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The Story of the Rise of Modern China

ASHFAQUR RAHMAN tells the story of the growth of the world's second largest economy.

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In October of each year, China celebrates her Republic Day. This year too she will do it with the usual fanfare. But it is more than six decades now that she has been a Republic. For China it is significant. For over 2000 years it was one imperial dynasty after another that ruled over the people of the country. But in 1949, China finally threw out all imperial trappings and became a People's Republic (PRC). The creation of PRC also ended the long process of governmental upheaval there, which had begun with the Chinese revolution in 1911. Earlier, the Communist Party of China took over the reigns of government. To this day, this party had held on to paramount power, and guides, policies and distributes privileges among the people.

But in spite of the creation of a republic in 1949, the Chinese people remained poor. This continued, till the late seventies. At that time in 1978, China's population was 962 million. This put severe strain on her food supplies. Average calorie intake was just marginally above the minimum survival requirements, particularly in the rural areas. About 250 million people lived in absolute poverty. The country's infrastructure was primitive. Steel production was very low.

But then great changes took place. What really happened to morph this poor, backward country into the second largest economy in the world after the USA, in just a span of 34 years? The story of the rise of China is therefore like a fairy tale and is worth telling.

It all began after the death of China's first revolutionary Communist leader, Mao Tse Tung. During his days he brought both the political and state power under a monolithic system. But he also tinkered with the economic and social systems. There he failed miserably in improving the living conditions of the people. The so called 'Cultural Revolution' under his watch created social anarchy. His agriculture commune system which followed Soviet Russia's collective farm model was also an abject failure. It depopulated villages and made the common people poorer. The consequence was hunger and famine.

At that time, a diminutive, chain smoking and a 'discredited' man called Deng Tsao Ping entered the political scene. First he consolidated political power and could elevate himself as the supreme leader. This was possible because his mentor Mao Tse Tung was no more and his political rivals were not up to his mark. Once he did his political homework, he then went for economic development and for the betterment of the living condition of the Chinese people.

A significant development at that time inside China made him look towards the economy. In 1978, China suddenly faced a balance of payments crisis. It dawned on China's leadership that there was need to take steps to pay large bills owed abroad. But the state coffer did not have enough funds to meet these outstanding bills. There was an immediate need to shift policy to get the money to repay the dues. That is not to say that Deng was anti reform. He was keen to open China to the world. But 'he was from part socialist, part Chinese tradition of economic management'. He had at the same time a limited grasp of economic fundamentals. He did not at any moment doubt that socialism was better than capitalism. However, he could not ever imagine that China's development trajectory was unique. Deng possessed a great asset which no one in China had. He had a damage limitation expert. He was a dour technocrat known as Chen Yun. During the time of Mao and also during Deng, Chen made a career of undoing their excesses.

Chen's first recommendation was to put an immediate stop to all the mega-projects that had been undertaken or were on the planning board. He wanted to save money from these projects which he thought were not the priority and first pay off the bills. Secondly, he recommended an increase in price, the government paid, for procuring agricultural produce from the farmers who grew them. This would assist millions of farmers to grow more food and reduce imports. Next he suggested more investments in light industry and services. These create jobs more cheaply than heavy industry. Chen was aware that more than 7 million people who were sent by Mao to the countryside to 'learn from the peasants' during the Cultural Revolution were returning to the towns in 1978. Several millions more were being released from prisons and the government had promised them jobs once they returned to their towns and cities.

In the meantime public opinion in the rural areas had been created that agricultural communes established by Mao had to go. The peasants had always disliked sharing common facilities, including land and commune canteens.

So in 1979, the Chinese leadership decided that land could be divided and farmed on the basis of smaller 'work groups'. But the principle of common ownership remained inviolable.

Then something happened by accident. As soon as the new 'work group' policy and agriculture was introduced, farmers started to make their work groups, their families. The process was fastest in provinces most distant from Beijing, the capital. The local leaders first gave implicit support, then explicit. The pace at which this re-parceling took place was astounding. In 1980, household farming accounted for 14% of agricultural output. By 1983, in two years' time, it was 98%.

This had an immediate impact on agricultural output. The total grain harvest shot up from 305 million tons in 1978 to 407 million tons in 1984. Per capita grain production also reached for the sky. Together with the high output, the total acreage under agriculture also shrank. The farmers were producing grains more efficiently. With increased output, came higher income. The farmers now wanted more electricity and more fertilisers. Then everyone was in the market for basic consumer goods, like clothing and washing powder. Thus between 1978 and 1990, consumption of affordable goods jumped three times. Fertiliser consumption rose from 8 million tons in 1978 to 26 million tons in a year. Electricity consumption jumped from 25 billion kilowatt hours to 84 billion by 1990.

But as consumption in these items increased, so did demand for bricks, cement, etc., grow by leaps and bounds as farmers wanted to show off their new prosperity by extending their homes. The 1980s were a kind of golden age, with harvests breaking new records each year. Rural output rose by 30% each year. The result was a massive transfer of wealth from government coffers which had expropriated society's savings for urban development to the hands of majority of the people.

But then some obstacles came in the way, the work groups were allowed to operate. The government put limitation on the family enterprise reforms. Household business could not employ more than seven people from one extended family. However in some areas people persuaded local officials to register a new form of enterprise called the 'stockholding cooperative'. This was not a state owned unit, but it was invested by private equity partners. Within a few years, stockholding cooperatives spread throughout China. It energised the economy and created wealth which private individuals could keep and spend as they wished.

One area of China's economy which made real progress was in foreign trade and investment. Here Deng deserves all the credit. He was the one who reintegrated China into the world economy. He advocated accelerating exports from China as well as accepting foreign loans for economic growth.

In international trade, China had an overvalued currency before 1978. She had also destroyed all incentives to export goods manufactured at home. The currency exchange rate was like a double whammy. When goods were exported, the exchange rate meant that their international price was lower than the domestic cost of production. This led to loss and government had to subsidise exports. Most of China's exports were raw materials. But China's advantage was in the use of cheap labour. Deng therefore slowly rationalised the foreign trade system. He allowed exporters to retain a portion of their export earnings. This came as a real incentive to sell abroad. The incentive became greater, when export firms could swap their foreign exchange for local currency in the currency exchanges. The government also started giving rebate on sales tax on exports and stopped taxing imported components of exports.

As regards attracting foreign investments, Deng first took an extensive tour of Southern China, especially Guangdong province which is next to Hong Kong. His first decision was to allow the opening of four Special Economic Zones on an experimental basis. Three of them were in Guangdong and the fourth in neighbouring Fujian province. The most forceful drivers of this economic rise were the Hong Kong manufacturers who had by 1991, established 25,000 Hong Kong factories inside China, The reason for this investment was simple. They could avail of much cheaper labour in China than in Hong Kong. Another important reason was that they took advantage of the financial, logistical and port facilities that neighbouring Hong Kong offered. With theses twin advantages, big Hong Kong businessmen availed of the facilities in the Special Economic Zones. They also could effectively use the marketing, exhibition, design, advertising and quality control services in Hong Kong to produce world class goods and sell abroad. These firms gobbled up the so called value chain, linking globalised manufacturing to international consumers.

In the end, Deng decided which way China would be going. He was now determined not to allow the country to return to central planning.

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Thus even in the 1980s when the political disturbances in China led to the Tianianmen Square incidents, they could not scuttle economic growth in China. Deng had become confident that the Chinese people had received a taste of affluence and would not easily be swayed by political agitation that would topple his regime and the political system. He boldly used tanks and guns to crush the student agitations.

Deng took another historic South China tour in 1989. This time he visited the paddy fields in a place called Shenzen just next to Hong Kong. He decided to convert this area that abutted Hong Kong to a manufacturing and service base that would eventually rival Hong Kong and would lead southern China towards tremendous economic growth and modernisation.

This time Deng could not fathom the scale of the forces he unleashed. In 1992 he had spoken to two main audiences outside China. The first was the overseas Chinese. There were at that time 30 million Chinese living abroad. This affluent diaspora was immediately energised. The investible riches of expatriate Chinese came flowing in as foreign investment in China.

The other audience was multinational businesses. The new phenomenon sweeping the world at that time was 'globalisation'. Investment bankers, legal practices and logistical enterprises swept into China and with them brought in their capital, technology and ideas. So when Deng offered up the Chinese dream the whole world rose in a frenzy. The optimism spread not only in all the provinces of China but in all corners of the globe.

Now let us see what all these tours and preaching by Deng led to. In the two decades between 1992 and the present China has converted herself to an economic behemoth. Just look at the statistics.

Today China is the second largest economy in the world after the USA. The GDP of China in 2011 in terms of Purchasing Power Parity was US$ 11.44 trillion. Compare it with the GDP (PPP) of Bangladesh which is only US$100 billion. Since the beginning of economic reforms in China, she boasted of double digit growth. In 2011 it fell slightly to 9.2% due to global recession. Inflation in China even with such torrid growth was only 5.5%. Even this was very high according to Chinese standards. Per capita GDP (PPP) rose to US$ 8500 in 2011. By standards of developed countries it was not so high. But compare it from the time reforms were started in China . At that time the per capita GDP (PPP) was only US$ 312. Investment (gross fixed) also jumped in the early days to 54.2%. China today is also first in exports to the world. The total exports last year was US$1.9 trillion. The country is second in imports and this is worth US$1.7 trillion. Thus China has been able to accrue huge foreign exchange reserves totaling US$3.23 trillion. Do not forget that this was the country that in 1978 could not pay its outstanding dues to the world.

Yet China has paid a heavy price for her economic rise. Even though people are well off, there is a great inequality of income between people in China. There is also inequality of income between regions. The east coast is much more affluent than middle China or the vast western hinterland. There are other major economic challenges in China. The savings rate of the people are very high. This has led to low domestic demand. Second, job growth for migrant labour as well as new entrants to the labour market is unsustainable. Third, there is much corruption in the country that at times stifles growth. Fourthly, environmental damage and social strife are widely prevalent. This causes slowdown in economic growth. Fifthly, China needs huge energy resources to fuel her growth. She has to import costly oil and gas. Now she is tapping into nuclear energy and alternative energy sources. But energy shortage remains a key challenge for China.

The economic rise of China has led her to modernise her military. She has been increasing her defense budget by 12 % every year. But this is less than 1/4th of that of the USA. China is concentrating investing on 'asymmetrical capabilities'. This is designed to blunt USA capacity to project power in the Asia-Pacific region. This 'area denial' approach means that China has thousands of land-based ballistic missiles and cruise missiles, modern jets, a fleet of submarines and other cyber and space weapons.

So what are the implications of a rising China? To begin with, the phenomenal rise of China has altered the balance of power once again in Asia and also in the world. China is also a permanent member of the United Nations Security Council with veto powers. She now uses the veto to push for her regional advantage as well as global advantages. The military and diplomatic clout of China has made the western powers scurrying to their drawing board to make new plans to contain China. Many say that this is a major reason for instability especially in the Asia-Pacific region.

China also has large political footprints throughout the world. Her diplomatic presence is awesome. It is the most befriended country anywhere in this world. She has aided many small and weaker countries and has traded with them in many ways that are helpful to them. It has left behind symbols of its friendship with them by building friendship bridges, roads, stadiums, conference halls, ports much to the delight of the recipients.

The rise of China has global implications. Any structural adjustments in China lead to structural challenges for the world economy. This often leads to readjustment in bilateral relations with China and also among the countries affected. As China plays a leadership role in a multilateral framework like that in the World Trade Organization (WTO) there are now institutional basis for expansion of international trade. This is a positive sum rather than a zero sum game. Again, the countries of the world can tackle common issues like macro economic stability, financial integration, poverty reduction, climate change as well as regional and international security together with China. How China will rise further in the future will depend on how these goals are managed.

It is expected that by the year 2050, China will even outpace USA in military terms. It is likely that by then she could be more powerful than the USA. Her economy will be outpacing USA in another five to eight years i.e., by 2020. But then the moot question remains. Will China be able to change her present political system to adjust to democratic way of doing things and making policy decisions? She has to of course rethink her strategy of growth. This 'peaceful rise' of China could then be anything but certain in the future. Only time and tide can tell.

Ashfaqur Rahman is a former Ambassador and a commentator on contemporary issues. E-mail: ashfaque 303@gmail.com.