Putting China's economic reforms into perspective

It is easy to get pessimistic about China these days. The economy is faltering after three decades of breakneck growth and some commentators are even questioning whether the much-lauded Chinese economic miracle is, in fact, a mirage.

People are seriously questioning Beijing’s resolve to implement its comprehensive economic reform package announced at the end of last year. It is easy to get caught up in the pessimistic mood and China Spectator shares some of the gloominess. 

But it is also important to put things into historical perspective. At a time when China has reached yet another crossroad in its future development, it is necessary to look at the country’s recent history of economic development to get a sense of how far China has come in its long march to prosperity.

1978 should be a good starting point. At the time, China had only one bank and no insurance company. Savings from state-owned enterprises and governments accounted for 83.8 per cent of the total. The average income for urban residents increased 4 yuan annually between 1958 and 1978 and for farmers, it was only 2.6 yuan.

A report from a Japanese business journalist illustrates how backward China was at the time. When he was visiting a steel mill in Chongqing, he was astonished to discover a British-made steam-operated steel presser from 140 years ago. He couldn’t believe it -- and the mill manager told him it was true.

This little episode is from Wu Xiaobo’s masterpiece Thirty Years of China Business, which captures the turbulent history of China’s modern business history. 

Wu, China’s most formidable business writer, also told us a story of how Liu Chuanzhi, the founder of Lenovo (the world’s largest computer maker by unit sales) got excited about reading an article on how to raise pigs on the notoriously political People’s Daily.

Liu, who was a 34-year-old researcher at the Chinese Academy of Sciences at the time, regarded that as a sign that things were about to change course after years of Maoist political madness.

Indeed, there were many momentous changes in 1978.

Eighteen peasants from a small, poverty-stricken village in Anhui signed a contract to divide up communal land between them, a move that potentially carried the death penalty. But it signalled the beginning of the end of Mao’s mad experiment of the People’s Commune, which killed millions from starvation.

The daring move was soon introduced across the country and unleashed the biggest increase in farm productivity since the Chinese communist party took power in 1949. The end of the disastrous People’s Commune system of collective land ownership is arguably one of the most important economic events in 20th century China.

The original contract signed with blood from 18 peasants is now enshrined in China’s national museum.

Another groundbreaking change was the re-opening of the country’s higher education system. When Mao was still in power, the country sank into an abyss of permanent class struggle against intellectuals and scholars. Universities were closed down; a whole generation of Chinese was lost to political slogans and Mao’s red books.

But in 1978, five million aspirants sat for university admission exams and 400,000 of them were offered places. Those people would become the backbone of China’s economic miracle for years to come, including some of the country’s best known businesspeople.

Before 1978, Beijing treated foreign capitals like the bubonic plague, but once it decided to throw open its doors to foreign investors, it courted capitalists from arch-enemies like the United States and Japan.

Li Ka-shing, the richest and most powerful tycoon from Hong Kong, was even invited to appear at the Tiananmen gate alongside Chinese party elders during 1978’s national day celebration.

Deng Xiaoping, who is widely regarded as the modern architect of the country’s reform, courted the Japanese, who he fought against in the 1930s and ‘40s to invest in China. Japanese companies like Panasonic started to invest in China that year. During the same year, Coco-Cola also sold its first batch of drinks in red China.

These seemingly innocuous changes were hugely controversial at the time. Party ideologues resisted the tide of change but the momentum for reform carried the day.

This article is not to indulge in historical nostalgia but to highlight how far China has come from its utter isolation and deprivation three decades ago. A lot of contemporary commentary around China is often highly critical of the slow progress in China’s reform pace, which is a fair assessment.

But at the same time, some commentators fail to acknowledge the tremendous changes that have taken place, such as the end of collective farming; the emergence and subsequent flourishing of private entrepreneurship; the partial death of the planned economy; and perhaps most importantly, the end of the suicidal focus on political struggle instead of economic development.

China’s economic miracle is real and it is a product of the country’s bustling entrepreneurial spirit. Nicholas Lardy, one of the best China economists and a senior fellow from the Peterson Institute for International Economics, argues in his new book Markets over Mao: the rise of private business in China, that the widely held view that the state-owned sector dominates China’s economy is false.

In fact, he says, SOEs appear to be a relative small portion of the Chinese economy. They account for between one third and one quarter of GDP. In many sectors, private enterprises have largely replaced state-owned companies.

We have to give credit to China’s past reform measures. There is a little doubt the country is going through a difficult period of adjustment. But the country’s entrepreneurial energy will eventually prevail and the rise of world-class Chinese tech companies like Alibaba offers us a ray of hope.