"Red Dust: The Transition to Capitalism in China". Chuang, No.2 (2019).
Introduction: Hermitage
The conquest of the Western Jin dynasty by 'barbarian' nomads saw the mass flight of northern upper classes across the Yangtze River to seek refuge in southern China. The new Eastern Jin dynasty they formed, with its court in Jiankang, was weak and extremely decentralized, with power divided between multiple regional factions of refugee northerners and their southern supporters. Even the desire to reconquer the north could not unify these factions enough to muster a capable military force. It was during the Eastern Jin period that the archetype of the scholarly hermit emerged in Chinese culture, as nobles abandoned the pointless intrigues of the powerless court in Jiankang for a life of leisure in secluded rural estates. Becoming a hermit, albeit on a lavish estate staffed by slave labor, became prestigious and the imperial government actively recruited from hermitages, a practice that would continue under later dynasties.
At the end of the socialist period, in the late 1960s, China was extremely isolated, cut off from both the global capitalist economy and from the Soviet-aligned majority of socialist nations. In addition to its national focus on self-reliance, the extremely decentralized economy was nearly autarkic at the local level, with nearly all basic goods produced and distributed at the level of villages or factories. The end to this isolation and China's integration into the global capitalist system, the 'Chinese Miracle', was the result of responses to two convergent crises: one of the socialist developmental regime in China and one of the global capitalist system.
The global capitalist system faced a crisis of overproduction in the late 1960s and 1970s as economic growth slowed and profits shrank. Keynesian stimulus programs failed to address this crisis as unemployment and inflation surged upward. The crisis was resolved and profitability restored by the expansion of capitalism to new areas, particularly the Asian Tiger economies, and neoliberal reforms that cut wages, dismantled welfare programs, and increased debt. Lower wages and costs at home and access to lower wages and costs in newly subsumed territories made it again possible to profitably manufacture goods cheap enough to be consumed. The social unrest occasioned by neoliberal reforms was contained by access to cheaper consumer goods and more accessible credit made possible by the integration of the Pacific Rim into the capitalist system through massive American and Japanese investment. The expansion of the frontiers of capitalism is only ever a temporary solution to a crisis of overproduction, so capitalists were on the lookout for opportunity for future expansion. The integration of China into the capitalist system was desirable because its massive cheap labor force and huge markets could delay the crisis of overproduction for a long period of time by absorbing excess goods and capital that, if concentrated in the West, would facilitate that crisis of overproduction.
In China, the threat of war with the USSR amid total geopolitical isolation forced the government to seek new ways to economically develop. The socialist developmental regime had failed; China had not raised agricultural productivity enough to transition large portions of the population from agriculture to industry and progress towards that goal was excruciatingly slow. The impetus for China's integration into global markets was the 1969 Zhenbao Island incident, when border conflict with the USSR saw the deployment of over 200,000 Soviet soldiers and raised the prospect of nuclear war. The gravity of potential conflict with the USSR prompted China to reach out to the West, confirmed by the official resumption of relations in 1971. China used its new ties with the West, particularly the USA, to buy advanced manufactured goods to develop the Chinese economy. This strategy created a dependence on foreign imports, particularly in advanced agricultural equipment, that incentivized further integration into global markets. Although China's full integration into the capitalist global economy was spearheaded by Zhou Enlai 周恩来 and completed by Deng Xiaoping 邓小平, this trajectory was first charted under Mao Zedong 毛泽东 and enjoyed broad approval among high-ranking Communist leadership.
China's market reforms can be split roughly into three periods:
- From 1969 to 1978, China allowed very limited imports of certain industrial goods while still seeking to essentially preserve the socialist developmental regime. At this point, the economy was increasingly dominated by the military, including through the 'Third Front' industrialization program.
- From the ascension of Deng Xiaoping in 1978 to the 1989 Tiananmen Square protests, during which market relations were established within China but the majority of the economy remained disconnected from global markets. Market-oriented 'town and village enterprises', owned by local governments, were opened and household responsibility was established within agriculture. Foreign investment and ownership was limited and contained with a small number of special economic zones, chief among them Shenzhen. Over half of all foreign investment during this period came from Hong Kong, often routed through there by Taiwanese or overseas Chinese.
- From 1990 to the early 2000s, China became fully integrated into the global capitalist economy, as marked by its entry into the WTO in 2001. During this period, capitalist class relations became fully articulated, aided by the domination of the state apparatus by the capitalist class. Chinese growth during this period concentrated on exports to the West and was buoyed by investment from Hong Kong, Japan, South Korea, and Taiwan. State-owned enterprises were consolidated into conglomerates 集团 financed by selling stock on international financial markets; although owned by the state, they were retooled to respond to capitalist incentives. Existing Chinese industry was destroyed as the 'iron rice bowl' of heavy industry in the Northeast experienced massive layoffs and factory closures beginning in 1997 and many town and village enterprises were shuttered. The temporary ruination of Chinese industry, which reached a low point of 11% of the labor force in 2001, generated the surplus rural labor that facilitated the new industrial boom in coastal cities.
Many of the features of the socialist developmental regime were co-opted for capitalism, namely the the hukuo system, which was used to generate and control a rural proletariat, and the power of an autocratic state, used to mandate market reforms. Similarly, state-owned enterprises were restructured to serve the aims of capitalist accumulation and became the driving force of Chinese capitalism.
Part 1: Pacific Rim
Historically, China was a center of global commerce and ran major trade surpluses with Asian and European partners until the late Modern period. Maritime trade along the southern coast always constituted the majority of international commerce in China, especially after the decline of the Silk Road circa 907. Despite this, maritime trade experienced numerous historical interruptions under the Qing dynasty, including mass deportations of coastal populations inland immediately after conquest to counter the deprive the Ming loyalist fleet of Zheng Chenggong 鄭成功 of support. The Qing became increasingly suspicious and restrictive of international trade over time, eventually creating the 'Canton system', which limited foreign trade to Guangzhou in 1757 and was only ended by European victory in the Opium Wars in 1842. The Treaty ports established in the aftermath, essentially foreign colonies dominated by European and Japanese capital, connected China to the global capitalist economy, principally by facilitating the export of Chinese labor abroad, especially to the Americas. China began industrializing only late into the Qing period, with nearly all industry owned by foreigners and concentrated in the Treaty ports, and this process was repeatedly stalled due to political instability and war. The process of capitalist industrialization was eventually arrested entirely by Communist revolution, but preexisting patterns of migration, trade, and industrial infrastructure continued to affect the economy during the socialist period and the subsequent transition to capitalism.
Japan responded to European pressure by embracing industrial capitalism and instituting rapid social and political reforms, initiated after the Meiji Restoration. These reforms allowed Japan to become a major industrial and military power, defeating China in 1895 and Russia in 1905. In both of these wars, Japan did not make major territorial gains outside of Korea and Taiwan for fear of antagonizing Germany and Russia, but this caution sparked nationalist resentment within Japan as citizens demanded that Japan expand at the expense of European powers. As the Japanese Empire expanded into Korea and Manchuria in the early 20th Century, Japan began articulating its empire along racial lines with related, but inferior, peoples governed by the 'Yamato race'. This imperial expansion was partially motivated by capitalist incentives, particularly after protectionism in the Interwar period caused resource scarcity, as military power allowed Japan to position itself as the metropole within the peripheral economies of the 'Co-Prosperity Sphere'.
Japan experienced major economic growth in the 1910s, which slowed in the 1920s and suffered major crashes in the 1927 Showa Financial Crisis and the 1930 Showa Depression. Japan responded to the economic slump with the Takahashi policy -- named after Minister of Finance, Takahashi Korekiyo -- which slowly appreciated the currency after decoupling Japan from the Gold Standard and implemented Keynesian stimulus programs. The Takahashi policy led to major economic growth during the 1930s and the creation of a 'yen bloc' within Asia, but did not rectify falling rates of profit; the economy remained dependent on public investment for growth. Takahashi Korekiyo tried to ween the economy off public investment but was assassinated in 1935 by the 'Kodo-ha' faction of the army for trying to cut military spending. The Kodo-ha faction, who advocated state-led development along fascist lines, invasion of the USSR, and the replacement of 'corrupt' bureaucrats and financiers with direct imperial rule, were purged in 1936, but their economic ideas were shared by the dominant 'Tosei-ha' faction, oversaw the transformation of the Keynesian Takahashi policy into a militarized command economy. The Tosei-ha faction, lead by Kishi Nobusuke, among others, was more willing to work with zaibatsu industrialists and more cautious regarding the USSR.
After its defeat of Japan in WWII, the USA retained the unequal economic system Japan had constructed in East Asia, centered around Japan as an exporter of capital to a commodity-producing periphery. To this end, the USA released, pardoned, and supported Imperial Japanese politicians who wished to recreate Japan's wartime economic bloc -- most famously Kishi Nobusuke, who was pardoned for war crimes and given CIA support to organize the Liberal Democratic Party, resulted in his election as Prime Minister in 1957. The proximity of nations to the center of this new regional economic system was determined by their importance to American Cold War objectives, with American investment and military assistance given to South Korea to oppose North Korea, to Taiwan to prop up Jiang Jieshi's 蔣介石 dictatorship against Communist agitation, and to Hong Kong to contain Communist China. The USA had a political motivation to build stable developmental regimes in East Asia, to stop the advance of Communism, and an economic motivation, because reconstruction and industrialization programs created huge markets for American advanced industrial goods.
Japan's postwar economic boom, the 'Japanese Miracle', during which the economy grew sevenfold between 1951 and 1973, was enabled by huge labor reserves, low global energy prices, cheap loans from the USA, and high levels of private and government investment, facilitated by a banking system that privileged corporate investment by setting depositor interest rates at close to zero. Demobilization and the return of colonists to Japan created a huge labor surplus in Japan, equal to 18% of the population. Agrarian and land reform added to this labor surplus, as agricultural productivity increased and peasants sought other work. In 1950, perhaps 60% of the workforce was unemployed or engaged in informal work, represented a massive labor surplus. The loss of fixed capital investments in Manchuria also made Japan more amenable to new technologically advanced industrial ventures. The Japanese Miracle was kickstarted by the demand generated by the Korea War, as Japanese firms supplied America with military goods at guaranteed prices; military procurements represented 60-70% of Japanese exports during the early 1950s. Japan also benefitted from the large export markets created by the Bretton Woods system, under which the yen remained pegged to the US dollar at a competitive rate.
Japan and the Asian Tiger economies of South Korea, Taiwan, Singapore, and Hong Kong had a 'flying geese' pattern of economic development, with Japan investing capital and then transferring entire industries to other countries when labor costs became too high in Japan, facilitating technology transfer and industrial development in the same way that the USA did for Japan itself. This model for economic development had originally been proposed by Kaname Akamatsu in the 1930s for Japan and its colonies, but was only popularized in the 1960s. Limited application of the model occurred in the 1950s when Japan meet demands from the Korean War by temporarily investing in machine parts and electronics manufacturing capacity in Taiwan, but Japanese investment did not significantly increase until the mid-1960s, specifically following the normalization of relations with South Korea in 1965. The outsourcing of Japanese industry was largely a response to the depletion of Japan's own labor reserves, causing a decline in profitability. Between the mid-1960s and early 1970s, Japan emerged as a major player in heavy and chemical industries, overtaking European and American manufacturers, and transferring its light industry to the Asian Tiger economies, financed by Japanese investment. The next stage of industrial transfer occurred after the 1973 oil shock, when declining profits drove Japan to focus on precision machinery and advanced electronics for exports to the USA while transferring its heavy and chemical industries to South Korea and Taiwan. Japan capital exports greatly increased in the period following 1973, as returns on investments declined within Japan, with Japan making up 17.8% of global FDI in 1984 and its gross capital investment only increasing thereafter. Capital exports in the 1970s and 1980s went to both financing investments in South America and Asia, including a growing number of development loans within Asia, and purchasing safe assets in American financial markets.
Capital investment and the offshoring of industry to Asian countries with cheaper labor was only possible because of new logistics technologies, especially new standardized shipping containers that made shipping more efficient and allowed the concentration of Pacific trade into a smaller number of deep water ports. The development of container technology was driven by the US military, with American investment in procurement and logistic networks for conflicts in Korea and Vietnam providing the infrastructure and trade connections for an interconnected Pacific economy between the Pacific Rim and the USA. This shift to oceanic trade on a massive scale created the infrastructure that was a precondition to China's economic rise.
South Korean economic development under Park Chung-hee was facilitated primarily by US military procurement during the Vietnam War. South Korean firms received the bulk of US military contracts during the Vietnam War, with many chaebol firms first gaining access to important markets through connections made during the war and establishing South Korea as a hub for investment in the 1970s. Significantly higher wages, over 20 times normal, for the 50,000 South Korean soldiers deployed in Indochina further boosted the economy through increased consumption. South Korea was favored in military contracts because of its strong commitment to the Vietnam War, as was Thailand, whereas politically unreliable allies like Philippines were excluded from the economic opportunities occasioned by the conflict.
The core economies in the global capitalist system, including the USA and Japan, reached their manufacturing peak in the late 1960s and experienced economic stagnation in subsequent years as a crisis of overproduction set in. This crisis was expressed in rising unemployment and a combination of high inflation and stagnant growth, dubbed 'stagflation'. In the 1950s and early 1960s, the expansion of production had been offset by the expansion of global consumption from reconstruction efforts in Europe and Japan, but by the late 1960s global markets had stopped expanding, causing rates of profit to fall. This crisis was only addressed by the spatial expansion of the frontiers of capitalism, as profit levels were temporarily restored by the 'superexploitation' of labor resources in the new territories incorporated into the capitalist economy.
Japan responded to the stagflationary crisis through major public investments programs and increased exports to the USA. This strategy of export-led growth was successful and buoyed the Japanese economy throughout the 1970s and early 1980s because the USA was running large deficits during this period. Much of this debt was financed by Japanese banks, meaning Japan loaned the USA the money to purchase Japanese exports. This response did not, however, resolve the issue of overcapacity nor restore the falling rate of profit, and only increased capacity in industries that had already reached the point of market saturation. Profitability was only maintained by suppression of wages and government spending on infrastructure projects. The profitability of Japanese industry further declined after the 1985 Plaza Accords, which devalued the US dollar relative to the yen. In response to the decline in manufacturing profits following the Plaza Accords, Japanese firms invested less in industry and more in financial speculation, especially the real estate market and Asian currency markets, creating an asset bubble that burst in the early 1990s, resulting in the Lost Decade.
The USA eventually responded to the stagflationary crisis through the Volcker Shock, which forced unprofitable firms into bankruptcy and triggered massive layoffs. In its aftermath, American manufacturers embraced computerization and created less labor-intense factories, causing a major increase in American economic productivity in the 1980s and 1990s. The Plaza Accords also gave a boost to American manufacturing by making US goods more competitive against German and Japanese competitors, resulting in higher growth and lower unemployment in the USA. However, the Plaza Accords also revealed the increasingly zero-sum nature of international economics, as gains in US manufacturing came at the cost of slower growth and higher unemployment in Europe and Japan, and visa-versa.
Part 2: Borders
Relations between the Soviet Union and China became tense in the late 1950s due to ideological and strategic disagreements, particularly Chinese opposition to Nikita Khrushchev's policy of detente. Chinese bellicosity, as in the 1958 Taiwan Straits incident, frustrated Soviet attempts to establish detente and was internationally embarrassing. For its part, China believed that detente ignored the continued threat posed by the USA in Korea, Indochina, and Taiwan. Tensions had existed between Chinese and Soviet Communist leadership since 1927, when the Chinese Communist Party decision to follow Comintern directives to ally with the Guomindang ended in the massacre of communists by Guomindang forces, but were exacerbated by differing economic and foreign policies in the late 1950s. Soviet technical assistance and aid to China began diminishing in 1956, support for the Chinese nuclear program was pulled in 1958, and all forms of assistance had ended by 1960.
Deteriorating relations with the USSR simultaneously deprived China of its main source of inputs and technical expertise and raised the possibility of war. China responded by focusing its development strategy on heavy industry to replace Soviet imports and, in 1964, launched a program of rural industrialization and the Third Front industrialization program, both intended to move industry away from coastal cities, vulnerable to American attack, and northern cities, vulnerable to Soviet attack. Being cut off from Soviet supplies led China to pivot towards the USA as another source of necessary imports.
In 1967, in response to Chinese development of a hydrogen bomb, the USSR moved missiles into position to destroy the Chinese nuclear arsenal at Lop Nur. This prompting fears that the USSR would destroy China's nuclear deterrent, leaving it dependent upon the USSR for protection and thus vulnerable to invasion under the Brezhnev doctrine, like the states of the Warsaw Pact. Tensions further escalated in March 1969, when a border dispute over Zhenbao / Damansky Island, in the Ussuri River in Manchuria, blossomed into seven weeks of open conflict between Soviet and Chinese soldiers there and in Tielieketi, along the border with the Kazakh SSR. The USSR deployed almost 300,000 soldiers to the Chinese border, while, by August, China had begun planning for mass mobilization and the evacuation of major cities due to the threat of nuclear war.
The process of rapprochement between China and the USA was spearheaded by Zhou Enlai, but was broadly supported by the entire Communist Party leadership, including Mao Zedong. Initially, neither the USA nor any member of the Chinese leadership had the intention of integrating China into the capitalist system. President Richard Nixon visited China in 1971, following secret meetings between Zhou Enlai and Henry Kissinger, and signed the Shanghai Communique, in which the USA recognized the Beijing government, restored diplomatic ties, lifted its embargo on China, and promised to vacate some military bases on Taiwan, while leaving the status of Taiwan purposefully vague. China's strongest incentive to restore relations with the USA was its need for imports of fertilizer and petroleum, both necessary to facilitate its industrialization. One of the earliest agreements made with Henry Kissinger was for the import of $4.3 billion of industrial equipment for the manufacture of fertilizer.
Although the quality of and access to healthcare and education continued to improve, China experienced a general stagnation following the failure of the Great Leap Forward. In order to fund the construction of heavy industry in the Third Front, China suppressed consumption, especially in rural areas, manifesting in stagnant incomes throughout the 1960s and 1970s. Even so, industrial growth during this period was still too slow to match population growth, with the issue of urban unemployment only being resolved by exiling urbanites to the countryside during the Cultural Revolution; many of the improvements to rural education and healthcare were from this transfer of the skilled and educated to the countryside. The crucial issue confronting China's development was low agricultural productivity, which trapped over 80% of the workforce in agriculture. Agricultural productivity could have been increased by additional investment in agriculture, which received less than 10% of all state investment, but this would have necessitated reducing investment in heavy industry during a time when the latter was viewed as critical in any future conflict with the USSR.
Agricultural yields rose in the late 1960s and early 1970s due to the introduction of new hybridized crops, but access to fertilizers and pesticides was not widespread enough for China to fully benefit from the technological gains of the 'green revolution'. Moreover, agricultural production again stagnated in the 1970s and grain production was insufficient to meet urban demand between 1971 and 1976, to which the government responded by forcing urban youth into the country to perform agricultural labor. Peasants were generally unmotivated and participatory elements of the system deteriorated, as shown in declining attendance of meetings to assign workpoints.
Having been demolished by the introduction of mandatory state procurement, as the basic agricultural goods needed for production were taken by the state immediately after harvest, rural production was restored in 1955 in the form of peasant cooperatives and then massively expanded as 'commune and brigade enterprises' (CBEs) during the Great Leap Forward. When peasants were forced back into agriculture after the failure of the Great Leap Forward manifested in famine, the vast majority of these CBEs were shut down and new CBEs were prohibited, with the number of CBEs decreasing from 117,000 in 1960 to only 11,000 in 1963. The CBEs that remained after the Great Leap Forward focused on agricultural modernization, specifically the production of electricity, iron, steel, fertilizer, cement, and agricultural machinery, with all other industries reserved for urban areas.
CBEs boomed after 1970, when they were made eligible for loans and received official support as the main engine of agricultural modernization under the 4th Five Year Plan; by 1978, half of all industrial workers in China were in rural CBEs. Restrictions on communes and brigades, rather than counties, owning and operating steel, iron, cement, and fertilizer plants were also removed. CBEs remained officially restricted to goods related to agricultural modernization, and other types of factories were not eligible for loans, but many commune and county officials ignored these rules and factories of all varieties proliferated. CBEs were encouraged to use inputs and labor from within their local areas to meet their own needs, but also ended up exporting manufactured goods to other areas. This growth was facilitated by the Cultural Revolution, which saw skilled workers, technicians, and urban cadres banished to rural areas, where they helped develop rural industry; and disrupted urban production networks, allowing CBEs on the periphery of cities to take advantage of these production gaps and sell their goods on urban markets.
Resentment at austerity and stagnant wages during the 1960s and 1970s manifested in a wave strikes beginning in 1974 and lasting into the early 1980s. The strikers directed their anger at widening inequality and a corrupt bureaucracy as well as China's underdevelopment compared to capitalist South Korea, Taiwan, and Hong Kong. The most coherent political movement to emerge from the protests was a liberal and democratic movement centered around the Li Yizhe manifesto 李一折大字报. This liberal democratic opposition, which would form the base of the 1978 Democracy Wall Movement, was tolerated by Guangdong Party Secretary Zhao Ziyang 赵紫阳 for political leverage against conservatives. The strikes took on a more explicitly political tone after the death of Zhou Enlai in January 1976 and began blaming the Gang of Four for stagnant living standards. The government, then dominated by the Gang of Four, responded by forcibly clearing those mourning Zhou Enlai from Tiananmen Square and placing Deng Xiaoping, seen as the leader of the reformist faction, under house arrest. The death of Mao Zedong in September 1976 led swiftly to the fall of the Gang of Four, resulting in the ascension of the reformist faction led by Deng Xiaoping in 1977.
Deng Xiaoping inaugurated a period of liberalization, allowing more dissent and instituting elections at the village level. His government also authorized a series of pay raises between 1977 and 1979. These reforms failed to fully address public grievances, however, and protests continued. Influenced by fears over the rise of the Solidarność movement in Poland, the Deng government backed off from much of this liberalization, revoking nominal freedom of speech in 1980 and the right to strike in 1982.
CBEs rapidly expanded after 1978, when the Third Plenum of the Central Committee recommended that urban factories shift production to CBEs and help equip those rural factories, gave extensive tax breaks to CBEs, and removed all restrictions on the type of industries that could be owned and operated by communes and brigades, with the exception of tobacco, cotton textiles, armament, and certain types of iron and steel. All with previous restrictions, communes and brigades sometimes ignored the law and operated iron, steel, and cotton textile factories. The partnership between CBEs and urban factories, usually state-owned enterprises (SOEs), led CBEs to manufacture certain components as subcontractors for urban SOEs.
Agricultural production increased between 1977 and 1979, as the Deng government reallocated significant investment to agriculture, especially irrigation and mechanization. Moreover, this increase in grain output occurred contemporaneously with a reduction in the amount of land under cultivation. Peasant incomes increased significantly as a result of this increase in production. However, the influx of money from investment in agriculture and larger payments to peasants during grain procurement resulted in rising inflation and newfound budget deficits beginning in 1979.
The government responded to the budget deficits of 1979 and 1980 by transitioning to a household contracting system of procurement, gradually adopted between 1980 and 1983, by which individual households were allowed to keep excess produce. Inequality within and between rural communities increased during this period, as some peasants, by virtue of talent, soil quality, political connections, or some combination of factors, were able to produce more crops than others. This shift to household contracting, combined with major cuts to state investment in agriculture, helped address the deficit at the cost of only a small drop in grain production. However, much of the deficit was the result of the difference between higher prices paid to farmers, who increasingly earned higher rates from exceeding quotas, and the low subsidized price of food paid by urban workers.
Although intended as a temporary measure, the adoption of a household contracting system became permanent. This was followed by decollectivization, with communes reconstituted as 'townships' and brigades as 'villages'. Land was still to be collectively owned by the village and villages had to fulfill set quotas, but peasants now independently managed their household's land. The quota system became much harder to enforce, with peasants increasingly ignoring quotas to flout the law and sell their crops on illegal markets. Agricultural productivity increased under the new system as peasants were more incentivized and had the means to purchase more inputs, like fertilizer.
Increases in grain production created a fiscal crisis for the government, as the state remained obligated to purchase all grain exceeding quota productions at higher prices, which now constituted a significant financial burden. The government responded with further market reforms: in 1983, the set 'over quota' prices of certain major crops were replaced by negotiated prices based on demand; then, in 1985, the quota system was abolished along with the state guarantee to purchase all crops produced, replaced by a market competition between agricultural producers, stabilized by a minimum price. The introduction of market forces into Chinese agriculture successfully lowered the cost of grain purchases to the state, but not by enough to fully resolve the deficit. Prices for agricultural goods still remained high as the state had to increase its procurement price to encourage peasants to grow certain crops and prevent shortages.
CBEs had started to create aspects of labor and capital markets by the early 1980s by contracting and paying wages out-of-village technicians and selling shares in the CBE, a practice which was encouraged after 1984 to raise funds for existing CBEs and capitalize startups. In 1984, CBEs were reorganized as 'township and village enterprises' (TVEs) as part of rural China's decollectivization. That year they also began receiving the same privileges and access to state aid as SOEs, sparking another period of massive growth for TVEs. Growth was particularly strong in services and consumer goods, as rising wages and the relaxation of austerity policies allowed for growth in domestic consumption. This was facilitated by the abolition of the state monopoly on commerce in 1979, allowing private retailers and collectively-owned urban enterprises to grow explosively; over 1 million private retailers existed by 1982, as well as a greater number of collectively-owned retail firms. This expansion in the retail sector absorbed much of the population entering the labor market in the 1980s. Cadre promotion at local levels was increasingly based on the performance of the TVEs they managed, not political credentials, creating incentives within the Party for the further expansion of market reforms.
Into the 1980s, the government considered SOEs to constitute the core of the Chinese economy, with market reforms viewed largely as a way to decrease their overhead costs by subjecting the price of food and subcomponents to market pressures. SOEs retained their privileged status in state planning, with the attendant benefits for SOE workers, throughout the 1980s and 1990s even as TVEs and private businesses eclipsed them in output and employment. Investment in heavy industry was severely curtailed in the 1980s, however, with investment instead directed to light industry and consumer goods. Construction of new heavy industry also stopped, as what investment was received was apportioned to build new housing stock and other amenities to meet the needs of the large labor force resulting from Chinese baby boomers entering the workforce and the return from the countryside of those exiled during the Cultural Revolution.
Budgetary decisions were decentralized in the 1980s, with SOEs and local governments being given funds to use at their own discretion. SOEs were allowed to retain more of their profits than previously, with many SOEs reinvesting that money in the enterprise; by the 1990s, the majority of investment in R&D came from within firms. SOEs could also retain all goods produced in excess of set production targets, encouraging their sale on the market or barter with other enterprises. This decentralization of budgetary responsibility empowered SOEs to invest according to market pressures to increasing their competitiveness versus their rivals. This competition among SOEs was recognized and encouraged under the principle of 'responsibility for one’s own profits and losses' 自负盈亏.
By the late 1980s, the domestic Chinese economy had been marketized to the extent that SOEs increasingly bought industrial materials and sold their excess product on informal markets, often through barter, as determined by the demands of and supply from TVEs, private businesses, and other SOEs. SOEs became dependent upon markets for their supply chains and to generate profits by selling excess product. They also became increasingly subject to market pressures, competing against each other and TVEs to buy inputs and sell their products. Labor regulations were also relaxed during the 1980s, allowing for TVEs and private businesses to hire temporary and contract workers to suit the needs of the business cycle.
In the 1980s, academics directed by the government identified 12 models of rural industrialization in China, selecting three to be emulated nationwide: the Sunan model, based on TVEs; the Wenzhou model, based on private household businesses; and the Pearl River Delta model, based on simultaneous development of private business and collectively-owned enterprises at the county, township, and village levels.
As rising consumption fueled demand for industrial products, SOEs increasingly sought to increase their production, and therefore profits, by evading the restrictions placed on them by the government, including limitations on hiring workers without urban hukou. One solution to this was the Sunan model, which was most dominant in the area around Zhejiang and Shanghai. Instead of hiring costly urban workers and providing them danwei benefits, SOEs managers used personal connections to arrange for the production of components, or sometimes entire production lines, to be outsourced to TVEs in rural areas, which could produce goods at a cheaper rate and with greater output than was possible in cities. SOEs provided TVEs with the loans, equipment, and trained technicians needed for production. The system of cooperation between urban SOEs and rural TVEs significantly raised the income of rural workers. The end result of the system was that previous rural areas became urbanized as peasants abandoned agriculture to work in TVEs, particularly as industry polluted local soil and water supplies.
Some areas also followed the unofficial Pingding model, which resembled the Sunan model in its focus on TVEs, but was tailored to producing commodities and processing natural resources, particularly the mining and logging industries. The Pingding model was particularly successful applied to coal mining, with coal output increasing greatly after SOEs transferred mining operations to TVEs; by 1995, TVEs produced the majority of coal in China. The expansion of mining and resource extraction in rural areas was environmental destructive in the extreme and resulted in a high number of deaths and injuries from poor working conditions.
Guangdong was the first province to connect its rural economy to global markets. As early as 1978, farmers in Guangdong were encouraged to switch from grain to fruit, fish, poultry, and pork for export to wealthy consumers in Hong Kong. And, as early as 1981, Guangdong CBEs/TVEs were signing contracts with Hong Kong companies to receive industrial equipment in exchange for a portion of the resulting product. Guangdong was also host to 3 of the 4 Special Economic Zones (SEZs) -- Shenzhen, Zhuhai, Shantou -- established in 1980, the other being Xiamen in Fujian.
Premier Zhao Ziyang supported the actions of the Guangdong government and, in 1984, called for the rest of the country to emulate Guangdong by basing production decisions, especially in agriculture, on the demands of international markets. TVEs were particularly important to this plan and foreign trade more generally because of their flexibility and responsiveness to international market conditions, with TVEs accounting for 4.5% of China's export earnings in 1985 and 20.8% in 1990. TVEs in coastal areas were particularly prominent in export industries, as local cadres in these areas were under the most pressure to promote exports. The specialization of TVEs in light industry and consumer goods was suited to the export markets of the 1980s and 1990s, as they were able to successful compete against similar exports from Southeast Asian countries in a way that Chinese industry could not with the capital-intense production of Japan or the Asian Tigers.
Provincial governments were allowed to retain between 30% to 100% of their foreign currency earning, while SEZs were allowed to retain 100% of foreign currency earnings. This foreign currency could be used to finance new economic development, giving successful provinces, like Guangdong, an additional competitive advantage over poorer and less internationally competitive provinces. The economic success of competitive provinces gave their leadership more sway within the Communist Party, allowing them to push for policies than benefitted their own provinces and further promoted a strategy of exporting to international markets. Coastal provinces, by virtue of easier access to global markets, were more successful than inland provinces. As disparities between competitive and uncompetitive areas grew, labor from poorer inland provinces began to migrate to wealthy coastal provinces.
Production rapidly expanded in the 1980s and 1990s, only to then suddenly decrease in the mid-1990s as, for the first time ever, Chinese manufacturers reached a point of market saturation. This prompted an economic crash that began with SOEs faces loses due to large amounts of unsold product. Because labor regulations prevented SOEs from firing the workers they hired during the period of economic expansion, they instead cut costs by buying fewer goods from TVEs and abandoning long-standing relationships with local TVEs in favor of cheaper inputs from TVEs in poorer areas. TVEs subcontractors bore the brunt of the economic crash, with perhaps 60%-70% closing, resulting in millions of unemployed workers in suburban and rural areas. By the late 1990s, most TVEs had either closed or been sold to private companies, often foreigners. TVE equipment was often physically moved to production sites elsewhere and TVE workers were replaced with cheaper rural migrant labor.
From the mid-1980s onward, China began to be subject to market dynamics through its subsumption into the global capitalist economy and the development of capitalist dynamics in rural industry, ending with the marketization of TVEs in the mid-1990s. In the early 1980s, the commodity market was developing rapidly, the labor market was still limited and the capital market was almost nonexistent. By the end of the decade, however, the commodity market was pervasive, and it had begun to stimulate the growth of the labor market and facilitate the transformation of TVE ownership into something resembling a locality-based shareholder corporation. Capitalism was more developed in rural areas, where a decline in agriculture transformed peasants into wage workers, than in cities, where those with urban hukuo did not depend on wages for subsistence. Fully developed capitalism was present only in SZEs, with marketization was most advanced in the regions bordering SZEs.
Part 3: Sinosphere
International trade was minimal under China's socialist development regime and what trade existed was primarily with other socialist nations. At its height between 1952 and 1960, trade still remained under 10% of China's GDP. Over half of this trade was with the USSR, which exported industrial goods and machinery and imported Chinese textiles, processed foods, and commodities. Trade with the USSR sharply declined during the Sino-Soviet split and ended almost entirely by 1970. International trade picked up again after the restoration of relations with the West, particularly the normalization of relations with Japan in 1972, growing from a nadir of 5% of GDP back to 10% of GDP by 1978 and further expanding in the 1980s. Japan was China's most prominent new trade partner, particularly after the 1978 Long Term Trade Agreement, buying 20% of Chinese exports, mainly oil and coal, and supplying 25% of China's imports, usually the industrial materials and equipment needed to outfit Chinese factories. Chinese markets were particularly important to Japan since they provided export markets at a time of declining demand and profitability for chemical and heavy industries in Japan.
Trade dynamics between China and the West were based on China's export of natural resources, particularly oil and natural gas, in return for imports of machinery and industrial materials. Trade with the capitalist world was restricted to 12 licensed SOEs, which issued special 'foreign exchange certificates' as payment, since the yuan was not convertible. Much of the oil exported came from the Daqing oil field, one of the largest in the world during the 1960s and 1970s. China based the 5th Five Year Plan (1976) and a number of related trade agreements on the assumption that output from the Daqing field would continue to expand, despite no evidence of additional reserves. Oil production from Daqing field began to fall in the late 1970s, leaving China with a trade deficit that forced it to cancel some trade agreements and projects under the 5th Five Year Plan, and prompted China to pursue currency reform in subsequent years. The yuan was devalued throughout the 1980s to bring it into line with its valuation on currency markets, followed by a switch to convertibility at market rates beginning in the early 1990s.
Oil exports became increasingly marginal during the reform period, as China transitioned to mainly exported light manufactured goods. Domestic economic conditions also promoted China's strong push towards exports, including the strong incentives for TVEs facing collapse due to the overproduction crisis of the early 1990s to avoid bankruptcy by finding international markets for their goods. SEZs were also entirely geared towards exports, with regulations waiving all taxes on foreign trade within SEZs on the condition that all imports were used within the SEZ for producing exports. These changes occurred alongside an enormous expansion in the number companies with permission to engage in foreign trade.
China had established regional trade connections throughout Asia under the Ming dynasty, through initiatives like Zheng He's 鄭和 diplomatic missions, resulting in Chinese migrant communities throughout Asia, some of which held considerable political power. The size of these overseas communities grew during the prolonged Qing conquest of southern China, as many Ming loyalists fled to Chinese communities in Southeast Asia. By the mid-1600s, there were around 100,000 Chinese in Southeast Asia and Taiwan. The overseas community expanded again to 1 million as refugees fled China during the Taiping Rebellion, the majority settling in Australia and the Americas and forming a new relatively wealthy segment of the Chinese overseas community. It was during this period that Chinese first outnumbered indigenous Taiwanese. The last major waves of outmigration from China occurred after the Xinhai Revolution, with most refugees settling in Singapore and Malaysia, and after Communist victory, with most refugees settling in Taiwan and Hong Kong. These overseas Chinese communities often came into conflict with other ethnic groups in their home countries, manifested in the independence of a Chinese-dominated Singapore from Malaysia and anti-Chinese pogroms in Indonesia in 1965, 1966, and 1998, in Myanmar in 1967, and in Malaysia in 1969.
Although the political power exercised by many overseas Chinese communities ended with the advent of European colonialism in Southeast Asia, their economic networks remained intact and Chinese were often given preferential treatment by colonial administrators. These overseas Chinese communities tended to be wealthy, often having drawing from large capital reserves held in Hong Kong, Singapore, or Taiwan, and played a major role in facilitating the economic development of Malaysia, Indonesia, Thailand, and Philippines after the 1960s. Foreign investors, especially the Japanese, tended to favor overseas Chinese as local partners in Southeast Asia, leading some governments, like Suharto dictatorship in Indonesia, to also favor the Chinese with government contracts. The favored status of the Chinese was reflected in profound wealth inequality, with Chinese controlling between 70% and 75% of all private capital in Indonesia.
Until 1949, the majority of money from the overseas community to China was in the form of remittances, with only limited investments in Guangdong and Fujian. Direct remittances became impossible after Communist victory on the mainland, so money was instead smuggled from the overseas community to China via Hong Kong. Ethnic tensions in Southeast Asia led the Chinese community there to move their money to safe accounts in Singapore and Hong Kong, further concentrating overseas Chinese capital. Overseas Chinese invested large amounts of capital in Chinese economic development, with Macao and Hong Kong alone providing half of all FDI in China in 1983, compared to 20% from Japan and 10% from the USA. Hong Kong both invested its own capital in China and laundered capital from Taiwan and the mainland for investment in China.
Hong Kong played a particularly prominent role in midwifing Chinese economic development and Hong Kong firms had been important to trade and investment in the Pearl River Delta even before major market reforms and the creation of SEZs. Hong Kong itself rapidly industrialized in the 1940s and 1950s as Guomindang-aligned businessmen, particularly from Shanghai, brought their capital, knowledge of light industry, and managerial experience to Hong Kong, which had a large, cheap labor force swollen with refugees from the mainland. Hong Kong investment in China coincided with the deindustrialization of Hong Kong, as both native firms and Japanese subsidiaries moved manufacturing to the mainland while keeping the administrative, marketing, and financial parts of the businesses in Hong Kong. Hong Kong's industrial workforce declined from 47% of the population in 1971 to 14% in 1996, a rapid change enabled by the limited fixed capital investments involved in light industry, the decentralized nature of industrial organization, and weak unions. Hong Kong's economy transitioned to the financial sector and facilitating trade, which together accounted for 40% of GDP in 1996. Hong Kong companies usually paid the managers or cadres responsible for a Chinese enterprise a lump sum in US dollars or Hong Kong dollars for the manufacture of goods, while the Chinese workers were paid in yuan. In early contracts, Hong Kong firms also provided the necessary materials, components, and blueprints to Chinese factories. Much of the time, the dollar payment given to managers was laundered in Hong Kong accounts and then reinvested in further contracts. Most goods produced in China were not exported directly from Chinese ports, but instead exported first to Hong Kong -- which imposes no tariffs on most goods -- and then on to global markets. This traffic in Chinese exports led Hong Kong to become the busiest container port on Earth for much of the late 1980s and 1990s.
Economic growth was focused on southern China, which received 42% of all foreign investment between 1979 and 1994, and produced 47% of all exports by 1995. This was even more specifically concentrated on the Pearl River Delta, which received approximately 19% of foreign investment and produced around 17% of exports, accounting for 68% of Guangdong's output. This region continued to outpace the rest of China into the 21st Century, with Guangdong alone accounting for 42% of all exports in 2000, of which 90% came from 8 cities of the Pearl River Delta. Guangdong and Fujian had favorable conditions for producing exports, as their tropical and subtropical climate made them suitable for growing a variety of agricultural goods for export or as inputs for the food processing and textile industries. Migration and urbanization were particularly pronounced in southern China, particularly in the Pearl River Delta, with that region hosting 3 million of Guangdong's 3.7 million migrant workers at the end of the 1980s, half of whom resided in Shenzhen, Dongguan, Bao'an, or Guangzhou. Shenzhen, selected as a SEZ for its proximity to Hong Kong and because of Zhao Ziyang's pull within Guangdong after his ascension to Premier in 1980, grew from a underdeveloped town of 30,000 to a city of 10.4 million by 2010, boosting an annual GDP growth of 30% and being the fastest growing city on Earth between 1980 and 2000.
Early integration with global markets during the Qing and Republican periods led to the rapid growth of coastal and riverine cities, especially Shanghai, Guangzhou, Wuhan, Nanjing, and Qingdao. Urban areas also grew under Japanese colonialism in Manchuria. Urbanization effectively stopped during the socialist period and workers became strongly tied to individual villages or enterprises. Migration controls were relaxed after 1980, as those with rural hukou were allowed to move to specific urban areas to work after 1984 and allowed to work in any nearby town beginning in 1985. This mainly encouraged migration within provinces, with 88% of migrants to the cities of the Pearl River Delta coming from elsewhere in Guangdong. Urbanization was rapid during the 1980s, with the number of cities doubling between 1978 and 1990, and focused on mainly on the transformation of previously rural areas into cities, with rural areas receiving 71% of all immigrants during this period. These new cities were spread out and buildings were normally limited to two or three stories, with most industry concentrated in small factories employing under 200 people.
The urban proletariat during the socialist period was restricted to 'lane labor', youth and women paid to cook, sew, and launder for SOE workers; and worker-peasants temporarily recruited from surrounding rural areas. These exceptions to the danwei labor system first appeared in areas with few prominent SOEs, like Guangzhou and Shanghai. The proletariat only began to expand during the reform period, as peasants flocked to towns and cities to work in TVEs. Most early migrants were young unmarried women seeking factory work.
Pacific trade eclipsed Atlantic trade for the USA around 1980, driven by booming economic growth in the Pacific Rim, a massive flood of FDI from Japan, and US demand for cheap light industrial and consumer goods. US international economic policy during this period was dominated by competition with Japan and the Bonn Republic, to which the USA responded by placing tariffs on Japanese electronic goods, restrictions on certain Japanese imports, and ultimately by negotiating the depreciation of the US dollar and the appreciation of the Japanese yen and West German mark in the 1985 Plaza Accords.
The Plaza Accords increased the competitiveness of Asian countries with currencies pegged to the dollar -- including Malaysia, Indonesia, and Thailand -- making them prime targets for the next stage of outsourcing and investment. The early growth of Thailand, Malaysia, and Indonesia in the 1960s to 1980s, and thus the creation of early industrial infrastructure there, was facilitated primarily by US military contracts and direct US economic and military support, which constituted the majority of foreign investment in those countries, particularly Thailand. Following 1985, Malaysia, Indonesia, and Thailand received a massive influx of FDI from Japan and the Asian Tigers, alongside the transfer of labor-intensive industries. This transfer of light industry involved less local ownership and technology transfer than had previous offshoring operations; the countries were only used for cheap labor and very few production techniques were shared. Most factories were either owned by foreign companies, particularly in Malaysia; businessmen with connections to the Indonesian or Thai military regimes; or the Chinese commercial class. The transfer of manufacturing to Southeast Asia also saw a growing trade imbalance within Asia, as Japan and the Asian Tigers increasingly ran large trade deficits with Thailand, Malaysia, and Indonesia. This trade imbalance within Asia was only offset by Japan and the Asian Tigers' trade surplus with the USA. Within the regional economic structure of this period, Singapore and Hong Kong provided financial services, Japan, Taiwan, and South Korea manufactured high tech goods to be exported to the USA and Europe, and Southeast Asian countries and China provided the cheap labor and natural resources needed for labor-intensive manufacturing.
In the late 1980s, China was in a strong position to compete at the low end of global manufacturing. Its currency was set at market rates and it entered global markets around the 1985 Plaza Accords, when the yen became less competitive. China's main competitors for export market was Southeast Asian countries whose currencies were pegged to the, now more competitive, US dollar. China ended up outcompeting its Southeast Asian rivals for the chief position in labor-intensive manufacturing due to the collapse of Japanese investment after the 1990 Lost Decade financial crisis and its replacement with overseas Chinese capital, mainly from Hong Kong, Macau, and Taiwan, focused mainly on China. This competitive edge was confirmed in the 1997 Asian Financial Crisis, which saw the collapse of capital and investment networks between Japan and the Asian Tigers and Southeast Asia.
Part 4: Iron to Rust
By the mid-1980s, a small number of urbanites had exited the danwei system to pursue private businesses, especially in commerce, retail, and restaurants, buying their supplies from peasants or rural TVEs. In rural areas, most industries were collectively owners, although private TVEs existed by the 1980s and were the fastest growing type of enterprise by the end of the decade, they were particularly prominent in the area around Wenzhou. During his tour of southern China in 1992, Deng Xiaoping initiated a new wave of market reforms, beginning with opening real estate markets to foreign investment and allowing foreign importers access to Chinese markets on the condition of investment. The 14th Party Conference in October 1992, at which Deng Xiaoping declared that China was a "socialist market economy", was followed by further reforms that limited central planning, reduced taxes on private businesses, allowed SOEs more ability to fire workers, extended market pricing to more of the economy, permitted companies to engage in joint enterprises with foreigners, and allowed foreigners to purchase shares on the Shenzhen and Shanghai stock exchanges, which had opened in 1990. In 1994, the dual exchange rate system was abolished and the yuan was floated a market rate, albeit one manipulated by the Chinese government.
For the majority of urbanites, living standards rose slowly during the 1980s and even these gains were threatened by high inflation and the reduction of subsidies on the price of basic goods. Urban workers were also aware of the growing disparity between their wages and the sudden wealth of urban entrepreneurs and corrupt cadres. Protests against corruption and high inflation first occurred among university students in Anhui in 1985, spreading to major cities by late 1986. These initial protests failed to attract a base outside of students and were repressed by the government. General Secretary Hu Yaobang 胡耀邦 was forced to resign in January 1987 for his alleged leniency towards the protesters.
Protests against corruption and inflation resurfaced following the death of Hu Yaobang on 15 April 1989. Hu Yaobang was popular among students for his role in rehabilitating intellectuals during the beginning of the reform period and was widely seen as an incorruptible figure opposing bureaucratic interests. After congregating in Tiananmen Square to place wreaths in Hu Yaobang's honor at Monument to People's Heroes, students organized a nighttime march of 10,000 students on 17 April. Gatherings thereafter were continuous and many gave impromptu political speeches. Although the Tiananmen Square protests included both students and workers, student groups dominated the movement and deliberately sidelined workers, who they feared would become violent or otherwise justify a crackdown. To this end, students convinced workers not to strike, fearing that a strike would increase the relative power of workers within the protest movement. Two student groups controlled the protests: the 'Autonomous Student Union of Beijing Universities', whose elected leadership determined the movement's strategy; and the 'Headquarters for Defending the Square', who used their control of Tiananmen Square's loudspeaker system to organize the occupation within the Square, shaping it into hierarchical rings so that student leaders were positioned closest to the Monument to People's Heroes, regular students in the outer rings, and workers excluded and forced to camp on the opposite side of the Square. Other groups, such as the 'Beijing University Student Dialogue Representatives Group', were harassed and dispersed by the Autonomous Student Union.
The Tiananmen Square protests included students, workers, and the unemployed. Although united in the protests, students had demands and interests distinct from other groups. Workers and the unemployed were opposed to the process of market reforms, which they saw as responsible for stagnant wages, high inflation, rising unemployment, growing corruption and wealth inequality, and the loss of price stability; some workers agitated for a return to workplace democracy as had existed during the early Cultural Revolution. In general, students supported market reforms, but complained that bureaucratic corruption excluded them from the benefits of these reforms and unnecessarily slowed the reform process. The ideology of student protesters in Tiananmen Square was primarily authoritarian, with students demanding that a single strongman push through market reforms and end factional fighting among Party leadership and bureaucracy. Liberal and democratic criticisms were also articulated during the protests, as well as rare voices bringing attention to the effect of market reforms on workers. Students tended to support Zhao Ziyang as the champion of market reforms and demonized Li Peng 李鹏, a moderate politician seen as representative of bureaucratic interests.
At their height in May 1989, over 2 million people participated in protests in Beijing alone, not counting similar protests in other Chinese cities. Initially, General Secretary Zhao Ziyang endorsed student demands, as did the All-China Federation of Trade Unions -- the demands of workers were entirely ignored -- but Party leadership became increasingly divided as protests intensified in May. At a 17 May meeting of the Politburo Standing Committee, Deng Xiaoping and Li Peng argued for the declaration of martial law. On the morning of 19 May, Zhao Ziyang travelled to Tiananmen Square and warned protesters to evacuate and not sacrifice their lives; he was placed under house arrest later than day. Martial law was declared on 20 May, although by this point the size of the protests had declined. The remaining worker protesters pointed to martial law as evidence of a repressive class structure within China and declared a general strike, which, although not comprehensive, mobilized large numbers of striking workers to join the protests. On the night of 2 June, the approximately 250,000 soldiers gathered around Beijing were ordered to move into the city. Protesters, mainly workers but including some students, managed to stop the advance with relatively little violence, setting up roadblocks and surrounding military vehicles; soldiers captured in this manner were often well cared for and fed by crowds. The army again tried to enter Beijing on the night of 3 July, this time managing to penetrate to Tiananmen Square despite violent resistance by protesters, who set up massive roadblocks, set buses and military vehicles on fire, and threw rocks and molotov cocktails at soldiers; several hundred civilians were killed during these clashes. Upon arriving at Tiananmen Square, the army then negotiated the surrender of the last student protesters remaining there, allowing them to evacuate the Square after being beaten. Related protests in other cities were also crushed following the declaration of martial law. In the weeks following the crackdown, those involved in the protests were given prison terms or sentenced to execution, with students generally receiving more lenient punishments than workers. Leading reformists were purged from the party and the reform process was placed on hold.
Rising peasant incomes after 1978 fueled rising levels of consumption in rural areas and provided the savings underpinning investment in TVEs. The growth of TVEs further raised incomes in rural areas and thus perpetuated the cycle of growth, which reached its height in the early 1990s. Some TVEs remained in their role as subcontractors for SOEs or produced goods for export through SZEs, but most TVEs primarily produced goods for the expanding rural consumer market; a portion of these degenerated into pyramid schemes. Throughout the 1980s, banks and other lenders had been encouraged to give large loans to TVEs without really asking any questions. These enormous loans, combined with the transformation of passive savings into investment, contributed to skyrocketing inflation in the late 1980s and created a speculative bubble. Since cadre performance, and thus the opportunity for promotion, was measured by the value added to the enterprises they managed, managers in the 1980s were incentivized to lie about growth figures and overestimate performance of TVEs, especially since inflated figures could attract private investments that could then be represented as growth. By the early 1990s, it was clear that many TVEs were unprofitable and the commercial real estate market was overvalued, as loans often went into developing commercial real estate. Lenders found themselves holding mainly bad loans and overvalued commercial properties on their books.
The international community placed sanctions on China for its violent repression of the 1989 protests, cutting it off from international credit, although not closing foreign export markets; investment in China's SEZs was also exempt from sanctions. Open export markets meant that China never ran into balance-of-payments crises, despite international sanctions and the decline in oil exports. China responded to this temporary credit freeze by instituting austerity measures, suppressing wage growth, limiting the lending power of banks, and reimposing price controls. These measures had the positive effect of curbing inflation, addressing one of the key complaints of the 1989 protests, because the recession they created reduced rates of consumption and led savers to withdraw their money from investments. This depression temporarily popped the speculative bubble, leading to lost savings, bankruptcies, and increased unemployment in rural areas.
None of the underlying problems driving high rates of inflation in the late 1980s had been solved by the 1989 recession, nor were they solved in a similar recession in 1992; new speculative bubbles formed in the place of old ones and inflation shot up, with annual inflation reaching as high as 20% in cities and 25% in rural areas in 1993. The high rates of inflation were primarily caused by a major expansion of the money supply through widely available credit and the increase of grain prices, first from upward revision of state pricing by 35% in 1991 and 25% in 1992, and then from the introduction of market pricing for grain in 1993. Inflation remained high even following banking reforms in 1993 designed to restrict credit, as growth in rural consumption and rising agricultural prices fueled growth and inflation.
The rampant speculation of the 1980s and early 1990s was demonstrated by the 1993 Hainan crash. The island was turned into a province separate from Guangdong and a SEZ in 1988. It saw a rush of speculative investment organized as unregulated trust companies, often capitalized by other provincial governments, bought up real estate on the expectation of a manufacturing boom similar to Shenzhen. By the early 1990s, there were 20,000 real estate companies in Hainan, one for every 80 people. Very little industrialization occurred, however, especially because the real estate market incentivized inflating property values through residential buildings rather than industry. Financial reforms begun in 1993 destroyed investor confidence in the future value of Hainan real estate, which was already flagging by the early 1990s. Real estate values collapsed, leaving China with a mass of bad debt equal to 10% of the national budget. Hainan was subsequently stripped of its status as a SEZ.
The rural economy experienced a full and long-term collapse In 1996, causing widespread unemployment and triggering mass immigration to cities. Banking reforms carried out in 1993 restricted credit accessibility and tax reforms in 1994 simultaneously increased taxation on agriculture, slowing the growth of peasant incomes and thus dampening rural consumption, and redistributed tax revenues away from local governments and towards the central government, making local governments less able or willing to sustain heavily indebted TVEs under their ownership. In 1995, fearing that high inflation would trigger a repeat of the 1989 protests, the government intervened to lower grain prices, again depressing peasant incomes and suppressing rural consumption. Under the pressure of reduced access to capital and insufficient demand to repay their substantial debts, TVEs were already going bankrupt or being sold to private buyers; seeking to expedite the process, in 1996, the central government applied political pressure to TVEs to close or privatize -- either through transfer of ownership to the current manager or sale to foreign capitalists. The number of TVEs and their share of employment declined drastically after 1996, creating widespread rural unemployment. Rural areas of China remained in recession throughout the remainder of the 1990s and early 2000s, generating peasant protests and massive outmigration.
China did not have a functional banking system during the transitional period, with the only formal bank being People's Bank of China, a branch of the Financial Ministry that provided no banking services. Following 1978, Chinese personal savings rapidly increased and were more likely to be denominated in currency, facilitating the creation of an unregulated and ad hoc banking sector. The rapid expansion of TVEs during the 1980s was capitalized by an array of lenders that provided the necessary financial services without any regulation, including spontaneous banks, credit unions, and pawn shops. In the aftermath of the 1989 and 1992 recessions, China reformed the banking sector in 1993 to replace dispensation according to state planning with a regulated banking system capitalized by personal and household savings as the main method of finance. This process was spearheaded by Zhu Rongji 朱镕基, the former mayor of Shanghai who was promoted to Vice Premier and Governor of the People's Bank in 1991. Under this reform, all the unregulated lenders were joined into 4 state owned commercial banks, the 'Big Four': Industrial and Commercial Bank of China (ICBC), Agricultural Bank of China (ABC), China Construction Bank (CCB), and Bank of China (BOC). Each bank was given a different mandate -- urban banking, rural banking, project financing, and foreign trade and currency exchange, respectively. The government also formed three policy banks to carry out specific goals: China Development Bank, Export-Import Bank, and the Agricultural Development Bank. The Big Four continue to dominate interbank lending in China and constituted 50% of all capital in 2000, with policy banks having another 25%. Other extant banks were joint stock commercial banks or small credit unions.
The state had shielded SOEs from the worst aspects of austerity and previous recessions, although profitability still suffered due to the intrinsic connections between SOEs and the rest of the economy. The isolation from market forces provided to SOEs meant that, with the exception of SOEs focused on export-oriented light industry, they were less competitive and less profitable than other Chinese businesses. Zhu Rongji was selected to pilot reforms to shed central government responsibility for all small enterprises while retaining control of major SOEs and ensuring their competitiveness. SOEs were restructured into giant conglomerates, whose stock would then be floated to raise the capital needed to modernize production, first on the Hong Kong stock exchange in 1993 and then on Chinese and international exchanges. The Big Four banks also went public in the mid-2000s, raising more capital to be reinvested in Chinese industry. Between 1993 and 2010, Chinese conglomerates and the Big Four banks raised $262 billion in equity sales. Any unity that may have existed between SOE managers broke down during consolidation, as SOEs jockeyed to demonstrate their value and obtain prominent, and lucrative, positions in the new conglomerates.
Those SOEs not restructured into conglomerates continued to exist following reforms, but at rates of profitability under 2% and crushed under bad debt. Using the auspice of the Asian Financial Crisis and the collapse of the Guangdong International Trust and Investment Company, Zhu Rongji sought to get rid China of underperforming SOEs and their debt burden, a reform which would bring China into line with the fiscal and financial requirements for WTO membership. After Zhu Rongji's ascension to Premier in 1998, he pushed SOEs to either file bankruptcy and have their assets auctioned off, as local officials had been permitted to do following the 15th Party Congress in 1997, or sell the enterprise to private buyers. The privatization and mass bankruptcy of remaining SOEs succeeded in reducing overall debt-equity ratios from over 2:1 in 1994 to under 1.5:1 by 2004. Some of this reduction in debt levels was real and some was fancy accounting engineered by China Construction Bank head, Zhou Xiaochuan 周小川, in 1998 by transferring the bad debts held by the Big Four to asset management companies and covering them with injections of governmental capital to produce "good" debt-to-capital ratios. The government still held large amounts of bad debt, but it was now better disguised.
The importance of SOEs to Chinese manufacturing declined during the privatizations and bankruptcies initiated after 1998, with SOEs going from constituting around 65% of the industrial workforce in 1997 to only 36.3% in 2003. The closures dealt a major blow to Chinese manufacturing in general and created a rustbelt across the northeast, which saw the majority of the factory closures. Between 1993 and 2001, and particularly after 1998, around 40% of the SOE workforce, some 18 to 20 million people, was laid off. The workers laid off from SOEs tended to be older and higher in seniority than those in previous layoffs. Being laid off from SOEs not only deprived workers of wages, but also access to healthcare, education, housing, and pensions. Some workers were compensated by being allowed to buying their danwei housing at below-market prices, allowing them to become landlords or benefit from rising real estate prices, but others, less privileged in the hierarchy, simply lost their pensions and became impoverished. Workers protested the privatization of SOEs and the wave of layoffs, with unemployed SOE workers, some 1.6 million persons, constituting half of all participants in mass incidences in 2003. These protests were concentrated in the northeast, with over 830,000 people participating in over 9,000 mass incidents in Liaoning province alone between 2000 and 2002. Mass incidents increased in number and scale from the mid-1990s onward, from 8,700 incidences in 1993 to 87,000 in 2005.
Chinese integration into the global capitalist system coincided with a long period of continuous economic growth in the USA throughout the 1990s, as increased productivity due to computerization and increased consumption due to access to cheap goods from the Pacific Rim and an increase in credit availability led to lower unemployment and low inflation. China was thus able to expand economically by selling low-cost, labor-intensive goods that could not be profitably produced in the developed world and thus did not challenge jobs and industries in the developed world.
The economic boom in China was largely dependent on foreign investment, which constituted 20% of all investment in 1993. Economic growth in the Asian Tigers and Japan had been much more driven by state-facilitated investment, with FDI constituting at most 1% of GDP. China reached this 1% level in 1991 and rose to 6% in 1994, similar to the levels of FDI in Southeast Asian countries. China received more FDI than any other country in the 1990s except the USA and UK, and more than any other country in the early 2000s. China received between 25% and 50% of total FDI in developing countries, outcompeting its Southeast Asian rivals. Most of this capital came from Hong Kong and Macau, with Taiwan later playing a major role; collectively, the USA, Japan, Canada, and EU only contributed around 25% of FDI. China offered the investors from the 'Bamboo network' of overseas Chinese very favorable terms, similar to how it treated domestic capital. Investment and economic development was geographically concentrated, with interior provinces receiving little investment and major coastal provinces like Guangdong and Fujian having FDI to GDP ratios closer to 13% and 11%. This geographic distribution seemed from the fact that most overseas Chinese originated in southern China; sometimes, as in the case of Hong Kong and Taiwan, investors were former residents and invested in former friends, neighbors, and relations, in other cases, especially Chinese from Southeast Asia and the Americas, connections were more distant and based on linguistic or cultural ties.
Japan had been experiencing declining returns on investment for years and had responded by pushing capital into speculative ventures and real estate, trends that exacerbated after Japanese manufacturing competitiveness took a hit in the 1985 Plaza Accords. These speculative bubbles burst in 1990, leaving Japan with stagnant growth and firms burdened with debt incurred during the boom. Despite the availability of cheap credit, Japanese firms did not take many new loans or engage in many new investments after 1990, instead focusing on correcting their balance sheets. To generate demand and prevent economic collapse, the Japanese government had to step in and fund Keynesian infrastructure projects, however, lacking private sector participation in investment, Japan still suffered through 20 years of stagnant growth, increasingly precarious working conditions, and persistently high unemployment. Japan remained a prominent investor in China throughout the 1990s and early 2000s, especially in Shanghai and in industries along the north and central coasts, but the weakness of Japanese capital meant that it was now clearly eclipsed by overseas Chinese investment. This shift from Japanese to overseas Chinese capital also signaled a shift away from Southeast Asia and towards China.
The underlying factors of the Asian Financial Crisis manifested in the early 1990s, as rates of profit began to fall and Southeast Asian countries failed to acquire the labor-saving technology that would have allowed them to move up the value chain. The Lost Decade crisis meant that the previously large consumer market of Japan had shrunk significantly, forcing Southeast Asia to compete with China for export markets in Europe and the USA, a competition that China was clearly winning. Seeing the dim prospects for profits in manufacturing due to rising wages and losing market share to China, Southeast Asian capitalists instead invested in real estate and speculative ventures. After 1994, both domestic and foreign investment in Thailand was increasingly concentrated in real estate. Speculation was further encouraged by deregulation of the Thai financial industry, particularly allowing Thai businesses to borrow in foreign currency. The real estate bubble in Thailand burst in 1997, after which capital fled Thailand, triggering a currency exchange crisis as the Thai baht depreciated and businesses were unable to pay their foreign currency debts. Currency speculation and capital flight soon rocked all of Southeast Asia, followed by political unrest. In Thailand, inflation soared and unemployment doubled, sparking widespread populist unrest after the government forced workers back into rural areas. In Indonesia, high inflation led to rioting and anti-Chinese pogroms, ending in the resignation of the Suharto dictatorship. In South Korea, the stock market and financial institutions crashed, requiring an IMF bailout, and many chaebol went bankrupt or were subject to restructuring.
China was only mildly affected by the Asian Financial Crisis, as it had a higher rate of profit and had maintained a significant market share in exports to the USA. State regulation also made currency speculation difficult, protecting it from capital flight. China had only one major failure, the bankruptcy of the Guangdong International Trust and Investment Company, which collapsed in 1998 amid large amounts of bad debt. Although this demonstrated that China's financial system was not immune to crisis, the Chinese leadership came out of the Asian Financial Crisis convinced that their methods of regulation and state management of the economy were superior. In the aftermath of the Asian Financial Crisis, all of China's economic major rivals had been wiped out, leaving it to dominate low-end manufacturing.
During the Cultural Revolution, despite the growth of cadre numbers and the increase of privileges for top-level officials, there was awareness that the bureaucracy was ossified and corrupt. The proposed solution was recruitment from lower social classes, the expansion of primary education, and the deportation of students from closed universities to the countryside. This move to promote those of a lower class background within the party were ended after the arrest of the Gang of Four in 1967. Class restrictions on Communist Party membership were lifted entirely in 1978, allowing party ranks to fill with more educated cadres from the privileged upper ranks of bureaucracy, whose privileges had continued to expand throughout the socialist period. Although the majority of party cadres were still from lower social backgrounds, half of all new members in 1985 were from educated backgrounds, predominantly in technical education and engineering, and often the children of privileged bureaucrats. The retirement of veteran cadres from the civil war era, who were mostly peasants or workers, further shifted the demographics of the CCP to educated 'red experts' or 'red engineers'. In 2002, 76% of all Politburo members were engineers, as were all members of the Standing Committee.
Capitalism was promoted from within the Communist Party, with independent capitalists and the old capitalist class of Hong Kong and elsewhere largely excluded from influencing reforms or holding political power. Despite suffering during the crackdown in June 1989, student demands were largely fulfilled in subsequent years, as market reforms accelerated and the generation of students in the 1980s received privileged positions as managers in the emerging economic system. Student politics became more right-wing over time, increasingly focusing on free speech, protection of property rights, and Chinese nationalism. Students did not join the worker protests over worsening economic conditions that intensified throughout the 1990s. The transition of cadres into capitalists was facilitated by privatizations that simply conferred ownership rights onto existing enterprise managers.
During the capitalist period, the hukou system lost its function in fixing rural labor to farms and instead structured a two tier system of labor that suppressed wages and dissent, wherein rural migrant labor formed an underclass and ultimately the proletariat. Hukuo justified excluded the rural proletariat from welfare systems, and thus their subsumption into wage labor, and allowed for their deportation during periods of unrest. Rural migrants composed large portions and often the majority of residents in new cities; 70% to 80% of the residents of cities like Shenzhen may have had a rural hukou. Rural migrants remained precarious and distinct from those possessing urban hukou, as demonstrated by the ramshackle and informal nature of their businesses and living arrangements in cities. Rural migrant labor provided the backbone of Chinese economic growth. Numbers of rural migrants increased from between 8 million to 40 million in 1990 to as many as 100 million by 2000 and certainly in excess of 100 million by the mid-2000s. By this time, rural migrants composed 57.5% of China's industrial workforce, 37% of its service industry, and were overrepresented as 70% to 80% of the workforce in the textile and construction industries. Migrant workers tended to be young, often growing up entirely during the reform period, and often female. This put them at odds with the older, majority male, established urban working class.
Together, migrating peasants, unemployed workers fired during the restructuring of SOEs, and unemployed rural workers fired during the collapse of TVEs composed the proletariat of China as the collapse of industry in the northeast and rural areas pushed these people into wage labor in coastal cities. This class had fully formed by the early 2000s. "Beyond and beneath the glittering coasts, the landscape could only be described as apocalyptic: fields and workshops abandoned as youth emptied out of the collapsing countryside, local government reduced to little more than a predatory machine helmed by officials fattened through barely-disguised theft; the vast factories of Manchuria hollowed of workers and machines, their skeletal forms looming over the landscape like the crumbling pillars of a fallen world; and in the red dust of those new cities, masses of people fleeing these collapsed histories huddled into crowded factories, living in the spaces squeezed between the glittering new skyscrapers that they themselves had built, moving constantly between jobs, between cities and between lives in the service of the inscrutable, inhuman logic of the material community of capital."
— Eunice Noh, January 2020
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