaders, that Chinese investment is an asset for developing countries and that Beijing is not following in the
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West’s colonial footsteps.

Problems of growth

China is not only sharing some of the successes of the ‘dragons’

that grew up in Asia during the Cold War. It also suffers from some of the same drawbacks, as well as new problems that were not thought of in the 1960s.

Most noticeable to anyone who visits China is the level of environmental pollution that has come along with growth. This is not entirely a problem of the reform era. Plenty of Mao-era state-run factories poured chemicals into the air and water with abandon. However, the breakneck pace of economic growth since the 1980s made the problem many times worse. Japan in the 1960s, during its period of fastest postwar growth, also 113

had a serious pollution problem. However, there were factors that helped to overcome this (in part at least): the growth of environmental groups in civil society and press exposés of scandals, such as the poisoning of fi sh with mercury at Minamata, provided some sort of counterpoint to the agenda of government and big business, which were more interested in growing the economy. China lacks a true civil society and environmental campaigners are kept within strict boundaries. Dai Qing, the journalist whose book
Yangtze! Yangtze!
argued that the Three Gorges Dam would lead to massive environmental destruction, had her book banned and was under arrest for a period of time. Since the early 2000s, the government itself has put more emphasis on environmental problems, particularly as the country becomes keener to increase tourist numbers, particularly around the Beijing Olympics. However, the problem is a very long way from being openly audited or dealt with. In 2004, SEPA (the State Environmental Protection Administration)
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stated that Y512 billion of direct losses to the economy had been caused by pollution (around 3% of China’s entire gross domestic
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product).

One of the largest internal drivers to Chinese economic growth is the development of an urban middle class with a high-consuming lifestyle. At the same time, the country’s level of consumption is proving an immense strain on resources. A generation ago, Beijing was a city of bicycles. Now it is a warren of endless traffi c jams (its public transport system is being expanded but is insuffi cient for the city’s size). In Beijing, 66 out of every 1,000 urban households owned a car in 2007, but the number is rising all the time. The growth of car ownership encapsulates a wider problem: China’s energy crisis. Pomeranz’s model of the ‘great divergence’ was predicated in part on Britain’s good luck in having access to fossil fuels in the 18th century. The strain on China’s supply of such fuel in the 21st century has produced serious strains on its potential to grow. Although China has coal supplies, they are of low quality 114

17. A woman wears a smog veil as she rides her bicycle in Beijing in
1984. In the years since then, China’s environmental pollution has
become worse, and it is now the world’s largest emitter of carbon
dioxide into the atmosphere

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and highly polluting, and its oil supply is limited. This has led it into a much closer partnership with Russia, which supplies China by pipeline, but Russia has other customers and cannot be guaranteed to be reliable in the long term. Nuclear energy is another option, but world supplies of uranium are also limited, although China’s new friendliness with African nations, such as South Africa, gives it further access to the raw materials needed.

China’s desire to move population westward is hobbled by the same problem that the US had in its push west: lack of water.