China’s Economic Reform Requires Political Reform

By Tianlun Jian Created: April 17, 2012 Last Updated: November 14, 2012
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An employee of a trading house speaks into a microphone as he comments on the stock market, in Shanghai on Aug. 18, 2010. (Philippe Lopez/AFP/Getty Images)

An employee of a trading house speaks into a microphone as he comments on the stock market, in Shanghai on Aug. 18, 2010. (Philippe Lopez/AFP/Getty Images)

China’s economic reforms have reached a critical point, and the economy designed to support the Communist Party’s rule now calls that rule into question.

When Deng Xiaoping proposed economic reforms in 1978, the Chinese Communist Party (CCP) found maintaining its rule difficult. The Chinese economy was about to collapse, and people’s daily living had become a problem.

China’s economy is no longer the same as it was 10 years ago

The economic reforms were meant to preserve the rule of the CCP by turning the economic situation around. The reforms that took place afterward—the dual-price system, joint-stock ownership, special economic zones, stock listings, privatization of real estate, and so on—were all based on Deng’s strategy of “letting some people get rich first.”

Of course, the “some people” who got rich were the leaders of the CCP and their children

Getting Rich

China’s high growth over the last 30 years has relied heavily on manufacturing for export, investment, and real estate. 

In order to encourage exports and open up the international market, China artificially undervalued the RMB’s exchange rates. As a result, a product that did not make money in the domestic market would, once exported to foreign countries, attain profit margins of 30 percent, 50 percent, or even more, after foreign exchange earnings were converted into yuan.

Since the 1980s, the foreign-export sector became most sought-after, and the children and grandchildren of Communist Party officials have made big money in it.

In the 1980s, China’s central government allowed some producers to sell products at two different prices: a state-set price, for centrally rationed supplies, and a higher, free-market price. Under such a dual-price system, many officials who controlled goods at the state-set prices sold them at the much higher market prices, making a fortune. Corruption has been out of control ever since.

Later on, to set up joint-ventures, China exchanged land and factories for foreign investment and technology. The land and factories are state assets and belong to the people. However, the profits generated from such joint ventures did not go to the people. The profits went into pockets of the Party officials and factory directors.

The reform of state-owned enterprises has resulted in a small number of officials and investors owning the state assets, while a large number of workers have been laid off, losing their benefits and retirement funds.

Presidents and general managers of the big state-owned enterprises are all appointed by the central government. Some of these enterprises, through selling the company’s state-owned assets and listing the enterprises on the stock market, have generated large amounts of cash. The Party officials and factory directors are the ones who have benefited.

Then came the “housing reforms” in the late1990s. In effect, the practice has been to sell state-controlled land. When the land is sold, more investment comes in, the land price goes up, and GDP growth accelerates.

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Higher growth is then taken as evidence of good administrative performance, providing better chances of promotion for these officials. At the same time, by colluding with real estate developers, the officials selling the land share in the profits of development.

Prior to the Tiananmen Square massacre in 1989, the CCP openly proclaimed the imperative of “upholding the leadership of the CCP.” After the massacre, the CCP began talking instead about “maintaining social stability.” The CCP softened its tone, but the meaning remained the same: The first priority was to maintain the Party’s rule. Economic reform was simply a means to that end.

Economic Reforms Are Failing

But the Chinese economy can no longer be counted on to maintain social stability.

The export sector is slowing down. Since the global financial crisis, economic growth has significantly slowed worldwide. The Eurozone, China’s largest export market, is experiencing a serious debt crisis, which has greatly affected China’s exports. The slowdown in other regions has also decreased the demand for Chinese exports.

The exchange rate does not provide as big a boost as it formerly did. As China’s trading partners have been denouncing more loudly how China’s long-undervalued exchange rates have disrupted world trade, the regime has revalued the exchange rates in recent years. Consequently, China’s exporters are now facing higher costs, as they get less of a subsidy through the exchange rate.


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