China Story – A race to the top

Over the last 40 years, China has transformed beyond recognition, the volume of its growth and the sheer speed of change has been mind-boggling, nothing like this has ever happened before, but as China rises, others will fall. In the 21st century, the balance of power in the world will inevitably change.

So how did the communist country become an engine of global capitalism?

History in a nutshell

For the modern man whose history goes back to approximately 15,000 years, several cradles of civilizations developed independently. Mesopotamia, ancient Egypt, ancient India, ancient Nubia, and ancient China were the earliest in the Old World.

There are archeological pieces of evidence that specific cultural regions that developed Chinese civilization were the Yellow river civilization, the Yangtze civilization, and the Liao civilization. Han Chinese make up 97% of China and are the largest ethnic group, about 18% of the world population today.

China in the past glory was the economic superpower of the planet. Chinese dynasties discovered almost everything from the compass, to printing, to making paper and gun powder. They led huge expeditions across the globe. This was China, the middle kingdom and with its next-door neighbor India, this region was the center of global economic resource.

By the 18th century, things started changing when a major revolution happened in Europe and USA. Science, weapons, machines were giving rise to the Industrial Revolution and the aspiration for global expansion and domination for more power across the globe. China succumbed to the firepower of the West expansionism, Britain took over Hong Kong. The next 100 years were painful for the nation with foreigners all over their land, China was suffering from colonial oppression, the Japanese war, and then the Civil war. It was descending further and further into decline. At the same time, capitalism was proving to be a miracle for some other nations like Germany, France, and Japan. The Chinese call this “The century of humiliation”.

In 1949, the communists triumphed and PRC made its government and hoped that would bring peace but soon economic disasters led to the great famine, and then in the ’60s the class struggles of the cultural revolution. By the 1970s the country was traumatized and exhausted, its economy was in ruins. The economy was largely agricultural with 80% of the people involved in farming.

The big breakthrough came to China in 1972 when US President Nixon met Mao Tse Tung, US since 1949 had not recognized the PRC when it grabbed power of China. This was a defining moment when PRC was launched on the world stage. Then USA’s National Security Advisor Henry Kissinger thought he will take China to the democratic and liberal fold.

In 1976 when Mao Tse Tung died, the Chinese economy was in tatters as he was a great military leader and a revolutionist, but had led the communist nation with horrible economic policies. During Mao’s era, the economy merely grew by 3% each year while other Asian economies were racing ahead.

Deng Xiaoping – The Visionary leader of 20th century

Post World War 2 some other countries like Japan became very successful economies, China emulated that.

Deng Xiaoping was initially given the responsibility of Education and Science, he immediately opened graduation colleges which were closed due to Mao’s cultural revolution, and took the first exam in Dec 1977. Chinese youth who have for last so many years worked in fields, coal mining, agriculture, as wage earners, and as soldiers as part of Mao’s re-education policies (Sending kids after completion of school to work in fields, coal mines, army, etc. to understand real work) were extremely happy and exhilarated. It was a life-changing moment for millions of Chinese. 5.7 million candidates aged between 18 to 35 years applied for the examination. In a culture that had for thousands of years believed in the value of education, this was a transformational moment.

The top leadership of PRC soon understood that to lead the kind of dramatic change that the country needed, to fulfill the aspirations of several hundred million people Deng Xiaoping would be the right choice. He took charge in Dec 1978, Deng was a technocrat and largely responsible for the China of today.

In May 1978 Deng Xiaoping sent a 30-member team on a fact-finding mission to Europe. They were shocked to see how far China was left behind. They recognized Europe was far ahead in economics and science and the European countries also wanted to help China due to the huge market it had which could be mutually beneficial.

Deng Xiaoping specifically went to Singapore and Japan early on in his term and was particularly impressed by Singapore’s strongman Lee Kuan Yew and his business model. He saw that they had adopted the free market and were thriving. He asked to make videos of the lifestyle of ordinary Singapore and Japanese citizens having refrigerators and Televisions at home which came as an eye-opener and a shocker to the Chinese masses at that time.

On his coming back to China he went about restructuring the entire economic model of China. The overriding priority was to lift people out of poverty. His vision was “To be rich is glorious”. He wanted to experiment with some versions of capitalism but he had to be cautious not to disrupt the one-party rule, he started by supporting the PSU’s. This was called the “Boulan Fanzheng” period meaning “end the chaos and return to normalcy”.

The four modernization goals which were set up by Deng were to strengthen the fields of Agriculture, Industry, defense, and Science and Technology. The goal in 1979 was to achieve a “Moderately prosperous society” which China says it has achieved today. Deng had a Bottoms up approach in which he involved every stratum of society and business in policy and decision making.

Chinese DNA changed with 7 reforms of Deng Xiaoping

1. Decollectivisation of agricultural land which made the farmers happy and prosperous in next ten years.

2. Opened doors of China for Foreign investors and businesses as Deng famously quoted “The color of the cat doesn’t matter till the time it catches the mice.

3. Reduced price controls giving more freedom to the corporates

4. Keeping stable international relations, no more Maoist revolutions for a better world image.

5. One child policy was introduced to check on the population.

6. Privatization of all the unviable state-owned enterprises.

7. Despite the new market reforms and opening up to the world China will remain a socialist nation under the absolute power of PRC’s regime.

The Shenzen Story and China’s bay area

Deng started with his experimentation on Shenzen, a sleepy village in Southern China having a population of 30000 people, next to the border of British controlled Hong Kong which was at this point thriving due to its hardcore capitalist economy. Shenzen was designated as a “Special Economic Zone” where foreign companies could set up and invest in a capitalistic free market. Hong Kong would act as a bridge between western businesses and this little gateway of communist China. It was still socialism but with some Chinese capitalistic flavor. Post the KMT era China started welcoming the dollar for the first time. The leader of this SEZ was Yuan Geng and the slogan was “Time is money” and “Efficiency is life”

What followed was a mind-blowing economic miracle ever to have happened on this planet. Shenzen the sleepy village exploded from a little fishing village of a few thousand people growing paddy to a massive city of over 10 million people. The average income went from $1/ day to $30000/ year.

Once the Shenzen model was successful, similar replicas like Zhuhai and Xiamen came all over China. This made more and more foreign companies flock to China for want of cheap labor and corporate supportive government policies. It became the World’s factory.

By 2000 China had become the manufacturing hub of the world and by 2020 its GDP is second to the USA. The trade liberalization that led to lower import tariffs on industrial products gave Chinese imports a big push. Millions of people came out of poverty.

Aiming for Western Education thereby enhancing own infrastructure

To liberate talent in the workforce and human capital they gave people in the middle authority to make decisions. They understood motivated and talented people in the middle rung were extremely important to realize the dreams they had.

To train the managers of the future Chinese students were sent to the leading foreign universities. In the next 20 years over 2 Lac students studied in the US alone.

China understood that success in the Universities would depend on the initial schooling and a major feature in the reform process was a major investment in the primary and secondary schooling system, especially for women. Today Chinese students are the most competitive in the world, they value education extremely highly. They also believe in increasing their national prestige.

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Urbanization

A key feature of China’s growth has been urbanization, the rural population which was nearly 80% has been taking jobs in factories in the cities at a rapid pace. To understand rapid economic growth, the productivity of a rural worker who moves to a city and takes up a factory job increases by 20 times. With a fast-paced growing middle-class production had to keep pace with the growing consumer demand and through big centrally controlled factories, tens of thousands of small enterprises accounted for a growing percentage of national output in construction material, clothes, and leather. So in just the initial four years China’s industry, agriculture, and education were reformed. The private business employed thousands of people and was allowed to flourish.

Lack of regulators and regulations

The rate of accumulation of wealth is now waning down, however, it is still fairly high. The companies in China are still developing new technologies, new products, new markets which are relatively less regulated as compared to other parts of the world. They do not have to face the kinds of consumer market protections. This is catalyzing the entire process of building products to launching them. This lack of regulation has really helped China to catch up with other world leaders in technology very quickly.

Belt and Road initiative

High-speed rail (HSR) in China is the world's longest high-speed railway network and most extensively used, with a total length of 37,900 km by the end of 2020. This is the biggest network in the world. This network is planned to reach different geographies of the world. BRI will search for new markets and raw materials, it’s an infrastructure project of extraordinary scale and ambition.

China’s sensors benefitted their companies

Following a cyber-attack, Google exited China in 2010. Since then Chinese internet market has grown by 200% to approx. 900 million users now. Their systems protected Chinese entrepreneurs, creating a conducive environment for homegrown applications to meet the huge domestic demand for internet-based services. Baidu became China’s google, Youku Tudou is Youtube, they have their own Instagram. WeChat and Ali Baba were quick to create apps tailored and customized as per the needs of the Chinese markets.

Synopsis

So after decades of struggle, China’s path to modernization was set. In the beginning, China’s low production costs offered huge opportunities to the world outside and with its fast-expanding workforce, China’s GDP increased nearly 70 times in 40 years.

In the last 30 years, China has managed to continuously strengthen its financial, fiscal, and economic clout. It has invested heavily in its defense infrastructure in a sustained manner, it has the biggest navy fleet in the world. Their civic infrastructure is world-class. Due to extremely deep pockets they have invested in mining, research, and development of hi-tech projects. They invested in education building extremely good universities and sent thousands of students to American universities on Govt. scholarships who after doing their higher studies went back to China, and some of those extremely high-quality engineers who wish to stay in the US were given double the salaries and called back. Today even in the post covid world China is still a preferred destination for multinationals due to it being the biggest and wealthiest market.

According to the target given by the 19th National Congress of the CPC, China will build a beautiful society by 2020, achieve socialist modernization by 2035, and will be a strong democratic civilized, harmonious and beautiful socialist modernized power by 2049 when CPC completes 100 years.

In the post-pandemic world, by 2030 China would have surpassed the GDP of America and the World cannot just afford to ignore the hard power of China.

Post pandemic powers

America introduced China to WTO in 2001, slowly over the last two decades China became an inseparable part of the Global Value Chain.

In 2021 5G, AI, Nanotechnology, and robotics have become integral to any nation’s preserve and prestige. After Xi took over, China wanted to be self-sufficient in the leading technologies like Semi-Conductors which till now they were not the world leaders in cutting-edge technology. When President Xi announced China’s “Made in China 2025” program Silicon Valley sat up and felt that their leadership may be lost. Donald Trump started a trade war in 2017 to slow down China significantly.

China, as it is, is the world’s factory of low-quality goods due to its advantage of cheap labor, however, over the last two decades, the wages have increased. Due to this and the aspiration of becoming a world leader in cutting-edge technology “Made in China 2025” was announced. The targeted high tech fields were Pharma, Auto, Semiconductor, Aerospace, IT, and Robotics

A 2016 US report has revealed that China’s research on neural networks and deep learning was much more advanced than that compared to the US and intellectual property belonged to China. At the same time, Huawei with its 5G technology and ZTE were becoming global leaders in the telecom business so all these Chinese companies were banned in the USA however EU was slow to follow suit as they were not very happy with big US tech firms. EU in June 2020 clarified that it will not take sides between China and USA.

An aging China

The result of the one-child policy has proven to be disastrous as the average birth rate has fallen to 1.6 births per woman however unofficial sources claim a figure of 1.05 births per woman. Thus China will be dominated by older people in the coming years. Most couples do not want more than 1 child due to economic reasons and lifestyle. An aging population has a multi-dimensional effect on any economy, savings decline, and costs on health, social welfare and pensions go up. On the other hand, a fall in the numbers of young people would mean a decline in manufacturing, exports hence a decline in government revenues. With its current per capita income of $10000 as it gets older with a slowing economy, its income may never catch up with the USA, Singapore, and Japan.

Conclusion

In these extremely uncertain times, it is difficult to predict whether China will be the new center of the world economy, or we again are in a bi-polar world. One thing is for sure the world will change by 2040 and the change will be catalyzed by technology. Who wins will be the one who plays better on that turf.