Saturday December 22 marked 40 years since China began its long march of economic reform and opening up. The particular anniversary is of the end of the 3rd plenary session of the 11th Central Committee of the Communist Party of China, at which Deng Xiaoping effectively became paramount leader of the Communist Party, and won a mandate to begin reforming and opening up the country to the world.
Deng’s reforms started with the effective privatisation of agriculture: the collective farm system was abandoned and peasants were given their own private plots. A set quota of their produce still went to the government, but the rest they were allowed to sell in the free market. These reforms were such a success that they were expanded to other parts of the Chinese economy.
Private businesses and foreign investment were allowed for the first time since before the communist takeover in 1949, and the government gradually allowed the price system to play a part in more and more parts of the economy. Importantly, the central government created Special Economic Zones, where entrepreneurs and firms could be free of much of the bureaucracy and regulation that so hamper progress. Control of provincial governments was also relaxed, giving them the freedom to experiment and discover the best way to encourage development. Both of these helped to turbocharge the reform process and turn China into a high growth economy.
Despite its success, the process of reform and opening up has never been smooth or easy – most notably in the wake of the 1989 Tiananmen massacre and the social unrest associated with it, the ruling Chinese communist party applied the brakes to its liberalisation project. However, by 1992 the reform agenda began to accelerate once more.
The economic progress has been remarkable: since 1978 economic growth has averaged 9.6 per cent per year, and GDP per capita has increased from less than $300 to just under $9,000. Finally, although nominally still smaller, measured on a PPP basis China’s economy overtook the US in 2013 to become the largest in the world.
On a recent trip to China I was struck by how developed parts of it now are: the most affluent regions such as Beijing or Shanghai average salaries, measured by PPP, are over $35,000, higher than in much of Europe.
Nations have of course achieved rapid development before – the examples of Hong Kong and Singapore immediately spring to mind — but nothing on the scale of China. The World Bank estimates that since it opened up in 1978, more than 800 million people in China have been lifted out of poverty. It is quite simply one of the most remarkably trends in human history. Not only are most Chinese no longer poor, but a great many are affluent: today China has a middle class of over 400 million people and the largest consumer market in the world, with retail sales now exceeding those in the US.
The rapid development of China has led its government to raise its sights. It’s when you see projects like the spectacular Hong Kong-Zhuhai-Macau bridge, which opened in October of this year, that you realise just how ambitious China now is. The bridge took six years to plan and nine years to build is the longest in the world at 55 km, it includes four artificial islands, a 6km underwater tunnel, and is designed to withstand earthquakes and typhoons.
But having visited the administrative centre from which the bridge is to be managed, I cannot help but worry that it may end up as a bit of a white elephant: because a crucial link road in Hong Kong is yet to be completed traffic is currently strictly limited. Furthermore because of the ‘one country two systems’ arrangements for Hong Kong and Macau, there are three customs regimes, complicating matters for traders wanting to use the bridge to transport goods.
However, the authorities seem confident that technology and cooperation between the Chinese mainland, Hong Kong, and Macau can overcome any issues and the bridge will be a success. (How refreshing to hear government officials say that different customs and regulatory regimes can exist side by side and not present an insurmountable obstacle for business, or a threat to the peaceful coexistence of the different regions.)
Ambitious infrastructure projects are a key part of the much talked about Belt and Road initiative. But it’s the geopolitical aspect of the initiative which reveals the role China sees itself playing in future world affairs. Despite the repeated assurances of every single Chinese official I met that it is not an attempt by China to challenge the hegemony of the US and rule the world, but simply to better connect China’s less developed central and western regions with the world, it is hard to escape the conclusion that Belt and Road is exactly that.
However, given China’s size both in terms of population and its economy, it doesn’t seem strange or wrong that it should play a larger role in world events and institutions. This, of course, must mean that the relative importance of the US will decline somewhat. But China is not suddenly going to start having the control or influence that the US has had in the post-war era. Today, China is still far behind the US and the West, both in overall living standards and in particular in certain key technical areas, such as the semiconductor industry as The Economist recently reported.
While it is right to praise the progress that has already been made, it is also important to look to the future and discuss some of the issues ahead. Firstly, it is important to remember that large areas of China, especially those central and western regions are not highly developed and still have millions of people living in poverty.
Secondly, China and in particular its current president Xi Jinping may seem determined to continue with reform, such as opening up the services and financial sector, but there are plenty of special interest groups which could prevent this. In particular, the more than 150,000 Chinese State Owned Enterprises (SOEs) play a very sizeable role in the economy, accounting for between 30 per cent and 40 per cent of GDP.
This is partly because they are given advantages that private companies, including foreign firms, are denied. For example, the Chinese government have over the last few years increased capital controls in an attempt to defuse the debt bomb under the Chinese economy. However, these controls have mainly hit Chinese private firms, which have found it increasingly difficult to get access to the credit that they want. Whereas Chinese SOEs have been given special treatment and have had far less difficulty in getting credit.