China's Transition Process: An Overview
In other articles of mine, I have reviewed some common positive and negative characteristics of the transitioning process in countries moving from a central planned economy to a market-based economy. In this article, I will provide you with an overview of the transitioning process in China and its accomplishments and consequences.
How Is China's Transition Process Unique?
There was no official starting date for the transition process in China, but it was estimated to begin at the end of 1979. The transition process in China differed from the transitioning process in other countries such as former Soviet blocs for several reasons.
First, at the beginning of the process, the economic conditions in China were much worse than in any of those other countries. Agriculture using intensive manual labor and outdated techniques still accounted for a big proportion of the Chinese economy. Most people lived in rural areas, and the infrastructure including the transportation system was inadequate.
Second, China had never been formally ruled by any democratic party. Before the Communist Party, China was dominated by the Qing Dynasty, an imperial regime with the King holding the ultimate power over the whole government and country. China was not in contact with other democratic countries in the Western world due to the geographical distance.
Finally, China had a unique Asian culture and history, which appreciated Confucianism and trust, respected the authority. Chinese cultures placed a great emphasis on patriotism and collectivism as opposed to the emphasis on individualism that can be seen in most Western countries. China upheld the one-party policy with the Communist Party continuing to be the only political party in China. Also, it adopted the gradualism strategy, and the transition process in China spread over a few decades, shifting gradually from a central planned economy to a market-based economy (Chan 1999).
Do you think that the transition process is over in China?
China’s Historical Setting
The Beginning of the Transition Process
In China, the reform started in 1978, marked by a rise in power of Deng Xiaoping. The destructive consequences of the Cultural Revolution cast doubt upon Maoist’s conservative socialist ideology and the theory of central planning economy, slowed China’s economic growth, and revealed the need for both economic and political reform in China.
At the Third Plenum of the National Party Congress’s Eleventh Central Committee in December 1978, the party led by Deng Xiaoping declared to start a rudimentary economic reform. The program did not intend to completely abandon communism and the domination of the communist party, but just implement some substantial changes to the current system, reducing the central planning of the government, allowing some degree of economic freedom to improve the performance of the economy.
Reform in the Agriculture Sector
Reform was first implemented in the agricultural sector in China. For most of its reform in all aspects, China followed a dual-track approach meaning that it maintained the overall planning role of the government while allowing some mechanisms of the free market to some extent.
Since 1978, the liberalization process in agriculture was carried out rapidly, while most of the industrial sector still remained under the government’s central planning management. The government slowly disbanded the collective system in the rural area, and introduced a new household responsibility system. Under the new system, the land was distributed to the peasants with an up to 15-year lease, and farmers could freely trade their leases. After the farmers met the quota assigned by the government, they could keep the excess amount to use or trade by purchasing contracts, giving farmers more incentives to work harder and increase their productivity.
As the government loosened their grip over production, specialization started to take place encouraging each region to focus on producing the type of products it has the most comparative advantage. As a result, crop patterns changed considerably among provinces, and crops yielded a much higher output rate than ever before. The index of crop output shows a continuous increasing tendency in the total agricultural product output in China from 1975 to 1987.
China's price reform was somewhat conservative, concentrating on reforming the price of final goods/products rather than the price of intermediate goods and the price of factors of production. The state still kept close control over the price, and it gradually adjusted the price over time to catch up with the market price.
Due to the cautious proceeding of the price reform process, although China did experience some inflation, the inflation rate in China was not as high as the inflation rate in other transitioning countries. Furthermore, the household savings rate was unusually high in China, which helped to reduce the need to print more money by banks. China was able to restrain and control the price level of goods, but in the early 1990s due to the high demand for goods and services in China and the increase in the cost of production, the inflation rate in China shot up. In addition, some state-owned enterprises abuse their monopoly power to raise the price of their products in order to earn more profits.
Financial and Banking Sector Reform
With an aim to relieving the central government's financial burden and encouraging local authorities to become financially independent, the government implemented some main reforms to the financial and banking system. Abolishing the mono-banking system, the Chinese government allowed a two-tier banking system including state central banks and commercial banks. This system was promoted to decentralize the power of state banks and create a more competitive banking environment. Commercial lending was separated from central banking functions. The government also altered the interest rate policy, requiring banks to set positive real interest rates to encourage people to deposit money in banks instead of hoarding money, and channeling their savings in real assets such as real estate and foreign currencies.
In terms of exchange rate, the Chinese government maintained a weak Yuan policy to give China an advantage over export. In 1981, the Chinese authorities devalued the Yuan by half, and in 1987, the authorities depreciate the value of the currency by 15 percent in a single step (Lardy, 2005).
Reform in Foreign Trade Policy
So as to attract more investment from foreign countries, China opened up its economy partially to participate in the global economy. The government gradually abolished quantitative restrictions on imports and exports in some goods and services, introducing import tariffs and export taxes, and enhancing trade liberalization.
In the late 1970s and early 1980s, China allowed enterprises to set up joint ventures using foreign capital, and approved a legal status for foreign investment in China. China adopted more favorable regulations to encourage and provide incentives for more foreign direct investment inflow into the country, trying to match the foreign capital with the domestic industrial objectives (Fung, Iizaka, & Tong, 2002).
In 1986, the State Council disseminated the "Provisions of the State Council of the People's Republic of China for the Encouragement of Foreign Investment". The new regulations provided foreign investors with favorable tax incentives, freedom to import, export and trade with each other, and more simplified licensing procedures. One of Chinese's secrets to its astonishingly high growth rate was its attractiveness to foreign investment.
Challenges Following the Transition Process
Along with many achievements stemming from the reforms, China experienced some other undesirable consequences. First, the gap between the rich and the poor expanded. The transition process favored some of the top elite members in the government and enterprises who capitalized on the big opportunities brought up by the open market. The income of most of the people living in the countryside and mountainous areas fell behind, and the gap between the living standards in rural areas and big cities kept widening. This income inequality made Chinese society became volatile and the incumbent government faced many criticisms from political opposition groups.
Challenges Towards the Socialist Ideology
Second, the reform challenged the socialist ideology. During the transition process, China still maintained the dictatorship of the Communist Party, favored and emphasized the leading roles of state-owned sectors in the economy, and barely separated the influence of Communist Party over the government. However, the original meaning of socialism and the idea of a central planning economy were not suitable anymore.
As a result, the definition of “socialism” and the whole ideology system following it had to be redefined. Some of the ideological moves were the acceptance of the private property ownership rights, the existence of private sectors besides the state sector, and the authority having to give up part of its power over the control of the economy. Nevertheless, the government still dominated the education system, the media, and all means of communication, using them as tools to “educate” new generations of a socialist country and preserving its power.
On the other side, along with a free market, the need for more democracy and freedom arose among the people, and conflicted with the desire to maintain the dictatorship power of the Communist Party, causing much resentment among people. Hundreds of thousands of people had to flee from the country to seek refugees in other countries, and many people were kept in jeopardy for political reasons.
Moreover, there was considerable evidence that corruption was a serious problem in both China during the transition process. Authorities and businessmen took advantage of the bottlenecks in the legal and regulation system, and the new business environment to corrupt and, most of the cases, escape without any punishment.
"Gaining a license or permit is apt to require bribery. Managers of state-owned enterprises may require bribery before signing a contract. The state is unable to protect the assets of state-owned assets from parasitic managers. Smugglers handle everything from drugs and guns to rice. Police investigations can be compromised. Taxes are assessed arbitrarily. Local governments establish inspection along highways and extort fees from trucks and travelers" (Chan, 1999).
Environmental issues also posed potential threats to the transitioning economy. China still relied on the extraction of natural resources as one of the main sources for export and income, using outdated technology, which resulted in high pollution levels. In order to support the heavy industry sectors and receive foreign investments, regulations regarding environmental protection had been ignored or could not keep up with the rapid pace of industrial expansion. The government also had minimal resources to develop and carry out a thorough environmental protection program.
Achievements and Shortcomings of the Transition
Increase agricultural products
Higher income inequality
Lower inflation rate
Challenges to socialist ideology
Stable and efficient banking system
Open foreign and trade policy
Higher FDI inflows
Booming private sector
China's 13th 5-Year Plan
For the period 2016–2020, China has initiated the thirteenth five-year plan, which was approved by the top country’s leaders, setting the national development orientation and priorities for the next 5 years. In order to come up with the plan, the Chinese government had consulted and collected advice, opinions and views from all levels of government and also from the private sectors. Therefore, it aims not only to guide policy-makers to develop their corresponding cultural and socio-economic development strategies, but also to instruct state-owned and private enterprises to know where to allocate their resources.
One of the highlights in the Five-Year Plan includes a five-year economic growth target at 6.5%, doubling China’s economy between 2010 and 2020. In the next period, China focuses on serving domestic consumption instead of exports, accelerating urbanization, allowing more competition in national monopoly sectors, emphasizing new energy and clean production, and expanding its cyber-economy. In addition, the government also wants to improve the country’s social stability and people’s living standards by reforming national healthcare system, natural resource management, military and strengthening international cooperation and China’s influence.
After more than two decades of the transitioning process, China's economic conditions have changed considerably. Although there are still some shortcomings, overall, the transition process has been a great success for China, improving the living standards of Chinese people and making China one of the world's economic giants nowadays.