China in the 20th Century (1911-2008)The Emergence of China in the 21st Century — Session three Luis Torras (@TorrasLuis) November 2015

China in the XX century: Chinese economic history can be divided in three main periods

WTO$entry$

Asian$Crisis$Shenzen$SEZ$

Deng$Xiaoping$

$$$Cultural$Revolu=on$

$$$End$of$Qing$dynasty$

$$$Communist$Party$of$China$founda=on$

$$$People’s$republic$of$China;$Mao$first$Chairman$

$$$Great$Leap$Forward$

1900$ 1910$ 1920$ 1930$ 1940$ 1950$ 1960$ 1970$ 1980$ 1990$ 2000$

ECONOMIC REFORM

MAOIST ERA

Farm$priva=za=on$

GDP

Source: Maddison; IMF.

!  Between&1949&and&1978&China&suffered&the&consequences&of&a&socialist&planned&regime&that&caused&famine&and&starva>on&

!  In&1978,&Deng&Xiaoping&became&China’s&new&leader&and&the&economic&reform&began&

!  1978&it&is&the&essen>al&milestone&to&understand&Chinese&recent&history&

2

Chinese GDP though 20th century

REPUBLIC OF CHINA

1912-1949: Republic of China, Dr. Sun Yat-sen

Sun Yat-sen (1866-1925), chairman of the Republic of China and premier of the Kuomintang.

3

1912-1949: Republic of China, Chiang Kai-shek

Portrait of Chiang Kai-shek hangs on the Tiananmen. 4

1937-1945: Second sino-Japanese war

December, 1937, bodies of victims along Qinhuai River out of Nanjing's west gate during Nanjing Massacre.

5

1937-1945: Japanese occupation, situation at the end of World War II

Japanese occupation (red) and Communist bases (striped). 6

1946-50: Chinese civil war: Chiang Kai-shek (nationalists) vs. Mao Zedong (communist)

Chiang Kai-shek on the cover of a 1933 edition of Time magazine

Mao Zedong in 1938, writing On Protracted War.

7

1946-50: Chinese civil war: Chiang Kai-shek (nationalists) vs. Mao Zedong (communist)

1934-1935: movement of Communist forces during the long march. 8

October 1, 1949: Mao Zedong proclaims the People’s Republic of China (China last unification)

Mao Zedong proclaiming the establishment of the People's Republic in 1949.

9

Between 1949 and 1978, Mao and the CCP set up a socialist planned-economy regime based on Marxist theory

Source: Mises; Huerta de Soto; Margolin.

Socialism aims a social system based on public ownership of the

means of production

Socialism in China was implemented thought three main things: Agricultural

collectivization, central planned economy and repression

French scholar J.L. Margolin estimates the number of deaths due to the

Communist policies in 65 million people

!  government is the only employer

!  government decides what has to be produced (planned economy)

!  anyone can consume more that what the government allows him to do

!  there is no room left for freedom

!  Agricultural collectivization

WHAT IS COMUNISM? HOW WAS IMPLEMENTED IN CHINA? WHAT WERE THE RESULTS?

Therefore in a socialist commonwealth…

“the theory of communism (socialism) may be summed up in the single sentence: Abolition of private property”

Communist Manifesto (1848)

•  Mao started an agricultural revolution in order to collectivized the land and set up a commune system

•  Peasants were force to join the communes and small business and private property was abolished

!  Great Leap Forward (1958-62) •  Once all resources were centralized in the power of

the State, the communists design a plan in order to transform China into an industrialized country

!  Cultural revolution (1966-78) •  In order to re-establish faith in the revolution, Mao

intensified the purges and violence against those who question their policies

!  Violence (many people were forced to move to the countryside, people were forced to join the communes, private business forbidden,…)

!  Between 30-65 million people died, 35 million during the period of the Great Leap Forward alone (worse famine in absolute terms in human history)

!  Starvation !  Internal purges

!  Social repression

!  Environment collapse

!  Dictatorial state under the CCP

!  China did not develop growth and industry

10

Mao’s Cultural revolution 1966-76

Completely smash the capitalist class and the reactionary line of Liu and Deng!11

Mao’s Cultural revolution 1966-76

Mao’s Little Red Book (1966).

12

China's Communist Party (CCP) focused on Soviet-like socialist policies to rebuild the economy after wars and invasions

During'Mao'Zedong's'rule,'the'CCP'focused'on:'

!  Rural'collec:viza:on'!  Central'planning'!  State'control'and'ownership'of'industry'!  Chinese'selfAsufficiency'

1949

1950s

1958

The Chinese Communist Party (CCP) establishes the People's Republic of China (PRC)

1953

First Five Year Plan announced •  Industry nationalized •  Profits diverted to "key" industries

(iron, steel, textiles)

Second Five Year Plan announced Mao's "Great Leap Forward"

Nationalization of industries: focus on industrialization Land reform: collective model in the agrarian sector

(Soviet model )

Cultural Revolution 1966

13

– Deng Xiaoping

“To get rich is glorious.”

14

1978: Deng Xiaoping, the road to (state/Chinese) capitalism to promote growth

Deng Xiaoping (1904-1997).15

In 1978 “the wall falls,” and China begins his particular process of global integration

Deng Xiaoping on an official visit to the United States with President Carter in January 1979.16

Since 1978, China has experienced the “great convergence”, the great story of our generation

Source: IMF.

0%

5%

10%

15%

20%

25%

1980 1985 1990 1995 2000 2005 2010 2014e 2018e

China's per capita GDP compared to the GDP per capita of US!

In#1980#the#average#American#was#20#6mes#richer#than#the#average#

Chinese#richest#,#today#this#ra6o#has#been#reduced#to#

only#5#6mes

17

China is been growing two decades above 7%

Source: Oficial stats.18

6%

8%

10%

12%

14%

2002 2004 2006 2008 2010 2012 2014 2015

XVI$$NPC$ XVII$NPC$ XVIII$NPC$

Chinese Real GDP growth

China: the great story of our generation.

The “great divergence” The “great convergence”

GDP$per$capita$evolu0on$ra0o$selected$countries,$150082008$ World$GDP$percentage$on$total$principal$economies$(198082018)$

Source: Maddison; IMF. PPP data. Adapted form Prof. Niall Ferguson.

Share of Chinese GDP on total

19

Catch-up in GDP per capita with the US

Ratio of GDP per capita in China to GDP in US (%)

The reform is a story of a great success that has allow China to catch-up with the rest of the world after years of stagnation

Source: IMF.

0%

5%

10%

15%

20%

25%

1980 1985 1990 1995 2000 2005 2010 2014e 2018e

China's per capita GDP compared to the GDP per capita of US!

In#1980#the#average#American#was#20#6mes#richer#than#the#average#

Chinese#richest#,#today#this#ra6o#has#been#reduced#to#

only#5#6mes

20

Chinese/US per capita GDP ratio

Deng had a clear vision for China: Open Door Policy and reversed policies that had closed China's market

21

!  Economic growth main priority, could best be achieved through liberalization policies (Special Economic Zones)

!  Descollectivization (household responsibility system) and swift towards private initiative

!  Responsibility in agriculture and industry was decentralized, small-scale enterprises and services were permitted

Posi%ve:)!  China's)GDP)quadrupled)from)1978)to)2002)!  Manufacturing)exploded;)in)Shenzhen)(the)

first)SEZ),)the)number)of)manufacturing)enterprises)increased)from)26)in)1980)to)500)in)1984,)and)personal)income)was)five)%mes)the)na%onal)average)

!  Trade)and)investment)flourished,)China's)economy)grew)faster)than)any)other)in)the)world)in)the)1980's))

!  Liberaliza%on)policies)set)the)stage)for)China's)accession)to)the)WTO)

)

Open)door)policy) First)results)

Nega%ve:)!  Serious)

environmental)problems)caused)by)industrial)pollu%on)and)rapid)economic)development)

!  Inequali%es)and)migra%on)pressures)

The reform (in short) refers to the process of transformation of the Chinese economy: from planned economy to market economy

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COMMUNIST DICTATORSHIP

As#of###20151)#1978

Abolition of private property

and private business

Central planned closed economy (“Soviet type”)

Political and social

dictatorship

FREE OPEN SOCIETY

Private property

Free entrepreneurship

Free-market economy

Democracy

(rule of law)

Commune system descollectivization

Household Responsibility

System

Increase procurement prices

Agricultural decentralization

SOEs allowed to retain their profits

Creation of a Profit Tax

Bank system

“Growing out of the plan”

Openness (SEZ)

Join WTO in 2001

Private property in China

Reduction of SOEs

Market liberalizations

30%

55%

70%

0%

Reduction of tariffs PL

ANNED

#ECO

NOMY# M

ARKET#ECONOMY#

Increase efficiency

Market mechanisms

1984 1988 1990 2000 2007

Fiscal decentralization

Source: Author. Illustrative. (1) Based on the 2015 Index of Economic Freedom.

The process of openness and reform

Agricultural descollectivization provide the right incentives to generate the surplus needed for Chinese industrialisation

23

Maoist'era'lack'of'incen/ves'

!  In'1979,'procurement'prices'rised'by'22%,'and'40%'accumula/ve'during'the'next'decade'

!  Descollec/viza/on'of'the'commune'system'was'done'with'the'Household'Responsability'System'that'allowed'subcontrac/ng'small'plots'to'individual'households'

!  In'1983,'almost'98%'of'the'agrarian'sector'had'switched'to'the'HRS'

!  Results'(1978L1988):'!  Fixed'quota'(State'plan)'from'47.8'million'tons'to'50.5'million'

!  Domes/c'produc/on'jumped'from'304.8'million'tons'to'394.1'million'

Key'facts'

The Dual-track strategy was used in several issues of the reform as part of “the growing out of the plan” system…

24

The idea was that market economy began to drive Chinese economy gradually

0102030405060708090100

1991 1995 1999 2003 1978 1985

Market prices State guided State fixes

Share&of&regulated&price&for&industrial&transac3ons&[%]& Key&facts&

!  Dual:track&strategy&represent&the&coexistance&of&both&systems&(socialism&and&capitalim)&during&some&3me&

!  This&way,&the&number&of&loosers&due&to&the&reform&was&minimize,&while&the&old&ins3tu3ons&serve&as&second&best&op3on&beFer&than&abolish&them&all&at&once&&

Coal market (in million tones)

Labour market (in million people)

Planed

1981 1989

329 427

Market 293 628

Planed 74.5 112.1

Market 48.9 204.9

Examples:*

Source: OECD.

China has become the “world’s manufacturing plant”, having an economic model based on export

Source: Oficial stats.25

Foreign Direct Investment

Imports

Raw materials and components

Industrial activity

Exports

Components and semi finished goods

Chinese economic growth export model

This strong growth has been very uneven ...

Source: Oficial stats.26

Chinese GDP distribution

High Medium Low Very Low

Beijing Tianjin

Shanghai

Dalian

Nanjing

Xiamen Fuzhou

Hong Kong

Shenzen Guangzhou

Chongqing

Xi’an

Chengdu

Wuhan

Tsingtao

…and the same has happen in terms of Foreign Direct Investment

Source: Oficial stats.27

Foreign direct investment distribution

High Medium Low Very Low Very Low

China is among the countries that has benefit the most form globalisation developing region-states

Source: BBT Research Institut via Kenichi Ohmae.28

Chinese main economic clusters

Beijing Tianjin Dalian

Tsingtao

Shanghai

Suzhou

Fuzhou Xiamen

Hong Kong Shenzhen Guangzhou

Dongguang

Beijing / Tianjin Area

•  R&D •  IT, bio, space and defense •  Government services

Liaoning Area

•  Heavy industry, aircraft •  Software •  Japanese BPO

Shandong Area

•  Heavy industry, aircraft •  Software •  Japanese BPO

Zhu Jiang Delta

•  IT •  Electronics components •  Chemicals •  Automobiles

Chang Jiang Delta

•  Textiles •  Automobiles •  Laptops, mobile phones •  Financial institutions •  LCD panels

Xiamen / Fuzhou Area

•  Agricultural products •  Textiles •  Taiwanese companies •  Tea

Capital factor and total productivity factor had been the major drivers of Chinese GDP in the past

Source: Bloomberg.29

Real vs. potential GDP growth

Real%GDP%

Poten,al%GDP%

Capital%factor%TFP%Labor%factor%

Poverty has decreased world wide in the last three decades, specially in China

Source: Human Progress.30

Poverty rate world wide and in East Asia

Poverty has decreased world wide in the last three decades, specially in China

Source: Human Progress.31

Poverty in absolute terms

China has experienced the shortest Industrial Revolution

Number'of'years'required'to'double'the'real'GDP'per'capita'

RPC (1990-1998)

Japan (1885-1919)

US (1839-1886)

RPC (1981-1990)

Corea (1966-1977)

United Kingdom (1780-1835)

8'

9'

11'

34'

47'

55'

Source: IMF.32

In 3 years, China used more cement than the US did it a century

33Source: USGD; International Cement Review.

Cement usage in the US and China

The reform process is still today the main issue in order to understand Chinese economy

34

Summary chart: economic policies in China 1949-2006

Chinese Socialism 1958

!  Chinese'economic'policy'based'on'the'Soviet'model'

!  Agricultural'collec8viza8on''

!  The'Great'Leap'Forward'(1958D60)'broke'with'Soviet'model.'Mass'mobiliza8on'of'resources'to'promote'Chinese'selfDsufficiency'

!  The'Cultural'Revolu8on'(1966D76)'focused'on'poli8cal'consolida8on'

!  Open'door'policy:'Built'on'a'principle'of'moderniza8on'and'emphasized'econoDmic'liberaliza8on'to'achieve'growth'

!  This'policy'allowed'foreign'investment'in'China'for'the'first'8me'(SEZ)'

!  Liberaliza8on:'A'liberaliza8on'and'priva8za8on'package'was'introduced'in'order'to'realize'China's'candidacy'in'the'WTO.''

!  The'focus'of'the'CCP'was'to'enter'the'global'market'(while's8ll'restric8ng'poli8cal'freedom)'

Soviet-like system 1949

Open door policy 1978

Liberalization 1994

1960

The Great Leap Forward

1966 1976

Cultural Revolution 2006

Mao Zedong Mao Zedong Deng Xiaoping Deng Xiaoping, Zhu Ronji

China recognise that the institutions that work in one economy may not work in other economies

35

Key success factors of Chinese economic reform

•  Existence of a real consensus. Chinese economic reform has had a clear objective since the beginning and had a real consensus of all society

•  Gradualism: Chinese economic reform, in contrast of other former Soviet economies that had followed a “big-bang” strategy, has perform its economic reform step-by-step

•  Existence of carefully designed strategy and the existence of mechanism that helped to drive the transformation of the economy step-by-step (e.g. SEZ, dual-track strategy)

•  Decentralization, that together with pragmatism make possible that good policies spread around the rest of the country and that local governments adapt this policies to its particular region

•  Customization of economic institutions. China chose its own institutions recognizing its unique case and its particularities

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