The forty years from 1980 to 2020 have been witness to one of the fastest power displacements in the history of the world. As the late Lee Kuan Yew, Singapore’s Senior Minister, noted, “The size of China’s displacement is such that the world must find a new balance …. It is not possible to pretend that this is just another big player. This is the biggest player in the history of man”.
The figures speak for themselves. In 1980, China was an impoverished backwater: 88% of its population of 994 million lived in poverty, in what were designated as rural areas; 75% of the workforce of about 600 million people worked on the land, producing 35% of gdp. The cities held 18% of the population, or 172 million people, employed in state-owned enterprises (SOEs) of which there were 883,000, mostly small factories, employing under 500 workers. Corporations were the prime source of government revenue. Technology was backward . Exports represented 1% of global trade. Productivity per capita had stagnated for the past 20 years, and population growth rates were slowing; gdp per capita stood at 2% of the US level (at purchasing power parity).
Forty years on, China’s population had risen to 1.4 billion; 800 million people had been lifted out of poverty; the World Bank calculates that only 23 million continued to live below the national threshold. Labour supply into the cities over the four decades had been fed by a mass exodus from farm work to industry and manufacturing, attracted by higher wages. By 2016, fifty-six per cent of the population lived in cities, just under 770 million people. That still left 44% of the population, well over 600 million living in rural areas. Of a workforce of 816 million, 35% were still on the farm, producing 9% of gdp; 28% were in industry, accounting for 39% of gdp; and a rapidly expanding 45% were in services, representing 54% of gdp. Average per capita income stood at just under 8000 US$ per capita, or 9% of the US average. China was the world’s leading manufacturer, and the prime production platform for the supply chains of transnational corporations. Exports amounted to 12% of global exports, and 18% of manufactured exports; foreign exchange reserves topped $3 trillion. At 15% of the global economy, China wa on track to return to the 30% of the world’s economy that it had enjoyed in 1820.
Economic success has been crucial to the regime’s exit from Marxist to market Leninism. Enough Chinese citizens have benefitted for a determined party-state to discount the myth of a social volcano about to erupt. Nor was China’s performance a miracle: it was due to policy and to the Chinese people with their aspirations, ambitions, and above all their hard work. Wealth is made by work, intelligently applied.
The conviction of the author is that of all the boldest policies pursued over these four decades, the prize must go to Prime Minister Zhu Rhongji -whose picture is above. The very bold policies that he had adopted in 1998 in response to the Asia Pacific economic crisis of that year set China on the dramatic trajectory that transformed its place in the world within a short decade.
The phases of economic policy.
From the moment when he became de facto leader in December 1978 until October1992, Deng was the sole architect of economic policy. For Deng, reform meant strengthening, not weakening the party-state. The good news was that, at the start of the Open Door policy, all governments in America’s Asia-Pacific sphere of influence were one party states or dictatorships of one kind or another. The bad news was that in China famine was rife and an ineffective central plan stifled entrepreneurial spirits. Ex post, we may identify a number of phases: the first ran from 1979 to 1989; the second ran from the Tienanmen crackdown to Deng’s “southern tour” in October 1992; the third ran from 1993 to the Asian crash of 1997-98; the fourth runs from 1998 through to China’s WTO entry; the fifth from WTO entry to the financial crash of 2008, and the party-state’s response, through to President Xi’s assumption of power; the sixth covers the 8 years from the start of the Presidency to the outbreak of the coronavirus pandemic. A pattern emerges over time: the twists and turns in policy were not foreseen ahead of time; they were often as not made on the hoof by the leadership; a consistent factor was the leadership’s determination to keep a dynamic economy, despite all the political noise. The results speak for themselves.
Table 1 : GDP per capita growth rates :
China and Selected Countries, 1980–2018, (in percentage)
1980–1990 1990–2000 2000-2010 2010-2020
China 7.7 9.2 9.9 7.0
India 3.3 3.6 5.6 5.6
Indonesia 3.3 2.3 3.8 4.1
Russian Federation …. -9.0 2.0 1.2
East Asia 3.6 2.5 3.7 3.7
Japan 4.0 1.1 0.5 1.1
United States 2.4 2.1 0.7 1.3
Source: World Bank.
Phase one: 1979-89: Deng’s first appeal was to the overseas Chinese. “No matter what clothes they wear or what political stand they take, all Chinese have a sense of pride and identification with the Chinese nation and would want the People’s Republic to become strong and prosperous”.  Asia Pacific investors were quick to respond; foreign investment poured in in response to the creation of four free trade zones and the September 1984 settlement with the UK on Hong Kong. Crucial agricultural reforms allowed farmers to keep part of their produce for their own use or for sale on local markets ; Mao’s collectives converted fast into non-regulated Township and Village Enterprises (TVEs; market-oriented measures were then extended to the state enterprises in 1984. Firm level changes included the end to worker control at plant-level, the de facto downgrading of the official trade union, promotion of small scale businesses, and greater freedoms to township and village enterprises to extend their range of production beyond farming. All of these reforms were accompanied by a boom in consumer industries, filling the shelves with produce for urban populations ; a rapid rises in income disparities ; a surge and then gradual decline in farm incomes, a rise in inflation, and desperate efforts by the party-state to buy off its core urban working-class constituencies through the payment of ever larger subsidies. Differences among the leadership intensified over whether policy should veer to more market or more plan, more democracy or more authority. Leadership disunity was clearly on display during the months of May-June 1989
Phase Two: 1989-1992: Nineteen eighty-nine to 1992 were truly anxious years for China’s leadership. Japan’s boom turned to bust in the summer of 1989; Germany moved fast to unity, pulling up global interest rates to fund the cost of reunification; the Soviet Union disintegrated; and the so-called Washington consensus paved the way for the internationalisation of the American way of capitalism. The immediate lesson from the events of 1989 was for the Chinese collective leadership never again to reveal their differences in public. Deng took the crucial decision to suppress the student movement, ordering the troops into central parts of Beijing in the early morning hours of June 4, killing both demonstrators and bystanders in the process. He also made the crucial statement in his famous southern tour of late 1992 that “it is glorious to get rich. The direction of change in China’s macro-context was heralded by the opening in 1990 of the stock exchange in Shenzen—the supreme symbol of capitalism.
Phase Three: 1993-1998: A crucial appointment was Jiang Zemin to the Presidency, which he held from 1993 to 2002. His first Prime Minister was Li Peng. Praetorian intervention in June 1989 was rewarded through greatly increased military budgets, the purchase on world markets of hi-tech weapons, and a professionalisation of the PLA officer corps, with some residual deal for it to indulge in business profiteering. The concept of the “socialist market economy” was bedded down in the Decision of the CCP Central Committee on Some Issues Concerning the Establishment of a Socialist Market Economic Structure, and adopted in November November 1993.  The document, drawn up in a party group headed by then Party-Secretary Jiang Zemin, presented a grand strategy to introduce a “socialist market economy” under a state of law as the way forward for China. The immediate task was to reduce inflation. The 1995 Central Bank Law, revised in 2003, modeled the PBoC along the lines of the US Federal Reserve system. Its branches were reduced from 49 to 9 inter-provincial branches, with the focus of policy aligned more on monetary control. Monetisation of debt was disallowed. Managerial autonomy gained with exchange rate reform, and currency convertibility on current account. Beijing re-centralised the collection and allocation of fiscal revenues, and tightened control over banks and financial institutions with a view to achieving price stability. Inflation rates were successfully lowered from an annual 27% to zero over the time period.
Firm level initiatives included de-regulation of nearly all industrial prices, and the passage of the 1994 Company Law, which aimed to create “a modern enterprise system”. The Law introduced the formal instruments of corporate governance, along German corporate lines, while keeping party-state nomenklatura control over key appointments. These measures were accompanied by divestment by the state of smaller state enterprises, and the development of a policy to promote national champions. In 1997, the leadership prompted a policy described as “grasp the large and let go the small” (zhua da fang xiao), involving the identification of “pillar industries”, such as petroleum, and automobiles, the formation of joint-stock enterprises, the reduction in ministerial controls, and the de facto privatisation of the smaller state enterprises. Joint ventures between state enterprises and foreign corporations were encouraged with a view to promoting technology transfer. Foreign investment rose in the energy, telecommunications, transport, and construction sectors, as well as in retail and consumer goods sectors. The party-state meanwhile divested itself of most of its social welfare functions to market mechanisms and private initiative. Management exercised undisputed control within plants
Phase Four: 1998-2002: Then in January 1998, the bottom fell out of the Korean currency, the won, and a number of major conglomerates (chaebol) went bottoms up. Imagine the Chinese leadership’s dismay. There had been the horror at events in the Soviet Union; followed by the creeping realisation that Japan’s old formulas did not work in a global market; to the interest in the Korean ways of doing things, only to see the Korean won collapse in early 1998; through to the anxious observation that the US way offered a way forward, only to observe its vulnerability to corporate-led under-and over-investment cycles. The leadership chose to strengthen the extensive public sectoir by purging it. As head of the Central Bank, Zhu had succeeded in bringing down the inflation rate. This had tightened budgetary constraints on the 350,000 or so state enterprises. Command economy structures had ensured a considerable expansion of employment in the state sector from 95 million employees in 1978 (amounting to nearly 10% of the active population) to 148.5 million in 1994 (nearly 20% of the active population). Indeed, China’s industrial growth in the period had resembled that of Japan and Korea in the cold war years, when both countries invested into industry at very high rates, but with lowering rates of return. China’s heavy industries devoured raw material and energy inputs, as well as squandering the country’s abundant savings. By 1998, at least half of these large and medium industrial enterprises were bleeding money, their managers engaged in widespread asset-stripping, and their workers pushing for above-productivity wage rises. Writing in 1997-98, Nicholas Lardy, from the Brookings Institution, considered that government was heading to a debt/gdp ratio of 110% by 2010. This meant the government would have to raise interest rates to keep Chinese households investing in Treasury bonds.
What to do? With the Asian financial crash of 1997-98 demonstrating only too clearly the political risk to Asian governments of pursuing bank-financed growth policies, the leadership determined on action. In September, the CCP’s Fifteenth party Congress declared state-owned enterprise reform a priority, and in November 1997, financial market reform was launched at a National Affairs Conference.  This crucial National Financial Conference, held under the auspices of the CCP financial working committee, was attended by the 180 or so top financial officials in China. The proclaimed aim was to foster a viable banking system by introducing stronger lending criteria and greater accountability. The conference was convened anew in February 2002 to discuss further reform orientations on much the same
In March 1998. Zhu Rongji was moved to the Premiership, while his predecessor, Li Peng, was moved sideways to head the National People’s Congress. The thrust of the new policy was to accelerate the pace of marketisation, withdraw the government further from the market, upgrade private property rights in the Chinese constitution, reform the bureaucracy, and to move decisively to join the World Trade Organisation (WTO). Global norms would be thereby incorporated into Chinese legislation and practice, while central government control over recalcitrant provincial, or city governments would be reinforced. In April 1998, Premier Zhu Rongji, announced an administrative reform to cut the state bureaucracy by 4 million or by 50% within 3 years, reduce the number of ministries at the centre from 40 to 29, separate ministries from their business enterprises, and cut the branches of the Central Bank from 31 to 9.
The agenda was made public when in November 1998, major newspapers published the speech of Joseph Stiglitz, World Bank Chief Economist, to Beijing University, delivered in July of that year. In “Second Generation Strategies for Reform for China”, Stiglitz recommended further deeper institutional restructuring, and a completion of its move to markets. Stiglitz in effect sketched the programme for China’s future economic reforms: the need to enhance government revenues through tax reform, welfare policy, reform of the financial system and of state enterprises, and entry to international organisations. Membership of the WTO, Stiglitz pointed out, was bound to restrict the state’s freedom to direct credit. This was clearly one lynchpin around which future political battles would turn.
Marketization was an ambitious policy prompting rapid changes in Chinese society, reflected in President Jiang Zemin’s Three Represents concept, proposed in 2000. The concept sought to specify the more complex society which the CCP would have to represent in the future. Banks were obliged to adopt more commercial lending practices, their capital base was strengthened, and they were converted into share-system organizations. Corporate non-performing loans were hived off into asset management companies (AMCs), modeled on the Resolution Trust Corporation—a US financial institution created to clean up the losses from the savings and loans debacle of the 1980s. Within a year, one trillion yuan of state enterprise debts were transferred to the companies in exchange for shares, helping to clear up bank portfolios and sharply reduce state enterprise debt. Corporate finances were also improved by a ruthless shakeout among state enterprises, which ditched over 25 million workers between 1998 and 2003. In March of that year, Jiang Zemin had the Constitution altered to incorporate private ownership and rule of law. Article 11 of the Constitution now places private business on an equal footing with the public sector: “The non-public sector, including individual private businesses, is an important component of the socialist market economy”.
Zhu Rongji accentuated Deng’s priority to growth as a crucial counterpart to restructuring. Alongside the ambitious agenda for bank supervision, and financial market reform, the leadership launched an infrastructure boom in order to accelerate the process of urbanization. The idea was simple: create surplus supply (of ports, airports, roads etc) and the facilities will attract business. In addition, SOEs were ordered to sell off their housing to urban households at favourable prices. Land prices ignited, touching off a building boom which fed through into surging demand for steel, cement and urban infrastructure. In turn, banks lent to new profitable businesses, which soaked up labour from the countryside. Despite the leadership’s initial misgivings, WTO membership was pursued with vigour, and eventually achieved in late 2001. Membership entailed wholesale adoption of western business norms into the operations of a communist party-state. This stored up future problems. But growth helped to shrink the liabilities in the AMCs books by over one half.
Phase Five: 2003-2012. The verdict on the years in office of President Hu Jintao, and his prime Minister, Wen Jiabao, is that they failed to carry through with economic reforms, accelerated by Zhu Rongji, allowed for bloat in SOEs at the expense of widespread corruption, and left the nation saddled with debt after two rounds of economic stimulus 2008 on.
Their incumbency began well enough. In March 2003, the new leadership announced their aim to “perfecting the socialist market economy”. Five remodelled agencies were set up, with US style names, signifying government intent to implement commitments under the WTO, and to extend its regulatory reach much further across the length and breadth of China. WTO entry was meanwhile followed by the rapid rise of the private sector, accompanied by further development of the capital markets, and of corporate and bankruptcy law.
The initial impetus for the surge in counter-cyclical spending, driven by capital outlays, had been to sustain business activity at the time of the Asian financial crash.  But as the economy, propelled in part by the infrastructure boom, continued to grow, this motivation soon disappeared. A host of other mega-projects were maturing or already in the policy pipeline, such as the Three Gorges Dam, the Go West strategy, the development of the Pudong business zone in Shanghai, or the creation of further growth hubs around the Yangtse Delta, the Pearl River Delta and the Bohai Sea region. The result of the party-state’s growth orientation was to promote surplus capacity across most industrial sectors, an explosion in lobbying for access to scarce resources by local governments, and –importantly—greatly improved infrastructure, which helped to reduce the total operating costs of corporations, foreign and domestic, setting up shop in China.
The Hu Jintao and Wen Jiabao leadership developed policy in a more statist direction. There was much more discussion in the party about the importance of achieving a “harmonious society” (hexei shihue). This included initiatives to improve income distribution, reduce the fiscal burden on farmers, narrow rural-urban income gaps, and develop the infant social security system. In the institutional changes introduced in March 2003, the State Assets Regulatory Commission(SARC)—one of the five new regulatory commissions– was charged with management of the State enterprises, and continued to work in parallel with the powerful Enterprise Work Committee of the Party’s Central Committee. SARC created a state holding agency—The State Assets Supervision and Administration Commission (SASAC)—to exercise its ownership rights, and maximise shareholder returns. Local SASACs were set up under local government control. Initially, the central SASAC was given oversight over 197 conglomerates, with assets officially valued at a sum equivalent to 116% of China’s GDP. The explicit objective of the reform was to create national champions in a range of sectors. The result was bloat in SOE, and a politicization of business. Corporations restructured under the 1994 corporate law, acquired boards of directors and supervisory boards, and gained greater managerial autonomy to raise capital, invest, expand or re-allocate resources.This has been the prime rationale behind the development of the Shenzhen and Shanghai equity markets. The large SOEs constituted 90% of the 1200 or so enterprises listed on the two markets.
In these firms, the state in the form of many different organisations kept 60-70% of “red chip” shares,–as the shares were appropriately called. The downside was that so many CCP-owned organizations holding shares, and with competing interests, encouraged inter-industrial rather than intra-provincial mergers, as provincial governments remained jealous of their own local champions. The benefit for the party-state of diversification was that opening up the markets to diversified ownership facilitated mergers and acquisitions, as government organizations could exchange shares after negotiations. Privileged financial [12) circuits centred on the party-state never went away. The result was that by 2007, China featured 24 out of the Global Fortune 500 leading enterprises; and retained earnings were the prime source of funding for SASAC-run state enterprises. For all the problems, China’s industrial policy was yielding considerable dividends to the party-state in its capacity as lead shareholder.
Mid-decade is the inflexion point towards more state and less market, noted by analysts of China’s economic policy. Chinese policy-makers were concerned that the country had become a cheap-labour platform for foreign multi-nationals. The sentiment fed into development of a set of comprehensive policies to upgrade education, corporate innovation and the development of new industries. This placed China on a trajectory of direct competition with corporations from developed market economies, and was accompanied by a rise in the share of Chinese firms accounting for hi tech exports. Relations with the US and western Europe were salvaged by the financial crash of 2008-2010, which prompted a surge in debt levels following two rounds of economic stimulus from 2008 on. Up to 82% of bond market debt was accounted for by government debt by 2016, while most large firms on the Shanghai and Shenzen stock markets were state-controlled. As corporate retained earnings rose, state enterprise managers enjoyed enhanced autonomy,. This in turn pointed to serious deficiencies in corporate governance, accountability and transparency. Corruption boomed: as two reputed economists concluded , 80% of officials were corrupt, but only 6.6% of officials who were disciplined received punishment.  Fighting corruption became the lead cause of the new leadership.
Phase Six: 2012-2020: In 2012, Xi Jinping immediately made clear as President thathe, not his that his Prime Minister, Li Keqian, was in charge. The new President announced his priority as stamping out corruption—the private embezzlement of public funds. The period of transformation since 1978, writes Minxin Pei, has resulted in the growth of “local mafia states”, predicated on collusion among state agents. Chinese capitalism, writes Yasheng Huang , is “crony capitalism built on systemic corruption and raw political power. Property rights are not secure”. Minxin Pei comes back to the same charge in a book about Xi’s campaign to expunge corruption from the party. As he explains, “..the lurid details of looting, debauchery, and utter lawlessness that have emerged during the campaign only confirm, albeit with fresher empirical evidence, the prevailing view that, instead of building Deng Xiao-ping’s “socialism with Chinese characteristics”, modernisation under one-party rule has produced a .. rapacious crony capitalism”. 
The reason, he writes, is not hard to fathom. “ Our study shows that China’s crony capitalism may have produced a unique multilayered oligarchy, based largely on geographical jurisdictions in which a small group of elites connected with local party chiefs control an inordinate amount of power and have a capacity to loot that is disproportionate to their relatively modest status inside the Chinese party-state”. “ They have every incentive to preserve their privileges and the institutions that make them possible.” Unless the powers that be cut the Gordian knot linking political power to property rights, the regime is in danger of decay and collapse. This study, he summarises “finds pervasive institutional decay-degeneration of norms, disloyalty to the regime and subordination of the regime’s corporate interests to the private interests of members of corruption networks”. The evidence , he concludes, is that “it is inconceivable that the CCP can reform the political and economic institutions of crony capitalism because they are the very foundations of the regime’s monopoly of power” . 
What is XI’s anti-corruption drive about? The answer is simple: it is an old fashioned purge in modern guise. Since being appointed leader of the party in 2012, Xi has concentrated power in his own hands, overthrowing the norms of collective leadership established since 1982 by Deng Xiao-ping. Since inception, Xi’s campaign has found over 1.5 million government officials guilty of a variety of corruption-related charges. The range of people targeted includes army generals, 35 members of the party’s influential Central Committee, nine members of the party’s internal disciplinary body, a former Chinese president’s chief of staff, a member of the influential Politburo Standing Committee, and another who was just about to be appointed a member. In the autumn of 2017, a plot to overthrow Xi was uncovered, and in March 2018, at China’s 13th National People’s Congress, three important votes were cast that resulted in multiple expansions of Xi Jinping’s power : he was elected for a second term presidential term ; his authority was confirmed over national security, finance, and economic reform; he created a new government anti-corruption agency, with powers to detain people for months at secret locations without access to lawyers, answerable only to him; and -most significant of all- terms limit for the Presidency were abolished. China now has a President-for-life.
The Xi Jinping-Li Keqiang administration, while distancing itself from its predecessors in style, in effect kept previous policies largely in place. A reform programme was announced with much fanfare in November 2013:  it called for a renewed commitment to « the decisive role of the market in allocating resources ». The financial system, driven by technological changes and the demands of a rapidly developing market society, became ever more diversified. But most large firms on the Shanghai and Shenzen markets had state-controlled shareholders; over four fifths of the bond market capitalization was government debt; three key policy banks remained under state control, with the function of financing major infrastructure projects, at home and -increasingly- abroad. The fiscal reforms from 1994 yielded an upsurge in central government revenues, while local governments came to account for 85% of expenditures. Local governments bore the brunt of the fiscal expansion to counter the 2008 recession, leading to a rapid rise in general government debt. According to the Institute of International Finance, China’s combined household, corporate and government debt surged from 140% of gdp in 2008, to 317% by May 2020.  Two notable components were the rise in household consumer and in local government debt. As China’s growth slowed, there were growing concerns that many of these debts were at risk of default, triggering thereby a systemic crisis in China’s state-dominated financial system.
Nor did Xi deviate from the previous administration’s statist orientation in industrial policy. The Hu Jintao-Wen Jiabao years witnessed the biggest ever housing and infrastructure boom in the history of the world. Between 2001 and 2012, China’s urbanized population grew by 228 million; steel production rose from 149 to 716 million tonnes of crude steel; the output of cement quadrupled;
in 2001, only Shanghai port handled containers; by 2012, China had seven of the top fifteen container ports in the world; power plant construction soared; tens of thousands of kilometers of highway were laid; in under a decade, China built a high-speed rail network totalling more than 10,000km, and the number of internet users grew from 33 million in 2001, to 573 million in 2012. Heavy industry lobbied hard to back Xi’s signature One Belt, One Road initiative, financed by the policy banks to the tune of hundreds of billions of dollars, to create a transport infrastructure overland via Central Asia to Europe, and via the maritime route past South and South East Asia to the Gulf and Africa. Developing on earlier hi-tech programmes, the administration in 2015 launched “Made in China 2025”, designed to promote the use of IT in manufacturing, and to raise the domestic content of components and materials.
At the heart of the statist economy are the SOEs. There is a strait line from the early years of reform to the present: the business group was first defined in 1987; then in 1995, the “grasp the big, release the small” programme was launched, opening the way to the ruthless downsizing of SOE workforces in the late 1990s. SOE profits then soared as 200 centrally controlled groups were placed under the tutelage of the newly created SASACs- the central and local government supervisory agencies for SOEs. These were reduced to under 100 by 2020. Their reduction was due to mergers into an ever smaller number, decided through the SOE restructuring plan. But at the same time, 82% of total corporate debt, at 166% gdp in 2016, was due to SOEs, particularly from local governments.  Beijing moved to curb the growth, and in early 2020, asserted CP committees ahead of the board of directors of SOEs.  CCP control over key resources and economic growth are not necessarily compatible one with another.
The four drivers of China’s forty year transformation.
Deng had no blueprint how to exit from Mao’s legacy. His method amounted to a series of complementary rules of thumb: one was to pre-empt revolution from below by accepting that change should be encouraged from above; another was to preserve the de facto monopoly power of the communist party-state. Given widespread famine in 1978, mindless protection of the status quo was not a viable option. Here is a list of the main rules of thumb which served to guide the regime,: first, exploit the demographic dividend; second , re-deploy China’s surplus labour to higher productivity uses; third, allow private businesses to boom; fourth, open Mao’s sclerotic economy on to the world. All the while, the party-state kept its monopoly on powerwhile the leadership moved to widen to key posts moved away from the party’s worker and peasant origins. Policy across the five levels of the party-state remained messy. The key though was to manage the complex process in a highly dynamic economy
Driver 1: The demographic dividend.
The dynamics were vital to escape the dead-end reached under Mao of a growing population with finite resources, poorly allocated and badly utilised. Despite the 30 to 40 million deaths caused by Mao’s Great Leap Forward policy, (1959-1962), in subsequent years – as may be seen in Table 2 below – the population boomed. In 1973, the government introduced a ‘later, longer, fewer” policy: 2 children per couple in cities, and 3 in rural areas. Fertility rates, already on a downward trajectory, fell away. The origins of the subsequent “one child” policy are traceable to attendance mid-1978 by Song Jian, a leading scientist in the China military-industrial complex, at the 7th Triennial World Congress of the International Federation of Automatic Control, being held in Helsinki, capital of then neutral Finland. There he was exposed to the arguments of population control associated with the work of the Club of Rome. On return to Beijing, he found willing ears among the party leadership for the computations of his research team on a set of population projections for the years 1980-2080. The computations revealed that if fertility rates remained at 1975 levels, China’s population would top 4 billion people—a number quite unsustainable for China’s limited natural resources. The ‘one child policy” was introduced in 1980, and remained in place for three decades.
Table 2 : Population, Employment and Sector’s Proportion of the National Economy (in millions and percentage)
1964 1982 1990 2010 2018
Total Population (m) 694.6 1008.18 1,144 1, 340 1395
Urban population % total 18.2 21 26 50 59
Working age population % 56.1 61.5 66.3 74.5 71.2
Total Employed (m) 406 501 671 761 776
Primary (m) 295 311 364 279 202
Secondary (m) 51.5 103.8 152 218 214
Tertiary (m) 35.6 83.5 154 263 359
Number employed in:
Urban areas (m) 95 128 184 347 434
Rural areas 407 501 487 414 341
SOURCE: China Statistical Yearbooks
Its effect is contested, but there can be little doubt that fertility rates remained low, yielding a declining dependency ratio per family for over three decades. Smaller households meant that more resources were available for improvements in nutrition, education, consumption and savings. As illustrated in Table 2, it secured the Chinese economy an abundant supply of labour from people in working age (15-65) in addition to an abundant supply of labour from workers migrating towards the higher wages in urban areas and in manufacturing jobs. t National savings rates rose from one third to a half of national income (savings of households and corporations) over the period, and the economy winged along at just below 10% average growth rates per annum.
The other dimension of reform was to get the Chinese to work more efficiently. Deng’s challenge is readily summarized: China had to feed 20% of the world’s population with 5% of the world’s fresh water, and 8% of the world’s arable land. China was net food importer in 1978, and rural poverty was endemic. Tt was imperative to increase farm output. The farm reforms introduced under Deng transformed China. Over the next four decades, annual farm output rose at 4.5% annually, while the population grew at barely more than one per cent per annum. Per capita gdp quadrupled over the coming forty years. China succeeded in providing 95 % of its own food needs. 
Market reforms began in Anhui province. The initial step was to free farm prices, and then to allow farmers to sell their surplus in the market. Next, rural communes—established in 1958—were replaced by the household responsibility system, whereby farmers leased land (from the party-state) for a period of fifteen to fifty years in return for contracts to deliver supplies at fixed prices. Like post 1945 land reforms in Japan, Korea and Taiwan, the CCP supervised an equal distribution of land, to avoid having to deal with large numbers of landless peasants. Village committees were introduced to replace the communes, and local government structures inherited from Mao were formally ended. The 1982 Constitution provided for direct elections of these committees by village residents. By the late 1980s, village elections were being held, and the practice was expanded to most of China over the coming decade.
The result of these reforms from the early 1980s was a sharp rise in output and a return of China to food self-sufficiency. Meanwhile, demographic structures in rural China were transformed. As can be seen in Table 2, nearly 60 of the population came to live in urban areas, the size of the workforce in industry more than doubled, and-significantly- employment in services expanded even more rapidly. With productivity rates growing by multiples higher than agriculture in industry and services, farm incomes went into relative decline. The country’s demographics thereby set the broader context for public policy and continues to do so: China’s dependency ratio is on the rise, such that by 2040 , there is expected to be 2 persons in working age for every person over 60, compared to 6 in the first decade of the millennium. The implications are clear enough: the economy has to use scarce resources ever more efficiently; a social and health system must be in place to cover the costs of an ageing population; the government has to keep control of the process.
Driver 2: Sir Arthur Lewis “surplus labour model” in action.
A key to rapid growth in developing economies is the speed at which surplus labour is absorbed into manufacturing. The faster that urban higher productivity jobs grow, the faster the surplus labour population can transfer out of rural low productivity sectors. This process is described by the West Indian economist, Sir Arthur Lewis, in his “surplus labour model” of development, which states that the modern sector—the world economy—faces an unlimited supply of labour at wages in the traditional sector not far from subsistence level.  Lewis posits that profits remain high, and are reinvested until the absorption of surplus labour come to a halt. This may happen when new investment opportunities in the modern sector dry up, and wage differences between the two sectors persist. Or the expansion of the modern sector persists, and surplus labour in the traditional sector is mopped up as wages and skills there converge on the modern sector. The workers in both sectors receive the same wages.
As a stylisation of China’s transformation, Lewis’ “surplus labour model” has much going for it. Labour and capital inputs have been better deployed as a result of the Deng reforms, non-state sector enterprises have grown much faster than state enterprises, consumer products have become available to widening sections of the population, and China’s production system, as we have noted, has become tied closely into that of the booming Asia Pacific. At the root of this success in China’s growth and productivity is the reassignment of the labour force out of agriculture, where labour productivity is below the rate in manufacturing.As long as there is an abundant supply of labour, profits in manufacturing remain high. But as soon as the supply of labour slows, and labour becomes scarce, wages begin to edge up. That point began to be reached in the first decade of the millennium.
In the longer term, the key to sustained economic growth is not the availability of the labour force, so much as productivity. Economists consider that the total output of an economy is a function of its resource endowments, and the productivity with which these resources are deployed. The conventional technique to account for the sources of growth is to measure the contribution of labour, capital and a residual which indicates a ragbag of factors—called total factor productivity–such as management, the application of technologies or the improved use of resources. For the post-1978 reformers, the results of these studies are relatively favourable. The contribution of labour inputs has tended to increase since the 1978 reforms, underlining the contribution of the farm surplus population to growth. About half of China’s growth is explained by capital inputs. Indeed, capital inputs have increased, but their productivity has declined, and stocks per capita have risen sharply. This is a clear sign that capital has not been used as well as it might have been. Indeed, this high contribution of capital to China’s growth may be taken to indicate that China’s growth is not due so much to efficiency improvements, as to simply piling up production factors, with little concern about efficiency. Nonetheless, the residual measure–total factor productivityt(tfp)– rose sharply from -0.78 % growth rates in the years 1952 to 1978, to +2.23% thereafter. 
A number of these studies record, a decline in tfp growth rates in the late 1990s—a loss of dynamism due to institutional and political blockages. The government response to this challenge was to bring China into the WTO in 2001; to free up urban labour markets, modify the registration (hukou) system, and to invest in education. In the years 1998-2003, a country-wide programme was launched to give all children nine years of education, while a big push was made to expand higher education, notably in technical subjects. The aim was to build a high-performing innovation system and knowledge economy.  China’ output of engineers is 600,000 engineers a year—a figure amended by Duke University researchers to 351,537 per annum. As the OECD observed, the average quality of the labour force benefitted, with new entrants having almost 3 times as many years of schooling as those going into retirement.
The doyen of Chinese scholars on productivity writes on the period 1978-2015 that “China’s labour productivity (GDP per worker in real terms)increased by 16.7 times; labour productivity in the primary sector by 5.5 times; in the secondary sector it increased by 13.5 times and in the tertiary setor by 5.2 times”. The dominant factor was the shift of labour towards sectors with higher productivity growth rates. But, he concludes, the demographic transition is coming to an end, and traditional sources of growth are being exhausted: negative growth in the working age (and economically active) population has aggravated labour shortages, weakening China’s comparative advantage in industry; the rapid increase in the capital-labour ratio has resulted in diminishing returns to capital; the slower growth in the number of new entrants to the labour market has slowed the rate of human capital improvement; not least, an ageing rural population has diminished rural areas as a source of cheap labour. As a result, he calculates growth rates as slowing to 6-7 per cent per annum for the coming decade, and a tougher policy environment to push through the reforms needed to sustain a competitive market system.
Driver 3: Industrial structure and growth of private businesses.
One cause of the fall-off in productivity growth in the late 1990s was related to local protectionism across the length and breadth of China. In the initial period of economic reform after 1978, local protectionism-encouraged by the policy of de-centralisation-had a significant impact on the localisation of industries. As one assessment stated of the first twenty years of reform, China had evolved into a “fragmented internal market with fiefdoms controlled by local officials”. By contrast, the deep insertion of the coastal provinces into the international division of labour was underpinned by competitive inter-provincial product markets. These market-friendly coastal regions also fostered the emergence of private sector businesses,  while the internal provinces tended to remain more under the rule of party-state government-business networks. Policy efforts from the central government to counter local protectionism included the 1993 Law on Unfair Competition; reform of the fiscal system in 1994; the push in the years 1998-2001 to reinforce market integration by incurring international commitments under the under the WTO; and the April 2001 central government directive forbidding local governments to enforce local protection. In the new millennium, the evidence suggested that price behaviour across China was more than ever inter-related, and that businessmen considered price and quantity controls of little importance in restricting inter-provincial trade.
A further major contribution to the longer-term trends towards higher productivity in the use of resources has been the substantial change in the ownership structure of the economy. The industrial sector has been segmented statistically along ownership lines into the state and non-state sector, which is characterised as consisting of town and village enterprises(TVEs), urban collectives, foreign-funded enterprises, and privately-owned Chinese firms and small business. State-owned enterprises (SOEs) accounted for 77.6% of industrial output in 1978, down to 26.5% in 1998. The non-state sector – TVEs, urban collectives, etc – overtook the state sector in the mid-1990s, accounting for 73.5% of industrial output in 1998. The non-state snapped up opportunities in the faster moving consumer goods markets, while the state sector concentrated in heavy industry, utilities, banking and transport. Following the formal legalization of private ownership, the number of enterprises under private ownership boomed, as illustrated in Table 3 below. A point to note is that China’s emergent industrial structure, closely tied into the metamorphosis of the party-state under Deng, fed on guanxi, or relationships between business and political enterpreneurs, but was also subject to strong competition, to harder budget constraints, open markets and low taxation.
Table 3: Number of enterprises by ownership type, & industrial employment by ownership type.
Year No SOEs Employed No of Employed by Total Total
in SOEs Private firms Private firms Enterprises employed
Source: CEIC China Data base, in Ligang Song, “State-owned enterprise reform in China: past, present and prospects. Australian National University Press.2018. pp.370-371
As implied in Deng’s policy of “feeling the stones as you cross the river”, reformers did not know the future course of events. Deng admitted as much in 1993, when he was quoted as saying that “the greatest achievement that was totally out of our own existence is that rural enterprises have developed”.  The story of the TVEs opened in July 1979, when the central government allowed provinces to grant tax holidays to their enterprises and also to enter consumer goods production. The bigger step came in March 1984, when the former commune and brigade enterprises were renamed TVEs, and business in the countryside was in effect liberalised. There, numbers shot up from 1.4 million in 1983, to 6.4 million in 1984 and 24.5 million in 1993. As a result, China accelerated into the reforms, with more goods in the shops, more jobs being created, and greater incentives for party-members to become entrepreneurs, by contrast to the Soviet Union where reform was introduced while the economy stagnated.
If TVE expansion was the story of the 1980s, the growth of the private sector has been the main feature of China’s economy since 1992. Up to then, private business in China developed in a context of unclear property rights, extensive local government patronage, and much regulatory and political uncertainty. Deng’s call in his famous southern tour in 1992 for an acceleration of market-oriented reforms signalled to entrepreneurs that party-state attitudes to private enterprise were more welcoming. It was in the course of the nineties, as the conditions of state enterprises worsened, that the party-state converted more to the virtues of entrepreneurship. The shift in official attitudes was confirmed at the Fifteenth Party Congress held in September 1997, when private enterprise was recognised as an important component of the economy. The forum also emphasised the rule of law and its key role in a modern market economy. Private ownership and the rule of law were incorporated into the Chinese Constitution in March 1999, and further reforms to protect private property and the rights of entrepreneurs were introduced in the first decade of the new millennium.
Zhu’s reforms did greatly improve the return on assets of SOEs through to 2007, substantially reducing the underperformance of SOEs relative to private firms. Even so, the OECD has calculated that the private sector was responsible for as much as 57% of the value-added by the non-farm business sector by 2003.  Over the years 1998-2003, the output of domestically owned private companies rose fivefold, compared to a threefold rise in the output of non-mainland controlled companies, in other words of multi-national corporations. In this period, the output of the state sector shrank by 70%, shedding 22 million jobs, while the private sector gained 18 million. This rapid growth of private companies in the industrial sector was associated with high productivity, estimated to be almost twice that of enterprises controlled directly by the state. The private sector’s export-market share jumped five times over the previous five years, and accounted for three-quarters of exports by 2003 .
Nicholas Lardy has pointed out, the productivity gap widened significantly since 2008. By 2016, he calculates that returns on assets of registered private industrial firms was three-and-a-half times that of SOEs- the largest gap since the late 1990s. “The large and growing gap in the economic and financial performance of private and state firms reflects the superior management of the former and the failure of banks, almost entirely state-owned, to impose hard budget constraints on money-losing state-owned enterprises”.  The story Lardy tells of SOEs relative to China’s private sector may be summarized thus: the SOE share of industrial output shrunk from an 80% share in 1978 to 20% by 2016. But because China’s industrial output (in constant prices) was 47 times the level of 1978, the output of SOEs was 12 times that of 1978. They were huge, politically powerful, entrenched in the structures of the party-state, holding sway over critical sectors of the economy, and able and willing to affect government policies.
Driver 4: The Open Door for trade and foreign direct investment.
By 1978, the evidence was all around the Asia Pacific that countries open to trade enjoyed much faster growth rates than closed economies. Over the following decades, tariffs were lowered ; export firms were allowed to keep a proportion of their foreign exchange receipts and to import components for re-export after processing at zero tariffs. The currency was slowly devalued from 1978 to 1994, and the state monopoly on trade was abandoned. Meanwhile, foreign investment rates consistently grew, rising steeply in the boom years of the late 1990s when inward investment came to account for up to 13% of total investment for one year. Trade policy and inward investment proved highly complementary. Trade policy encouraged local production for export markets; foreign investors sought to escape higher wage costs at home. Trade with Asian countries boomed, as China sucked in their exports, processed them, and re-exported on to global markets.
The very close association in China between foreign investment and trade was established at the very beginning of the Open Door policy. Four special enclaves were set up in 1980 opposite Hong Kong in Guangdong province, and Taiwan, in Fujian province. The best known of these special zones, was initiated when the PLA Construction Corps erected a barbed-wire fence around Shenzhen village. The aim was to attract investment from ethnic Chinese business people in Hong Kong and in Taiwan by offering to isolate their operations from local mainland Chinese regulations on ownership, tax, labour relations or materials. So successful was the experiment that in 1984, Deng had similar privileges extended to 14 coastal cities, on the grounds that “we should create several Hong Kongs”. The advantages of their coastal infrastructure, proximity to markets and skill availability was compounded by the business-friendly environment, the dynamic spill-over effects on surrounding areas, and the ability to pull in immigrants. Locating these zones on the sea coast opened up wealth gaps with the internal regions of China, prompting Beijing to extend the priveleges to five inland provinces—Anhui, Jiangxi, Hunan, Hubei, and Sichuan. The zones provided platforms for the emergence of a mainland Chinese business class. A considerable proportion of investment there originated as funds siphoned offshore from state enterprises, and then recycled via Hong Kong for location in the zones to benefit from the various tax or labour privileges.
A key to China’s Open Door policy was Hong Kong, one of the destinations to which Shanghai’s business community had fled following the communists’ takeover of the mainland. The Chinese provided the low wage workforce in a free market economy operating under British law and administration. Exports boomed, while the city’s importance grew as the mainland’s entrepot, and as a centre for corporate headquarters and financial services throughout East Asia. Corruption was stamped on, and when the mainland opened up in 1980, Hong Kong’s sophisticated mercantile culture seeped into southern China. Rich business house owners bonded with powerful mainland political barons to hitch the mainland’s near inexhaustible supply of cheap labour, to foreign capital and technology. By the time of Hong Kong’s reversion to Chinese sovereignty in 1997, its population of 6 million in effect supplied China’s prime capital market, accounted for about 50% of the mainland’s trade with the rest of the world, provided two-thirds of inward investment there, and represented about 25% of China’s total gnp. State enterprises lined up to list on the stock market as a stepping stone to their emerging as corporate players on world markets. Hong Kong in short was a gleaming example of what Chinese people could accomplish in a market society under the rule of law. On the other hand, there were now two Chinese territories, Hong Kong and Taiwan, with democratic traditions existing formally as territorial units in China.
Over the four decades since the Open Door policy was initiated, China in 2010 became the world’s largest exporter of goods . Exports grew at double digit rates, and the structure of exports shifted from half of total exports in the 1980s in primary goods to 90% in manufactured goods in the new millennium. Just under half of exports out of China in 2019 went to other Asian countries, while 20% went to North American markets, and a similar amount to Europe. China is also a very large importer, becoming the second largest after the United States. Indeed, it has been notably more open than Japan, with 64% of gdp in the import and export of goods and services in 2008, compared to Japan’s 42%. China ran a huge current account surplus during the first decade of the millennium, but the surplus disappeared in the second. Over two decades since China’s accession to the WTO, its markets have become the prime destination for Asia-Pacific exports.
Deng’s initial appeal for foreigners to invest in China was to the Chinese overseas diaspora – the more than 50 million Chinese people who had made their homes anywhere between British Columbia and California to Taiwan, Singapore and South East Asia. In Thailand, Malaysia, the Philippines and Indonesia, Chinese business are prominent far beyond their numbers. In the Philippines, for instance, the Chinese represent 1% of the population but hold 35% of the sales of domestically owned firms. In Indonesia, ethnic Chinese account for 2% of the population but hold 70% of private capital. In Malaysia, overseas Chinese business are closely associated with the Malay power structure. Together, the Chinese diaspora’s combined overseas liquid assets in 1990 amounted to about two thirds of Japanese bank deposits at the time.
Deng’s call was heard. Between 1979 and 1993, the countries dominated by the overseas Chinese—Hong Kong, Singapore, Taiwan, Macau and Thailand alone–accounted for 81.2% of enterprises with operations in China and for 84.6% of the total value of fdi there.  In 1992, the overseas Chinese held full ownership of 8,000 subsidiaries in China, while Japanese corporations owned 311 and Americans, just 39. In the following decade, the largest inward investors were again the overseas Chinese. Two fifths of Taiwan’s overseas investment went to the mainland, making it the second source of inward investment after Hong Kong. These investments were primarily targeted at labour intensive, and low tech activities, and located along the special economic zones of the Pearl River Delta, that border Hong Kong and Macau. In turn, this inward flow deepened China’s integration in the production and trade networks of Asia Pacific. In the early 1990s, inward investment to China was equivalent to 6% gdp, falling to 3% gdp in the first decade of the new millennium. This placed China among the top three recipients of fdi, alongside the US and the UK, and by far the largest recipient of fdi among developing countries, accounting in some years for 25-30% of the total to all developing countries. By 2001, the 145,000 foreign invested enterprises were reckoned to account for 10% of the urban workforce, 17% of industrial output, and –variably from one year to the next—forty to fifty of annual exports. There were by then about 700 R&D centres in China run by international businesses, two thirds of whose production now went to the domestic market. In 2005, of China’s top 100 exporters, 53 were foreign companies and all were electronics or information technology companies. Thereafter the pace of inward investment slowed, but the stock of inward investment remained high at around 12% of gdp. 
The main impact of fdi has been on stimulating the domestic economy, and accelerating China’s insertion in the global division of labour. Such large injections of resources have stimulated growth, especially in those provinces which have received most. With output of foreign enterprises growing in the mid-1990s at four times the rate of local enterprises, it was not surprising that they acted as locomotives on local economies, attracting sub-contractors and stimulating suppliers. Domestic enterprises benefited by transfer of technology and by the demonstration effect of managerial know-how. Not least, fdi has helped to build a highly competitive and dynamic manufacturing export sector: 65% of the growth of exports in the 1990s and early 2000s was attributed to foreign firms investing in China. For the three decades following the Open Door policy, China’s trade grew four and half times faster than global trade. Trade continued to grow, but at a slower pace in the decade following the global financial crash of 2008-2010.
In conclusion, the past forty years have seen a remarkable trasnformation of China’s economy to become the prime manufacturing platform of the world economy. There remain many challenges: an ageing population; a better educated and networked population, with aspirations for the consumption of quality products, requiring ever higher standards ; major problems of pollution, water scarcity, and soil deterioration; rising levels of debt, particularly by SOEs; corporate power structures entrenched in the party-state; a prevalence of corrupt practices, and not least a serious deterioration in relations between China and the western powers, notably the United states. We turn to that subject in the following chapter.
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 « China debt: how big is it, who owns it and what is next? » South China Morning Post, May 19, 2020.
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