The Chinese Economy and its Challenges

Transformation of a Rising Economic Power

Charles C.L. Kwong

• Publisher: Routledge
• Year: 2019
• ISBN:
  9781351051200
• Edition: 1
• Topic: Economics
• Subtopic: Economic Theory
• Index: Economics

The remarkable transformation of the Chinese economy in terms of its structure and growth has drawn unprecedented attention from academics, policy makers and businessmen alike. In the past four decades, China swiftly transformed from a centrally-planned to a market-oriented economy, with an economic size just behind the US and ahead of Japan. Amid commendations for China's economic success offering valuable reform and growth lessons to other developing countries, underlying challenges have been emerging, which constitute long-term risks in shaking China's sustainable success. These challenges encompass a wide range of sectors and issues such as the rural-urban divide, state monopoly, policy loans in the banking sector, lack of skilled and sophisticated workers, environmental degradation, etc.

This book unveils the risks and challenges embedded in China's spectacular economic success and demonstrates that effective handling of these challenges is vital for China to avoid falling into the "middle-income trap". It is elucidated that feasible solutions are available to accommodate these risks and the clue of success lies on the willingness and ability of China's central leaders to implement further reforms. This book is a valuable reference for undergraduate and postgraduate students, academics, and public and business policy makers who are concerned about the current status and future development of the Chinese economy.

1 Transformation, initial success and challenges embedded

China’s economic reforms that have taken place since the late 1970s have had profound and far-reaching effects on the Chinese economy, which are unprecedented in its economic history. China’s four decades of economic reforms have transformed the country from a closed and centrally planned economy to a market-oriented economy integrating into the global economy, from one of the poorest countries in the world in 1978 to one of the fastest growing economies in the world, from one of the major FDI recipients to one of the major ODI investors. With its rising economic power, China has become an important and influential player challenging the US’s hegemony in the global economy. The lessons and experiences of China’s “success story” have been followed, to various extents, by other formerly centrally planned economies, such as Vietnam, North Korea and Cuba as well as other developing countries.

This chapter reviews the background of economic reform inaugurated since the late 1970s and the emerging issues in different stages of reforms and development. It is demonstrated that China’s reform agenda can best be described as an ad hoc suite of crisis-and-response strategy, instead of a well thought-out reform plan. Most reforms initiatives, in particular in the early years of reforms, were ad hoc responses to the emerging problems and issues arising from the preceding phase of economic reforms and development. China’s economic reform and development can broadly be divided into five phases. This chapter will first highlight the initial success of the first phase of economic reforms from 1978 to 1984, during which rural reforms brought spectacular growth in output and enhancement of living standard. The other main plank of reform in this phase was the adoption of open door policy in early 1980s, which marked China’s first move to re-enter the global economy. The second phase, 1985–1991, focused on state-owned enterprises (SOEs) and price reforms. Though SOEs and price reforms were modeled upon the rural reform, that is, mainly decentralisation and marketisation, the resulting macroeconomic imbalances finally led to a political crisis in 1989, the Tiananmen Incidence. After the setback from 1989 to 1991, China embarked on another key phase of reform, marked by Deng Xiaoping’s Southern tour (nanxun). Chinese leaders reaffirmed that market was the fundamental economic operating system. A series of extensive reforms, including financial reform, exchange rate reform and fiscal reform, were implemented to alleviate the structural and efficiency problems inherited from previous reforms. China entered the fourth phase of economic reform since its admission to the World Trade Organization (WTO) in 2001, which manifested China’s further integration into the global economy and its global influence in terms of trade and financial flows. The prolong period of rapid trade expansion and growth, however, came to a halt amid the outbreak of global financial crisis (GFC) in 2008, which prompted China to initiate a 4-trillion stimulus programme to hedge against the substantial fall in external demand and stabilise the domestic economy. However, the stimulus package was implemented at the expense of generating nonperforming loans (NPLs) and massive overcapacity. The repercussions of GFC and the stimulus package drove China to move into its fifth phase of reform in 2013, with new development strategy of refocusing from extensive growth to intensive (i.e., quality) growth emphasising further market reforms, competition and efficiency. Externally, the Belt and Road Initiative (BRI) signifies China’s strong intent to evolve from a passive participant in global economy to an active leader in one of major global economic cooperation programmes. The BRI extends China’s arms of global influence from East Asia via Middle East to Eastern and Western Europe.¹ BRI, coupled with the China’s initiative of setting up the Asian Infrastructure Investment Bank (AIIB), enables China to assume a significant role in global political economy.

Inauguration of China’s economic reform: institutional changes, opening up and initial success (1978–1984)

China’s journey of four decades of reforms started with institutional changes in the countryside in the late 1970s and the implementation of an open-door policy in the early 1980s. Though the reforms in the late 1970s lacked a comprehensive blueprint, the rural reform and open-door policy were by no means coincidental. The series of reforms was driven by the devastated economic conditions inherited from the pre-reform era and the political changes in the late 1970s.

The momentum behind the reforms is at least threefold. First, the Gross National Product (GNP) and GNP per capita growth rates were not very low, with respective average annual growth rates of 6.2 percent and 4.3 percent during 1952–1980 (Yeh 1996: 12). However, such growth record did not accurately reflect the living standard of households as heavy industry occupied a large share in China’s GNP, which did not bring direct material wellbeing to the households. Instead, the standard of living was better gauged by per capita consumption and disposable income. Table 1.1 shows the average annual growth rate of material consumption and disposable income per capita, which were significantly lower than GNP growth. The average annual growth rates of material consumption and disposable income per capita were only 2 percent and 1.6 percent respectively over the period of 1957–1978. It indicates that benefits of economic growth could not filter down to enhance the living standard of households. From a comparative perspective, China’s per capita income was $74 in 1960, which was only about half of that of Taiwan and 22 percent of that of Hong Kong. After 20 years, Hong Kong and Taiwan had become middle-income countries with per capita income of $5,441 and $2,341 in 1980 respectively while China’s figure was just a meagre $249, which was only 10.6 percent and 4.5 percent of the per capita income of Taiwan and Hong Kong (Garnaut 1989: 41). The widening gap with neighbouring Chinese societies incentivised reform leaders to initiate and allow pragmatic and bold steps to catch up with the newly industrialising economies (NIEs). A prolonged period of a lagged-behind living standard might shake the legitimacy of the ruling party.

Table 1.1 Average Annual Growth Rate of Material Consumption and Disposable Income Per Capita

Period	Material consumption per capita	Disposable income per capita
1957–1978	2.0	1.6
1978–1985	9.1	11.7
1985–1990	4.1	1.2

Source: Chai (1996: 248–249)

Second, economic growth cannot be sustained by merely increasing the amount of physical inputs such as capital, labour and land (i.e., natural resources) as they are all subject to diminishing returns. To break away from diminishing returns, long-term productivity can be enhanced by innovation, which increases output with a given amount of physical inputs. China is no exception. Inability to enhance technological innovation would mean that China’s productivity would be constrained. In the 1950s, China’s main sources of imported technology were the former Soviet Union and Eastern European countries. However, since its split with the Soviet Union in 1960, China had been insulated from imported technology. The Soviet Union withdrew all technical support, both hard and software, from China in 1961. In the late 1970s, China’s overall level of industrial technology was 10–20 years behind world level, and 20–40 years in some specific areas (Chai 1997: 4). The technological gap prompted Beijing leaders, in particular Deng Xiaoping, to initiate open-door policy to capture foreign capital and technology.

Third, the death of Mao in 1976 and the fall of the Gang of Four offered a relaxed political atmosphere to embolden local and central cadres to take decisive step...

Table of contents

• Cover
• Half Title
• Series
• Title
• Copyright
• Dedication
• Contents
• List of tables
• Introduction
• 1 Transformation, initial success and challenges embedded
• 2 The rural economy: a sector lagging behind
• 3 State-owned enterprises: big and strong?
• 4 The banking sector: struggle between commercial and policy loans
• 5 China and the world: a new form of integration
• 6 Population growth and human capital investment: hindrance to growth?
• 7 A change in development model: a key to sustained success
• 8 Conclusion: transformation and challenges of a rising economic power: from rapid growth to sustained growth
• Index