How China’s Pragmatic Reform and Opening Up Paved the Way for Unprecedented Growth of the Manufacturing Sector
After the death of Mao Zedong in 1976, China was in terrible shape. The policies during Mao’s period failed, and China’s economy hardly grew after the devastating wars. It hadn’t become an industrial nation under Mao’s policies and had become an uneducated nation. The vast majority lived in poverty in rural areas in a country that completely isolated itself from the rest of the world.
In 1976, Hua took over power in the country, followed shortly after that by Deng Xiaoping. Deng Xiaoping launched its reform agenda, China’s Great Reforms and opening up (Gai ge kai fang, 改革开放), opening the country up to the world in 1978. The reforms would lay the foundation for decades of unprecedented economic growth in China, leading to the economic and industrial powerhouse that China is today.
Pragmatic approach
Deng Xiaoping watched the developments of the so-called “4 Asian dragons” (Japan, South Korea, Taiwan and Singapore) that had achieved fast industrialisation and robust economic growth in the 1960s and 1970s. China could learn from the growth models of these countries and to be able to move forward, reforms would be needed1:
- Land reforms and more efficient food production: This made it possible for workers in rural areas to move to the city and work in factories while food availability was ensured.
- Focus on exports and trade: Markets needed to be found for the growing production of industrial goods. This demand only existed outside the country. It was necessary to focus on the export of industrial goods.
- Allow foreign investments in capital and expertise into the country: The country needed to buy (or steal) the skills and knowledge from abroad to produce technically more advanced products.
- Establish an efficient financial structure: The country needed its financial capital resources to be allocated to the most productive areas.
The economy needed to be restructured entirely from the principles of state ownership and pure central planning to a country embracing free market principles. This would happen without losing the ruling government’s Chinese firm’s top-down state control principles.
China’s reform and opening up policy included pragmatic reform policies of trial and error. Deng’s famous saying: “It doesn’t matter if the cat is white or black, as long as it catches mice”, shows this pragmatic approach to development and the economy. Local governments in different regions of the country were permitted to experiment with various market-oriented policies. Most of these regarded land ownership for farmers and access to capital, pesticides and fertilisers. Policymakers could then analyse which approaches work and which don’t. The ones that worked were implemented nationwide. The new market-oriented policies would lead to a sharp increase in agricultural output.
This pragmatic approach can be seen in many aspects of China’s society. In business, you’ll also see this pragmatism and ambiguity and you have to consider this when doing business in China. For Westerners, it is often challenging to deal with the Chinese pragmatic approach when problems come up. Contracts or agreements about prices or materials are not always taken 100% strictly by the Chinese supplier. Their attitude may lead to errors in products or financial damage. It can also offer opportunities when working with suppliers. Everything is possible and negotiable. Possible solutions often depend on the situation, the benefits for the company and your relationship with the supplier.
Availability of labour
Under Mao’s policy, childbirth was heavily promoted, leading to a sharp increase in the available workforce in the 1970s and 1980s. The increased agricultural production made it unnecessary for all these people to stay in rural areas and to work on the land. Massive urbanisation took place in China. The one-child policy of 1979 would also decrease the burden of taking care of children for women. This made it easier for women to enter the labour market. When we’re talking about many people being available to the labour market in China, this means tens of millions of people joining the workforce in the cities and the factories.
Where Mao planned to develop heavy industry in the country, Deng Xiao Ping saw a huge opportunity to create lighter, more labour-intensive industries, such as apparel, toys, furniture and other consumer goods. These industries were developed in the southeastern provinces of the country during China’s reform and opening up.
This labour-intensive industry is still very prominent in China. An example of this is the below picture where workers weave rattan baskets. These days, more and more work is taken over by machines and robots. Especially in the more developed parts of the country. Manual labour is widely present in many production processes in less developed regions. Many processes that you might not expect are still done by hand. Managing production risks requires knowing how the product is made and which procedures are still done by hand to identify where problems may arise.
The establishment of Special Economic Zones
The central government still held firm control over how and where the country’s industrialisation would take place. In the 1980s, five special economic zones were created in southeast China (Xiamen, Shantou, Shenzhen, Zhuhai and Hainan). Later, the Special Economic Zones of Shanghai and Tianjin were added. Entrepreneurship and participation in new business ideas were allowed and promoted within these economic zones. It was the first time since 1949 that private ownership of a company was allowed.
Financial investments from Chinese and foreign parties could flow to these Economic Zones with few restrictions. High economic growth was established in these zones, with Shenzhen being the most obvious success story. This city bordering Hong Kong would develop from a fishing village in 1980 to a metropole with a bigger population and GDP than its neighbour Hong Kong now.
Millions of people started to set up businesses within these Special Economic Zones. Everyone with access to a room and a few sewing machines could start producing something. The policy was to let everyone who could create wealth be able to do so. Most factories in these areas were small and specialised at that time. Most entrepreneurs could not invest large sums of money. Because of the number of factories and the strong cooperative mindset of the entrepreneurs, driven by collectivist values in the country, entire supply chains were set up. (If one factory produces leather, another factory paints the leather, another factory produces steel, another factory turns the steel into steel frames, another factory produces packaging, and finally one factory assembles all, then together they can produce furniture, and all factories can earn a part of the profit).
Meanwhile, high-level infrastructure was created in the Special Economic Zones due to heavy investments. The Economic Zones became places with a first-world infrastructure for production, transport and trade, combined with third-world labour costs and an almost unlimited resource of labour force equipped with a culturally strong work ethic. It was a perfect mix for the growth of mass production and export. The Chinese started to out-compete other Asian industrial powerhouses in labour-intensive industries at that time. Labour costs were rising and the available labour force was shrinking in those other Asian countries.
The Economic Zones are still the central production locations for many goods and have the best infrastructure today. Within the Economic Zones, there are Special Industrial Zones. Many of these industrial zones have become highly specialised areas. Large industrial zones are often entirely dedicated to making one product, for example, furniture, toys, handbags, glasses or consumer electronics. By having all suppliers, infrastructure and educated/trained people in this area, the area becomes exceptionally efficient in producing and transporting certain goods.
China’s reform and open up policies led to enormous economic growth in the Special Economic Zones. For the first time in ages, some people in China got rich. This happened in a country where most of the population still lived in poverty and had to accept meagre wages, barely enough to survive. It was all part of another pragmatic plan: “Some people have to get rich first, then the rest of the country can profit later.” Growing wealth inequality is one of the first side effects of the reforms.
More market oriented growth
China’s reform and opening up era would continue in the 1980s and 1990s, by more market-oriented reforms. A continuing GDP growth of about 10% per year was realised. The reforms of this time included the privatisation of public companies, less state control over private companies, decentralisation of state control, price liberalisations and the opening of the first stock market in Shanghai in 1990. In the 1990s, the private sector would grow as a percentage of GDP.
In the late 1980s, the first backlashes of the reforms were also becoming visible. Price liberalisation caused several events of high inflation in 1985, 1988 and 1992. Wealth inequality led to increasing corruption, especially at the local government level. In 1989, following the democratisation movements in the Soviet Union and Eastern Europe, a large student protest for more democratisation and against inflation and corruption took place at Tiananmen Square in Beijing. The Party sent its army to suppress the movement, killing hundreds of protesters and leaving thousands wounded or imprisoned. Deng showed the country and the world that there was no intention to reform and democratise the central power. China was to stay an authoritarian country.
After Deng died in 1997 and his successor Jiang Zeming took over power. China’s reform and opening up policies continued in the same direction as that of Deng Xiaoping: more privatisation, liberalisation and opening up, without losing state power to provide boundaries for the operation of the market. In the following years, many inefficient and corrupted state-owned enterprises got privatised or merged. The volume of the private sector in the total economy increased further.
In 1997, the former British colony of Hong Kong was handed back to China. The city, which had become a significant economic power during British control, could keep its open market and freedoms within the “1 country 2 system model” within China. Hong Kong became an intermediary between Mainland China and the rest of the world. This would allow Mainland companies to export and import via Hong Kong, bypassing strict Chinese regulations.
Nowadays, more regulations are imposed on Hong Kong, and the regulations have become more similar to those on the mainland. Still, there are a lot of exceptions allowed. For example, Hong Kong banks and companies still have much more freedom to trade in foreign currencies. That’s why many Mainland companies often use a Hong Kong entity or have a Hong Kong bank account to receive or send foreign currencies.
Further opening up after joining the World Trade Organisation.
In 2001, after 15 years of negotiations, China joined the World Trade Organization (WTO). This opened the doors for expanding international trade and deeper integration into the world’s economy. China was then required to follow the international trade rules of the WTO. China reduced tariffs on imports and exports and reduced trade barriers and regulations. Also, stricter laws to protect intellectual property were implemented.
The increase in exports led to major shifts in the Chinese economy in the 2000s. The demand for labour in the manufacturing and export-related sectors exploded and wages for workers started to rise. A massive flow of urbanisation occurred since people could improve their income and better provide for their families when working in the city. The percentage of workers employed in agriculture decreased drastically to only 11,2% in 2010.
The accession requirements for the WTO brought the nation into a period of further liberalisation of capital flow and privatising many weakened state-run enterprises. The loosened government control and the growth of competition in the private sector led to increased productivity. The opening up for foreign investments, the increasingly available domestic capital and the more liberalised regulations for capital flow brought increasing capital investments to the industrial and export sector. On top of that, investments in technology and education grew exponentially during this time.
The combination of the increased wages and labour costs, the increased productivity, the inflow of capital, the increasing knowledge and expertise and the increased focus on product quality created a gradual shift of China’s industrial output. From producing labour-intensive goods to an increase in high-tech products with more added value. China was no longer a country that only makes cheap, low-quality goods. Productivity growth and increased production of added-value products led to further economic development.
The rapid changes in privatisation, urbanisation and growth in welfare in China also had their drawbacks. The rapid changes caused an increasing trade imbalance, wealth inequality, corruption and environmental and social issues. In 2005, Hu Jintao, who was more conservative towards market reforms than former president Jang Zeming came to power and started to halt some of the developments.
The enormous surplus of exports created a colossal trade imbalance and an inflow of foreign capital into China. This was mainly in US dollars and US debt papers and bonds. The US had allowed China to trade on beneficial terms under the condition that China would buy US dollar bonds and debt papers.
A slowdown of China’s reform and opening up
In 2008, there was a financial crisis in the US and most of the world. One of the measures the US took to tackle the situation was an expansionary monetary policy and the massive printing of money. This led to a decreased value of its bonds and debt papers. At that time, China decided to stop investing in US debt, leading to decreased trade volumes with the US. It was clear that China’s economy could not rely solely on export anymore and that a more substantial domestic market needed to be created.
To avoid economic stagnation in China during the worldwide financial crisis and the decrease in exports, China started an economic stimulus plan in 2008. The plan was to change the economy from an export-driven economy to an investment driven economy. The government invested heavily in public works, mainly infrastructure projects. Airports, highways, bridges, dams, subway systems, ports, infrastructure for telecommunications and the internet and many more were built or expanded. Many of these projects are still ongoing today. The most famous and costly project is the high-speed railway system, a unique project connecting all cities in the country with a system of high-speed railway connections. Because of all these investments, China didn’t go through a period of economic stagnation as the West and most Asian countries did. Instead, China would increase its domestic economic demand.
A second rising problem was the growing wealth inequality and corruption. Despite the country’s tremendous growth of capital and economic activity in the 2000s, not everyone could benefit from it equally. While factory bosses and higher government officials got more prosperous, the money flowed less to lower-skilled workers and rural areas. The gap between the wealthy cities in east China on the one hand and the countryside and the western provinces of China on the other side was growing rapidly. It led to an unequal division of the limited resources in the country. The wealthy minority could afford the highest quality education and healthcare, while the poor majority were not able to afford these. This would also lead to a growing division of opportunity between children born into rich and poor families.
Even though China now had more open market policies, still for every aspect of doing business, strict government regulations are in place. Companies still needed government permission to do business. Many corrupt government officials used their power to serve their own benefits. To gain the cooperation of government officials, it was common to give them excessive gifts or invite them to extremely lavish banquets to get them on their side.
Another major problem was the environmental impact of rapid industrialisation and urbanisation in the country. Wastewater from mining, manufacturing and cities caused lots of the already limited water supply to get polluted. The increasing number of cars, motorbikes, factories and coal-burning plants caused significant air pollution. And many more environmental problems existed in China. At some points, pollution was so heavy that it threatened the health of people and the livability of areas.
Also, social issues were arising. A big part of the population used to work within the government system and the not-very-efficient state-owned companies. This gave their lives stability. After privatising many state-owned companies, these employees needed to compete in the private sector and join the rat race. Many employees at that time had difficulties competing since many were uneducated or even illiterate.
Split families are another social issue. Urbanisation let tens of millions of people travel to the cities to work in factories. Because of the Chinese Hukou system, which regulated migration to the cities, workers could not bring their families when moving to the city to find work. Many children stayed with their grandparents, far away from their parents, in rural areas. Most families and parents can only see their children occasionally, usually only once a year during the Chinese New Year. This is also why workers quit their work during Chinese New Year and why many factories close for several weeks.
Rapid changes and growth in the industrial sector, due to China’s reform and opening up policies, had led to a unique production landscape in China. During 45 years of development and trial and error during China’s reform and opening up, the country has gained tremendous experience in manufacturing. Infrastructure has become very efficient as well. China has constantly been changing. The pragmatic nature of Chinese society has helped the country be flexible in the ever-changing environment. However, society has many problems today that have also been caused by rapid changes.
To tackle the growing problems, the government started to regulate the industrial and other private sectors more strictly in the second half of the 2000s. An anti-corruption program was launched in 2008 and later intensified by Xi Jing Ping. Environmental protection regulations became stricter and better enforced. In 2012, Xi Jinping took over control of the country. He would start to combat the issues in China and regulate the private sector more. He would attempt to recover the reduced power of the Party over the economy and society.
