Deception and Manipulation inside China’s Growing Economy – Part 1/3

Introduction

The 70 years that came after the founding of the People’s Republic of China (PRC) saw one of the most extraordinary economic expansions in history. Once an impoverished country plagued by civil war, China today is characterized by a strong authoritarian government and the second biggest economy in the world. While China has intentionally played down its ambitions abroad and promised to be a responsible stakeholder in international affairs, its predatory trading practices and bullying of neighboring states suggest otherwise. Through explicit and implicit government subsidies and forced technology transfer of Western firms, China was able to leverage its abundance in economic factors of production (Land and Labor) to rapidly industrialize and modernize its economy. As a techno-authoritarian state, a growing China threatens not only the integrity of global trade governed by rules but also the free world founded on the principle of liberal orders. In this research paper, I aim to uncover the untold story of how the Chinese Communist Party (CCP) used deception, coercion, and corruption to advance its agenda, and why China’s Economic rise, though admirable in magnitude, comes at the cost of Western and especially American interests. As the first of a series of papers, this article will focus on laying out the necessary political and socioeconomic background for understanding China’s approach to the economy.

1949: The Start of A Century Long Nightmare

Speaking before the National Party Congress in October 2017, President Xi revived a familiar sounding slogan from Maoist era and declared that “east, west, north and center, the Party leads everything.” Indeed, now 70 years after the Communist take-over, the tight grip on 1 power by the CCP has only increased in lock-step with the economy. It is as if China has caught up with the West in all elements of organizing a successful economy – namely industrialization, technology, and financial modernization- only to have intentionally left out the single most important element of sustained economic prosperity, that is, free-market economics. Almost from the onset, the CCP has gone back on its promise to democratize and modernize China and made it clear that maintaining the party rule was absolutely the top priority.

From 1949 to Mao Zedong’s Death in 1976, China has sought to adopt a model of command economy to centralize all economic factors of production – land, capital, and labor – to focus on heavy industries and agriculture . During this time, all of China’s individual farms were collateralized into communes, and private ownership of property was nearly non-existent. The idea was that China at the time was too poor of a country with a large but overwhelmingly rural population, and that the quickest way to economic modernization was through massive build-up of both the agriculture and the heavy industries so that China could obtain self-sufficiency . With that in mind, China undertook in a series of the so called “economic reforms” that made extensive use of forced labor and heavy investment, with the people of China bearing the burden while the government acting as the dominant power in all aspects of civil life and market dynamics. The central government set production goals, controlled prices, and allocated resources throughout the economy.

However, since most aspects of the domestic economy was controlled by the state, there was no market mechanism for balancing prices and efficiently allocate resources. Moreover, the command economy under Mao set ill-conceived production goals that were unrealistic to say the least, which only added to a waste of resources and weakened the economic potential of China . The focus on heavy industries, for example, was based on the assumption that China had enough energy reserves, which later turned out to be completely false. It was under such a system that China experienced several prolonged and severe economic downturns, most notably the Great Leap Forward (1958-1962) and the Cultural Revolution (1966-1976). During these periods, famine claimed tens of millions of casualties as political infighting and flawed economic planning left the population of China lacking in resources vital to survival. Although China’s per capita GDP on a Purchasing Power Parity increased two fold from 1950 to 1978, it fell 20.3% from 1958 to 1962 and another 9.6% from 1966 to 1976. The Soviet-style command economy of China and inter-party power struggles came to define this era of China as “Maoist China”.

Immediately after Mao’s death in 1976, China was poised to start a new wave of economic reform. Decades of poorly planned command economy has seriously hampered China’s economic potential and discouraged real progress. Over-investment in the heavy industries and the inability to supply enough oil to meet unrealistic steel production goals in particular exhausted the country and gave rise to the reformist that came to define China’s subsequent economic miracle.

1979: The Decade of Hope

By the end of 1978, almost all enterprises were under direct state control, and the economy was more centralized than ever before. However, as pressures to accelerate the economy built up, it was becoming increasingly clear that the command economy focusing on agriculture and heavy industry were holding China back. By early 1979, inflation and unemployment further highlighted the inefficiency of the economy as it was. And with Mao gone, Chinese leaders were finally ready to implement fundamental economic reforms that later proved decisive and necessary.

The Third Plenum of the Eleventh Communist Party Central Committee in December 1978 marked Deng Xiaoping’s return to power as the paramount party leader, and charged Chen Yun, who gained fame by saving the economy at various times leading up to 1978, in control of the economic policy. The decision was so fundamentally important in that both Deng and Cheng, who came into power after Mao’s death, were advocates of economic liberalization. The assumption of political and economic leadership by reformist marked a decisive break-away from the much-to-blame command economy to a centrally-organized but partially-liberalized economy that later became known as the “China Model”, and set China on a path to both economic prosperity and global influence.

Beginning in 1979, Beijing launched a series of economic reforms . Although the reforms were carried out in stages, the two characteristics associated with post-1979 reforms – decentralization and reorientation – help to define its success over the previous attempts. First, the central government sought to revitalize the rural economy, based largely on agriculture, to eventually increase output and productivity. The key change here was allowing farmers, who previously had to sell all of their products at set prices to the government, to be able to sell at higher prices set by the market and while also providing a minimum price set by the government . This two-tiered pricing system provided incentive for farmers to partake in limited forms of free-market, and greatly increased the pace of agriculture reform. Similar pricing systems were also adopted in select markets, mostly in commodity and consumer good markets. The adoption of limited market reform whereby the government gives up pricing power and allowing workers and farmers to increase their income as well as productivity eventually led to huge increases in total output that were fundamental for China’s subsequent success.

The second distinguishing characteristic of the economic reform that came after 1979 was the reorientation of the economy from heavy industries to lighter industries, and from the production of industrial goods to manufacturing of consumer goods. It was unambiguous that the failures of previous reforms were largely due to unrealistic and poor central planning. The relentless focus on heavy industries led to poor allocation of human capital and created a situation where, given China’s staggering population, average labor productivity remained low. It also skewed the distribution of income strongly in favor of industrial goods, which is largely dominated by state-owned-enterprises. The result was a modest increase in industrial output but massive productivity loss and opportunity cost.

To counter this, Beijing sought to encourage more production of consumer goods and to rebalance the distribution of income in favor of the labor force. They did so by encouraging investments in manufacturing and allowing private firms to compete with state-owned-enterprises in select industries. Several port cities such as Shanghai were designated as economic free zones, and local government as well as private firms were given incentives (e.g. tax breaks, subsidies) to participate in the newly-formed goods and services market wherein the government yielded its pricing power and granted firms and individuals the freedom to participate in an economic environment dictated by free-market dynamics. Whereby household income claimed 55% of national disposable income in 1978, it had grown to 66% by 1981 and reached 70% by 1984. Farm household income in particular increased from about 30% of national income in 1978 to 44% in 1984. Moreover, while heavy industrial output declined 2.8% during the period, light industry increased output by 36%.

Prior to this period of reform, despite China’s abundance of land and labor to draw on, it remained lacking in the energy and technology to effectively utilize its resources efficiently. The shift of focus to manufacturing from heavy industries was thus necessary and appropriate. China was now able to leverage its cheap labor prices and vast areas of land into the production of consumer goods, which in turn drew capital investments and allowed for the import of much needed technology. In essence, the economic reforms post-1979 had undone the damage to the economy caused by poor central planning, With its reinvigorated economy, China was able to strategically build itself into the export-based economy which allowed for its economic prosperity and global influence.

By Prince 小王子

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