China Since 1978 Part 3: Political Economy

Part 2 Available Here

Deng Xiaoping meets with Margaret Thatcher

Rural Economic Reform

Deng was branded as a ‘capitalist roader’ as he supported some level of market forces in China’s economy.

Hua Guofeng wanted to import technology on an unprecedented scale with emphasis on heavy industry over light industry & agriculture in an ambitious (unrealistic) modernization plan. Deng sought a more balanced form of development.

Deng’s advisors supported two changes to the economy. More decision making by producers, and introducing markets to varying extents.


1949–1952: Post revolutionary land reform followed by an agricultural collectivization project.

This process of collectivization became rushed and was declared completed in 1957 years ahead of the intended completion date. Agricultural production rose somewhat in the first few years, but “as the collectivisation drive went into high gear in the summer of 1955, the growth rate of agricultural production dropped.” Unaware of any problems leadership transformed agricultural coops into people’s communes for commerce, education, government & rural industry.

1952–1966: Rapid collectivization, the Great Leap Forward, and natural calamities combined to cause a decline in agricultural production. Collective agriculture was maintained but reformed to allow limited individual production until the Cultural Revolution.

1966–1976: During the Cultural Revolution private plots were condemned, raising animals by individual peasants was restricted. Material incentives were seen as inherently capitalist. Still agricultural production increased significantly from 1966 to 1976 as there was no significantly deleterious weather issue.

First-Stage Reforms

Since 1976 Chinese agricultural policies have promoted individual farming allowing material incentives, and diversifying agricultural production.

Land is owned collectively, but families are assigned the right to use the land. Land rights can be handed down, but not sold for a profit.

The cooperative plays a role in irrigation, pest control etc. but the family is the main unit for agriculture, owning its own capital, choosing crops, organizing production etc. Households had contractual obligations, but if they exceeded their quota they could sell more for more money to the state or on the open market. The market had higher revenues, but also higher costs. (transportation, labor)

Tongguo system: meant buying grain from rural areas and selling them to urban residents for less. It was a large bill for a poor nation, but it meant food prices could be stable for its residents.

1978–1984: Agricultural output grew so rapidly that there wasn’t enough space to store it all. Under the unified purchase system the state was obligated to buy as much as was offered by the peasants which meant an even larger subsidy cost.

Second Stage Reforms

New rules were written to formalize the existing system, but in practice it meant the somewhat illiterate peasants were taken advantage of by local officials.

Unified purchase system replaced by contract purchase system which granted more decision making to the household. There was also a loosening of price controls for less vital products, and an increase in prices for foods sold to urban residents.

It became more lucrative, and almost necessary to diversify and produce something besides grain. Meat, fruit and the like increased as grain production declined. Chinese leadership was somewhat concerned as national and even regional self sufficiency was an important objective for stability.

The famine following the Great leap Forward still haunted them. While China’s development, and relationships have changed they still have to feed 22% of the globe with 7% of its cultivated land. In a worst case scenario, China could just buy food from its allies, but if money was diverted into buying food, technology imports would slow.

Industrial Economic Reforms

Since 1978 China’s urban industrial sector has decentralized decision making, broadened the role of the market, reduced price controls, and introduced material incentives.

Decentralization means moving decision making from higher to lower levels of bureaucracy. Decision making authority has passed from government bureaucrats to enterprise managements. This made enterprises more concerned with quality, market demand, and profits. Factory directors have the power to hire and fire management, and adjust wages as needed. Success is materially incentivized to improve efficiency.

Running thousands of small enterprises has been tedious for local authorities, but the state is still reluctant to fully privatize them. Small enterprises are leased to small groups of people who can run them. Lessees pay a proportion of their earnings to the state in return for use of the state’s assets with occasional requirements to improve the value of the asset by upgrading the machinery etc. Larger enterprises are too important/powerful for the CPC to lease.

“This has created a dual system where the plan and the market play parallel coordinating roles in the allocation of resources and in the distribution of products… The state still exercises a high degree of administrative control over the economy. The difference is in the nature and scope of the planning.”

Urban economy planning has been steadily reduced since 1984.

Mandatory plan for essential goods.

Guidance plan for unessential goods and services.

Chen Yun wanted a greater share for the mandatory plan. Some young economists wanted to scale up the market considerably. Deng took the centrist path, which satisfied no one.

Price Rationalization

The correct handling of prices is crucial to any change from a centrally planned to a market-based economy. Whether this transmission succeeded or not will depend in large measure on the reformers willingness and ability to direct the reform process through this extremely difficult and politically most sensitive area. Expansion of the role of the market and the decontrol of prices are two aspects of a single process. Unless factory and goods prices can be successfully readjusted to reflect their real values, attempts to reform the economic system will achieve little. Before the start of the price reform, the volumes of goods to be produced or services to be provided were largely determined in advance of price formations by the planning authorities, thus denying the allocative role to prices. The price of an industrial product was composed of costs of raw materials, power, labour, depreciation, tax and a planned profit (i.e. an arbitrary rate of mark-up which was standardised for broad categories of goods). The price at which a product was sold by an enterprise to the state trading system bore little relationship to the actual cost incurred by individual production units. Any profit the manufacturer made was turned over to the state, while the state subsidised any loss.

Four types of prices in China.

  • Planned prices: fixed by the state, covered by mandatory state plan.
  • Floating Prices: upper and lower limits.
  • Negotiated prices: Non staple products negotiated by local governments and producers.
  • Free market prices: sold on free markets.

Price reform and ensuing inflation have been controversial with the people. Wages have grown, but so has inflation, and some say they aren’t breaking even.

“The real impact of price reform became evident in 1988 when inflation jumped to 18.5 per cent as against 7.3 per cent in 1987. The urban Chinese were particularly angry about the inflation because they had been living with stable prices and guaranteed incomes for decades. In fact, urban residents continued to pay for rationed grains, cooking oils and rent at 1950s prices well into the 1980s. Unlike farmers, who were accustomed to income flux tuations associated with crop harvests, urban residents had received financial protection since the early 1950s by way of food subsidies, and medical and social welfare facilities. With prices changing every day, they no longer feel financially secure. While factory workers could rely on bonuses at a time when the economy was growing at 10–11 per cent annually, the steep rises in prices made life difficult for pensioners, academics and other fixed-income earners whose workplaces were either unprofitable or who were not in the business of making profits. The widespread discontent which led to the tragedy of June 1989”

Material Incentives: Mao didn’t care for material incentives, but Deng thought they had a legitimate place in Chinese Socialism. Even under Mao he pushed for incentives to boost industrial and agricultural production, which led to his branding as a ‘right deviationist.’

The Great Leap Forward and Cultural revolution had moral incentives, titles like ‘model worker’ or ‘model enterprise.’ These moral incentives are still around but they are based on economic performance not political ideology.

Wage system reform made wages more linked to performance. Total salary was made up of a basic wage (minimum income), a post wage (based on job demands), and a floating wage (based on enterprise profit).

Such reintroduction of material incentives indicates a change of attitude toward values hitherto spurned by the CCP. It also reflects the pragmatic interpretations of Marxism used by Deng and his followers to justify almost every method that has been used to promote economic growth under the slogan of building socialism with Chinese characteristics’. Inherent in this change of attitude is the recognition of China’s poverty and the need to improve Chinese living conditions in a region of high economic growth and unprecedented prosperity, and dominated by capitalist societies. In a clear denunciation of past economic policies, Deng once said: Poverty is not socialism … if it is to be superior to capitalism, it must enable us to eliminate poverty.” To achieve this objective, principles and policies which were anathema to Mao, such as emphasis on material incentives, have been actively promoted by the Chinese leadership.

Following the fall of governments in Eastern Europe led by Marxist-Leninist parties and the dismantling of the Soviet Union, China’s leaders find themselves on the horns of a serious dilemma. If they continue with market economic reform, they risk becoming increasingly irrelevant. If they backtrack and reassert centralised control, they could force the economy into stagnation and face social and political crises. However, as of the end of 1992, the leadership has opted decisively for market economic reform, making such a backtrack most unlikely in the near future.

Special Economic Zones & Open Investment Areas

The Deng Era meant a shift to a more open China abandoning Mao’s views on self reliance.

In 1980 four Special Economic Zones (SEZs) were started: Shenzhen, Zhuhai, Shantou, and Xiamen.

Cities were chosen for their proximity to foreign investment sources, and their distance from population & political centers of power. Investment could be maximized, and disruptive influences could be minimized.

These SEZs took some inspiration from Asian Export Processing Zones (EPZs) which were designed to increase employment & foreign exchange earnings without disrupting domestic manufacturers. Bonuses include technology & skills transfer. SEZs combined standard EPZ features with agricultural production for export and tourism.

“Deng Xiaoping described SEZs as ‘windows for technology management, knowledge and foreign policy to better serve China’s modernisation programme.’”


  1. Foreign Exchange earnings
  2. Technology transfer
  3. Skills transfer
  4. Ideological concession to the people of Hong Kong
  5. Labs of economic reform

Bad outcomes were limited in scope, and good outcomes could be replicated. (Another characteristic of the political system discussed in my introduction.)

The success of Shenzhen led to the opening up of 14 coastal cities including Shanghai, which were granted some level of local autonomy to attract foreign investment.

“The popularity of the SEZ concept, as evident from the creation of so many ‘zones’ of all kinds, may give the impression that the SEZs have been extremely successful in achieving their goals. But down to the end of the 1980s, SEZ successes were only limited, even Shenzhen, the most successful of all SEZS.”

Foreign participation has improved quality control, managerial skills, and customer service, but its intended function of bringing in advanced technology has been underwhelming. Technology transfer through EPZs is usually limited. Foreign firms are not in the interest of giving up their technological secrets.

“The SEZ as a whole has always run a trade deficit…The SEZ has failed to live up to the expectation that it should be an export-oriented zone. Although Shenzhen’s per capita income was almost three times the national average, its prosperity was based largely on its unintended function as an entrepôt between the mainland and foreign countries.”

Shenzhen was closed off by a fence known as the ‘second line.’

“One reason for erecting the fence was to prevent tariff-free imported goods from finding their way into the interior markets, although such practices have persisted. It was also designed to prevent large-scale migration of people into Shenzhen.”

Shenzhen was also the first city to introduce price reforms meaning wide price differentials between Shenzhen and other parts of the country.

Much of the prosperity of the SEZ has been based on these price gaps which have provided SEZ firms, particularly state firms, with opportunities to make profits by selling tariff free or low tariff imported goods from Shenzhen to other areas.”


“Development versus the environment is a hard choice for all nations as they strive to continually improve the living standard of their people. But this choice becomes even more difficult for the developing countries, whose primary concerns are to provide adequate food, shelter and clothing for their citizens. In a rapidly developing world, even these most basic of all needs cannot be met without at least some degree of industrialisation, which has become almost synonymous with modernisation. But industrialisation has come at a price, extracted in the form of damage to our physical environment, upon which our very existence is based. All countries, regardless of their geographical location and stage of development, are affected by environmental problems. While some problems may affect only a limited area, the most threatening environmental problems are global in nature.”

This chapter aged much better than I anticipated.

“Can the Chinese people and their government be blamed for aspiring to expedite their economic development and for trying to catch up with the developed countries in individual incomes and living standards? After all, many of the global environmental problems were created by the developed countries, which concentrated on industrial development to the neglect of the physical environment. China and the other developing countries are indeed latecomers to the ranks of guilty nations who have, for example, contributed to ozone depletion. Chinese leaders argue that the blame for such environmental destruction should be apportioned fairly and the developing nations should not be penalised for the past and present mistakes of developed countries.”

China is well aware of their environmental problems, and a network of new government institutions has been created to deal with it. Problems that began before reforms have only been accelerated with quicker industrialization.

Problems include: acid rain, deforestation, soil degradation, and water pollution. These problems no doubt have changed significantly in the decades since the book was written, but at the time the high rate of fossil fuel burning led to severe health problems in major cities including lung cancer rates that often quintupled the countryside’s. “Coal provides 76 per cent of China’s Energy.”

Deforestation: is currently being addressed with contentious results. This may be a topic I explore in the future as reforestation can be a form of both adaptation and mitigation. (More on that here.)

Water pollution: Pollution in the air and on land eventually makes its way into the water, which can then negatively affect people from the food they consume as well as the water they drink.

Energy: was one of the weak links identified by the four modernisations program of 1978 along with raw materials, communications and transportation.

One of the solutions to this weakness is the Three Gorges Hydroelectric Project which thanks to increased economic growth and technical expertise has become feasible. It would be one of the largest most expensive projects (financially, socially, environmentally etc.) ever undertaken by the PRC. There is a tradeoff of energy independence, flooding protection, and reduced coal burning that make the project seem worth it. Planning began in 1955, was postponed for feasibility for four decades, and construction was completed 11 years after this book was published.

“Environmental protection measures such as the green belt project have been widely praised by the United Nations and other international organisations. But the implementation of such projects requires enormous amounts of money, and that is what China demands from the developed nations in exchange for compliance with international environmental agreements. The government has said that it is ready to assume responsibilities commensurate to our economic possibilities’… Chinese demands for financial and technical help from the developed nations are supported by many other developing countries, including India and Brazil. They argue that the developing countries should not be penalised by setting limits on their growth.”

In recent years China has signed agreements, passed laws, formed environmental agencies, raised public awareness, and established environmental education curricula, but economic growth is still primary.

Foreign Relations II: Neighbors

Post Mao Leadership nominally supports independent paths of development for all countries regardless of their political ideology.

China’s Relationship with India has been improved despite India’s historical alignment with the Soviet Union & ongoing border disputes. China and India shared a cynical view of Western Human Rights rhetoric. Both countries emphasize the ‘right to subsistence and development’ as the premier human right. (Possibly because they still remember being deprived of that right by the same western powers.)

“China’s preoccupation with economic and technological modernisation under Deng has caused it to seek friendly ties with its neighbours. It now sees Southeast Asia and Japan as major sources of technology and investments to aid its four modernisations program. Its pursuit of economic prosperity, rather than military or ideological domination of the region, sits nicely with its neighbours objectives. China’s readiness to use the language of economics in international relations is understood better by its neighbours than the ideological rhetoric it used in the past.”

Neighboring countries were more restrained in their response to the Beijing Massacre, and thus maintained closer economic ties.

China’s relationship with Vietnam has its fair share of historical baggage, but they are the two most populous communist countries in the world, both of which have been forced to “adopt distinctly unsocialist economic policies” to attract foreign capital & technology. Trade between the two is on the rise.

China’s relationship with Japan is complicated. Historical baggage would be an understatement. The relationship is strong anyway, because the Chinese government puts the needs of the economy over the sentiments of the people.

“There are two reasons for this: firstly, the past history of Japanese militarism in China; and secondly, the economic and technological advances that Japan has made in the postwar period. In spite of the bitterness and mistrust that the Chinese leaders harbour towards Japan for its cruel treatment of China in the past, they are nonetheless impressed and awed by its spectacular economic successes. Such mixed feelings are also reflected in China’s relations with Japan. During the 1950s and 1960s, the presence of American bases in Asia and United States military association with Japan were perceived by the Chinese as the main sources of threat to China’s national security. At the same time, however, China kept trying to develop trade ties with Japan.”

Australia sanctioned China following the Beijing massacre, but soon decided making life worse for both Chinese people and Australian people was unlikely to lead to productive change.

Hong Kong

In the decades leading up to the handover it was unclear whether or not China would really take control of Hong Kong. Hong Kong was an important source of foreign currency and China may have been hesitant to destabilize the relationship.

In 1982 Thatcher, fresh off a victory in the Falklands war was shocked and dismayed by China’s plan to regain sovereignty in 1997. Chinese negotiators were resolute, and an agreement was signed in 1984.

In 1992 Chris Patten, a Conservative Party member, took over as Governor of Hong Kong and decided to democratize it drawing the ire of Beijing. For the first time Hong Kong’s 150 year colonial history, half of the legislative council was allowed to be elected via universal suffrage. The handover took place three years later.

Bill Clinton expressed strong support for Patten as some of his administration was eager to see the CPC overthrown, and thought that the last minute democratization of Hong Kong may somehow set such events in motion. “All sides saw a movement for democracy based on Hong Kong and assisted from overseas as a potential threat against CCP rule.”


“A balanced evaluation of reform and modernisation from the late 1970s to the early 1990s would generally be positive if the criteria used are the goals which Deng and his cohort set for themselves in the late 1970s. In their terms, China is undoubtedly a more ‘modern’ country in the early 1990s than it was in 1978. On the other hand, the foregoing account makes clear that the beginnings of the modernisation process have come at a considerable cost. Other than those already mentioned, problems have included ecological degradation, widening inequalities, official corruption and cynicism and disillusionment among the intelligentsia and youth.”

Output rose as well as standard of living. Development is still very uneven, and poverty is still widespread at the time of publishing.

“To each according to need” did not apply to China under Deng. He criticized the ‘iron rice bowl’ of the Mao era which kept people employed regardless of performance. The level of inequality is almost certainly more than anticipated by Deng’s leadership. Inequality is high between regions as well as individuals. The Eastern seaboard particularly the south are much more developed than western regions.

Human rights are very badly served if understood according to the Western notion which emphasizes the rights of the individual against the state. On the other hand, China has not done too badly since 1978 if the basic human right is considered as subsistence, as Deng’s media have so repeatedly insisted in recent years that it should. Western-style democracy does not appear imminent, but it was never part of Deng Xiaoping’s modernisation program to preside over its introduction in the first place. The emergence of the “civil society’, in which citizens can take part in political, administrative and economic mechanisms autonomously from the state, is a notable factor in China since 1978. On the other hand, it remains weak and shows no signs of reaching the stage where it can challenge”

The CPC is one of the few surviving Marxist-Leninist parties, but the citizens particularly the intelligentsia have become disillusioned with the ideology.

Ordinary people appeared to have lost interest in politics, diverting their energies into making money and in the case of many young people, getting as much amusement from life as time and means permitted.”

The party itself garners support from ordinary workers thanks to its stability and prosperity, more than its ideology. Its membership is growing which would be unlikely on a sinking ship.

“China’s experience has been very different from that of the Soviet Union in the past few years. The rank and file of the CCP have shown themselves somewhat more malleable and less reluctant to change than their counterparts in the Soviet Communist Party. But it is also important to note that Deng Xiaoping actually required somewhat less drastic changes in the CCP than did Mikhail Gorbachev in the Soviet Communist Party. Gorbachev always gave priority to political rather than economic reform, whereas Deng Xiaoping’s policy was just the reverse. In China the CCP encore aged and implemented elections, but they were always local in scope and never national. Certainly they were never of the kind which could bring to power a rival of the supreme leadership, as did in fact happen when Boris Yeltsin was elected Chairman of the Russian Federation’s Supreme Soviet in 1990 in spite of Gorbachev’s persistent and intense opposition.”

On PRC Dissolution as compared with the USSR

“A question worth asking is whether those countries which have indeed fallen apart really constitute such positive models worthy of emulation. Were the central Chinese government to collapse and various minorities or southern provinces secede, the possibility of large-scale conflict could not be ruled out. Having seen what has actually happened in the early 1990s in the Balkans and parts of what was the Soviet Union until 1991, even the most ardent secessionist would need to think carefully before risking the kind of conflict which could ensue if China fell apart. Even under its capitalist system, Russia does not appear to be doing anything like as well as China. The history of China from ancient to modern times suggests that disintegration would be most unlikely to be peaceful.”

The CPC need not collapse for China to become capitalist. Private ownership of the means of production has increased. Two stock exchanges have been in operation since 1990. (One in Shenzhen, one in Shanghai) In 2020 there are three, if you include Hong Kong.

“Chinese people appear more interested in accumulating money and capital and in improving their standard of living than in pushing for a more equal society… The Singapore model, a centrally controlled system with free-ranging capitalism, appears to have great appeal in China… Socialism with Chinese characteristics may blend into and turn out rather similar to capitalism with Chinese characteristics.”

“No matter if it is a white cat or a black cat; as long as it can catch mice, it is a good cat.” — Deng Xiaoping



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