Economic Governance 101: China
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Economic Governance 101: China


Foreword


This series of articles aims to provide a summary analysis of some of the key economic governance methodologies in application in the world today. Starting with the world’s largest economy the United States of America – characterised by its free-market orthodoxies. Onto Germany, the beating economic heart of the European Union. Through the hybrid phenomenon that is the contemporary Chinese economy and its direct democratic counterpart in India. The series will finish with an examination of “The Nordic Model” in Sweden and finally the enigma that is Post-USSR Russia.


The Economic Governance 101 series consists of 6 main articles:


  1. Economic Governance 101: China

  2. Economic Governance 101: India

  3. Economic Governance 101: Sweden

  4. Economic Governance 101: Russia


Economic Governance 101: China


‘China is a civilisation, masquerading as a nation-state.’ (Cho 2009), so spoke US political scientist and leading China specialist Lucian Pye in 1988. China as a country or as Pye argued a civilization has been a great many things throughout its extraordinary, rich, and complex history. In light of the contemporary incarnation of China as a global economic powerhouse, it is worth remembering that such prominence was not acquired easily. According to data published by the Chinese National Bureau of statistics for the year 2018 (stats.gov.cn, 2019), China has reduced the number of its people in poverty by almost 800 million since the beginning of the 1980s (Lugo et al., 2021). An astonishing accomplishment achieved through a unique mix of economic and political policy that has often been labelled “State Capitalism”, or as the Chinese Communist Party (CCP) has phrased it “Socialism with Chinese Characteristics” (Xiaoping, 1984). Under this system of governance, relatively normal free market conditions can be said to apply with considerably more state economic intervention than may be expected in an orthodox Market-based Economy. This article will serve to examine some of the key principles and drivers of Chinese economic governance, with particular reference to how Chinese economic principles have continued to evolve since the establishment of the People's Republic of China in 1949 through to the present day.

Figure 1: The modern Chinese economy is a truly unique hybrid of east and western economic ideologies

A Meeting of Worlds


The modern Chinese Economy can effectively be seen as a construct of the Maoist Communist Party Philosophy – which still forges many of the key ideologies and governing principles under current Chinese leader Xi Jinping – in combination with the “open door” economic policies implemented circa 1978 by then Chinese Premier Deng Xiaoping. Having remained relatively closed off to the outside world during previous Head of State Mao Zedong’s 27 year rule, Deng’s time in charge brought about a dramatic change in Chinese economic policymaking which he titled “reform and opening” characterised by China’s increased openness to foreign investment and international trade (Chen 1998). An economic volte face which laid the foundations for the extraordinary economic development China has experienced over the past now 40 years plus.


In order to understand the significance of China’s economic policy shift under Deng Xiaoping it is important to understand where it was coming from. During Mao Zedong’s 27 year tenure from 1949 to 1976 (“Three Chinese Leaders”) China had employed a heavily centralised command based approach in which the Chinese government implemented direct control over almost every facet of the economy at both regional and national level. Government authorities alone would decide who would produce what, when, and where, a notion that runs directly counter to the basic tenets of any free-market based system wherein private citizens are given the freedom to make their own choices with regard to what they wish to produce and consume. As the founder of the CCP, Mao took direct inspiration from the centralised command based economic model employed by the then Soviet Union and sought to replicate the Soviets’ success for the newly established People's Republic of China (PRC). Upon assuming his position as Head of State in 1949 Mao placed an absolute priority on the development of Chinese heavy industry, relying almost entirely on the existing success of China’s agricultural sector to fund his industrialisation drive. In parallel to the Soviet Union’s own economic journey China experienced strong economic growth at first before running into a host of supply and co-ordination difficulties which ultimately led to stagnation (Cheng, 1971).


Figure 2: As the founder of Communist China Mao Zedong still enjoys hero worship within the country until this day

Ideology over Practicality


Mao’s grand industrial ambitions were fatally undermined by the Chinese working classes’ lack of practical knowledge, skills and training in this area. China's attempts at rapid industrialisation were further undermined by a lack of access to the cutting edge technologies enjoyed by the Soviet Union, which had allowed the Soviets to successfully implement an extremely capital intensive production strategy (Cheng, 1971). In effort to more easily transition a large percentage of China’s working class to industrial production Mao’s newly established government decided to overhaul existing market based agricultural practices in favour of a new centrally run and regionally administered commune system. Far from having the desired effect of transforming China from an Agrarian society to a modern industrial powerhouse overnight, the enforced re-purposing of much of the Chinese working population resulted only in the production of low-grade industrial goods and at the additional expense of essential agricultural efficiency. “Most of the small workshops and backyard furnaces, lacking technical equipment and skilled labor, turned out unusable products at exceedingly high costs, while the commune system destroyed peasant incentives and caused mismanagement of agricultural production” (Cheng, 1971, P. 4).


Not only was China suddenly saddled with an industrial dependence which it completely lacked the skills and resources to implement, the new commune based system of agricultural production also served to undermine essential food production with appalling consequences. “This frenzied enterprise did not produce steel but mostly lumps of brittle cast iron unfit for even simple tools. Peasants were forced to abandon all private food production, and newly formed agricultural communes planted less land to grain, which at that time was the source of more than 80% of China's food energy” (Smil, 1999, P. 1619). A supposed “Great Leap Forward”, Mao’s disastrous economic policies throughout the 1950’s instead led directly to a famine for which some estimated death tolls range as high as 40 million (Smil, 1999, P. 1619). Though the 1960’s saw some significant readjustments to Chinese economic policymaking, China would remain under Mao Zedong very much an ideologically driven, rather than a rational and objectively successful economic operation. (Cheng, 1971).


Figure 3: Shenzhen stands out as the ultimate example of China's successful Special Economic Zone Policy

Mao was of the fundamental belief that the technological and resource based shortcomings China faced in its drive toward industrialisation could be overcome by the sheer power of human will channelled correctly. “According to his view, to transform society and pursue economic development is to first and foremost transform human beings, who must be guided to raise their consciousness and strengthen their will” (Li, X., P. 143). In order to achieve this vision Mao sought to overhaul the existing Confucianist philosophy embedded in Chinese society which prioritised "filial piety" and dedication to one's family by “broadening the concept of the ‘whole’ which had been narrowed to imply loyalty to one’s family, village and clan, to include the consciousness of the class, the nation and beyond”, (Li, X., P. 144)


The Chinese cultural revolution which raged from 1966 until Mao's death in 1974 serves as perhaps the ultimate example under Mao of the imposition of a radical socialist ideology taking precedent over the practical functioning and development of the national economy. In light of the damage wrought to Mao's reputation by the famine of the 1950's and amidst perceived growing dissent amongst many Communist party members, Mao sought to reassert control and political authority by fomenting a culture war amongst the Chinese population with the explicit aim of stamping out any doubters or would be "capitalists". Mao and the supporting CCP factions' objectives were plainly laid out in a 1966 missive on the stated goals of the cultural revolution "At present our objective is to struggle against and crush those persons in authority who are taking the capitalist road, to criticize and repudiate the reactionary bourgeois academic “authorities” and the ideology of the bourgeoisie and all other exploiting classes". The briefing goes onto further state the explicit intention to "transform education, literature, and art and all other parts of the superstructure that do not correspond to the socialist economic base, so as to facilitate the consolidation and development of the socialist system" ("The Sixteen Points", 1966, P. 1).


What followed was one of the bloodiest and divisive periods in modern Chinese history. Through the actions of Government security forces and self-styled Maoist militias "somewhere between 500,000 and two million people lost their lives as a result of the Cultural Revolution". Wider societal and economic infrastructure was targeted as war was waged on the “'four olds' - old ideas, old customs, old habits and old culture. Schools and universities were closed and churches, shrines, libraries, shops and private homes ransacked or destroyed as the assault on “feudal” traditions began." (Phillips, 2016). The social and economic consequences were devastating with the widespread collapse of higher education systems proving particularly damaging to a nation in dire of fresh ideas and innovations. Needless to say later analysis does not look kindly upon this period with many, including the CCP themselves seeing it as a major backward step in China's long march toward economic development and modernisation, "The 'cultural revolution', which lasted from May 1966 to October 1976, was responsible for the most severe setback and the heaviest losses suffered by the Party, the state and the people since the founding of the People’s Republic" ("Resolution on certain", 1981).


Reform: China’s Special Economic Zones


The one argument made in favour of the cultural revolution today is that it necessitated the subsequent economic reforms that followed under Deng Xiaoping, following Mao’s death in 1974. One of the key tenets of China’s economic revival over the past now 40 plus years has been the presence of what the Chinese government have termed “Special Economic Zones” (SEZ’s), a specific title given to certain cities and regions granted exclusive economic freedoms and autonomy. These zones were marked by significantly relaxed economic policy regulations with a specific focus on attracting Foreign Direct Investment (FDI). Such policy exemptions included "tax breaks, reduced duties on imported equipment and production materials, free or low-rent business accommodation, flexibility in hiring and firing workers" as well as "income tax exemption for foreigners working within the SEZ." ( (Yeung, Lee & Kee, 2009, P. 230-231). The SEZ's would go on to form an essential part of Deng Xiaoping’s bold new economic strategy first unveiled in 1978 and formally implemented throughout the 1980’s. The three SEZ’s originally selected Shenzhen, Zhuhai and Shantou were all located in Guangdong Province on China’s south-eastern coast and in very close proximity to the former British territory and established trade centre of Hong Kong. The fourth, Xiamen, was officially granted SEZ status just a few months later in October of 1980 and is located in neighbouring Fujian province (Yeung, Lee & Kee, 2009)


The policy proved extraordinarily successful. In the 4 years following the establishment of China’s first SEZ’s, Chinese national GDP growth averaged around 10 percent. Shenzhen by comparison recorded a staggering 58 percent year on year growth rate over this period. Though Zhuhai, Shantou and Xiamen failed to record the same preternatural levels of expansion, the relaxed trade policies in place there also proved extremely successful with each region recording growth rates of 32, 9 and 13 percent respectively. Encouraged by this initial and overwhelming success China resolved in 1984 to designate “Special Economic Zone” status to an additional 14 coastal cities – indicating further China’s increased openness to international trade and development through these locations’ ease of access to international shipping routes. SEZ status was later further granted to Hainan island in China’s far south in 1988, and Shanghai’s Pudong New District in 1990. Having witnessed first-hand the enormous potential of open market based economic policy, greater economic freedoms were granted in 1992 to all Chinese provincial capitals and autonomous regions (examples include Tibet and Inner Mongolia), as well as a number of cities in Chinese border areas (Yeung, Lee & Kee, 2009).


In the time since China has continued to experiment with specifically tailored economic and developmental policies in different regions throughout its vast territory. These policies include “free-trade areas, industry parks, technical innovation parks and bonded zones that facilitate experimentation and innovation over a wide range of industries” (World Bank, N.D.). These zones however do not enjoy the same level of privilege as the previously designated SEZ’s, which has led to growing accusations of widening inequality and the favouring of coastal regions over China’s incredibly vast inland territories.

Figure 4: Migrant workers form an absolutely essential element of modern China's economic infrastructure

Class Division and The Chinese Hukou System


There is little doubt that contemporary Chinese economic policy has favoured certain regions over others, and that China’s eastern coastal districts enjoy greater levels of economic opportunity. This naturally extends to a generally higher standard of living for residents of these areas in line with their continued economic success (Crane et al., 2018). This inequality is further complicated by the Chinese Hukou system, which significantly limits migration of Chinese citizens between different provinces and regions. Broadly speaking, the Chinese Hukou is a registration document that records a given individual’s basic demographic information, “including the name of the natural person, date of birth, relatives, and marital status” (Wong, 2019). More specifically however, it serves as a population management tool designed to prevent the mass-migration of people to certain of China’s more economically viable population centres. An understandable desire perhaps even necessity in light of the sheer enormity of China’s population – currently registered at in excess of 1.4 billion (“Population”, The World Bank, 2022).


An important underlying principle of the Chinese Hukou system is that it is predicated upon a fundamental Urban – Rural divide. Just how crucial this classification is with regard to one’s prospects for success in Chinese society is difficult to underestimate. “With respect to rights and entitlements, those holding rural hukou are distributed arable land for their livelihood while urban hukou holders have access to government jobs, subsidized housing, education, and healthcare” (Wong, 2019). The consequences of such a system are much broader than simply financial, “without a local (urban) hukou, migrant workers in the cities are unable to use most basic public services such as public education for their children”. This has the direct consequence of “forcing migrant parents to leave their kids in the village and producing tens of millions of ‘split families’ and ‘left-behind children’” (Chan, 2021).

Figure 5: China's Hukou system has served to further entrench a long established urban vs rural class divide

While it is technically possible to alter one’s Hukou status and to re-register elsewhere – for example in a larger more developed urban area, there are many barriers to doing so, particularly for those with a lower or rural level Hukou status. Larger Chinese cities such as Shanghai and Beijing have established 4 generally accepted means of achieving a formal Hukou re-registration, “investing in a local business; buying a home; having a degree; or holding a qualified job” (“Changes to China’s”, 2020). By default, citizens from under-privileged areas have less access to developmental tools such as high quality education, while the dramatically higher cost of living in more developed urban areas makes it extremely unlikely for the vast majority of rural residents to be able to afford to invest in property or entrepreneurial ventures in such locales. Added to these existing complications is the ferocious competition between different municipalities attempting to attract outstanding young professionals with the aim of boosting productivity in these areas. A study of over 120 Chinese cities by economist Zhang Jipeng, quoted by The Economist “found that prosperous coastal cities had raised their standards for obtaining a local hukou in recent years, whereas inland cities had lowered them” (“Changes to China’s”, 2020). While this may be regarded as progress of a sort, it also further highlights the growing economic class divide manifest by contemporary domestic Chinese economic policy.


China’s migrant workers have been an absolutely fundamental driver of Chinese economic growth due to their low-cost labour provision. In fact, this has been one of the chief reasons why China has been able to remain hyper-competitive in the global manufacturing sphere (Haney, 2009, as cited in Chan, 2021). In spite of their living and working throughout China’s vast array of developed urban population centres, these workers’ Hukous remain registered to their rural or less developed places of origin. Meaning that should they wish to access public services such as pensions and public education, they must do so there, and not in their place of work (“Changes to China’s”, 2020). This has led to migrant workers – “defined as those without local household registration (hukou)” being labelled China’s “floating population”. The most recent census data recorded in 2020 indicates that the proportion of China’s population matching this description has increased dramatically over the past 10 years, from 155 million in 2010 to 376 million in 2020 (Chan, 2021). This trend is even more pronounced when taken over a wider 30 year period (National Bureau of Statistics, 2021, as cited in Chan, 2021).


Figure 6: China and the US' trade war remains a source of ongoing concern for the entire global economy

The Belt and Road Initiative


In especial light of the migratory difficulties posed by the Chinese Hukou system, a proposal by Crane et al. to extend Special Economic Zone status' to certain central and inland areas no doubt holds some merit in attempting to address China’s increasing economic divide (Crane et al., 2018). Given that China’s incredible growth over the past 40 years has been heavily export based, it is easy to see why eastern coastal regions with their ready access to the world’s shipping routes have been prioritised over more inaccessible inland territories. China’s much vaunted “Belt and Road” initiative could prove a major opportunity for more egalitarian economic development by granting greatly improved access to international trade routes for China’s central and in particular western provinces such as Xinjiang. Indeed the Chinese Government’s “13th Five-Year Plan” which states economic and social development goals for the Chinese State and covers the period of 2016-2020 explicitly cites the intention to “work to develop Xinjiang as the core region for the Silk Road Economic Belt and Fujian as the core region for the 21st Century Maritime Silk Road” (The 13th Five Year Plan”, 2016).


Sometimes referred to as “One Belt, One Road”, China’s Belt and Road initiative is a colossal scale infrastructural project which seeks to revive the historical Silk Road route which once linked China to territories as far afield as Central Asia, Western Europe and North Africa (UNESCO, N.D.). China's modern vision of the silk road has been upgraded to include maritime capabilities allowing for greatly increased volume of trade across the world's oceans (OECD, 2018). The project now extends “to more than 140 countries, including in Africa, the Middle East, South Asia and Latin America” and has been updated to include a strong digital arm (Umbach, 2022), and a proposed arctic presence for the purpose of the “development of oil, gas, mineral resources and other non-fossil energies, fishing and tourism in the region” (“China unveils vision”, 2016). The Belt and Road program has been interpreted by some as a “response to China’s industrial overcapacity, low domestic demand, stagnating exports abroad and the need to increase connectivity with developing economies for expanding to new foreign markets” (Umbach, 2022).


Figure 7: China's zero-covid policy has caused dramatic ripple effects throughout global markets

It is certainly true that the Chinese government has struggled to stimulate domestic consumption in recent years in the way it might have hoped. The gross impracticability of an ongoing “Zero-Covid” policy has not helped in this regard and has created a culture of fear amongst its populace with regard to spending given the susceptibility of policy regulations to change at a moment’s notice. Although China’s ambitions now clearly spread far beyond the confines of its own borders, as the world’s leading exporting nation continued infrastructural development which directly links China to a growing number of foreign markets by both land and sea will prove a massive boon to continued Chinese economic development. If implemented conscientiously it should also assist in attempting to redress the economic imbalances generated domestically by the Chinese Government’s specific focus on certain key economic – and in particular coastal – areas over the past 40 years or so.


Centralised Planning


While modern China embraces many facets of a free-market economic policy model, at its core it remains a centrally run economy in which the State has the ultimate say on any major decisions. This principle is evidenced in the Chinese private sector by the much commented upon ties between major Chinese corporations such as Huawei and the ruling Chinese Government (Corera, 2020). The spine of Chinese economic policy making remains entrenched in the CCP’s ongoing 5 year plan strategy, referenced above in relation to China’s aspired globe spanning belt and road initiative and first implemented under Mao Zedong from 1953-1957. Barring a brief two year pause for readjustment between 1963 and 1965 (Cheng, 1971), the five-year plan blueprint has been an ever-present feature of Chinese economic policymaking in the time since. China is currently in the midst of implementing its 14th 5 year plan which places a strong emphasis on the continued digitisation of the Chinese economy (Creemers et al., 2022). A nod to the importance of high technology in the continued success of a centralised economy that was a notably absent consideration in Mao Zedong’s first 5 year opus dating back to 1953. It is also a further indication of modern China’s ambitions to become stronger by learning from past mistakes. Following the historic lows of Mao's Great Leap forward, the ill-informed economic policies and devastating famine that accompanied it, the long-term socio-economic infrastructural damage manifest by the chaos of the Cultural Revolution and the daring economic reforms that followed, today's China is a significantly more shrewd, canny and formidable economic operator. The success of China’s drive towards true industrialisation from the 1980’s onward, in combination with its increased openness to trade has dragged the country from a point of existential crisis to its current position as the world's second largest economy and a leading global power.


Figure 8: In spite of the onslaught of difficulties imposed by Covid-19 and increasingly complex international relations, China shows no sign of slowing down under the CCP's governance

A Great Leap Forward


Modern Chinese governance is a truly unique hybrid of state led capitalist enterprise, in combination with a deeply embedded social communist philosophy. Centralised economic planning manifest through the continued implementation of 5 year plans outlining the Chinese Government’s economic and social ambitions serve as a key reminder of China’s totalitarian approach to the management of its economy, while the ubiquity of Chinese produced goods in global markets testify to the extraordinary success of its market-based transition. Having learned the lessons of the inadequacy of an entirely inflexible command based approach through the ultimate failure of the Soviet Union’s economy in combination with China’s own failures under Mao, modern China is a truly fearsome economic force that looks set to hold enormous global influence for many years to come.



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Figure 2: AP Photo, Schiefelbein, M., (2020). A paramilitary policeman wears a face mask as he stands guard near the large portrait of Chinese leader Mao Zedong at Tiananmen Gate adjacent to Tiananmen Square in Beijing on January 27, 2020. [Photograph]. The Times of Israel. https://www.timesofisrael.com/china-counts-106-virus-deaths-as-us-others-move-to-evacuate/


Figure 3: Terazawa, M., (N.D.) Lasers and LEDs light up the facades of skyscrapers in Shenzhen at the Shenzhen Light Show. [Photograph]. Nikkei Asia. https://asia.nikkei.com/Business/China-tech/Shenzhen-in-pictures-a-former-fishing-village-is-transformed


Figure 4: (N.D.). (N.D.). [Photograph]. CGTN. https://news.cgtn.com/news/3167444e316b7a6333566d54/share_p.html


Figure 5: Ritter, J., (2020). Like China, the West has long used state resources to bolster industry. [Illustration]. The New Yorker. https://www.newyorker.com/magazine/2010/12/13/enter-the-dragon



Figure 7: Liwang, J., Xinhua, via AP, (2022). In this photo released by Xinhua News Agency, a patient who has recovered from Covid-19 is disinfected as he leaves a makeshift hospital in Shanghai. [Photograph]. POLITICO China Watcher. https://www.politico.com/newsletters/politico-china-watcher/2022/04/14/foreign-business-demands-chinas-zero-covid-retreat-00025153


Figure 8: Han Guan, N., (2021). Performers dressed as rescue workers surround the Chinese Communist Party flag at a gala celebrating the party’s centenary in Beijing. [Photograph]. The Financial Times. https://www.ft.com/content/0a03e5a0-203f-41a0-b3bc-73a17a29c7cd

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James Duggan

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