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Saturday 26 September 2009
Deng’s cats fuel boom
Sixty years after the founding of the People’s Republic, China is finally on the brink of realising the dream of prosperity for its people and dignity on the world stage.
China’s failed experiment with utopian socialism gave way to a more pragmatic economic approach
Woods Lee 25 September 2009
Sixty years after the founding of the People’s Republic, China is finally on the brink of realising the dream of prosperity for its people and dignity on the world stage.
But the road to success has not been easy. It has been forged through trial and error, with pain and huge cost. Neither is the transformation finished. Even after decades of reforms, the economy still resembles a jumbo state-owned company, with Beijing as the sole boss.
When Mao Zedong and his comrades came to Beijing in 1949 to take power from the Kuomintang’s Chiang Kai-shek, China’s 400 million-plus population was struggling in desperate poverty, the result of an economy brought to its knees by decades of war. China was unable to produce even basic items such as iron nails, kerosene or bicycles.
Today, the mainland is dubbed the world’s factory, supplying global markets with products ranging from clothes, toys and television sets to personal computers, steel and cars.
After 30 years of dazzling economic growth - at a rate of around 10 per cent a year since 1978 - the mainland has rapidly closed the gap with developed countries, and is now the world’s third largest economy in terms of gross domestic product. China could replace the United States as the world’s largest economy by 2030 if it can maintain an annual GDP growth rate of 7 per cent.
Sixty years ago, Mao was also confident of delivering what the Communist Party promised - growing national economic clout and independence and respect on the world stage.
“At that time, both the Communist Party and intellectual elites pinned great hopes upon socialism,” said Sheng Hong , an economist with the Beijing-based Unirule (Tianze) Institute of Economics, an independent research agency.
The rapid rise of the Soviet Union during the 1930s and ‘50s following the Great Depression and the second world war greatly boosted the confidence of China’s leaders.
“What China urgently needed then was a reliable military power to protect the nascent regime from possible outside attacks or invasions, a constant threat facing the nation over the past century,” Sheng said. “The Soviet Union’s rise as a military power, based on strong investment in heavy industry organised by a rigid state-controlled economy, became almost a natural choice for China at that time.”
But Mao’s 30-year experiment with socialism fell well short of original expectations.
“By 1978, most Chinese people still found it hard to have enough to eat,” the National Bureau of Statistics says on its website. “The havoc that resulted from the Cultural Revolution (1966-1976), together with the almost severed connections with the world market, had pushed China’s economy almost to the verge of collapse.”
Analysts said the failure of the first 30 years was a defeat of utopian socialism. But out of this failure came the “cat theory” of Deng Xiaoping that would pave the way for the successes of the second 30 years. As early as 1962, at a debate within the party about whether farmers should be allowed to secede from communes and farm their own land after the serious famine of 1959-1961, Deng, who supported giving land back to farmers, expounded his famous theory. “It doesn’t matter if a cat is yellow or black, it’s a good one as long as it catches mice,” he said. The yellow cat was later changed to a white one.
While Deng’s pragmatism has been proven correct in hindsight, there was no guarantee it would be the approach adopted in the first years of reform and opening up. “Crossing the river by feeling for the stones,” was Deng’s way of summing up the uncertain progress.
“Deng’s method of reforming in an ad-hoc manner was of profound philosophical wisdom,” Sheng said. “Such a method actually established the possibility of making mistakes in reform attempts and left room for constant corrections, starkly different from Mao’s ideological rigidity.”
Such pragmatism and gradualism brought benefits. From 1952 to 2008, per capita GDP, after adjusting for inflation, grew 33-fold, to 22,698 yuan (HK$25,726). And according to the World Bank, the mainland ascended to the medium-income group of nations last year.
A boost to national pride came with the accumulation of the world’s largest foreign exchange reserves - more than US$2.1 trillion as of June. China became the biggest creditor of the United States, with a holding of more than US$800 billion in US debt as of July.
Economists widely believe that without any major internal and external interruptions, the mainland is capable of continuing to grow at around 8 per cent for another 30 years, propelled by the twin engines of urbanisation and industrialisation.
Despite its fame as the “world’s factory”, the mainland still stands midway through its industrialisation process compared with advanced countries. This means plenty more room for growth. Likewise, the urbanisation level is now at 45.68 per cent, lagging behind the 70 per cent to 80 per cent for developed countries.
Wang Jian , an economist with the China Society of Macroeconomics, a government think tank, estimated that if Beijing moved another 450 million, or 62 per cent, of existing rural residents to cities, it would need to spend 223 trillion yuan more on fixed-asset investment, 13 times the amount spent last year and 7.4 times last year’s GDP.
“Urbanisation creates not merely supply, but demand as well,” said Tang Min , an economist with the China Development Research Foundation.
But, just as in the past six decades, the next 30 years are unlikely to be plain-sailing.
“The biggest challenge of the next decade will be to realise a successful transformation of the economic growth models,” Tang said.
The mainland’s long dependence on investment and exports over the past three decades has forced the government to artificially keep workers’ incomes low to ensure export competitiveness. Together with a shaky social security network, this results in high precautionary saving rates and an unwillingness to consume.
Of the mainland’s 30 trillion yuan of GDP last year, household consumption accounted for just 35.3 per cent, compared with 55 per cent in Japan and 71 per cent in the United States.
“The economic slowdown since the second half of last year wasn’t just because of the global credit crisis and cyclical self-adjustment of China’s economy. It was also because of long-time negligence of people’s welfare,” said Han Meng , an economist from the Chinese Academy of Social Sciences.
Others have warned that unfair treatment of private firms and a lack of social justice for the lower classes are also jeopardising economic growth.
Despite the years of market-oriented reforms, the economy still resembles a super-sized state-owned company, with the central government as the sole boss.
Key industries - such as banking, energy, telecommunications, railways and equipment manufacturing - are still either state monopolies or controlled by state firms. Stock markets and commercial banks, the two most important capital-raising sources, still favour state-owned enterprises, especially the industrial behemoths.
“China needs further reform of its state-owned enterprises,” Sheng said. “These state firms use land and natural resources almost for free and enjoy preferential tax policies, but for decades they haven’t handed back any dividends to the state or the people. This is a phenomenon you’ll hardly find anywhere else in the world.”
Meanwhile, maintaining social stability remains a headache for Beijing as growing income disparity, rampant government corruption and injustice for those at the bottom of the social ladder spark increasingly severe clashes.
Research by Yu Jianrong , a CASS sociologist, showed the number of major clashes between ordinary people and local governments increased 10-fold to about 90,000 from 1993 to 2006. And Sheng said that figure would only have risen in the past couple of years.
“These issues are not purely economic ones, but political issues and [therefore] prone to be overlooked as the economy seems to be motoring along,” he said.
3 comments:
Deng’s cats fuel boom
China’s failed experiment with utopian socialism gave way to a more pragmatic economic approach
Woods Lee
25 September 2009
Sixty years after the founding of the People’s Republic, China is finally on the brink of realising the dream of prosperity for its people and dignity on the world stage.
But the road to success has not been easy. It has been forged through trial and error, with pain and huge cost. Neither is the transformation finished. Even after decades of reforms, the economy still resembles a jumbo state-owned company, with Beijing as the sole boss.
When Mao Zedong and his comrades came to Beijing in 1949 to take power from the Kuomintang’s Chiang Kai-shek, China’s 400 million-plus population was struggling in desperate poverty, the result of an economy brought to its knees by decades of war. China was unable to produce even basic items such as iron nails, kerosene or bicycles.
Today, the mainland is dubbed the world’s factory, supplying global markets with products ranging from clothes, toys and television sets to personal computers, steel and cars.
After 30 years of dazzling economic growth - at a rate of around 10 per cent a year since 1978 - the mainland has rapidly closed the gap with developed countries, and is now the world’s third largest economy in terms of gross domestic product. China could replace the United States as the world’s largest economy by 2030 if it can maintain an annual GDP growth rate of 7 per cent.
Sixty years ago, Mao was also confident of delivering what the Communist Party promised - growing national economic clout and independence and respect on the world stage.
“At that time, both the Communist Party and intellectual elites pinned great hopes upon socialism,” said Sheng Hong , an economist with the Beijing-based Unirule (Tianze) Institute of Economics, an independent research agency.
The rapid rise of the Soviet Union during the 1930s and ‘50s following the Great Depression and the second world war greatly boosted the confidence of China’s leaders.
“What China urgently needed then was a reliable military power to protect the nascent regime from possible outside attacks or invasions, a constant threat facing the nation over the past century,” Sheng said. “The Soviet Union’s rise as a military power, based on strong investment in heavy industry organised by a rigid state-controlled economy, became almost a natural choice for China at that time.”
But Mao’s 30-year experiment with socialism fell well short of original expectations.
“By 1978, most Chinese people still found it hard to have enough to eat,” the National Bureau of Statistics says on its website. “The havoc that resulted from the Cultural Revolution (1966-1976), together with the almost severed connections with the world market, had pushed China’s economy almost to the verge of collapse.”
Analysts said the failure of the first 30 years was a defeat of utopian socialism. But out of this failure came the “cat theory” of Deng Xiaoping that would pave the way for the successes of the second 30 years. As early as 1962, at a debate within the party about whether farmers should be allowed to secede from communes and farm their own land after the serious famine of 1959-1961, Deng, who supported giving land back to farmers, expounded his famous theory. “It doesn’t matter if a cat is yellow or black, it’s a good one as long as it catches mice,” he said. The yellow cat was later changed to a white one.
While Deng’s pragmatism has been proven correct in hindsight, there was no guarantee it would be the approach adopted in the first years of reform and opening up. “Crossing the river by feeling for the stones,” was Deng’s way of summing up the uncertain progress.
“Deng’s method of reforming in an ad-hoc manner was of profound philosophical wisdom,” Sheng said. “Such a method actually established the possibility of making mistakes in reform attempts and left room for constant corrections, starkly different from Mao’s ideological rigidity.”
Such pragmatism and gradualism brought benefits. From 1952 to 2008, per capita GDP, after adjusting for inflation, grew 33-fold, to 22,698 yuan (HK$25,726). And according to the World Bank, the mainland ascended to the medium-income group of nations last year.
A boost to national pride came with the accumulation of the world’s largest foreign exchange reserves - more than US$2.1 trillion as of June. China became the biggest creditor of the United States, with a holding of more than US$800 billion in US debt as of July.
Economists widely believe that without any major internal and external interruptions, the mainland is capable of continuing to grow at around 8 per cent for another 30 years, propelled by the twin engines of urbanisation and industrialisation.
Despite its fame as the “world’s factory”, the mainland still stands midway through its industrialisation process compared with advanced countries. This means plenty more room for growth. Likewise, the urbanisation level is now at 45.68 per cent, lagging behind the 70 per cent to 80 per cent for developed countries.
Wang Jian , an economist with the China Society of Macroeconomics, a government think tank, estimated that if Beijing moved another 450 million, or 62 per cent, of existing rural residents to cities, it would need to spend 223 trillion yuan more on fixed-asset investment, 13 times the amount spent last year and 7.4 times last year’s GDP.
“Urbanisation creates not merely supply, but demand as well,” said Tang Min , an economist with the China Development Research Foundation.
But, just as in the past six decades, the next 30 years are unlikely to be plain-sailing.
“The biggest challenge of the next decade will be to realise a successful transformation of the economic growth models,” Tang said.
The mainland’s long dependence on investment and exports over the past three decades has forced the government to artificially keep workers’ incomes low to ensure export competitiveness. Together with a shaky social security network, this results in high precautionary saving rates and an unwillingness to consume.
Of the mainland’s 30 trillion yuan of GDP last year, household consumption accounted for just 35.3 per cent, compared with 55 per cent in Japan and 71 per cent in the United States.
“The economic slowdown since the second half of last year wasn’t just because of the global credit crisis and cyclical self-adjustment of China’s economy. It was also because of long-time negligence of people’s welfare,” said Han Meng , an economist from the Chinese Academy of Social Sciences.
Others have warned that unfair treatment of private firms and a lack of social justice for the lower classes are also jeopardising economic growth.
Despite the years of market-oriented reforms, the economy still resembles a super-sized state-owned company, with the central government as the sole boss.
Key industries - such as banking, energy, telecommunications, railways and equipment manufacturing - are still either state monopolies or controlled by state firms. Stock markets and commercial banks, the two most important capital-raising sources, still favour state-owned enterprises, especially the industrial behemoths.
“China needs further reform of its state-owned enterprises,” Sheng said. “These state firms use land and natural resources almost for free and enjoy preferential tax policies, but for decades they haven’t handed back any dividends to the state or the people. This is a phenomenon you’ll hardly find anywhere else in the world.”
Meanwhile, maintaining social stability remains a headache for Beijing as growing income disparity, rampant government corruption and injustice for those at the bottom of the social ladder spark increasingly severe clashes.
Research by Yu Jianrong , a CASS sociologist, showed the number of major clashes between ordinary people and local governments increased 10-fold to about 90,000 from 1993 to 2006. And Sheng said that figure would only have risen in the past couple of years.
“These issues are not purely economic ones, but political issues and [therefore] prone to be overlooked as the economy seems to be motoring along,” he said.
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