China’s economy is a global powerhouse. The country and the activities it undertakes has immediate as well as long term global ramifications on other nations of the world, such is its reach and undeniable impact. It was not long ago that the nation was struggling with a crippling poverty issue that had serious economic ramifications. Through the course of this resource, we will aim to understand the issues China faced, reforms it undertook, the impact of these reforms and the overall growth story that China is today.
China was a stagnated economy for close to 150 years, between the period of 1800 – 1950. The economy was so flat-lined that it failed to recognize any substantial growth in over 150 years.1 During the same time, The United States began its own growth story. In 1791, The USA produced 2 million pounds of cotton. This was greatly pumped up to 385 million pounds in 1831 and 1650 million pounds in 1860 (66% of the world’s production). In 1860, The US produced 11 million pounds of wheat. This further grew to 25 million pounds in 1990. America’s iron and steel production story is even more impressive. The USA had near zero production of iron and steel in 1850. Fast forward 50 years, the country pumped up iron and steel production to over 30 million tones.
While the US and certain other parts of the world were experiencing economic growth, China experienced 150 years of economic stalemate. What ensued was sky high poverty rates, unemployment and a constant frustration and a feeling of unfulfillment among its population.
During the decline of the Qing dynasty in the late 1800s and early 1900s, China experienced various economic and political strains, resulting in great socio-economic problems. Opium (a plant that is used to later produce the illicit drug heroin) exports from Britain to China increased, crippling its economy and society. These exports were a source of great tension to the Chinese, eventually resulting in the Opium War (1839-1842) and the second Opium War (1856-1860).2 Before the Opium Wars, The UK would export opium to China through a single port. After the 2 wars, over 80 different ports were set up to facilitate trade. The Opium Wars resulted in “The Century Of Humiliation”, a 100 year period of unrest, external invasion and a multitude of political, economical and socio-economical issues.3
These wars, along with “The Century Of Humiliation” were not kind to the Chinese. China’s balance of trade greatly suffered due to the country’s opium consumption habits, further driving back the already war torn nation.
Growth reforms undertaken by China
Post China’s “Century Of Humiliation”, its government, along with revolutionary leaders undertook various reforms, with the goal of bringing China back on track. Broad economic reforms undertaken were:
- Various agricultural reforms were undertaken to aid production
- Marginal privatization that sold-of certain sick state owned enterprises
- Various export centric reforms
We will study the effects of each of the above reforms on the Chinese economy in detail below.
Chinese economy between 1949-1978
Mentioned within are some of the economic reforms undertaken by China during 1949 to 1978. These reforms were implemented to bring China out of poverty and spur economic growth.
Five year plans
The 5 year plans were initiated by the Communist Party of China in the year 1953. These plans have the aim of sustainable and large scale social and economical growth. These 5 year plans were critical in shaping China into what it is today. The country has had thirteen 5 year plans in the course of 64 years, with five of them ranging between 1953 to 1978.
First Five Year Plan
China initiated efforts to stimulate its economy by investing into 694 major industrial projects.4 Special incentives were provided to the agriculture and handicraft industry. One of the major highlights of the plan was a 98% increase in Chinese coal production during this five year tenure. Chinese agriculture also saw a 26% rise in production.
Second Five Year Plan
China furthered their socialistic activities during this period. Along with renewed efforts in sectors like handicrafts and agriculture, China also looked to improve infrastructure and aid transportation.
Third Five Year Plan
China concentrated on developing its defense capabilities during the tenure of the Third Five Year Plan. It also introduced the Shenyang J-8, a high altitude fighter jet within its fleet during this time. China also publicly stated that its agricultural goals were surpassed during this phase.
Fourth Five Year Plan
China’s self-investment efforts paid off, as this was China’s fastest growth year. It grew at an annual rate of 7.1%, 3.8%, 7.8%, 2.3% and 8.7%, respectively.5
Fifth Five Year Plan
China further intensified its self-investment practices by proposing the following during its Fifth Five Year Plan:6
- 8 additional strategic coal bases were proposed to be built, with the aim of further spurring up coal production
- An additional 10 oil fields would need to be build across the country
- 9 critical metal bases were set up during this period
- The country poured in more money in its infrastructure than it ever had before, initiating a ferocious growth rate.
- The One Child Policy was also introduced in this period to curb population explosion.
One child policy
The One child policy was introduced by the Chinese government in 1979. According to research, this policy has worked extremely well and has reduced China’s birth rate by at least 250 million births.7
Chinese economy between 1978-1995
China’s catalyst of growth was China’s land reform program. A bold move by the Chinese government to distribute ploughable and farmable land to farmers. The ownership was transferred from landlord to farmers in this revolutionary reform. Approximately 60% of unused farmable land was redistributed to farmers, with the condition that farming activities be immediately initiated, making optimal use of the country’s natural resources.
Agricultural activities were further incentivised by the government in the early 1980s. It had a strong focus on exports, wanting to solve the country’s BOP problem. By this time, the country was also struggling with population explosion. To curb the same, China exercised the One Child Policy. The country also aggressively invested in alleviation poverty and unemployment, and creation of a sustainable and self-sufficient economy. China’s self-investment bore fruit:
- Its GDP grew from roughly $220 billion in 1978, to over $700 billion in 1995
- China’s PPP grew from just under $300 in 1980, to over $2200 in 1995
- The country had an impressive GDP growth rate of 13.9% in 1993
Between 1978-1995, the country also had its sixth, seventh and eighth five year plans.
Sixth Five Year Plan
Exports were favorable during this phase. China was now among the top 10 export driven nations of the world. The increase in exports also had a positive effect on the country’s Balance Of Trade account, due to the inflow of foreign exchange.
Seventh Five Year Plan
A specific Impetus was given to the country’s educational system. China had the vision of educating its population, with the aim of developing a skilled and contributing population force. China also aimed to train 5 million highly skilled professionals for market absorption during this phase.8
Eight Five Year Plan
Due to China’s educational centric efforts in the Seventh Five Year Plan, the country achieved an increase of 50 million in its labor force. This increase had a direct effect on production increase and exports, finally culminating with a healthy inflow of foreign exchange, propelling the economy further.
Chinese economy between 1995-2005
China’s Human Development Index (HDI) went from 0.580 in 1995 to 0.677 in 2005.9 The HDI of a nation is a complex amalgamation of various factors such as average lifespan, education index, PPP, among others. China’s HDI further rose to 0.772 in 2007, ahead of countries like India, Indonesia and South Africa.
China’s GDP growth rate was consistently over the 7.5% growth rate mark during this period, with hitting the highest GDP growth rate of 11.4% in 2005. Its PPP went from a shade over $2200 in 2995 to $6533 in 2005. More money with the Chinese people resulted in increased purchases, further spurring economic growth. China also became a member of the World Trade Organisation in 2001. In 2005, China becomes the world’s 4th largest economy, ahead of countries like The United Kingdom and France.10
Ninth Five Year Plan
Modernization initiatives were undertaken, bundled with population control initiatives during this five year period.
Tenth Five Year Plan
China set up its Tenth Five year plan with the following goals:11
- It wanted to control inflation within its economy
- Further boost exports
- Modernizing any obsolete infrastructure
- Population reduction
Chinese economy between 2005 – current
The country’s economy further sped up. It was consistently growing at over 9.4% between 2005-2011.
Eleventh Five Year Plan
Various developmental reforms were undertaken during this phase, they included:12
- Keeping a check on China’s growing pollution problem
- Increasing pension coverage for the older population
- Creation of additional high-skill jobs
- Investing in renewable energy sources
Twelfth Five Year Plan
The plan included China’s vision of building a brand new airport in Beijing. (scheduled for completion by 2019). It also includes the nation’s plan to effectively and safely dispose of nuclear waste in harmony with the environment, and the country’s plan to generate more hydro electricity.13
Thirteenth Five Year Plan
The nation included various reforms for its development during this phase. Some of them are:14
- The goal of eradicating poverty by 2020
- Two child per family policy
- National defense reform
We will explore the above reforms in detail a little later.
An export driven nation
Due to pro-export reforms undertaken post 1978, China is considered as an export behemoth, with a positive trade surplus with most countries of the globe. In 2011, China exported over $350 billion worth of goods and services to the European Union. Coming in at a close 2nd place is the United States Of America. China exported goods and services amounting to over $320 billion to the US in 2011, and over $50 billion to India.15
A slowing economy
Post 2011, the country is gradually showing a downward growth trend. The country’s GDP went from 7.9% in 2010 to 7.3% in 2014. It touched a 6.7% GDP growth in 2016. The reason for China’s economic slowdown can be attributed to the following:
- The country is currently experiencing a slowdown of exports
- Chinese banks have bankrolled various failed infrastructure projects
- Failed projects result in bad debts, hurting the overall economy
- There is a growing emergence of corruption in the nation
Further reforms undertaken by China
Eradicate poverty by 2020
China plans to eradicate the menace of poverty by 2020.16 To accomplish its bold goal, it would need to to get 1 million people a month out of poverty, on average, till the year 2020. Chinese civilians earning below $360.75 are considered to be below China’s poverty line. To meet its goal, China would have to get each one of its 70 million civilians over the line by 2020.
Made in China 2025
This Chinese initiative focuses on increasing the efficiency of China’s manufacturing sector, specifically 10 major components. They include: Aviation, railroad, heavy machinery manufacturing, robotics, medicine, among others.
National defense reform
China has also initiated a National defense reform that would cut defense related expenses and at the same time, increase modernization. The country is looking to ease up the pressure on its economy by introducing these changes. It has already cut over 300,000 personnel from its army, in accordance with the reform.17
Two Child Policy
China’s birth rate spiked 7.9% in 2016. This was attributed to China’s Two Child Policy, a reform where the government abolished its One Child Policy (initiated in 1979) and started with the new 2 children per parent reform.18 China aims to revitalize its economy by an influx of youth in the coming decades, with the aim of getting its population’s average age down.
Problems in the Chinese economy
The problem of deflation
Deflation occurs when the price of goods go down. This happens because of a lack of consumer demand. China may be looking at long term deflation issues because of its massive production havens. China’s production overshoots its demand, causing a fall in prices. Deflation is associated with economic problems like:
- Lack of growth (China’s growth has steadily declined)
- Low profit levels for corporations, resulting in decline in investment
- Decline in Foreign direct investment (FDI)
Corruption in the banking sector
The country has had a history of corruption within its financial sector, resulting in various bad loans given. Bad loans not only affect the bank that gives the loan, it also has a reverberating effect on the economy. A recent banking fraud amounting to $4.9 billion was discovered within China’s Bank of Liuzhou.19
Rising labor cost
China’s labor cost has been rising consistently over the years. This has happened on the back of regular economic growth and china’s impetus to improve the skills and education of its people. As education levels rose over the years, educated Chinese individuals chose not to participate in labor intensive activities. This resulted in lower job demand for labor intensive activities, increasing labor costs. As China’s labor cost increases, it has a direct impact on the foreign capital it receives. International corporations that previously had its bases set up in China (Due to low cost of labor), may look to move at other cheap-labor havens like India and Indonesia.
Deng Xiaoping, born in 1904, was arguably China’s most influential person. Xiaoping was instrumental in introducing a plethora of reforms between the 1970s and the late 1990s. His reforms included focus on exports, external affairs and socialism. Many of the reforms you see in this article were initiated by Xiaoping. He was preceded by Zhou Enlai and succeeded by Deng Yingchao.
Mao Zedong is the founding father of China. He was also the chairman of the CPC, that initiated early reforms within the Chinese economy. Along with implementation of various reforms, Mao Zedong was also criticized for his extremely autocratic leadership style. According to estimates, one of Zedong’s reforms, ‘The Great Leap Forward’ reform was a massive mistake and cost the lives of over 40 million Chinese lives, due to a famine. He was later succeeded by Hua Guofeng as the Chinese Premiere. On a personal account, Mao Zedong had a total of 10 children with 4 wives.
Enlai was an important cog in the Chinese external affairs machine. He implemented various external affairs policies and plans to improve China’s global image that later culminated in effective trade relations. He was succeeded by Hua Guofeng
Xi Jinping is the current president of China. Jinping was instrumental in forming The National Security Commission of the Communist Party of China. The Two Child policy was also introduced during his tenure.