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China has long had an ambition to catch up with the West, but wars, internal conflict, ideology and the sheer scale of the country have combined to make this dream all but impossible to achieve. However, recent policy changes in China, coming in the wake of a quarter-century of transformation, may mean that within the next 50 years China will achieve its cherished goal, writes Allan Zhang.
The Chinese civilisation has strong claims to be the longest continuous civilisation in human history. China was the "middle kingdom" surrounded by a group of barbarian tributary states. Its advanced culture, technology, philosophy and level of economic development made it the dominant power in Asia. But this long-held supremacy, together with national pride and confidence, was brutally shattered by the guns of the Western powers, starting with China's military failure in the Opium War with the British in 1840. In the following 70 years, China suffered a series of humiliating defeats by the West, as well as large-scale domestic uprisings, which eventually brought down the imperial dynasties of over 3,000 years and led to the creation of China's first republic in 1911.
After China lost the Second Opium War, Japan, a long-time student of Chinese civilisation, switched to the West for inspiration and quickly turned itself into an industrialised country through its ‘meiji reform'. In 1895 Japan defeated its old master's Royal Navy, occupied Taiwan and eventually controlled the whole of Manchuria. These events, together with the looting of China's imperial garden of Yuanmingyuan by the eight-power allied forces of Western countries in 1900, left strong feelings of humiliation in Chinese minds, and something of this victim mentality still lingers on today.
This table shows how direct trade in goods has altered over the years. The total value of business with China is much greater than this table indicates. Trade through third countries is not shown: trade through Hong Kong has almost equalled direct trade in some years. Sales of services have expanded rapidly over the past two decades, but statistics are not available. In 1953 exports to China were 0.2 per cent of the UK's total, and imports from China were 0.3 per cent of the UK's total imports. In 2003, exports to China were 1.0 per cent of the total worldwide, and imports from China accounted for 3.7 per cent of the total. Source: UK Customs
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"Rejuvenating the Chinese civilisation" and "catching up with Western countries" became the key objectives for generations of revolutionary activists, including Communists and the ruling Nationalists, who pursued different routes to the same target. Traditional cultures and values, thought to be the root of China's backwardness, were denounced and a strong wave of Westernisation engulfed the country. Yet, China's early modernisation process was severely interrupted by the Japanese invasion during World War II and the subsequent civil wars between Communists and Nationalists.
New China, new efforts
When Chairman Mao declared at Tiananmen in 1949 that the Chinese people had "stood up", China was one of the poorest countries in the world after decades of war and unrest. Its GDP per capita was only US$18, compared to US$505 for the US and US$464 for the UK. The Chinese economy was predominately agrarian, accounting for over 90 per cent of output, with modern industrial production still only in its nascent stages.
The new Communist government started its reconstruction process by launching a land reform programme – allocating land to poor peasants - after founding the People's Republic. By 1953 agriculture and industrial production quickly recovered to levels seen before the civil war. But the Korean War, which broke out in 1950, changed China's political and economic agenda. Relations with the US and the West deteriorated, as the West imposed trade and military embargoes against China. China turned to the Soviet Union for support - including copying the whole Soviet political, economic and social system - and the country stepped onto the road to a socialist transformation.
Mao's therapy for developing China into a modern industrial state was to follow the Soviet model of large-scale industrialisation – focusing on heavy industry rather than consumer goods - and the collectivisation of agriculture. In 1955 the government promoted collective farming and nationalised commercial and industrial companies that had stayed in private hands up until then. Meanwhile, the Chinese Communist Party (CCP) became heavily involved in almost all aspects of everyday life. Even writers and basketball players were required to serve a social purpose in tune with party policies.
As the "anti-rightist campaign" in 1957 had quelled all the dissident voices, the increasingly confident Mao launched the ambitious Great Leap Forward movement in 1958. The target was to "surpass Britain and to catch up with America within 15 years". Peasants were encouraged - or forced - to abandon their private land and to enter people's communes, where they lived in co-operative units and ate meals at common canteens. To boost the production of iron – which was seen as an important benchmark for judging the level of economic development – the CCP mobilised peasants to stop farming and instead produce iron in their backyards. The movement ended in disaster, as an estimated 30m people died of starvation, and the Chinese economy remained far behind Western countries in every respect.
A new policy of "readjustment, consolidation, replenishment and improvement" was introduced in the early 1960s under the leadership of Liu Shaoqi and Deng Xiaoping. Mao, fearing he was losing his influence and that China was becoming a "revisionist" country, launched the 10-year-long Cultural Revolution in 1966 – a bottom-up rebellion against all existing institutions and party policies. During this period, anything deemed traditional, capitalistic or bourgeois was denounced; temples and ancient buildings and artefacts were either demolished or burned; and teenage Red Guard factions, in showing their devotion to Mao, eventually descended into vicious infighting across the country.
At the end of the Cultural Revolution, the Chinese economy was believed to be on the brink of collapse, despite some economic and scientific progress in certain areas. China was sealed off from the West.
Changing course
After Mao's death in 1976, Deng Xiaoping was gradually restored to power and recognised that the old way of socialism no longer worked in China. Inspired by the economic successes of Japan and neighbouring Asian tiger economies, Deng called for "emancipating the mind" and re-establishing relations with the West in order to resuscitate the economy and restore party legitimacy.
Reform was started first in the field of agriculture. A "household responsibility system" was introduced and peasants were allowed to farm the land freely and sell their surplus produce at local markets. Eventually the people's communes were dissolved. On the industrial front, plant managers and local officials were given increased authority over their production, while a wide variety of small-scale enterprises in services and light industry manufacturing mushroomed across the country. Efforts to separate government from enterprises were made, and government controls over people's daily life were much reduced.
The private sector, long regarded as a "capitalist tail" that was nearly wiped out during the Cultural Revolution, revived quickly as its legitimacy was recognised by the CCP in 1982 as "a necessary component in the primary stage of socialism". People all over China responded to Deng Xiaoping's call that "to get rich is glorious" and rushed to make money.
Heading for the coast
In 1984 China's economic liberalisation expanded into the area of foreign investment and trade, as 14 coastal cities began to open up to outsiders. China's foreign policy also switched to creating amicable relations with all countries, including the Soviet Union and the US. Foreign capital poured into the country and consumer demand for foreign goods rose markedly as major foreign brand names such as Coca-Cola, Sony and Boeing became familiar logos. The economy grew by an average of around 10 per cent through most of 1980s.
After the Tiananmen demonstrations and suppression in 1989, China's reform and open-door policies backtracked for a while, as some senior leaders blamed Westernisation and privatisation as the main causes of the unrest. But the cloud was cleared by Deng Xiaoping's famous southern tour in 1992, when he called for bolder steps for further liberalisation and opening up to the West. This triggered a new round of rapid economic development. The private sector regained its growth momentum, and foreign investors hurried to establish businesses in China once restrictions had been relaxed. Building up a "socialist market economy with Chinese characteristics" became the guiding principle of the CCP.
In 1997, the 15th Party Congress endorsed more liberal policies, including recognising the private sector as "an important component of China's socialist market economy". A three-year bailout programme for moribund state-owned enterprises was launched and banking reform was initiated. Government restructuring accelerated, as the number of agencies was reduced and more administrative rights were shifted to enterprises, non-governmental intermediaries and local authorities.
In December 2001, after 15 years of strenuous efforts, China was formally admitted into the World Trade Organisation, thus triggering a new round of economic liberalisation. To reflect the fact that two-thirds of China's industrial output was produced by the non-state sector, compared to less than 20 per cent in 1978, the CCP decided at its 16th Party Congress in 2002 to welcome the "red capitalists" to join the party and vowed to "promote the development of the non-public sector" and "better safeguard private property". These policy changes were added into China's national constitution at the National People's Congress, China's parliament, in March 2004.
Different economic landscape
Over the past 25 years, China has been profoundly and irreversibly changed by its economic reform. By 2003 the Chinese economy had expanded by over 600 per cent, with average GDP growth of around 8 per cent since 1978. China has risen to become the sixth largest economy measured by GDP at current market exchange rates and, at PPP (purchasing power parity) rates, China is already the world's second largest economy only after the United States. China is now able to provide adequate food and clothing for its people, around a fifth of the world's population, with 7 per cent of the world's arable land.
Meanwhile, China has emerged as a major player in the world economy. In 1978 China's foreign trade (the total value of exports and imports), ranked 32nd in the world. Now it is the world's fourth largest trading power, with a total value of around US$850bn in 2003. Foreign capital inflows have increased markedly, with the total stock of actual foreign direct investment amounting to around US$500bn at the end of 2003, and around 465,000 foreign companies operating across the country. Foreign-invested companies now account for just over half of China's exports, a third of its industrial value added and a fifth of Chinese government revenue.
The Chinese domestic market has also become vital to many foreign companies. In the interim, state control over people's lives has been further diminished as tens of millions of people now work for private or foreign-invested companies.
As foreign investment rises and the private sector booms, China has become a "manufacturing hub of the world". According to The Economist's World in Figures 2003 directory, China is now the world's largest manufacturer of textiles, garments, footwear, steel, coal, cement, refrigerators, microwave ovens, televisions, radios, toys, office products and motorcycles. Chinese products, with lower prices and of reasonably good quality, are conquering world markets, although this has caused increasing concerns, especially from the US, about losing domestic manufacturing jobs to China. Meanwhile, China has increasingly become a major investor in foreign countries, particularly in the field of resource exploration.
New leadership, new approaches
With fixed investment rising by 27 per cent, the Chinese economy expanded by 9.1 per cent year-on-year in 2003. In 2004, China, despite representing only around 4 per cent of world GDP, is expected to account for 10 per cent to 15 per cent of the global economic growth.
However, rapid economic expansion also has its side effects. The Chinese economy is overheating, particularly in real estate and in industries such as cars, steel, cement and aluminium. Inflationary pressure has built up. Supplies of electricity and raw materials, especially oil and natural gas, cannot cope with rising demand. And there are a number of structural problems that need to be tackled, including the increasing disparity between the prosperous eastern coastal regions and the poor far west of the country, the rising gap between rich and poor, environmental degradation and water shortage, loss of arable land, resource-depleted rust-belt cities in northeast China, and rising corruption.
The de facto insolvent state commercial banks, which have accumulated huge amounts of non-performing loans by extending credit to loss-making state-owned enterprises as a result of government directives, are another source for concern. Moreover, China's total factor productivity – a measure of the rise in overall economic efficiency – has improved only marginally over the decades, as economic progress mainly derived from the shift of workers out of agriculture to manufacturing.
These factors explain why the new Chinese leadership under President Hu Jintao and Premier Wen Jiabao decided to change its approach to economic and social progress. Instead of pushing for economic growth at nearly any price, the new leadership called for "balanced, co-ordinated and sustainable development", which includes finding jobs for migrant and laid-off workers, fighting inflation and maintaining a sound balance of payments position. Bank lending has been scaled back and the target GDP growth rate for 2004 has been reduced to 7 per cent.
What about the next 50 years?
China has come a long way to reach its present state. Over the past two centuries, the Chinese people have endured wars, famines, different forms of government and colonisation. Generations of revolutionaries aspired, through different, sometimes even radical, approaches, to lift the country out of poverty, catch up with the West and restore pride to the Chinese nation.
It seems the Chinese leaders have learnt their lessons from the past and have now found the key to that process, which is to carry on with reform and open-door polices, from which China has benefited substantially. The CCP, which is committed to opening the economy wider to foreign and private investors, has set a target of quadrupling China's GDP of 2000 to around US$4 trillion by 2020, and of largely completing the modernisation programme by the middle of the 21st century when the People's Republic celebrates its centenary.
To achieve this objective, however, the Chinese government will need to maintain political stability and to tackle urgently the structural problems mentioned above in order to prevent them from running out of control. In addition, it needs to promote the rule of law rigorously, encourage free flow of information, reduce government bureaucracy and allow state commercial banks and state-owned enterprises to operate as genuine commercial entities.
It also needs to create a more favourable environment for the development of the private sector, while keeping good relations with the West for a freer flow of goods and services, and in particular foreign oil and gas supplies. This still represents an enormous task. Nonetheless, should all these conditions be met, there is no reason why the diligent and hard-working Chinese should not accomplish their mission of catching up with the West.
Allan Zhang is a senior Asian economist in PricewaterhouseCoopers' Macroeconomics Unit in London. He is concurrently the director of London-based China Business Centre. Allan can be reached at jianjun. zhang@uk.pwc.com
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