The China story...

Deng Xiaoping , the Chinese premier, who took over from Mao Zedong famously said “I don’t care if it’s a black cat or a yellow cat , as long as it catches the mice”

While this proverb is widely used in China for military strategies, Deng internalized it and explained China’s strategy to become an Asian powerhouse. He meant that in a socialist country there is need for a market economy for creating productive forces; It cannot completely negate the planned economy that USSR followed just because it encounters problems and obstacles. The planned economy and market economy should only be tools for the development of productive forces and should not become signs of ideology. Should capitalism or socialism be used to solve poverty? Let them solve the poverty problem individually, and whoever can solve it will be more powerful. Result is for all to see, today China is an economic and military superpower second to USA.

Once upon a time USA earmarked China as the most favored nation for trade, but now has taken a U turn. What is the trigger ?

Let me start with a brief history of China’s progress.

China was ruled by the Qing dynasty for close to three hundred years which was overthrown by the great revolutionary , a visionary called Sun Yat-Sen. He set the pillars of his party on three principles, Freedom, Democracy and Welfare and his party was called KMT. Military leader General Chiang Kai-shek was the last leader of the party and took over from him in 1928.

The 1931 Japanese invasion of Manchuria began a chain of events that led to the eventual communist overthrow of China in 1949. For years, the Nationalist government of Chiang Kai-Shek had worked to suppress rebellion by the Chinese Communist Party (CCP). Where Nationalist forces continued to be weakened from engagements with the Japanese, communist forces grew in size and support from the more rural parts of unoccupied China. Guerrilla attacks by the CCP against the Japanese gave the perception that they were a more effective option. By 1944, USA driven by the ambition to defeat Japan and also restrict the communist growth in China, started aiding Gen. Chiang Kai-Shek. Gen Chiang Kai-Shek of course lost the battle to the communist party (CCP) and retreated to Taiwan in the long march along with his troop. This marked the beginning of a long-drawn conflict between USA and China.

To make matters worse, the Korean war erupted in 1950 where North Korea was supported by the Soviets and Chinese and South Korea by the USA. Korea which was a Japanese colony till the world war was divided between USA (taking the southern Korea) and Soviets (taking Northern Korea) post the world war. This was the second trigger to bitterness between USA and China, which continues till date.

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What was the initial growth story of China

In 1958 ,?China adopted the Soviet model of industrialization, where there was a definite shift from agriculture-based economy to heavy industries like steel. In Soviet Union the population was not dense, land was not scarce and large swathes of land was available to convert this surplus to capital. In China which was largely agriculture-based economy, work was done through communes and community kitchens were setup in a decentralized social structure so that the women could be freed up as well to work in steel furnaces. However, the whole idea went rogue as steel manufacturing got setup in backyards with land cleared and animals slaughtered to accommodate this new initiative.?Inefficiencies thus, of commune system and diversion of labor force to small scale industries coupled with natural disasters led to a great famine. Around 20 million Chinese died between 1958 and 1962. A blame game started where some factions stated that the policies were half baked while some others said China must rely more on expertise and material incentives in developing the economy.?This period was christened as the “great leap forward” which essentially failed leaving behind new learnings. Mao Zedong could not take this failure and felt that his party was infiltrated by “capitalists” and there was a dire need to go back to the purity of Marxist theory. He setup a cleansing drive through something called a “cultural revolution” where Chinese students sprang into action, setting up red guard divisions in classrooms and campuses across the country. By August 1966 , so-called Red August mayhem was in full swing as 2000 died in this cleanup act. Mao realized this had gone out of control and sent the urban youth for “re-education” basically close down education institutes and setup Marxist learning centers. In the meantime, USA through President Nixon re-started diplomatic ties with China , a tie which had been broken in the year 1953 post Korean war. Once ?Chairman Mao died in 1976 the cultural cleansing had come to an official end. Deng Xiaoping took over and he was the first one to start moving away from Maoists principles or planned economy as they say in USSR to a more open market-based economy. His premise was clearly to pull out millions of people who were reeling under the poverty line.??First step to reform was the collectivization of farmland ownership. While the whole of 1950 to 1970 decade was all about community farming, China started to adopt a family owned farming resulting in higher efforts and lesser cost per person, therefore more income. Deng Xiaoping went to the USA and renewed trade ties with them by the late 1970s. Shenzen,?a special economic zone was created in 1979,?which was a stone’s throw distance from Hong Kong , accounted for a large trading zone for China. A small fishing town with access to a port is today the largest trading hub in the world. Similarly, Beijing, Shanghai and Guangzhou became centers of trade and rural population flocked to the cities for work. This massively impacted the economic growth of China and started to lift millions out of poverty.

China which followed the Marxist philosophy of large state-owned enterprise desired to make modifications to the principles, to include private players. If you refer to Marx, he never said that private players are not allowed to exist in the economic system, perhaps he alluded to the fact that private enterprises should not have a say in the political system. However, many believe that Marxist view does not allow private participation because we have been exposed to the erstwhile Soviet economic model. The erstwhile Soviet model was called a “planned economy” where the state owns and runs everything from defense to kerb side stores. This was necessitated due to the world war II situation when the Soviet government decided to take full control of the production environment. Probably, the mistake USSR made was to stay with the same model for the next 60 years, which they finally changed to an open market economic model in 1990 but it was too late and too little by then. From a complete dominance of state-owned enterprises , Russia is down to 35% state ownership , relegating the balance to private players.?In contrast China under Deng Xiaoping realized that this method will not work for them and therefore called it “Socialism with Chinese characteristics”. In this economic model , China retained the large industries which affect the masses, ?under state control, viz land, transport, energy, telecommunication, health and education and opened up the rest to entrepreneurs. China has 40% of its industries which are state owned, and all workers are guaranteed a lifelong job and pension thereafter, balance 60% are with private players. As an example, in China , land is leased and cannot be bought. Land belongs to the government; however, individuals are allowed to lease it for 70 years. If someone does lease it and builds a house on top , he retains ownership of it, till the lease expires. He is required to renew the lease of the land for another 70 years and if the government cannot renew the land lease it compensates for the house that is built on top. This is keeping up with Marxist principles that land does not belong to individuals but to the state and can be used under a community arrangement.

Bilateral trade opened up with USA as US saw the possibility of outsourcing manufacturing to a cheaper location, something that the economist term as “comparative advantage”. Even for a second, if we have to think of curtailing or stopping this trade , cost for a product will go up substantially and the Americans will have to shell out a lot more than they are doing today. A proof of it is the trade difference between the 2 countries which amounts to around $ 300b. In case someone does dream that USA can impose sanctions or long-term trade tariffs he must be from another planet ! American post USPS loses millions of dollars in transporting goods to households, that arrive from China ordered on the Alibaba ecommerce site. The cost of delivery to the US border from China is far cheaper than in-land US deliveries !

During the 2008 financial crises across the world, China which was riding a high wave did get affected, globally most economies came crashing down. China was the lifeline of many economies across the world and its crash would ?have had a domino effect on the rest of the world. But China pumped in $ 1 trillion and shored up the crisis.

How does China organize its administration ?

China has local governance , with full control and can take decisions for the greater good of its own citizens. They have free education and health schemes as long as the person is within the same zone. You may assume a zone to be a city. Each administrative block is ranked as per growth and this means there is regional competition. It ensures each region does its best to implement policies that enhances the standards of living of the people in that region.

China has 100 million party members and it is popularly believed that there is a democratic way of finalizing policies. Now you may argue, how 100 million?party workers can democratically decide on policies. But China has cracked that conundrum by bringing in various regional views to the final decision table. I read up on John Ross who is an expert on Chinese socialism based out of China and he vouches for the good practice of democratically deciding on policies within the government.

To be a private business owner you have to be a party member and should have certain merits to be able to run the business. While we may argue that meritocracy rules, this may or may not be entirely true and certain semblance of nepotism may be visible. In USSR ,once it opened up in 1992 , handed over the state-owned enterprises to its party members as a part of privatization of state machinery with no expertise. There was no visible signs of meritocracy and money was siphoned out of the country leaving Russia in a poor economic condition.

Unlike Soviet Union which was a totalitarian economy where the central planning body would decide everything from who will produce what and how much and what should they price it China does not do that and lets the market decide.

Singapore, Korea or Hong Kong also grew rapidly, so isn’t capitalistic country a better option ?

Singapore, Hong Kong or Korea are all known as state-capitalistic in nature where the state provides all the resources and money for the private players. Most of the big business houses have a large state holding. Temasek which is a Singapore state holding holds shares in many private ventures in the country. In Korea Samsung , LG or Hyundai also have a lot of state intervention which decides what businesses they should be in and which ones to divest and what markets they should participate in. Though the degree of state capitalism is far less in Korea and the chaebols are able to take their own decisions and participate in the global markets.

Why do we hear this negative narrative about China ?

In 1949 when Mao took over from Chiang Kai-Shek’s KMT party, ?China was among the poorest countries in the world. Today China is the second largest economy of the world with 160 billionaires in a matter of 4 decades, but you will now hear narratives of how China adds to the global pollution and how exploitative it is towards workers. Are we serious ? All these years of American or European behemoths who never added an ounce of pollutants , but for the Chinese,?who were running the outsourced factories for some of these behemoths are adding to the pollution ? Are we dreaming ?

China will overtake USA by 2030 and become the largest economy in the world. And they would have been the first socialist nation to rank no.1 globally

How is the methodology different between other socialist nations and China ?

If I only talk about former Soviet Union , they followed a planned economy where the state almost dictated everything from the price of a shoe to how much a cobbler should charge. China only dictated state control on largest “social” sectors like Oil and gas , transport, metals et al.

Former Soviet or for that matter other socialist nations did not allow the privatization to grow. China allowed private participation in areas other than the heavy industries viz technology or apparels or real estate. You hear of Alibaba, Wechat or Tiktok, however , unlike the West where the richest nearly run the government , China is clear that government is run by the communist party while the private sector can flourish within the regulatory environment and billionaires don’t have a say in governance.

Vietnam is trying to model itself on China and is seeing success in the way its economy is growing. Of course, as a percentage of the world GDP it is miniscule, but the economic growth is definitely visible.

How do you define economic growth ?

In my view the simple indicators of an economic growth are

1.??????How many people have been lifted out of poverty ? ?China has lifted 800 million , almost 70% of its population out of poverty in the last 3 decades. It will be difficult to name another capitalist nation which has done that in the past. Vietnam which has followed China footprints has also lifted a large population out of poverty , on a percentage level it is relatively small though.

2.??????How are we tracking the growth in consumption over a given period of time ?

3.??????The countries that gave remarkable growth before China stepped in, ?was England whose growth was 2% post the industrial revolution, USA about 4% post the civil war , Soviet Union at 8% post the great depression and now China which is upwards of 10% for the last 3 decades if we calculate this growth based on a pivot year.

4.??????Ascertain ?growth in number of trading nations over a comparable period of time

In summary China has done well in pulling out poor people from below the poverty line. China has revamped a large rural economy into a global leader where they had to ensure people left their villages and came to the cities to work. China being a manufacturing hub for most of the western economies has ensured that the cost of labor and land be cheap so that there is a significant pull towards China as a most favored nation. No matter what the west says , China’s advantage of low cost, high quality and a clear intention of moving towards “common prosperity” cannot be challenged in the world today. There is a definite shift now towards reining in the billionaires in China, to redistribute income across the lower strata of the society and we will wait for the next 5 years to see how this policy pans out.