CHINESE ECONOMIC

The Chinese economic reform refers to the program of economic reforms termed
"Socialism with Chinese characteristics" in the People's Republic of China (PRC) that
was started in December 1978 by reformists within the Communist Party of China, led
by Deng Xiaoping.

China had been one of the world's largest and most advanced economies prior to the
nineteenth century. In the 18th century, Adam Smith claimed China had long been one
of the richest, that is, one of the most fertile, best cultivated, most industrious, most
prosperous and most urbanized countries in the world. The economy stagnated
beginning in the 16th century and even declined in absolute terms in the nineteenth and
much of the twentieth century, with a brief recovery in the 1930s.

Economic reforms introducing market principles began in 1978 and were carried out in
two stages. The first stage, in the late 1970s and early 1980s, involved the
decollectivization of agriculture, the opening up of the country to foreign investment, and
permission for entrepreneurs to start businesses. However, most industry remained
state-owned. The second stage of reform, in the late 1980s and 1990s, involved the
privatization and contracting out of much state-owned industry and the lifting of price
controls, protectionist policies, and regulations, although state monopolies in sectors
such as banking and petroleum remained. The private sector grew remarkably,
accounting for as much as 70 percent of China's gross domestic product by 2005. From
1978 until 2013, unprecedented growth occurred, with the economy increasing by 9.5%
a year. The conservative Hu-Wen Administration more heavily regulated and controlled
the economy after 2005, reversing some reforms.

The success of China's economic policies and the manner of their implementation has
resulted in immense changes in Chinese society. Large-scale government planning
programs alongside market characteristics have greatly decreased poverty, while
incomes and income inequality have increased, leading to a backlash led by the New
Left. In the academic scene, scholars have debated the reason for the success of the
Chinese "dual-track" economy, and have compared them to attempts to reform socialism
in the Eastern Bloc and the Soviet Union; as well as the growth of other developing
economies. Additionally, these series of reforms have led to Chinas rise as a world power
and a shift of international geopolitical interests in favour of it over Taiwan
Chinese economy prior to reform:
During the 1930s, China developed a modern industrial sector, which stimulated modest
but significant economic growth. Before the collapse of international trade that followed
the onset of the Great Depression, China’s share of world trade and its ratio of foreign
trade to GDP achieved levels that were not regained for over sixty years.

The economy was severely disrupted by the Second Sino-Japanese War and its
continuation as the Second world war and the Chinese Civil War from 1937 to 1949, after
which the victorious communists installed a planned economy.] Afterwards, the economy
largely stagnated[citation needed] and was disrupted by the Great Leap Forward famine
which killed between 30 and 40 million people, and the purges of the Cultural Revolution
further disrupted the economy.[citation needed] Urban Chinese citizens experienced
virtually no increase in living standards from 1957 onwards, and rural Chinese had no
better living standards in the 1970s than the 1930s.[7][not in citation given] One study
noted that average pay levels in the catering sector exceeded wages in higher education.

The economic performance of the People's Republic of China was poor in comparison
with other East Asian countries, such as Japan, South Korea and rival Chiang Kai-shek's
Republic of China. [9] The economy was riddled with huge inefficiencies and
malinvestments, and with Mao's death, the Communist Party of China (CPC) leadership
turned to market-oriented reforms to salvage the failing economy
Economic performance since reform
China's nominal GDP trend from 1952 to 2005. Note the rapid increase since reform in
the late 1970s.
China's economic growth since the reform has been very rapid, exceeding the East Asian
Tigers. Economists estimate China's GDP growth from 1978 to 2013 at between 9.5%
to around 11.5% a year. Since the beginning of Deng Xiaoping's reforms, China's GDP
has risen tenfold. The increase in total factor productivity (TFP) was the most important
factor, with productivity accounting for 40.1% of the GDP increase, compared with a
decline of 13.2% for the period 1957 to 1978—the height of Maoist policies. For the
period 1978–2005, Chinese GDP per capita increased from 2.7% to 15.7% of U.S. GDP
per capita, and from 53.7% to 188.5% of Indian GDP per capita. Per capita incomes
grew at 6.6% a year. Average wages rose sixfold between 1978 and 2005, while absolute
poverty declined from 41% of the population to 5% from 1978 to 2001. Some scholars
believed that China's economic growth has been understated, due to large sectors of the
economy not being counted.

Impact on world growth

China is widely seen as an engine of world and regional growth. Surges in Chinese
demand account for 50, 44 and 66 percent of export growth of the Hong Kong SAR of
China, Japan and Taiwan Province respectively, and China's trade deficit with the rest
of East Asia helped to revive the economies of Japan and Southeast Asia. Asian leaders
view China's economic growth as an "engine of growth for all Asia".
Reforms in specific sectors
After three decades of reform, China's economy experienced one of the world's biggest
booms. Agriculture and light industry have largely been privatized, while the state still
retains control over some heavy industries. Despite the dominance of state ownership in
finance, telecommunications, petroleum and other important sectors of the economy,
private entrepreneurs continue to expand into sectors formerly reserved for public
enterprise. Prices have also been liberalized.
Agriculture

Production of wheat from 1961 to 2004. Data from FAO, year 2005. Y-axis: Production
in metric ton.
During the pre-reform period, Chinese agricultural performance was extremely poor and
food shortages were common.[40] After Deng Xiaoping implemented the household
responsibility system, agricultural output increased by 8.2% a year, compared with 2.7%
in the pre-reform period, despite a decrease in the area of land used. Food prices fell
nearly 50%, while agricultural incomes rose.

A more fundamental transformation was the economy's growing adoption of cash crops
instead of just growing rice and grain. Vegetable and meat production increased to the
point that Chinese agricultural production was adding the equivalent of California’s
vegetable industry every two years. Growth in the sector slowed after 1984, with
agriculture falling from 40% of GDP to 16%; however, increases in agricultural
productivity allowed workers to be released for work in industry and services, while
simultaneously increasing agricultural production. Trade in agriculture was also
liberalized and China became an exporter of food, a great contrast to its previous famines
and shortages.

Industry
In the pre-reform period, industry was largely stagnant and the socialist system
presented few incentives for improvements in quality and productivity. With the
introduction of the dual-price system and greater autonomy for enterprise managers,
productivity increased greatly in the early 1980s. Foreign enterprises and newly formed
Township and Village Enterprises, owned by local government and often de facto private
firms, competed successfully with state-owned enterprises. By the 1990s, large-scale
privatizations reduced the market share of both the Township and Village Enterprises
and state-owned enterprises and increased the private sector's market share. The state
sector's share of industrial output dropped from 81% in 1980 to 15% in 2005. Foreign
capital controls much of Chinese industry and plays an important role.

From virtually an industrial backwater in 1978, China is now the world's biggest producer
of concrete, steel, ships and textiles, and has the world's largest automobile market.
Chinese steel output quadrupled between 1980 and 2000, and from 2000 to 2006 rose
from 128.5 million tons to 418.8 million tons, one-third of global production.[46] Labor
productivity at some Chinese steel firms exceeds Western productivity.[46] From 1975
to 1992, China's automobile production rose from 139,800 to 1.1 million, rising to 9.35
million in 2008. Light industries such as textiles saw an even greater increase, due to
reduced government interference. Chinese textile exports increased from 4.6% of world
exports in 1980 to 24.1% in 2005. Textile output increased 18-fold over the same period.

This increase in production is largely the result of the removal of barriers to entry and
increased competition; the number of industrial firms rose from 377,300 in 1980 to nearly
8 million in 1990 and 1996; the 2004 economic census, which excluded enterprises with
annual sales below RMB 5 million, counted 1.33 million manufacturing firms, with
Jiangsu and Zhejiang reporting more firms than the nationwide total for 1980.[49]
Compared to other East Asian industrial growth spurts, China's industrial performance
exceeded Japan's but remained behind South Korea and Taiwan's economies.[50]

Trade and foreign investment

Global distribution of Chinese exports in 2006 as a percentage of the top market

Scholars find that China has attained a degree of openness that is unprecedented among
large and populous nations, with competition from foreign goods in almost every sector
of the economy. Foreign investment helped to greatly increase quality, knowledge and
standards, especially in heavy industry. China's experience supports the assertion that
globalization greatly increases wealth for poor countries. Throughout the reform period,
the government reduced tariffs and other trade barriers, with the overall tariff rate falling
from 56% to 15%. By 2001, less than 40% of imports were subject to tariffs and only 9
percent of import were subject to licensing and import quotas. Even during the early
reform era, protectionist policies were often circumvented by smuggling. When China
joined the WTO, it agreed to considerably harsher conditions than other developing
countries. Trade has increased from under 10% of GDP to 64% of GDP over the same
period.China is considered the most open large country; By 2005, China’s average
statutory tariff on industrial products was 8.9 percent. For Argentina, Brazil, India, and
Indonesia, the respective percentage figures are 30.9, 27.0, 32.4, and 36.9 percent.

China's trade surplus is considered by some in the United States as threatening

American jobs. In the 2000s, the Bush administration pursued protectionist policies such
as tariffs and quotas to limit the import of Chinese goods. Some scholars argue that
China's growing trade surplus is the result of industries in more developed Asian
countries moving to China, and not a new phenomenon.[38] China's trade policy, which
allows producers to avoid paying the Value Added Tax (VAT) for exports and
undervaluation of the currency since 2002, has resulted in an overdeveloped export
sector and distortion of the economy overall, a result that could hamper future growth.

Foreign investment was also liberalized upon Deng's ascension. Special Economic
Zones (SEZs) were created in the early 1980s to attract foreign capital by exempting
them from taxes and regulations. This experiment was successful and SEZs were
expanded to cover the whole Chinese coast. Although FDI fell briefly after the 1989
student protests, it increased again to 160 billion by 2004.
Services

Shanghai Stock Exchange (SSE)

In the 1990s, the financial sector was liberalized.[57] After China joined the World Trade
Organization (WTO), the service sector was considerably liberalized and foreign
investment was allowed; restrictions on retail, wholesale and distribution ended.[58]
Banking, financial services, insurance and telecommunications were also opened up to
foreign investment.

China's banking sector is dominated by four large state-owned banks, which are largely
inefficient and monopolistic.China's largest bank, ICBC, is the largest bank in the world.
The financial sector is widely seen as a drag on the economy due to the inefficient state
management] Non-performing loans, mostly made to local governments and unprofitable
state-owned enterprises for political purposes, especially the political goal of keeping
unemployment low, are a big drain on the financial system and economy, reaching over
22% of GDP by 2000, with a drop to 6.3% by 2006 due to government recapitalization of
these banks. In 2006, the total amount of non-performing loans was estimated at $160
billion. Observers recommend privatization of the banking system to solve this problem,
a move that was partially carried out when the four banks were floated on the stock
market. China's financial markets, the Shanghai Stock Exchange and Shenzhen Stock
Exchange, are relatively ineffective at raising capital, as they comprise only 11% of GDP.

Due to the weakness of the banks, firms raise most of their capital through an informal,
nonstandard financial sector developed during the 1980s and 1990s, consisting largely
of underground businesses and private banks.Internal finance is the most important
method successful firms use to fund their activities.

By the 1980s much emphasis was placed on the role of advertising in meeting the
modernization goals being promoted by Deng. Lip service was still paid to old Maoist
ideals of egalitarianism, but it did not inhibit the growth of consumerism.

Government finances
In the pre-reform era, government was funded by profits from state-owned enterprises,
much like the Soviet Union.[68] As the state sector fell in importance and profitability,
government revenues, especially that of the central government in Beijing, fell
substantially and the government relied on a confused system of inventory taxes.
Government revenues fell from 35% of GDP to 11% of GDP in the mid-1990s, excluding
revenue from state-owned enterprises, with the central government's budget at just 3%
of GDP.[69] The tax system was reformed in 1994 when inventory taxes were unified
into a single VAT of 17% on all manufacturing, repair, and assembly activities and an
excise tax on 11 items, with the VAT becoming the main income source, accounting for
half of government revenue. The 1994 reform also increased the central government's
share of revenues, increasing it to 9% of GDP.
Reasons for success
Scholars have proposed a number of theories to explain the success of China's
economic reforms in its move from a planned economy to a socialist market economy
despite unfavorable factors such as the troublesome legacies of socialism, considerable
erosion of the work ethic, decades of anti-market propaganda, and the "lost generation"
whose education disintegrated amid the disruption of the Cultural Revolution.

One notable theory is that decentralization of state authority allowed local leaders to
experiment with various ways to privatize the state sector and energize the
economy.Although Deng was not the originator of many of the reforms, he gave approval
to them. Another theory focuses on internal incentives within the Chinese government,
in which officials presiding over areas of high economic growth were more likely to be
promoted. Scholars have noted that local and provincial governments in China were
"hungry for investment" and competed to reduce regulations and barriers to investment
to boost economic growth and the officials' own careers. A third explanation believes that
the success of the reformists are attributable to Deng's cultivation of his own followers in
the government. Herman Kahn explained the rise of Asian economic power saying the
Confucian ethic was playing a "similar but more spectacular role in the modernization of
East Asia than the Protestant ethic played in Europe".

China's success is also due to the export-led growth strategy used successfully by the
Four Asian Tigers beginning with Japan in the 1960s–1970s and other Newly
industrialized counties.

The collapse of the Soviet Bloc and centrally planned economies in 1989 provided
renewed impetus for China to further reform its economy through different policies in
order to avoid a similar fate. China also wanted to avoid the Russian ad-hoc experiments
with market capitalism under Boris Yeltsin resulting in the rise of powerful oligarchs,
corruption, and the loss of state revenue which exacerbated economic disparity.