Economy in China

Is China a communist nation, economically? Is it more capitalist? Or is it, to paraphrase a quote the Chinese are so fond of saying, “capitalist with Chinese characteristics?”

A bit of history is in order. The nation still had an emperor and a traditional economy by the turn of the century, albeit one coping with a massive outflux of spices and other native products, and an economy dominated by the spheres of influence of foreign nations. The civil war consumed most of the nation’s resources, and by the time Chairman Mao defeated the nationalist party, the very name of the victors–the Chinese Communist Party–reveals what economic system the nation would adapt.

The communist system included detailed central five year plans and economic output goals, combined with the danwai, or work units, to which every Chinese citizen was assigned. These work units functioned as communal living islands across the countryside, where citizens heard indoctrination, ate collectively, and worked. The system was not effective or efficient at allocating food and goods, and combined with Mao’s “Great Leap Forward”–a crazed ideal to surpass the United States in steel production by smelting homemade pots and diverting resources from farming–millions of Chinese had starved to death by the end of the 1950s.

After Mao’s death, new leader Deng Xiaopeng opened up the country, both figuratively and literally, allowing less restrictive rules and more foreign capital. These reforms continue today, where, for example, new World Trade Organization rules are in place to cut previously sky-high tariffs on imported automobiles. Fascinating about a study of China’s economy is the fact that China is still very much in the process of reducing trade barriers and opening up industry to foreigners. A cursory glance at (very good) western (barbeque and pizza) restaurants reveals that not a single one of them, all ran by American expatriates, was open for business four years ago.

As for China’s domestic economy, there is a joke worth telling. In the mid 1980s, the world leaders got together to choose a Communist or capitalist system. Ronald Reagan looked at the two roads, and walked down the capitalist road. Mikhail Gorbachev likewise looked at the roads, and strode down capitalism. Deng Xiaopeng, however, looked at the two roads, reversed the signs, and walked down the road now marked Communism. And, on the surface, China’s economy is extremely capitalistic, perhaps of a purer sense than here in America. Everything is for sale (legally or illegally), as evidenced by the fact we paid in full for each tourist exhibit we entered. In Chengdu, the pandas are another great example: no reputable American zoo, I imagine, would allow visitors to manhandle the zoo’s prized animals, but for the right price, anything is possible in China. Street vendors likewise sell identical goods, competing with each other for the lowest price and highest sales pitch.

On the other hand, China still has a government dominated economy. Christian, a friend of mine, brought up the “commanding heights” theory when discussing this in class. This theory holds that, while common businesses such as retail or restaurants are allowed a free hand, the economies that dominate the nation’s infrastructure–the “commanding heights”–are still government run. This is true in China, where the top five nationwide banks are state run, the local banks are provincial run, the telecom sector is dominated by the government-underwritten corporation, and until two years ago, the only legal financial companies for Chinese citizens were Chinese corporations. Although WTO reforms, as mentioned, will open up the nation, it is still very much a directed economy. For example, while vising UnionPay, China’s version of a credit card processing company, they noted they were first new in 2002, and were just facing competition. Why? Well, until 2002, the government wholly owned what is now UnionPay, monopolizing the personal credit financial sector; and had previously prohibited international companies from operating either outside of Shanghai, or selling to domestic customers.

Much is made of China’s impressive 9-10% economic growth each year for over a decade. When visiting Shanghai, and later Suzhou, this was never in doubt. A set of photographs decorates the entrance to the Pearl TV tower, graphically illustrating Shanghai’s economic growth. The first photograph was taken in 1994, showing the Pearl TV tower, and maybe two or three high rise buildings. The photographs proceed each year until now, showing three or four monstrous office and industrial towers being built each year, until the skyline looks far more like New York than, say, Grand Rapids (MI). All this economic growth came in less than 15 years, a visually shocking feat. Added to the dozens and dozens of high rise apartments, and a view of the bustling port of Shanghai, well, it seemed clear that China will not stop until its economy rivals–or beats–ours.

Suzhou, about two hours south of Shanghai, is another eye opening visit. Although a serene and beautiful location, Suzhou is also one of China’s booming economies, and in fact, my Uncle’s company recently built a location in Suzhou. Passing the dozens of construction cranes, industrial plants, and high rise office spaces, I once again reflected on the new maxim that “The World is Flat,” and the fact that China’s growth will not stop anytime soon.

That being said, there are a few facts which lead me to believe that China will not overtake the U.S. economically for some time. I should emphasize believe; should China beat the U.S. in not only carbon emissions but GDP before I run for office, I don’t want a wrong prediction to sink my economic credibility! (Tongue firmly in cheek, for the record.)

First is the education system. Studying at Peking University, the “Harvard of China,” it is my contention that China’s higher education system does not produce students at the level of U.S. universities, or even many of the major European universities. Although cliched, the perception that Asian cultures only emphasize “rote learning” and memorization at the expense of independent thinking does, in my opinion, have a significant grain of truth. My conversations with Chinese students led me to believe that, although intelligent and motivated, their education system does not fully prepare them for a modern, interdependent global business world. The fact that in Beijing, without a U.S. masters degree, the vast majority of college educated students are unemployed lends credence to this fact. It could easily be different in Shanghai or Hong Kong, but I can only report what I see. That said, these students are very intelligent and motivated, and have no problems studying for 10-12 hours a day, so when the education system does catch up, be prepared for an influx of the new business youth.

Second is basic demographics. While China’s economic growth is incredible, the fact is that out of China’s 1.3 billion people, most still live in the countryside, at subsistence level farming. Although we as a class never got to fully experience countryside living, we had glimpses of these villages when driving or taking the train through China’s countryside. The living conditions are much more “third world,” and technology probably peaks at kitchenware and ovens–if that. While the city life is alluring for hundreds of millions, China’s cities host an estimated one hundred million “floating” citizens that migrated from the countryside and have no job. Thus, the disparity between the rich and the poor is enormous, and China, as far as I can tell, has no capacity to convert the majority farm and rural citizens into a service economy anytime soon. If and when China makes the transition, however . . .