Sometimes you can pick up a book and can’t put it down. Other times, once you put it down you never pick it up again. Something similar happened to me when one of my students handed me a book written by Professor Yasheng Huang entitled "Capitalism with Chinese Characteristics: Entrepreneurship and the State." Every time I put this one down I dreaded picking it up again. Not because it wasn’t any good, far from it, but because of the exhaustive research and empirical detail which had gone into it.
It was not bedtime reading.
However, I’m glad I persevered because some things I believed previously about China’s development have now been revised.
Just how "rapid" has this development been?
Well, try this:
Last week the Chinese government released its figures for last year’s exports.
"The figures suggest China will surpass Germany’s export total for the whole of 2009." BBC.
Thereby making them the world’s largest exporter. Far from heaping praise on them this will inevitably lead again to yet more demands for China to revalue its currency upwards.
"Led by the US, [China’s trading competitors] say it is unfair that China has been able to make its good [sic] cheaper by keeping the yuan weak, but Prime Minister Wen Jiabao has said China “will not yield” to foreign demands that it revalue the currency."
"Beijing has long said that it will not allow the yuan to trade freely until its domestic economy was strong enough to pick up any resulting decline in exports." BBC.
So when is this likely to happen?
No time soon is the answer.
The great value of reading Professor Huang’s book is that it traces the development of China’s trading surplus and explodes some myths along the way.
One of the biggest myths is that China managed to succeed with heavy central planning on the one hand and no property rights on the other — an impossibility unless China had found a new way of doing things!
The truth was that that the amazing speed of economic activity in the 1980s had little to do with planners and everything to do with property rights.
In 1958 the agricultural commune system was imposed by the government. For farmers and their families it was little more than serfdom, or slavery, by another name. It was a disaster.
For the next 20 years they laboured and suffered under an unworkable system. Then in 1978, two years after Deng Xiaoping assumed the leadership, something remarkable happened.
A poverty stricken farming community in a tiny village called Xiaogang, in Anhui Province, one of the poorest provinces in China. Late in 1978, the actual date is uncertain, 18 impoverished farmers met. They agreed to break up the land between each household and farm it individually. They would not ask the government for money or grain, they would meet their quotas, but whatever was left they would keep and sell themselves. This was against the law.
Fearful of what might become of their families they drew up an agreement which said that if any of them were arrested and imprisoned everyone else in the village would look after their children until they reached 18 years of age. It was signed with signatures and thumbprints.
And this, according to the story, was how it all began.
The following year the grain harvest was 6 times what it had been in 1978. They easily met their quotas and then sold the excess — many by the roadside. Per capita incomes jumped by a factor of 20. The Party Secretary, Wan Li, who was in charge of Anhui Province at that time, heard of and then approved of the "trial."
Word spread quickly to other communities throughout China. Such were the amazing improvements in productivity and output that it was given official approval by Deng in 1980. Four years later the commune system had all but disappeared.
Throughout the 1980s rural per capita incomes rose by an average of 9% pa. This extra spending power encouraged non-farm businesses to spring up. These became known as Township and Village Enterprises (TVEs). They were actively encouraged by the government and given easily obtained loans and lower tax rates. Having been virtually excluded from China’s welfare system, such as it was, peasants saw this as their opportunity to provide their own safety net. They went for it, not in their tens of thousands, but in their millions.
Here, the unbelievable depth of Huang’s research is revealed; he delved into the archives of the Ministry of Agriculture. For the year 1985 he found that, of the 12 million officially recognized TVEs, more than 10 million were privately owned and run by individuals and their families.
They had the right to own their own businesses, make what was demanded, sell to whom they wanted and keep the profits they generated.
Rural reforms made the whole thing possible but it was the emergence of free markets and property rights that made it happen.
“The diversity of production, commodity economy, and all sorts of small enterprises boomed in the countryside, as if a strange army had appeared suddenly from nowhere. This is not the achievement of our central government.” Deng Xiaoping, People’s Daily, 13 June 1987. (Emphasis added).
The 1980s finished with Tiananmen Square.
In passing, Huang explodes another myth here:
"After the collapse of the Soviet Union, many western and Chinese analysts came to the conclusion that China was spared the same fate in 1989 because it did not liberalise its political system. This is a flawed reading of history. The reason why China did not collapse in 1989 has very little to do with lack of political reforms … The real reason China did not collapse was that its rural population was reasonably content … At the height of the Tiananmen turmoil, Deng reportedly made the following remarks to other Chinese leaders: u2018The economy is still the base; if we didn’t have that economic base, the farmers would have risen in rebellion after only 10 days of student protests — never mind a whole month’.”
Huang writes that his research proves that there was a deliberate switch in policy in the early 1990s under the leadership of Jiang Zemin and then Zhu Rongji. The switch was from the rural economy to urban centers. When asked directly why this happened in this video he is honest enough to say that he doesn’t know exactly why. However, Tiananmen Square was a significant factor.
Rural reforms were scaled back along with liquidity flows; in the 1980s 30% of rural households had access to some kind of credit — in the 1990s this fell to less than 10%. Higher taxes were imposed along with more expensive health care and higher education fees. These policies were used to fund the investment in urban centers. The result was that per capita increases in rural incomes fell to less than 4% pa for most of the 1990s.
Thus, the rapid growth in the countryside of the 1980s ended in the early 1990s.
However, as a whole, the economy continued to grow at more than 9% pa. Huang argues that foreign academics and researchers failed to see what was really going on because they simply concentrated on figures for GDP and Foreign Direct Investment. The truth is that most couldn’t do much else anyway. There is no shortage of material. If there is a problem it’s with its reliability. However Huang could read the original source documents and this he did with a vengeance (e.g. as part of his research he combed his way through 22 volumes of internal bank documents; yes, 22 volumes!).
Chinese manufacturers were forced to sell abroad, not simply because domestic consumers saved too much but, more importantly, because the fall in disposable incomes in the countryside meant they simply didn’t have the money to soak up all of the output. Using an undervalued currency to promote exports was not a deliberate development strategy as such — they didn’t have much choice — there was no other way of shifting their output.
This, he argues, was the beginning of a global trade imbalance which just grew and grew. What Bush and Greenspan did in 2001, was to greatly exacerbate a serious problem which was already there.
When recovery comes the jobs will not return with it. As things stand they simply cannot until countries like China, in particular, start spending and countries like the USA, in particular, start exporting. China has to find a way of re-generating its rural economy. The USA has to find some way of drastically restructuring its economy. And there’s no choice here — Margaret Thatcher said it all back in the 1980s — if you cannot compete in a market you have to get out!
Until this happens the only thing that we’re going to "recover to" is a terrible kind of economic stalemate.
"Everyone … agrees that these imbalances involve too much spending and borrowing by Americans and too little of both by the Chinese and other developing nations … Once they start spending more of their incomes on themselves, those funds will no longer be available for us to borrow. Unfortunately, that is when our real economic crisis will begin." (Emphasis added). ~ Peter Schiff.
What a terrible conundrum — for all of us.
My thanks to Professor Huang.
Chris Clancy [send him mail] is Associate Professor of Financial Accounting at Zhongnan University of Economics and Law in Wuhan, Hubei Province, People’s Republic of China.