Economics

After 1976, the Chinese government under Deng Xiaoping initiated reforms which changed the face of a nation. New institutions were imposed from above. Most of these institutions were controlled by the Chinese government. For example, the Township and Village Enterprises was created to allow farmers to sell their surplus to the government.

After Mao, economic reform may be considered an economic success. For two decades, China experienced sustained economic growth. Standard of living has also significantly improved. The goal of the Chinese Communist Party was to achieve modernization in the shortest possible time. Throughout the country, infrastructure, agriculture, and telecommunications center were visible to the public.

The first major reform was directed to the countrys banking system. The Chinese government created a complex but conservative banking system (heavily regulated). Monetary and fiscal policies were set according to fluctuations in world capital markets. Indeed, according to Naughton, China has fundamentally restructured its banking system and experimented with numerous financial innovations (449). Temporary borrowing from the banking system has been a major innovation, as state-owned companies were unable to effectively compete in the world market. From 1978, policy-makers have been sensitive to financial innovations that might draw a considerable amount of funds from the countrys banking system. This clearly shows that the government is in control of all banking reforms.

Deng Xiaoping also introduced the so-called open door policy which encouraged international trade and foreign direct investment (FDI). Restrictions on foreign trade were relaxed to allow capital formation in urban centers. The Chinese government also held joint ventures with foreign firms. With the rise in income, there was a marked growth in the service and industrial sectors of the Chinese economy. These reforms on trade and foreign investment were closely controlled and monitored by the government.

In order to facilitate trade, the government set up Special Economic Zones. SEZs encouraged lower tax rates, fewer customs procedure, and duty-free imports. In 1985, the Chinese economy was emerging as a major export-oriented economy. Indeed, according to Naughton, China has achieved trade success through a combination of domestic economic reform with an astute accommodation of the opportunities created by East Asian economic restructuring and foreign investment (398).

In the early 1980s, the Chinese government created market institutions aimed to converting the economy from a planned economy to a generalized market economy. Price reform was achieved with the adoption of the dual-line pricing system. Under this system, prices of some goods particularly grain were determined by the state while the prices of other commodities were determined by the market.

From 1980, there was an increasing incentive to privatization of state-owned enterprises. However, some SOE were retained because they were essential instruments for transferring funds to social services. Quotas were kept but allowed SOEs to retain profits. With competition, state-owned industries became less profitable. Indeed, some state owned enterprises were opened for public bidding (mostly foreign corporations).

In summary, after 1978, economic reform in China has been controlled by the Chinese government. Deng Xiaoping, a pragmatist, opened China to modernization and capitalism (market-oriented economy).