Facing reality transformed China

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The most remarkable economic turnaround story of the 21st century undoubtedly belongs to the People’s Republic of China. As the country marks the 40th anniversary of economic reforms and opening, the world looks back at the rise of the new dragon in world economics. The country’s rapid economic transformation is puzzling as it generates a great deal of skepticism in equal measure. How could a nation with 1,386 billion people transform itself so rapidly from a vastly impoverished agricultural economy into a formidable industrial powerhouse when so many tiny nations have been unable to do so despite their more favourable socio-economic conditions?

How could their economic reforms be so effective in such a short space of time to change the scope of a capitalist based global trade order? According to the World Bank, China transformed from a US$192 billion economy in 1980 to a US$13 trillion economy as of October 2018 with an average GDP growth rate of 10% since 1990. No county can beat China in terms of long-term sustained and high growth in its economy. It has taken China only 30 odd years to achieve what took other countries several decades or even more than a hundred years.

This transformation lifted over 800 million people out of poverty and placed the country firmly as the second largest economy in the world after the USA. China’s economic story paints a picture so clear it requires most developing nation’s especially African countries to take notes on economic reforms, export led growth, investment policies, research and development strategies, agriculture transformation and import policies.

In 1980, China’s per capita income was only US$220 (one-third of sub-Saharan Africa’s per capita income). Today sub-Saharan Africa per capita income is US$1 560 while that of China is US$10 047 (6 times more). China has grown to be the world’s largest manufacturing country as it produces nearly 50% of the globe’s major industrial goods; including crude steel, cement, coal, automobiles and industrial patent applications. China is also the world’s largest producer of ships, high-speed trains, robots, tunnels, bridges, highways, chemical fibers, machine tools, computers, cellphones and other small merchandise mainly consumed in developing countries. China is the world’s largest trading nation with exports valued over US$2,26 trillion and imports of US$1,84 trillion thereby generating a trade surplus of US$42 billion.

What makes Chinese trade a marvel is that its largest trading partners are the United States, European Union and Japan who account for over 53% of the global economic output. China also holds the world’s largest reserves of foreign currency valued at over US$3,062 trillion as of November 2018. China reached all the set Millennium Development Goals (MDGs) by 2015 and made a major contribution to the achievement of the MDGs globally since it accounts for 20% of the world’s population. China’s growth has reduced poverty with only 3,3% of the population living below the poverty line, set at 2300 Yuan (US$333).

It is evident that Chinese growth was hinged on industrial exports which account for over 95% of the country’s export earnings. However there are a lot of economic policies that the Chinese nailed in order to rapidly industrialise the country. In December 1978, China’s free market principles under Deng Xiaoping sign-posted a turning point in its economic management and trajectory. For this to happen, the country’s leadership had to accept the painful truth that Maoist version of the centrally planned economy had failed to produce efficient economic growth and had caused China to fall far behind not only the industrialised nations of the West but also the new industrial powers of Asia such as Japan, South Korea, Singapore, Taiwan and Hong Kong. During the years of the centrally planned economy, citizens had to grapple with rationed clothing, basic shortages, inadequate housing, high inflation rates and a service sector that was inefficient. Deng’s policies strengthened the authority of institutional managers and economic decision makers at the expense of party officials from the Chinese Communist Party.

The effect of this policy was to separate economic policy from political interference and ensure efficient allocation of resources to economic development. The country also improved its investment policies by allowing investment into high tech industries and exchanging manufactured goods for technology. The growth in technology oriented research and development also meant the cost of production for various goods gradually went down. The purpose of the reform program was not to abandon communism but to make it work better by substantially increasing the role of market mechanisms in the economy through reducing (not eliminating) government planning and direct control.

By 1987 the program had achieved remarkable results in increasing supplies of food, fuel and other consumer goods which helped to control inflation. A new climate of dynamism, entrepreneurship and opportunity in the economy had improved the quality of goods and services in the economy.

The first years of reforms looked at economic re-adjustment, during which the major goals of the re-adjustment process were to earn foreign currency by growing exports rapidly through establishing export hubs and overcome key deficiencies in transportation, communications, coal, iron, steel, building materials and electric power that were the major cost drivers in the economy. The government also sought to redress the imbalance between light and heavy industry by increasing the growth rate of light industry which makes the bulk of Chinese exports and reducing investment in heavy industry during an era of the first industrial revolution. Agricultural production was stimulated in 1979 by an increase of over 22% in the procurement prices paid for farm products. The move was meant to reward key producers of rice, wheat, potatoes, tomato, sorghum, peanuts, tea, millet, barley, cotton, oilseed and soybeans. This phase featured the sprouting of millions of rural enterprises from 1,5 million to 18,9 million and growth in GDP from agriculture. Food security was achieved and aggregate wages for farmers increased 12-fold.

The second industrial revolution featured policies oriented toward mass production of goods for the domestic and international markets.
It also looked at massive investment into energy, transport, communication and industrial infrastructure in agriculture driven country sides. Because of the rapidly and enormously expanding domestic market for intermediate goods, machinery and transportation, there was a big surge in the consumption and production of coal, steel, cement, chemical fibers, machine tools, highways, bridges, tunnels and ships. In all, 2,6 million miles (3,9 million km) of public roads were built, including more than 70,000 miles (105 000km) of express highways.

Twenty-eight provinces (out of 30) have high-speed trains. The result was that cost of production drastically fell and made Chinese products attractive on the world market. Infrastructure investments also opened up markets for various producers in the local market and abroad through export led cities at the country’s borders.
The growth of the Chinese economy can be termed as the triumph of marketism. Free markets impose economic incentives to compete (profits), impose discipline on management so as to control risk and on technology adoption so as to improve quality and control cost of production. It also promotes destructive innovation where inefficient producers, monopolies and bureaucratic structures fall. Foreign investment inflows grew rapidly post 1990. According to the 2018 World Investment Report published by UNCTAD, China was ranked the world’s second largest Foreign Direct Investment (FDI) recipient after United States.

The country’s economy was ranked the second most attractive to multinational companies for 2017-2019. FDI inflows continue to increase between 2016 and 2017, from US$133 billion to US$136 billion. This growth is favoured by economic liberalisation policies, the rapid development of the high-tech sector and the establishment of free trade zones. The absorption of FDI is part of the policy of opening China to the outside world, aiming at creating a better business environment, structures and distribution of investment across the country. The government’s efforts to achieve a better geographical spread of investments have allowed central China to see its FDI increase. Over 35,652 foreign-funded companies were set up in China in 2017, thanks to the large base of internal customers. China’s favourable investment tag is hinged on the Importance of foreign currency reserves and effective public debt management by Chinese government. Labour costs remain comparatively low in the region for global brands manufacturers such as Nike, Coca-Cola, KFC, Apple, Toyota, Mitsubishi, Samsung, Hyundai, LG and Kia who operate in the country among others.

Despite fears of massive pollution caused by rapid industrialization, overcrowding in Shanghai, corruption by top government officials and massive debt overhang from funding State Owned Entities (SOEs), China’s will surely weather the storms of the negative impact of its massive economic growth. The Chinese government’s spending on key infrastructure projects and industry shaping state entities have been a significant drivers to modernisation. Efficient management of public funds through state entities has seen the growth of global giants such a Huawei, Sinopec, Lenovo, BAIC Motors, Yutong, ZTE, CHINT Electrical and Hisense in a country where 17 out of the 20 largest corporations are state owned. The development of a new trade network called the Belt and Road Initiative (BRI) which will link China to Asian, European and African markets will further expand the Chinese economy. Political stability, investment in research and development, consistency on trade and monitory policy will definitely help China make its economic growth sustainable.

Victor Bhoroma is business and economic analyst with expertise in business management aspects. He is a marketer by profession and holds an MBA from the University of Zimbabwe (UZ). For feedback, mail him on vbhoroma@gmail.com or Skype: victor.bhoroma1.

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