China's Economic Challenge

The following sections are included:

• Dedication
• About the Author
• Preface
• Contents
• List of Tables
• List of Figures

For over 40 years (1978–2019), China succeeded in sustaining rapid economic growth and achieved large-scale reduction in poverty — before pausing due to the 2020 Covid-19 pandemic. Over those 40 years, economic output increased 40-fold. China’s performance transformed both the country and the world’s commercial landscape, as it shifted and lengthened international supply chains and became a powerful new source of international demand. Domestically, China’s focus on improving living standards for the impoverished section of its population made it possible for the United Nations to meet its multi-decade worldwide poverty reduction targets. China’s modernization was and is a phenomenon achieved by unconventional methods, posing international and domestic challenges across the board…

The achievement of more than 40 years of 40-fold growth by China owed a significant debt to developments before 1978. Mao Zedong, or Chairman Mao, had headed the Communist Party of China and led the People’s Republic of China (PRC) from before its creation in 1949 until his death in 1976. China’s nearly 30-year Maoist period witnessed destructive policy blunders accompanied at times by horrific violence and cruelty, but it also accomplished much economic good…

China’s reforms in the 1980s accomplished a crude across-the-board launch for the restructuring of its economic systems. Urban, rural, and international commercial reforms in the 1980s prepared the way for more sophisticated reforms of the 1990s and China’s sustained development performance in subsequent decades…

Reforms in the 1980s accomplished institutional changes that bore even more plentiful reform fruit in the 1990s. However, they also set in play unavoidable tensions. By 1984–1986, price reforms had disturbed rural– urban terms of trade and caused domestic supply–demand imbalances that led to a severe crisis for China’s balance of payments and foreign exchange reserves. This crisis, and additional price reforms in 1988, generated inflation so harsh that it undermined urban living standards. The government’s response failed to resolve the situation peacefully, in part because senior leaders at the highest levels disagreed over the appropriate nature and pace of economic and political reform. A critical issue was reforms of Maoistera prices, which lasted more than two decades.

Despite immediate difficulties left over from inflation and turmoil in the 1980s, China’s economy in the 1990s squarely addressed its most difficult challenges since the breakup of communes and return to family farming. During the 1990s decade, China accomplished key agricultural price reforms, restructured state enterprise management and employment, recapitalized its banks, revamped its tax system, instituted financial securities markets, began selling off state-owned housing to urban residents, and met global standards for international trade and finance with current-account convertibility and a successfully negotiated entrance into the World Trade Organization (the WTO). The macroeconomic cycle of slowdown, boom, and then slowdown created conditions that reduced popular opposition to reforms, especially from the subsidized urban workforce…

With the tumultuous restructuring of the 1990s behind it, China in the 2000s carried out a broad range of reforms throughout the economy that cleaned up, consolidated, and built on the rougher and messier break-throughs of the previous decade. Many steps were logical follow-ups to previous initiatives, but a number of unexpected shocks and external pressures disrupted and prodded the process. Throughout the decade, China found itself reacting to developments largely outside its control…

The following sections are included:

• Did China cause the 2007–2009 financial crisis?
  • The 2007–2009 financial crisis: The result of multiple factors
  • Did China cause the 2007–2009 financial crisis?
  • China’s increases in US securities holdings were modest in pre-crisis years
• Chinese and American financial leaders debated the cause of the crisis
• China responded so well that it may have benefited from the crisis
• The crisis unfolds and initially worsens China’s domestic growth slump
  • China during the financial crisis years, 2007–2009
  • Statistical system progress and ongoing shortcomings
• China’s stimulus response
  • Stimulus’ heavy reliance on local project borrowing
  • Reform of local government post-stimulus indebtedness
  • The real trade impact on China
  • RMB internationalization
• The offshore impact of the financial crisis on China
• Endnotes

The new government of Party Chairman Xi Jinping and Premier Li Keqiang, which took office at the 2012 Party Congress and the 2013 National People’s Congress, faced familiar domestic challenges but new and complex international situations. The core domestic challenge was how to configure rapid growth that accommodated high-speed urbanization with modernization of output structure and reductions in poverty. The Xi–Li strategy seemed to delay another normal phase of GDP growth acceleration in the short term in order to prepare for a more ambitious reform-linked growth in the medium term. Internationally, China launched ambitious global financial and infrastructure initiatives but became entangled in a commercial confrontation with the US, enmeshed in escalating national security tensions…

Looking back over China’s long record from 1978 through 2020, the presence of its central and local governments in virtually every aspect of the economy stands out. From planning commissions, development banks, grain planting requirements, and price controls to many other dimensions, the government was there — either working together with or in place of competitive market operations. How did the government organize this economic presence, and how much of it was necessary? Both economic fundamentals and China’s successful example argue two points: government must be involved and its involvement must be beneficial.

China’s policy focus on poverty reduction was admirable in its own right, and it was also critical for the creation of a productive labor force and a strong consumer demand base. Significant resource re-allocation, at the expense of traditionally more privileged urban groups, accelerated the transfer of labor from low-income pursuits mostly in rural areas to higher-productivity and hence better-paying jobs off the farm and in towns and cities. The impact of shifting financial resources to rural areas hit urban areas in the form of inflation, state-enterprise closings, unemployment, and increases in economic uncertainty. Urban protest against these effects slowed the pace of improvements in rural areas but did not stop them…

One can better understand China’s trade and foreign financing situation in its historical dynamic context. Beginning in the 1980s, China’s surge in for-profit incentive reforms, technology adaptation, capital investment, and skills dramatically raised its per-person productivity. This rise in productivity posed an unavoidable challenge to the already-developed world. To meet this challenge, the developed world would have had to raise productivity for its own relevant workers. It was a challenge not every member of the developed world was ultimately able to meet…

The following sections are included:

• Economic challenges that China presents to the world
• The challenge of economic planning: Competition and freedom
• Social unrest and economic policy in China
• Endnotes

The following sections are included:

• The Near-Zero-Sum Theorem
• Illustrative 21st Century Growth Trends

The following sections are included:

• Bibliography
• Index