CHINA’S ECONOMY IN A NUTSHELL

Since its foundation in 1949, the People’s Republic of China has been solely controlled by one ruling political party–the Chinese Communist Party (CCP). The one-party system is fundamentally different from a multi-party system. Certainly, the one-party political system is lack of openness but possesses a superior executive power, which guarantees the practice of any new policies. Therefore, China’s economy and the everyday life of any Chinese citizens are basically shaped by the governance of the Chinese Communist Party.

This blog gives a brief picture about the past, current and future of China’s economy with the presence of strong governmental influence.

50s – 60s: Planned economy in line with national conditions

When the People’s Republic of China was founded in 1949, the whole country has suffered enormous damage from the Japanese invasion and the civil war with the Chinese nationalists. The Chinese Communist Party was faced by a tough challenge to start China’s economy from scratch and overcome the problem of food and clothing. With a strong belief in Marxism, CCP immediately adapted the planned economy, where most jobs were assigned by the government and lasted for life. People received tickets in exchange for all necessities. There was no need for money, no social classes, and people of all professions were treated equal.

The planned economy fitted the dream of communism and was indeed the correct decision considering very limited productive forces and the lack of essential technologies. The planned economy in 50s and 60s reduced the starving population, built the basic public infrastructure, and re-started the productions in light industries and heavy industries. The Chinese government of that time emphasized the criticism of capitalism and strongly discouraged individualism, inequality in wealth and any values that were considered part of capitalism. On the other hand, CCP leaders were obsessed with unrealistic goals to surpass western countries in agricultural and industrial productions. Planned economy did very little to develop China’s economy apart from public infrastructure and supply of food.

70s – 90s: Steps along economic transition

To develop economy effectively, CCP leaders understood that they need the elements of capitalism, such as free markets, private companies and social classes. But to maintain the control of the economy, CCP started changes with allowing private capitals to participate in government-owned companies and then gradually opened the possibilities of private companies. This may violate the dream of commonwealth in Marxism, but it improved Chinese families’ living standards and nurtured the germination of China’s modern economy.

To hold the principles of communism, CCP had to advertise that economic revolutions were aimed to allow portions of people to accumulate wealth first who will then help others and eventually achieve the dream of commonwealth. Aside from allowing some to be rich, another aspect of modern economic revolution was to allow a few areas to develop faster by implementing more flexible and favorable business policies in those areas. For a period of three decades since 1949, China as a communist country held few foreign trades with many countries. But after the economic revolutions in late 70s, China’s economy started to grow at an amazing speed and exports played a critical role as made-in China products began to appear all over the world.

In early 90s, China’s stock exchanges were launched in Shanghai and Shenzhen to further the development of capital markets. However, such an economy is still very different from western economies in a few aspects. First and foremost, the Chinese government heavily dominates or controls the vital industries, such as oil, tobacco, utility, steel and other minerals, insurance, etc. Additionally, China’s banking industries remain in the hand of the government even though banks have gained some autonomy in recent years. Moreover, trends of China’s stock markets rely heavily and sensitively on the movements of Chinese government. There are still many restrictions for foreign capitals. Last but not least, implement of new policies and/or abandon of old policies may dramatically alter certain industries. In every way, China’s economy is close to a free market in some aspects but is still largely influenced by the government.

Going forward: complicated set of challenges toward a market-oriented economy

The growth rate of China’s GDP has been the center of the Chinese government’s concern. Hence not until recent two years when the growth rate of GDP struggles to reach 7%, the Chinese government began to openly address some problems that have been growing together with the economy, such as the real-estate bubble, issues with economic structures, environmental pollutions, gaps between cities and suburbs, etc.

More importantly, it is time to re-think the model of China’s economic development. There has been a debate about whether a freer market would be more suited to China’s current political and economic situations where the center of the debate are those characteristics of China’s economy under the government’s influence. Under the government’s influence in economy, cutting edge researches in science and technology have been receiving ample funding and projects of public infrastructure like the high-speed trains and skyscrapers can be completed quickly. On the other hand, there are countless issues that are derived from government’s influence. For instance, China’s financial markets and stock markets are lack of consistency and often unpredictable. Moreover, all these issues are interrelated which creates another layer of complexity for the Chinese government.

One thing is clear. There would not be a simple reform to the China’ economy that can both ensure the political steadiness and eliminate the risk of economic breakdown. And it would take a long time to steadily transform China’s economy into a more flexible and open economy. Meanwhile, both the Chinese government and China’s entrepreneurs are turning their attentions to the quality of China’s economy rather than the quantity. Looking forward, with its increasing openness and structural transitions, China’s market environment presents exciting opportunities for global investors.

 

Xiaoxi (Sarah) Liu

M.B.A. Candidate, 2017