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Table of contents :
Contents
Preface
Chapter 1
Introduction and Overview
1.1. A Brief Introduction to the History
1.2. The Economic History of Modern China
1.3. Economic Transition of Contemporary China
Chapter 2
The Economic Situation of the Early Stage
2.1. The Early Stage of Foreign Trade
2.2. The Background of the Opium War
2.3. The Influences of the Opium War
2.4. Transformational Development of Late Qing Dynasty
2.5. The Society of the Republic of China
Chapter 3
The Chinese Economy in Wars
Part I: The Economic Situation during the Anti-Japanese War (1937-1945)
3.1. A Social Background of the Anti-Japanese War
3.2. The General Economic Conditions
3.3. The Economic Situation in Kuomintang Ruling Areas
3.4. The Economy under the Leadership of the Communist Party of China
Part II: The Economic Situation during China’s War of Liberation (1945-1949)
3.5. The Social Background of China’s War of Liberation
3.6. The American Influence in Kuomintang Ruling Areas
3.7. The Collapse of Kuomintang Areas
3.8. The Victory of the New Democratic Economy
Chapter 4
Early Governance of the People’s Republic of China
Part I: The Period of Economic Recovery (1949-1952)
4.1. Elimination of Residual Forces
4.2. The Agrarian Reform
4.3. Unified Financial Management
Part II: The Second Transition Stage and the First Five-Year Plan (1953-1957)
4.4. Industrialization
4.5. The Transformation of Agriculture
4.6. Transformation of Handicraft Industry
4.7. Transformation of Capitalist Industry and Commerce
Chapter 5
Twists and Turns of the Socialist Economic Construction
5.1. The Movement of Great Leap Forward and People’s Commune
5.2. The Adjustment Policies Attempting to Recover the Economy
5.3. The Great Cultural Revolution
Chapter 6
A Great Turning Point: The Reform and Opening Up
Part I: The Great Transition
6.1. Reform and Opening Up
6.2. The Household Contract Responsibility System
6.3. Township and Village Enterprises
6.4. A Reform of Urban Economic Systems
6.5. The Opening-Up Policy
Part II: Initial Success of the Reform and Opening up
6.6. The Theory of the Primary Stage of Socialism
6.6.1. Ownership of the Means of Production and Economic System
6.6.2. Mode of Business Operation and Distribution System
6.6.3. Foreign Relations
6.6.4. The Relationship between National Economic Construction and People’s Living
6.7. The Sixth Five-Year Plan
6.7.1. Agriculture and Industry
6.7.2. Transportation Industry
6.7.3. Government Revenue and Expenditure
6.7.4. Domestic and Foreign Trade
6.7.5. People’s Living
6.7.6. Expenditure and Investment on Scientific Research and Education
6.8. The Seventh Five-Year Plan
Part III. Progress in the 1990s
6.9. The Socialist Market Economy System
6.10. Reform of State-Owned Enterprises
6.10.1. The Overall National Economy
6.10.2. The Distribution of State-Owned Economy
6.10.3. Enterprise Management
6.10.4. Optimizing the Layout and Structure of State-owned Economy
6.10.5. Transforming the Operating System
6.10.6. Developing High and New Technologies
6.10.7. Properly Using Non-Renewable Resources
6.11. The Return of Hongkong to China
6.11.1. Further Promoting the Construction and Development of Socialist Market Economy of Mainland China
6.11.2. Strengthening the Development and Opening Up of the Central and Western Regions and Shanghai
6.11.3. The Formation of Economic Circle of South China
6.12. Achievements in the 1990s
Chapter 7
Developments in the 21st Century
7.1. The New Stage of China’s Economy
7.1.1. Accession to the WTO
7.1.2. The Transformation of Guiding Thoughts
7.1.3. The Tenth and Eleventh Five-Year Plans
7.2. New Development Strategies
7.2.1. Coordinated Development between Urban and Rural Areas and Different Regions
7.2.2. Mechanisms and Institutions for the Integrated Development of Urban and Rural Areas
7.2.3. ‘Bringing In’ and ‘Going Out’ Strategy
7.3. Experiences from the Tenth and Eleventh Five-Year Plans
7.4. Major Achievements
Chapter 8
The Breakthroughs of the New Stage
8.1. The New Normal of China’s Economy
8.1.1. The Decisive Role of the Market
8.1.2. The Role of Government Functions
8.2. The New Vision on Development
8.2.1. The Completion of the Twelfth Five-Year Plan
8.2.2. The Thirteenth Five-Year Plan
8.3. A New Era of Socialism with Chinese Characteristics
8.3.1. The 19th National Congress of Communist Party of China
8.3.2. The Achievements of the First Centenary Goal and the Future Prospects
Bibliography
About the Authors
Index
Blank Page

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Asian Political, Economic and Social Issues

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Asian Political, Economic and Social Issues Children and Youth in China Since 1978: Opportunities and Challenges Johnston Hong-Chung Wong (Editor) 2021. ISBN: 978-1-68507-149-3 (Hardcover) 2021. ISBN: 978-1-68507-224-7 (eBook) Taiwan: Environmental, Political and Social Issues Alexander C. Tan, Caleb M. Clark and Karl Ho (Editors) 2021. ISBN: 978-1-53619-837-9 (Hardcover) 2021. ISBN: 978-1-53619-871-3 (eBook) Challenges of Law and Governance in Indonesia in the Disruptive Era I Heru Susetyo and Qurrata Ayuni, S.H., MCDR (Editors) 2021. ISBN: 978-1-53619-129-5 (Hardcover) 2021. ISBN: 978-1-53619-348-0 (eBook) Challenges of Law and Governance in Indonesia in the Disruptive Era II Heru Susetyo and Qurrata Ayuni, S.H., MCDR (Editors) 2021. ISBN: 978-1-53619-130-1 (Hardcover) 2021. ISBN 978-1-53619-354-1 (eBook) Governance and Security Issues in South Asia Anju Lis Kurian C. Vinodan and Rajeev M.M (Editors) 2021. ISBN: 978-1-53619-461-6 (Hardcover) 2021. ISBN: 978-1-53619-520-0 (eBook)

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Yanqing Jiang and Yun Sun

Modern China in Transition and Development A Panoramic View

Copyright © 2022 by Nova Science Publishers, Inc. https://doi.org/10.52305/GHFN6111 All rights reserved. No part of this book may be reproduced, stored in a retrieval system or transmitted in any form or by any means: electronic, electrostatic, magnetic, tape, mechanical photocopying, recording or otherwise without the written permission of the Publisher. We have partnered with Copyright Clearance Center to make it easy for you to obtain permissions to reuse content from this publication. Simply navigate to this publication’s page on Nova’s website and locate the “Get Permission” button below the title description. This button is linked directly to the title’s permission page on copyright.com. Alternatively, you can visit copyright.com and search by title, ISBN, or ISSN. For further questions about using the service on copyright.com, please contact: Copyright Clearance Center Phone: +1-(978) 750-8400 Fax: +1-(978) 750-4470 E-mail: [email protected].

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Library of Congress Cataloging-in-Publication Data ISBN: H%RRN

Published by Nova Science Publishers, Inc. † New York

Contents

Preface

........................................................................................... ix

Chapter 1

Introduction and Overview...............................................1 1.1. A Brief Introduction to the History ..............................1 1.2. The Economic History of Modern China .....................3 1.3. Economic Transition of Contemporary China ..............8

Chapter 2

The Economic Situation of the Early Stage ...................15 2.1. The Early Stage of Foreign Trade ..............................15 2.2. The Background of the Opium War ...........................19 2.3. The Influences of the Opium War ..............................24 2.4. Transformational Development of Late Qing Dynasty .....................................................................27 2.5. The Society of the Republic of China.........................35

Chapter 3

The Chinese Economy in Wars ......................................41 Part I: The Economic Situation during the Anti-Japanese War (1937-1945) ..................................41 3.1. A Social Background of the Anti-Japanese War ....................................................................................41 3.2. The General Economic Conditions.............................43 3.3. The Economic Situation in Kuomintang Ruling Areas ......................................................................48 3.4. The Economy under the Leadership of the Communist Party of China ..........................................62 Part II: The Economic Situation during China’s War of Liberation (1945-1949) .........................................67 3.5. The Social Background of China’s War of Liberation ......................................................................67 3.6. The American Influence in Kuomintang Ruling Areas ......................................................................69 3.7. The Collapse of Kuomintang Areas ...........................72

vi

Contents

3.8. The Victory of the New Democratic Economy ..........75 Chapter 4

Early Governance of the People’s Republic of China ............................................................................83 Part I: The Period of Economic Recovery (1949-1952) .......................................................................83 4.1. Elimination of Residual Forces ..................................84 4.2. The Agrarian Reform..................................................88 4.3. Unified Financial Management ..................................91 Part II: The Second Transition Stage and the First Five-Year Plan (1953-1957) ................................98 4.4. Industrialization ..........................................................98 4.5. The Transformation of Agriculture ..........................101 4.6. Transformation of Handicraft Industry .....................103 4.7. Transformation of Capitalist Industry and Commerce .................................................................105

Chapter 5

Twists and Turns of the Socialist Economic Construction...................................................................111 5.1. The Movement of Great Leap Forward and People’s Commune ...................................................111 5.2. The Adjustment Policies Attempting to Recover the Economy..................................................116 5.3. The Great Cultural Revolution .................................121

Chapter 6

A Great Turning Point: The Reform and Opening Up .............................................................129 Part I: The Great Transition .............................................129 6.1. Reform and Opening Up...........................................129 6.2. The Household Contract Responsibility System .............................................................................132 6.3. Township and Village Enterprises ............................134 6.4. A Reform of Urban Economic Systems ...................136 6.5. The Opening-Up Policy ............................................139 Part II: Initial Success of the Reform and Opening up................................................................143 6.6. The Theory of the Primary Stage of Socialism.........144 6.7. The Sixth Five-Year Plan .........................................148 6.8. The Seventh Five-Year Plan .....................................155 Part III. Progress in the 1990s .........................................160

Contents

vii

6.9. The Socialist Market Economy System ....................160 6.10. Reform of State-Owned Enterprises .......................162 6.11. The Return of Hongkong to China .........................165 6.12. Achievements in the 1990s .....................................167 Chapter 7

Developments in the 21st Century ................................175 7.1. The New Stage of China’s Economy........................175 7.2. New Development Strategies ...................................183 7.3. Experiences from the Tenth and Eleventh Five-Year Plans ...............................................................191 7.4. Major Achievements.................................................195

Chapter 8

The Breakthroughs of the New Stage ..........................203 8.1. The New Normal of China’s Economy ....................203 8.2. The New Vision on Development ............................211 8.3. A New Era of Socialism with Chinese Characteristics .................................................................219

Bibliography

.........................................................................................229

About the Authors ....................................................................................233 Index

.........................................................................................235

Preface This book discusses China’s economic transition and development since its modern times. The book is written in chronological order and basically covers the time span of the last 180 years, roughly from the First Opium War, which broke out in 1840 and marked the beginning of China’s semi-colonial and semi-feudal society, up till now – the 2020s, a time of great historic importance for China as the country has completed the historical mission of the first Centenary Goal, and is striving for the second Centenary Goal – realizing the Great Rejuvenation of the Chinese Nation by the middle of the 21st century. The book is chronologically divided into eight connected chapters that collectively provide a comprehensive and coherent discussion of the book’s focus – China’s economic transition and development in its modern and contemporary times. However, each one of the eight chapters is sufficiently self-contained and can be read on its own, which potentially enhances the usefulness of the book. Chapter 1 provides an introduction and overview. All the subsequent chapters go into the detail with each one of them pertaining to a specific historical time period as the corresponding chapter title properly implies. Chapter 2 focuses on the period of transformational development of the Late Qing Dynasty and the socio-economic situation after the founding of the Republic of China. Chapter 3 is about the Chinese economy in wars and covers the period of the Anti-Japanese War and China’s War of Liberation. Chapter 4 is concerned with the economy under the early governance of the People’s Republic of China while Chapter 5 focuses on the subsequent twists and turns of the socialist economic construction. The longest chapter, Chapter 6 is devoted to the great turning point in the history of China’s socialist construction – the reform and opening up. The last two chapters, Chapters 7 and 8, stride into the 21st Century. Chapter 7 is about the new stage of China’s economy, new development strategies, completion and prospect, and the achievements of the first 12 years into the new century, while Chapter 8 focuses on the most recent ten years and discusses the economic new normal and the socialism with Chinese characteristics for a new era.

Chapter 1

Introduction and Overview This book is about China’s economic transition and development since its modern times, and in this very first chapter, we introduce the overall economic situations of China based on the timelines. In the part concerning modern China, the contents are combined with a brief sketch of the history, so the reader can better understand the economic situations together with the introduction to the social background during each period. Then, the part concerning contemporary China is about the economic transition and development under the leadership of the Communist Party of China. Chapter one is mainly a brief introduction to the economic history and development of China, so it is aimed to help the reader get a feel for the overall economic situation of modern China quickly. The rest of the book (Chapters 2-8) then goes down to the details.

1.1. A Brief Introduction to the History Originally, the word ‘modern’ means the stage of the capitalist society in the process of human civilization since approximately the 16th century. It represents a completely new age when the human society could build competitive production relations. In China, however, from the most typical view, ‘modern’ marks the beginning of China’s semi-colonial and semi-feudal society when the First Opium War came with British merchants. Modern China continued its history until the People’s Republic of China (PRC) was founded on October 1st, 1949, when the country officially entered the contemporary times. Although capitalist economy once emerged in Ming Dynasty and Late Qing Dynasty, China never truly developed the system of capitalism in its whole history. To be precise, ancient China was totally a feudal country before the First Opium War broke out in 1840, and it gradually became a semi-colonial and semi-feudal society after that. Since then, China had continuously suffered resources plunder, regime change, rebellion, warlords, invasion, civil wars and other great chaos.

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After China had fallen into a country that gradually lost its sovereignty and territories, then on July 23rd, 1921, the birth of the Communist Party of China brought new prospects that led the Chinese nation to successfully overthrow the feudal regime of the Northern Warlords, resist Japanese invaders and end the civil war with Kuomintang (KMT). Therefore, the CPC finally brought peace to the country and became the ruling Party after the founding of the PRC. Then, China finished the construction of industrialization and the remolding of agriculture, the handicraft industry, capitalist industry and commerce, transformed the private ownership of the means of production into socialist public ownership and then established the socialist system in 1956 under the leadership of the CPC. However, the Party also went through twists and turns at the early stage of socialist construction during the period from 1958 to 1976 because the economic operation failed to follow objective laws. Thankfully, after the reform and opening up policy was implemented in 1978, China soon returned to its normal development. Therefore, the Party Central Committee and the government made different five-year plans in the corresponding periods, which was aimed at finding the effective ways of implementing the reform and opening up policy. In the late 20th century, China created the path of socialism with Chinese characteristics in 1982, proposed the three-step development strategy in 1987, and established the socialist market economy in 1993. The amount of GDP in different years all overfulfilled the targeted one. At the beginning of the 21st century, China continued its path of socialism with Chinese characteristics and developed socialist market economy under the leadership of the CPC. Therefore, the country achieved great success in economic development with a rapid growth and has stably kept its second position of GDP since 2010. However, although it began to lead the world in some fields, the global financial crisis that occurred in 2008 brought huge shocks to the world economy. Thus, the Chinese government had to take effective macroeconomic policies to stimulate the economy and ensure the normal operation of its market mechanism. After several years, China has entered the stage of new normal since 2012. Different from the former rapid growth, the economy of new normal is characterized by slow growth in many fields. Therefore, it urges China to transform its development model and respond to the ever-changing situations from both home and abroad. In 2017, China has entered a New Era of Socialism with Chinese Characteristics.

Introduction and Overview

3

1.2. The Economic History of Modern China Ancient China used to be an independent feudal country before the First Opium War broke out in 1840 and was once proud of its peasant economy based on the self-sufficient production. However, many western capitalist countries had already developed capitalist economy, so they started the colonization to largely expand markets in the 19th century. Since the Qing government carried out the self-seclusion policy, it was hard for western businessmen to open the Chinese market through the trade of commodity economy. Although the gap between the East and the West was widening, the extreme protection policy obstructed the entry of foreign capitalist goods and considerably resisted the potential influence brought by foreign commodities. However, it also impeded the introduction of new technologies and new ruling thoughts, which became the major reason of Late Qing Dynasty’s decay. At the beginning of foreign trade in the 18th and 19th century, British products failed to meet the needs and preferences of Chinese people at the very beginning while China kept its absolute advantage in the increasing volume of exports like tea, so Britain suffered great deficit in China’s market during that period. However, with the imports of opium, the situation reversed. In order to open China’s market, British bourgeoise and government colluded with the officials of the Qing government and started the smuggling of opium. It not only severely jeopardized the health of Chinese people and then influenced the normal production and supply of Chinese products, but also caused massive outflow of silver (Chinese currency of the Qing Dynasty), which made the treasury gradually depleted and considerably weakened the national strengths. Therefore, China was seriously trapped into fiscal deficit and finally under the powerful military threats by foreign countries. Since China’s defeat in the First Opium War, the Qing government had been forced to sign a series of unequal treaties with those capitalist countries, such as Treaty of Nanking, Treaty of Peace, Amity, and Commerce, between the United States of America and the Chinese Empire, Treaty of Whampoa, etc. In addition to the reparations, China had to open its trading ports, relinquish the tariff autonomy rights, and worst of all, lose the sovereignty and territorial integrity and become a semi-colonial and semi-feudal society. In the early years after the Opium War broke out, a large number of foreign commodities quickly entered China’s market and its natural economy started to collapse especially in the regions near the treaty ports. For example, the transportation industry tended to decline with plenty of workers out of work. However, the import of foreign products decreased again after 1846, because

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Chinese traditional agricultural industry and cottage crafts still played a dominant role in peasant economy and its development inevitably resisted the foreign commodities to a large extent. Therefore, the Second Opium War occurred in 1856 to further open China’s market and the Qing government was compelled to sign the unequal treaties again like Treaty of Tientsin. China continued being forced to lose its right of inland navigation, reduce the tariff, and add treaty ports. After that, the import of foreign goods significantly increased, and the structure of China’s export gradually changed from the traditional products like tea to industrial raw materials like cotton. Besides, China no longer had the advantage in trade balance. Admittedly, since the foreign economy continued to enter China, traditional agriculture handicraft industries suffered huge shocks, but capitalist economy also came to Qing Dynasty. The Westernization Group realized the backwardness of China’s military, technologies, economic production, so they launched the Westernization Movement (from 1861 to 1894) that aimed at learning the western model in order to maintain the ruling of Qing Dynasty. Unfortunately, the movement finally failed to fundamentally save the nation because the Westernization Group learned from the technologies, economic production, education system and other aspects, but except the political systems. The defeat of Sino-Japanese War in 1895 ended the movement and made China fall into a semi-colony that was controlled by many imperialist countries. Then, the main sources of fiscal revenues such as tariffs and all kinds of taxes were manipulated by those countries. As a result, they gripped the lifeblood of Chinese economy, plundered the resources and invested in China’s market in railway construction, mineral exploitation, industrial production, education development, financial institutions and so on. With the further collapse of the natural economy, Chinese national capitalist economy developed. On the other hand, because of the limitations of both feudalist regime and imperialist oppression, the national capitalist economy of China was fairly weak, so it could not make China become a truly powerful country, just like the failure of the Reform Movement of 1898 (Hundred Days Reform) and the Revolution of 1911 (which overturned the Qing Dynasty and established the Republic of China in 1912, but failed to develop capitalism after the leader of the Northern Warlords became the president). With the breakout of the First World War from 1914 to 1918, the whole world was going through the great changes. During that period, rural economy of China tended to be increasingly commercialized, but the feudal forces and local monopoly power still enormously hindered the development of capitalist economy. Under the rule of the Northern Warlord government from 1912 to

Introduction and Overview

5

1928, people suffered exploitation and bore the heavy burden of conscription and all kinds of taxes. As a result, the society was filled with rebellion, strikes, movement and other chaos. In 1919, Kuomintang of China (Chinese Nationalist Party) officially replaced its previous organization called Tung Meng Hui (Chinese Revolutionary League established in 1894). The May 4th Movement launched by youth students in 1919 thoroughly opposed imperialist aggression and feudalist oppression, and it marked the start of new democratic revolution led by Chinese proletariat. After the Communist Party of China was established in 1921, the proletariat camp developed fast and gave rise to a new upsurge of revolutionary movement of workers and peasants. During the period of the Great Revolution (from 1924 to 1927), the first cooperation between KMT and the CPC started in January 1924 because Sun Yat-sen, the founder of KMT, proclaimed that decision to the public in 1923. The cooperation was directed at anti-imperialism and anti-feudalism revolution. However, although the Northern Warlord government was finally overturned, the first cooperation between the two parties split because of the coup launched by the KMT. On April 18th, 1927, the Nanking National Government was established, ruled by the top leader of KMT, Chiang Kaishek who became the president of the Republic of China. During the period of Agrarian Revolutionary War from 1927 to 1937, the two parties kept the strong confrontation. At that time, armed struggle led by the CPC was gradually developing in rural areas where new democratic economy came out. Unfortunately, Japanese imperialists launched the September 18th Incident in 1931 which represented the invasion of Japanese military on Northeast China. After that, Japan established Manchukuo (Japanese puppet regime in Northeast China) in 1932 and occupied the Three Provinces in Northeast China: they were Liaoning, Jilin and Heilongjiang. Since then, these regions of China had been colonized and monopolized by Japan. During those 10 years, the KMT government implemented a series of policies and concrete measures to develop its ruling areas, and some of them were truly effective, such as railway nationalization, tariff autonomy, monetary reform and etc. However, since KMT government strengthened the economic control and monopoly, the state monopoly capitalism and bureaucrat capitalism developed rapidly. Thus, there existed extreme polarization in people’s livelihood, the bankers, landlords and comprador class were unbelievably wealthy, while petty bourgeoisie, workers and peasants generally lived a hard life and many of them even lived on the breadline and suffered severe poverty and famine. The situation of revolutionary base areas led by the CPC was totally different because it carried out agrarian revolution

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to eliminate the feudal system of land ownership and strove for the land ownership of peasants. Its main construction was to develop agricultural and industrial production, foreign trade and cooperative economies, so as to provide goods and materials for the frontline and people’s needs. The Chinese War of Resistance against Japanese Aggression (AntiJapanese War from 1937 to 1945) started when the Lugou Bridge Incident on July 7th, 1937, broke out, and the whole country officially entered a full-scale resistance stage. According to the situation, the CPC and KMT decided to cooperate again and jointly resist the Japanese invasion. During those eight years, Japanese imperialists brutally plundered resources and oppressed Chinese people. Therefore, the whole economy was tremendously damaged, especially the Chinese national industries. Besides, the invaders plundered a large number of farmlands that were used to set up Japanese farms and make Japanese immigrants settle down. They cruelly exploited Chinese people through exorbitant taxes levies, and slave labor. The KMT government implemented the policies of industrial migration, industrial construction and economic control, which were effective at the beginning of the war. Since the KMT government relocated its capital city from Nanjing to Chongqing in November 1937, it also moved many industries from coastlands to inlands. Therefore, the production capacity was greatly improved in the home front, which directly enhanced the strengths to resist Japanese invasion and promoted the industrial development in the home front of Southwest China. In terms of economic situation, although the economic control policy helped to support the wars to some extent, the subsequent surging prices and stagnant production finally proved its improper implementation. However, since the KMT government directly controlled the finance, industrial and agricultural production and foreign business, the state monopoly capitalism and bureaucrat capitalism limited the development of its ruling areas. In contrast, in revolutionary base areas, the CPC implemented the policy of reducing rent and interest rates in order to overcome the fiscal problem of economic blockade caused by both Japanese imperialists and KMT government. Thus, the Production Campaign was carried out to develop economy and ensure the supply in base areas with the participation of both militaries and civilians. In agriculture, the rural labors were organized to conduct collective production through cooperatives, which could largely guarantee the supply of living substances and industrial materials. As a result, with the gradual development of rural economy in base areas, the morale of the troops and the efficiency of front work were greatly boosted. Finally, the

Introduction and Overview

7

new democratic economy in the revolutionary base areas considerably developed and gradually won people’s support, which paved the way for the victory of Anti-Japanese War and even the coming War of Liberation. After the Japanese government declared its surrender in August 1945, China recovered the lost territories occupied by Japan. However, it was still a semi-colonial and semi-feudal country before 1949. Although the KMT was established by Sun Yat-sen with the original purpose of developing capitalism and setting up democratic system, the actual governance still went back to the feudalism to some extent when Chiang Kai-shek ruled the party. And it was impossible to avoid a civil war between KMT and the CPC based on that political situation. In June 1946, Chiang launched the war and terminated the peace agreements of Chongqing Negotiations. Then, the KMT government signed treaties with American government, so the US invested the most in China’s market among all the foreign investment and got all kinds of privileges during China’s War of Liberation. In the KMT ruling areas, the national economy was strongly controlled by the state monopoly capitalism and bureaucrat capitalism through raising taxes, issuing government bonds, controlled procurement and distribution, exclusive agency policy, foreign currency control, gold speculation, feudal land tax and other measures. Therefore, people lived an extreme hard life under the pressure of the civil war, heavy levies and rising military expenditures. Finally, the economy collapsed there because of hyperinflation and rampant speculation in all fields. With the sharp decline of industrial and agricultural production output, people lived an extremely difficult life. However, in the new democratic areas ruled by the CPC, the lands owned by the feudal class and bureaucratic capitalism were required to be confiscated. National industry and commerce were under protection based on economic guidelines and policies. Agricultural production kept increasing with the new improvement of industry and commerce. Besides, the market price and finance remained stable, and people’s living standards were constantly improving, which proved that the ruling of CPC could win people’s support more. On October 1st, 1949, the People’s Republic of China was founded, and the great victory marked the end of foreign aggression, the oppression of imperialism and feudalism, and Chairman Mao Zedong became the core of the Party’s first generation of central collective leadership. Since then, China has been an independent country under the leadership of the Communist Party of China.

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1.3. Economic Transition of Contemporary China The contemporary history began after the PRC was founded, and the whole country started its construction soon after its founding. During the period from 1949 to 1956, China went through the stage of economic recovery (19491952) and the system transition (1953-1956). The first one was to recover the national economy, unify the state financial and economic work, and eliminate the residual forces left by the KMT government and some foreign countries. The main tasks were to confiscate the bureaucrat capitals, abolish the privileges in China and implement the agrarian reform. In addition, socialist state-owned economy was established to develop and adjust the industry and commerce. The whole recovery work was finished by the end of 1952, and the first five-year plan started in 1953. Each five-year plan was made to push forward the major national programs in the long term according to the actual situations. The second stage was to implement industrialization and finish the socialist transformation of agriculture, handicraft industry, and capitalist industry and commerce. After that, China has officially entered a socialist country and its public sector of the economy played the dominant role. During the period from 1958 to 1976, it was regarded as the twists and turns of socialist development. Divided into two stages, the first one went through the Movement of the Great Leap Forward and People’s Commune and started in 1958. These two movements failed to respect the laws of nature and production rules. In the process of the Great Leap Forward, the whole country blindly pursued the unrealistic targets of outputs, damaged the environment and neglected people’s health. Meanwhile, the People’s Commune overemphasized the public sector of the economy and the integration between the government administration and economic management. Therefore, people were less motivated under the distribution concept of absolute equalitarianism. Although some adjustment policies were made to rectify the former incorrect decisions and end the Movement of the Great Leap Forward by the end of 1960, the recovery trend was interrupted with the coming of the Great Cultural Revolution which was the second stage starting in 1966. The ten-year Great Cultural Revolution brought huge shocks to the national economy, and severely impeded the development of national cultural, educational and artistic programs. Although there were two major adjustments in the later years, the forces of the anti-Party clique led by the Gang of Four were too strong for the country to recover its economic production. Fortunately, through the efforts and strengths from the masses, the Gang of Four was finally crumbled in 1976, and then, China entered the turning point in 1978.

Introduction and Overview

9

The Third Plenary Session of the 11th Central Committee of the Chinese Communist Party was held in December 1978, which marked the beginning of the reform and opening up. Since then, China has entered a completely new stage and taken economic construction as the central task. The economic reform was implemented in the countryside first because China had a rural population over 80%, and the most important policy was the household contract responsibility system with remuneration linked to output. That policy was directed at improving the rural productivity, developing various forms of rural production and funds raising, and developing commodity production and modern agriculture. Besides, the government permitted the rural circulation to have multiple channels. Therefore, many agricultural products could be sold through new ways such as the management of local enterprises and selfmarketing by peasants, instead of just the controlled procurement and distribution by the government. In addition, the township and village enterprises were the new economic form which significantly accelerated the connection between urban and rural areas. Those enterprises were featured with small scale, simple production technique and low operating costs. Therefore, its establishment could create many job opportunities for rural laborers especially for those peasants who were not well-educated or not equipped with technical skills, which helped the Chinese government to alleviate the poverty to a large extent. Urban economic reform was directed at establishing an effect system to develop economy and pushed forward the opening up in relatively advanced cities. On the aspect of setting up urban economic system, the government decided to enlarge the decision-making powers of the enterprises and strengthen enterprise vitality, implement the system of economic responsibility and tax for profits, develop multiple economic forms and management ways, expand circulation channels, reform the planned economic system and fiscal system, promote the economic integration and implement pilot comprehensive reform. These measures were made to stimulate the market, raise people’s initiatives of work and promote the joint development of rural and urban areas. The opening up policy was aimed at establishing good relations with foreign countries through economic cooperation and technological exchange. Therefore, China participated in the international division of labor and utilized foreign capitals, advanced technologies, management and talents so as to give full play to its comparative advantages. The concrete measures of implementing opening up were mainly three steps. In the first step, distinctive policy was implemented in Guangdong Province and Fujian Province in 1980.

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Then, the government set up four special economic zones in Shenzhen, Zhuhai, Shantou and Xiamen, the cities of two provinces. Four years later, the second step was to open fourteen coastal cities and Hainan Administration Region in 1984. The third one was to open the Yangtze River Delta, Pearl River Delta and Southern Fujian Golden Triangle in 1985. Thus, coastal cities in the southeast regions got developed first in foreign business, and gradually promoted the openness in inland areas in the following development. With the implementation of the reform and opening up policy, China made great progress in economic growth and production improvement. The 12th National Congress of the Communist Party of China proposed the path of socialism with Chinese characteristics in 1982, so the development way chosen by China is different from any other socialist country in the world. To be specific, according to the requirements of that path, the major plans and strategies of China’s development should be based on the national conditions and realities of different stages. The 13th National Congress of the CPC was held in 1987 and proposed the economic deployment of the three-step development strategy. In the first step, the Gross National Product (GNP) of 1990 was planned to double that of 1980, the figure was expected to double that of 1990 by the end of the 20th century in the second step. And the third step required that per capita GNP would reach the level of mid-ranking developed countries by the middle of the 21st century. Therefore, the level of people’s living standard was expected to be improved according to that strategy. Besides, the theory of the primary stage of socialism became a major guiding ideology in the future development. Several years later, the initial success of the reform and opening up was achieved in the 1980s when China went through the sixth five-year plan and the seventh one. From 1981 to 1990, the main tasks were to develop agriculture, industry, transportation, education, capital investment, foreign trade and people’s living. In those ten years, China’s development focused more on quality-oriented production distribution, setting up diverse forms of economy and building economic relationship with foreign countries. However, because of the overheated economy that occurred in 1986, the government took some tightening policies to curb the trend of inflation, and finally turned the economic growth back to a normal speed. In the 1990s, China entered the stage of further pushing forward the reform and opening up and welcoming the next century. Establishing the socialist market economy system was one of the major decisions in the 1990s, and then, the state-owned enterprises (SOEs) were correspondingly transformed to support the reform and opening up. However, China still had

Introduction and Overview

11

to face the doubt from both home and abroad on its system. Deng Xiaoping, the Party’s second generation of central collective leadership, firmly pointed out that whether a country was capitalist or socialist was not up to the planned or market economy, both of them were just the measures to develop economy. With the return of Hongkong and Macau in 1997 and 1999, China has put the basic state policy of ‘One Country, Two Systems’ into effect and resolutely upheld the One-China principle. Both GNP of 1990 and 1999 reached the targets, so the final step of the three-step development strategy was the only one that needs to be striven for. President Jiang Zemin, the Party’s third generation of central collective leadership, proposed the important thoughts of Three Represents in 2000 as the theoretical guidance. Since China joined the WTO in 2001, it has been increasingly connected with the world economy, which significantly promotes the implementation of reform and opening up. Unfortunately, a severe acute respiratory syndrome (SARS) suddenly occurred in February 2003 and revealed the long-standing problems and deficiencies in China’s economic and social development at that time. To overcome that situation, President Hu Jintao, the fourth generation of central collective leadership of the CPC proposed the idea of ‘Scientific Outlook on Development’ in 2003 and insisted on people-oriented development, and comprehensive, coordinated and sustainable development value. What has to be admitted is that China used to develop with an extensive economic growth model in spite of its amazing development speed. Therefore, the former process of China’s transformation brought a lot of negative consequences such as environmental damage, exhaustive exploitation of resource, income gap between regions and other aspects. Besides, it was inevitable that China had to face the fierce competition from foreign countries after it joined the WTO, so it needed effective policy adjustment to further adapt to the situations and expand openness. As the first five-year plan of the 21st century, the tenth one from 2001 to 2005 marked the start of the third stage of the three-step development strategy with the main target of structural adjustment and economic growth. Since China had already established the socialist market economy system at that time, the plan required to give full play to the role of market mechanism during the first five years. Although the plans of economic development in the next five years were similar, there were still many new challenges and uncertainties brought by both domestic and foreign changes such as severe energy consumption, inefficient systems, unbalanced development, global financial crisis, etc. Therefore, China made new development strategies to respond to those situations, and finally reached

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the targets by the end of the eleventh five-year plan. Most strikingly, the GDP ranked the second in 2010 and has kept that position since then, so China had to face new problems in economic transition after going through the rapid economic growth for several decades. Since building a moderately prosperous society in all aspects of 2020 was one of the historical missions, the twelfth five-year plan from 2011 to 2015 became a key period to realize that magnificent task. With the deepening of reform and opening up, China met some difficulties in economic operation. The reasons behind could be attributed to both global changes brought by financial crisis and the bottlenecks in domestic development. After the 18th National Congress of the Communist Party of China was held in November 2012, China has entered the stage named the ‘new normal,’ pointed out by the Party’s fifth generation of central collective leadership, President Xi Jinping. Hence, the new stage urges China to constantly deepen the reform and opening up and keep its economic transformation. China used to have a growth rate of over 10% before 2011, but the average growth in the recent decade is about 7%. President Xi pointed out that China had to accelerate its economic transition to adapt to the new changes brought by the new normal. Therefore, economic structural optimization, innovation-driven growth model, high quality economic development, sustainable development and other new transformation concepts have become the trends. And the concrete development path is to give full play to the role of both the market mechanism and government functions at the stage of the new normal. In the twelfth five-year plan, China achieved great success in economy, science and technology, national defense, foreign business and international influence, which laid a solid foundation for building a moderately prosperous society in all respects of 2020. To better transform the country, China started to implement supply-side structural reform after it entered the new normal and focused on the production of medium- and high-end products. The thirteenth five-year plan from 2016 to 2020 was regarded as the final period of reaching the targets required by building a moderately prosperous society, and China kept its steady economic growth under the concept of innovative, coordinated, green, open and shared development in those five years. Therefore, the development was emphasized more on comprehensive improvement, not just the growth rate. In 2017, the 19th National Congress was held and took Marxism-Leninism, Mao Zedong Thought, Deng Xiaoping Theory, Important Thoughts of Three Represents, Scientific Outlook on Development and Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era as guiding thoughts. Therefore, the socialism with Chinese characteristics has

Introduction and Overview

13

entered a new era which is regarded as a new historical position of China’s development since then. In China, the principal contradiction determines its development direction and the main tasks. The former principal contradiction was between the growing material and cultural needs of people and the backward productive forces after the socialist system was established in 1956. However, the country has become a manufacturing giant which is characterized by its worldrenowned ‘Made in China.’ Therefore, it has turned into the contradiction between people’s ever-growing needs for a better life and unbalanced and inadequate development since 2017, but it does not alter China’s status as a developing country and its primary stage of socialism. Although the COVID19 swept the world and brought direct shocks in 2020, China still realized the targeted poverty alleviation and the historical mission of building a moderately prosperous society under the leadership of the Communist Party of China. On July 1st, 2021, the whole country celebrated the 100th anniversary of the great Party, which marked the completion of the first Centenary Goal. Now, China is striving for realizing the second Centenary Goal, the Great Rejuvenation of the Chinese Nation by the middle of the 21st century and creating new breakthroughs.

Chapter 2

The Economic Situation of the Early Stage Seen from the modern history of China, there have been a lot of fundamental social changes since the late Qing Dynasty. Ancient China was once an independent and self-sufficient country. However, the opium trade became the turning point that made this big oriental nation fall into a semi-colonial and semi-feudal society. Modern China began with the First Opium War in 1840 and continued to suffer from both foreign colonialism and domestic feudalism -- through the periods of Late Qing and the Republic of China. In this chapter, we mainly focus on the collapse of the ancient Chinese economy and the implications of China’s social transformations. The contents of this chapter run in accordance with the timelines spanning roughly from the latter half of the eighteenth century to the Agrarian Revolution in the 1930s.

2.1. The Early Stage of Foreign Trade In the 18th century, the economy of the Qing Dynasty kept going through an obvious recession after ‘Kang-Qian Flouring Age,’ which was known as the ‘Times of Prosperity.’ The reasons behind the recession could be attributed to both colonial invasion by western countries and the Qing’s feudalism ills. Before western colonialists invaded, ancient China was still an independent country, but its self-seclusion policies were too closed to sustain a dynasty. The Qing government implemented such closed policies because these rulers wanted to avoid plunder from European pirates and prevent the Chinese people from contacting the outside. Thus, they took these measures as effective ways to maintain the feudal regime. Nevertheless, against the background of the western colonist invasion, what extreme protectionism would turn out to cause was only to impede China’s production development and technology diffusion. Unfortunately, many countries, at that time, had entered the capitalist society, where industrialized production and economic operations had tremendously exceeded those of China, a nation merely continued its autarky peasant economy. Although the feudal regime had been maintained for nearly 200 years, advanced thoughts of governance were

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strongly restrained, which inevitably trapped China into a relatively backward position compared with the rest of the world. In fact, British merchants had attempted to open China’s market in 1527 when it was the Ming Dynasty. However, owing to the immature navigation and natural disasters, the British did not reach China until 1635. Fifty years later, the Qing government agreed to open several ports (Ningbo, Zhangzhou, Macao, etc.), allowing foreign business people to trade. British merchants finally signed the agreement in 1699 and got trade facilitation. However, with the more closed policies implemented by the Qing government, Guangzhou remained the only port where overseas transactions could continue since 1757. Meanwhile, it was approximately the times that British Industrial Revolution began, which propelled the Great Britain to establish an unprecedentedly powerful nationhood in the world. The following tables show the general situation of trade volumes between China and Britain from the late eighteenth century to the early nineteenth century. Table 2.1 shows the trade values of China and Britain. Table 2.1. Trade value of China and Britain (Annual Average) Unit: Silver (Tael) Index: Average of 1780 to 1784 = 100 Year

Imports and Exports Imports Silver Index Silver Index (Tael) (Tael) 1760 - 1764 1,449,872 42.8 470,286 36.1 1765 - 1769 3,383,534 99.9 1,192,915 91.6 1770 - 1774 3,585,524 105.9 1,466,466 112.6 1775 - 1779 3,216,242 95 1,247,471 95.8 1780 - 1784 3,385,277 100 1,301,931 100 1785 - 1789 9,104,271 268 3,612,763 277.5 1790 - 1794 10,851,405 320.5 5,007,691 384.6 1795 - 1799 11,092,987 327.7 5,373,015 412.7 1800 - 1804 15,272,029 451.1 7,715,556 592.6 1805 - 1806 18,874,732 557.6 11,474,509 881.3 1817 - 1819 15,707,048 464 7,646,777 587.3 1820 - 1824 16,341,267 482.7 6,525,201 501.2 1825 - 1829 17,806,955 526 7,591,390 583.1 1830 - 1833 17,285,309 510.6 7,335,023 563.4 Source: The Statistics of Chinese Modern Economic History.

Exports Silver Index (Tael) 979,586 47.0 2,190,619 105.1 2,119,058 101.7 1,968,771 94.5 2,083,346 100 5,491,508 263.6 5,843,714 280.5 5,719,972 274.6 7,556,473 462.7 7,400,223 355.2 8,060,271 386.9 9,816,066 471.2 10,215,565 490.3 9,950,286 477.6

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17

Table 2.2. Trade value and share of Britain and other countries on the Chinese market (Annual Average) Value Unit: Silver Tael Year

Total Value (Tael)

The Great Britain

The U.S.A

Export Share Export (Tael) (%) (Tael) 1764 1,908,704 1,207,784 63.3 / 1765 - 1769 1,774,815 1,192,915 67.2 / 1770 - 1774 2,094,336 1,466,466 70.0 / 1775 - 1779 1,995,913 1,247,471 62.5 / 1780 - 1784 1,994,617 1,301,931 65.3 27,290 1785 - 1789 4,489,527 3,612,763 80.5 123,164 1790 - 1794 5,876,663 5,007,691 85.2 181,096 1795 - 1799 5,908,937 5,373,015 90.9 374,124 1800 - 1804 8,727,364 7,715,556 88.4 828,326 1805 - 1806 12,348,319 11,474,509 92.9 767,775 1817 - 1819 9,053,298 7,646,777 84.5 1,184,551 1820 - 1824 7,952,488 6,525,201 82.1 1,427,287 1825 - 1829 9,161,314 7,591,390 82.9 1,534,711 1830 - 1833 9,192,608 7,335,023 79.8 1,766,692 Source: The Statistics of Chinese Modern Economic History.

Other European Countries Share Export Share (%) (Tael) (%) / 700,920 36.7 / 581,900 32.8 / 627,870 30 / 748,442 37.5 1.4 665,396 33.3 2.7 753,600 16.8 3.1 687,876 11.7 6.3 161,708 2.8 9.5 183,482 2.1 6.2 106,035 0.9 13.1 221,970 2.4 17.9 / / 16.7 35,213 0.4 19.2 90,893 1.0

From Table 2.1, the total value of imports and exports rose by a certain extent almost every four years (except 1805-1806, 1817-1819). During the 73 years, China occupied the absolutely favorable position because products made in Britain could hardly meet Chinese people’s immediate needs or preferences, but British people had great demand for Chinese tea, silk and chinaware. Afterwards, in 1784, Britain lowered the tax of Chinese tea from 119% to 12.5% so that smuggling trade could be effectively prevented. That stimulated the British merchants to further import Chinese tea and attempted to improve their competitiveness compared with other European countries in terms of the Chinese market. In fact, compared with other countries in Europe and North America, Britain always enjoyed the absolutely advantage on Guangzhou Port. At that time, France, Denmark, Germany, the Netherlands and Sweden were other major countries trading with China, but even all of their total trade value could not reach half of Britain’s, just like Table 2.2 illustrates. From Table 2.2, the export share of Britain on China’s market kept a prominent position, which was extremely difficult for other countries (even the U.S.A at that time) to approach or surpass. Thus, there was no doubt that since Britain decided to greatly reduce the tax, it had dominated the market

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share. The United States did not have any commercial relation with China until 1784 when America had the business ships, so in that period, Britain’s leading position was unsurpassable. Even for the exports toward other countries, Britain also possessed the absolute predominance on China’s port (Table 2.3). Table 2.3. Exports of Britain and other countries to Europe on China’s port (Annual Average). Value Unit: Silver Tael Year

Total Value (Tael)

The Great Britain

The U.S.A

Export (Tael) 1,697,913 2,190,619

Export (Tael) / /

Share (%) 46.7 52.4

1764 3,637,143 1765 4,177,909 1769 1770 4,362,676 2,119,658 48.6 / 1774 1775 4,725,989 1,968,771 41.7 / 1779 1780 5,008,263 2,083,346 41.6 15,864 1784 1785 8,454,720 5,491,508 65.0 325,988 1789 1790 7,348,420 5,843,714 79.5 440,978 1794 1795 7,937,254 5,719,972 72.1 1,399,680 1799 1800 10,391,797 7,556,473 72.7 2,036,448 1804 1805 11,168,783 7,400,223 66.2 3,391,560 1806 1817 13,770,740 8,060,271 58.5 5,710,469 1819 1820 14,678,252 9,816,066 66.9 4,862,186 1824 1825 14,390,108 10,215,565 71.0 4,116,182 1829 1830 13,443,641 9,950,286 74.0 3,321,296 1833 Source: The Statistics of Chinese Modern Economic History.

Share (%) / /

Other European Countries Export Share (Tael) (%) 1,939,230 53.3 1,987,290 47.6

/

2,243,618

51.4

/

2,757,218

58.3

0.3

2,909,053

58.1

3.9

2,637,224

31.1

6.0

1,063,728

14.5

17.6

817,602

10.3

19.6

798,876

7.7

30.4

377,000

3.4

41.5

/

/

33.1

/

/

28.6

58,361

0.4

24.7

172,059

1.3

Among the cargos from Britain to China, the goods could be divided into British domestic production and Indian production. And products made in India accounted for over 60%, even more than 70%, while those made in Britain were below 40%. That meant India was the main factory that worked for Britain to produce and process, aiming at capturing Asian markets and

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19

expanding scale of productivity (Table 2.4). According to historical statistic survey, woolen knitwear and metal goods were the main products of British domestic manufacture that were directly exported to China. Woolen knitwear included a variety of wool fabric, namely, wool spinning, wool sweater, wool cloth and even the pure wool. Tin materials, plumbum materials and copper materials were the main parts of metal goods shipped from Britain to China. India was a country that was primarily specialized in producing cotton. Most strikingly, almost all of China’s imported cotton came from India, which could indicate that handicraft industry was prosperous there. Table 2.4. Origins of China’s imports from Britain (Annual Average) Value Unit: Silver Tael Year

Total (Tael)

British domestic Proportion (%) 1775 - 1779 1,247,472 371,475 29.8 1780 - 1784 1,301,931 494,502 38 1785 - 1789 3,612,764 1,008,469 27 1790 - 1794 5,007,691 2,021,280 40.4 1795 - 1799 5,373,015 1,955,320 36.4 1817 - 1819 7,646,777 2,111,464 27.6 1820 - 1824 6,525,201 2,250,626 34.5 1825 - 1829 7,591,390 2,336,146 30.8 1830 - 1833 7,335,023 2,318,558 31.6 Source: The Statistics of Chinese Modern Economic History.

875,997 807,429 2,604,295 2,986,411 3,417,695 5,535,313 4,274,575 5,255,244 5,016,465

India Proportion (%) 70.2 62 72.1 59.6 63.6 72.4 65.5 69.2 68.4

2.2. The Background of the Opium War Although Britain was the biggest western partner trading with China, the business situation never lived up to the expectation during the past seven decades. As mentioned above, Table 2.1 only told the fact that the total volume of trade between China and Britain kept increasing, but Britain was persistently unable to cease suffering the deficit. In order to meet the huge demand of British capitalists on further expanding their domestic industrialized revolution and opening China’s market, the Great Britain had to remove the barriers that hindered their balance of trade. That urged British capitalists to take actions on both eliminating the monopoly of East India Company and fighting against the self-seclusion policies of the Qing government.

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The first step of British industrial capitalists was to mightily propose to the British government, abolishing the patent of East India Company. For the government, the interests of the whole country shall always be placed on the top priority. Therefore, it was not surprising to see the monopoly weakening because the government agreed that proposal. However, if the capitalists intended to force the Qing government to stop the self-seclusion policy, they had to be vigorous and aggressive, thus even an invasion war could be a consideration. Opening China’s market was not only achieving massive potential profits, but also the most direct and effective way to colonize. But actually, at the very beginning, British merchants probably wanted to exchange goods or set up a business relation with China merely, not considering launching a colonial war at all. However, apart from the external factor of monopoly caused by East India Company, Chinese people’s tastes and preferences could be the major intractable issue to face. Although Britain was famous for woolen knitwear in Europe, Chinese people thought these kinds of products were not exquisite or cheap enough. Thus, even East India Company, the biggest British dealer in China, still suffered huge losses each year, about 100 thousand to 200 thousand taels deficit (Table 2.5). Table 2.5. Profits and losses of East India Company (Annual Average) Value Unit: Silver Tael Year Woolens Metal Products Indian Products 1775 – 1779 –23,788 +7,989 +17,512 1780 – 1784 –22,456 +6,754 –4,849 1785 – 1789 –26,284 –4,443 +24,829 1790 – 1794 –106,187 +24,746 +26,703 1795 – 1799 –191,552 +9,772 +20,687 Source: The Statistics of Chinese Modern Economic History.

Total –2,831 –23,199 –7,906 –62.141 –163,099

Table 2.6. Opium imports of China (Annual Average) Unit: Container Year Total Patna Opium Malwa Opium Turkey Opium 1795 – 1799 4,124 1,804 2,320 / 1800 – 1804 3,562 2,288 1,274 / 1805 – 1809 4,281 2,824 1,364 93 1810 – 1814 4,713 3,184 1,469 60 1815 – 1819 4,420 2,665 1,354 401 1820 – 1824 7,889 3,825 3,877 187 1825 – 1829 12,576 5,875 6,296 405 1830 – 1834 20,331 7,620 11,918 793 1835 – 1838 35,445 16,317 18,385 743 Source: H.B. Morse, The International Relations of The Chinese Empire, 1910, Shanghai.

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21

According to the historical records (Table 2.5), East India Company kept in the deficits before the year 1800. Even if they could gain some profits on metal products or other goods made in India (especially the cotton), it was still difficult to cover the huge losses in woolen products. If Britain continued to choose such a loss-making trade model, the kingdom would not finish the industrial revolution, which meant high unemployment rate, high inflation rate, high deficit rate, pauperization and social instability would consequently come within the expectation. Since British products could hardly suit Chinese people, a certain kind of products which had been schemed for a long time gradually became the primary business. That was opium, somewhat representing the beginning of colonialist in China. Since 1773, in order to make up the losses on China’s market, the British government had planned to send opium into China, and found that it could soon become the advantageous competitiveness (Table 2.6 and Table 2.7). Table 2.7. Estimation of China’s opium consumption quantity Unit: Container Value Unit: Yuan. Index: 1819–1820 = 100 Year

Quantity Container Index Yuan 1816 – 1817 3,698 77.4 4,084,000 1817 – 1818 4,128 86.4 4,178,500 1818 – 1819 5,387 112.7 4,745,000 1819 – 1820 4,780 100.0 5,795,000 1820 – 1821 4,770 99.8 8,400,800 1821 – 1822 5,011 104.8 8,822,000 1822 – 1823 5,822 121.8 7,989,000 1823 – 1824 7,222 151.1 8,644,603 1824 – 1825 9,066 189.7 7,927,500 1825 – 1826 9,621 201.3 7,608,200 1826 – 1827 10,025 209.7 9,662,800 1827 – 1828 9,525 199.3 10,425,190 1828 – 1829 14,388 301.0 13,749,000 1829 – 1830 14,715 307.8 12,673,500 1830 – 1831 20,188 422.3 13,744,000 1831 – 1832 16,225 339.4 13,150,000 1832 – 1833 21,659 453.1 14,222,300 1833 – 1834 19,362 405.1 12,878,200 1837 – 1838 28,307 592.2 19,814,800 Total 213,899 / 188,514,393 Source: The Statistics of Chinese Modern Economic History.

Value Index 70.5 72.1 81.9 100.0 145.0 152.2 137.9 149.2 136.8 131.3 166.7 179.9 237.3 218.7 237.2 226.9 245.4 222.2 341.9 /

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The consequences brought by opium were truly disasters for the Qing dynasty. Through opium business, the situation of trade between China and Britain totally reversed. China turned export surplus into severe deficit, while Britain greatly benefited from it. One of the major reasons was that opium could cause irresistible drug addiction that strongly damaged people’s central nervous system, and many Chinese people relied on it all the day and almost the whole country fed on that poison. It was common to see people, from aristocracy to beggars, smoking opium in the public places like teahouses, tobacco houses, hotels and even the streets. Such terrible phenomena were widespread, so the physical and mental health of Chinese people was considerably impaired, and Chinese people were humiliatingly called the ‘Sick man of East Asia’ at that time. Plenty of production had to shut down because, owing to health problems, more and more people were forced out of agricultural, industrial and commercial and handicraft production, which directly resulted in a supply shortage. Even though Chinese tea and silk could gain some profits, the monopoly status and rigid demand for British opium led to the serious trade deficit of China. Therefore, labor shortage caused by the health damage impoverished the country very soon. Table 2.8. The ration of silver and copper Year

Silver-Copper Ratio

1798 1799 1800 1801 1802 1803 1804 1805 1806 1807 1808 1809 1810 1811 1812 1813 1814 1816 1817 1818 1820

1,090.0 1,033.4 1,070.4 1,040.7 997.3 966.9 919.9 935.6 963.2 969.9 1,040.4 1,065.4 1,132.8 1,085.3 1,093.5 1,090.2 1,101.9 1,177.3 1,216.6 1,245.4 1,226.4

Index 1821 = 100 86.1 81.6 84.5 82.2 78.7 76.3 72.6 73.9 76.1 76.6 82.1 84.1 89.4 85.7 86.3 86.1 87.0 93.0 96.1 98.3 96.8

Year

Silver-Copper Ratio

1826 1827 1828 1829 1830 1831 1832 1833 1834 1835 1836 1837 1838 1839 1840 1841 1842 1843 1844 1845 1846

1,271.3 1,340.8 1,339.3 1,379.9 1,364.6 1,388.4 1,387.2 1,362.8 1,356.4 1,420.0 1,487.3 1,559.2 1,637.8 1,678.9 1,643.8 1,546.6 1,572.2 1,656.2 1,724.1 2,024.7 2,208.4

Index 1821 = 100 100.4 105.9 105.7 109.0 107.7 109.6 109.5 107.6 107.1 112.1 117.4 123.1 129.3 132.6 129.8 122.1 124.1 130.8 136.1 159.9 174.4

The Economic Situation of the Early Stage Year

Silver-Copper Ratio

Index Year Silver-Copper Ratio 1821 = 100 1821 1,266.5 100.0 1847 2,107.4 1822 1,252.0 98.9 1848 2,299.3 1823 1,249.2 98.6 1849 2,355.0 1824 1,269.0 100.2 1850 2,230.3 Source: The Statistics of Chinese Modern Economic History.

23 Index 1821 = 100 171.1 181.5 185.9 176.1

Table 2.9. Guangzhou’s trade with Europe and the USA and the smuggling of opium Value Unit: Silver Tael Year

Total Value of Legal Export Goods

Total Value Trade of Legal Balance Import Goods 1817 – 1818 11,910,183 10,449,605 +1,460,578 1818 – 1819 14,415,017 10,002,162 +4,412,855 1819 – 1820 14,987,020 6,708,128 +8,278,892 1820 – 1821 13,374,090 7,173,128 +6,200,381 1821 – 1822 15,567,652 8,639,688 +6,927,964 1822 – 1823 15,150,148 6,896,615 +8,253,533 1823 – 1824 13,877,022 7,869,570 +6,007,452 1824 – 1825 15,422,345 9,182,859 +6,239,486 1825 – 1826 16,707,521 9,710,322 +6,997,199 1826 – 1827 13,734,706 10,284,627 +3,450,079 1827 – 1828 13,784,148 8,380,235 +5,403,913 1828 – 1829 13,901,480 8,805,107 +5,096,373 1829 – 1830 13,822,689 8,626,282 +5,196,407 1830 – 1831 13,316,534 8,462,825 +4,853,709 1831 – 1832 14,215,836 8,192,732 +6,023,104 1832 – 1833 15,988,204 9,498,107 +6,490,097 1833 – 1834 10,253,991 10,616,770 –362,779 Source: The Statistics of Chinese Modern Economic History.

Value of smuggling imported opium 3,008,520 3,416,400 4,172,400 6,048,576 6,351,840 5,752,080 6,224,114 5,707,800 5,477,904 6,957,216 7,506,137 9,899,280 9,124,920 9,895,680 9,468,000 10,240,056 9,272,304

Estimated Value of Silver Outflow +1,547,942 –996,455 –4,106,492 –151,805 –576,124 –2,501,453 +216,662 –531,686 –1,519,295 +3,507,137 +2,102,224 +4,802,907 +3,928,513 +5,041,971 +3,444,896 +3,749,959 +9,635,082

Another baneful influence on the social economy brought by the opium trade was the silver outflow. For over three hundred years, silver had played an indispensable role in the means of payment to Chinese people. Everincreasing deficit and silver outflow aggravated the fiscal burden of the Qing dynasty, disrupted the monetary market and further brought huge shocks to Chinese domestic production. First, because the outflow made the value of silver keep increasing, which largely decreased the purchasing power of Chinese consumers, and Table 2.8 shows that situation. In the early stage of the nineteenth century, per unit of silver (one unit of Chinese liang was equal to 50 grams.) was equivalent to 1,000 units of copper (Chinese copper coins).

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In 1832, the value ratio was 1,350 and reached 1,800 in 1837. Because of the supply shortage as mentioned above, the price of commodities shot up. That was not only prejudicial to consumer surplus, but also increased the burden on producers because they had to sell more products to afford the tax based on the appreciation of silver. As a result, the real income of Chinese people dropped dramatically. Second, the outflow of silver severely influenced the fiscal revenue of the royal court and brought an increasingly serious financial crisis. Even the ruling class was beset with opium, many ministers and generals of the Qing government smoke opium and could not live without it. In addition, the smuggling of opium was prevailing at that time, a lot of data could not be recorded so we could only know some of the facts from Guangzhou port where China smuggled opium with Europe and the USA (Table 2.9). It was obvious that the estimated value of silver outflow was huge, and it even reached 9,635,082 taels in 1834. Therefore, opium not only damaged the normal life of the mass but also harmed the interests of the feudal ruling class.

2.3. The Influences of the Opium War The opium was continuously sent into China no matter by normal customs or smuggling, so that trade kept going on and the whole country was increasingly deep in crisis. The historical turning point was the world-famous event of destroying opium at Humen Beach by Lin Zexu who was a patriotic politician of the Late Qing Dynasty. According to the record, Lin Zexu led his civil and military officials at Humen Beach, which was packed with people those days, and even the foreign ambassadors were invited there. It occurred in the June of 1839, and because of this incident trigger, Britain launched the First Opium War, taking this incident as an excuse of damaging their business interests. Undoubtedly, China was defeated for its significantly backward military equipment compared with advanced British weapons. In the end, as the vanquished country, the Qing government had to accept unequal treaties and the first one was the Treaty of Nanking signed on August 29, 1842. What it brought lied not in the conflicts or hatreds between Britain and China, but in the attainable interests on China’s territory that other western industrialized countries hungered for. Because the massive destruction of opium by Lin also severely harmed the American’s opium traffickers’ interests, they jointly submitted statements to the U.S Congress, requesting the American government to fight against China with Britain, France, the

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Netherlands and other countries. Two years after the Treaty of Nanking was signed, American president, John Tyler sent Caleb Cushing (one of the American congressmen) as the ambassador to require China to give them the same preferential treatment with Britain’s. Therefore, in 1844, Treaty of Peace, Amity, and Commerce, between the United States of America and the Chinese Empire became the result. China thus increasingly lost its sovereignty. At the same time, France also seized the chance to carve up the interests. Because Britain and the U.S had successively got the privilege, it was nearly impossible for France to just stand by indifferently. Thus, Treaty of Whampoa between China and France was signed in the same year by the French military threats to the Qing government. Apart from the three countries above, other countries, even those small nations with relatively lower capitalist extent, such as Belgium, the Netherlands, Sweden, Portugal and Spain, sequentially forced China to give privileges and signed unequal treaties. Hence, the First Opium War thrust this once-glorious oriental country into a passive position that had to open its market. In less than 20 years, China signed a series of treaties, namely, Treaty of Tientsin and Convention of Peking (during the Second Opium War). The foreign capitalism then gradually affected China’s politics, economy, military, education and even the ingrained traditional culture once a treaty came into effect. Except getting ceded territory and paid indemnities from China, all of the signed treaties entitled these capitalist countries to possess the privileges of politics, military, economy and jurisdiction on China’s territory. The primary thing was to obtain the right on negotiating tariff and customs administration. For example, according to the Treaty of Nanking, only the British government could decide the taxes of imports and exports, China had no right to intervene in. That meant China lost the tariff autonomy on its own land and had to implement the so-called agreement tariff. However, for Britain, opening the Chinese market was the original intention. Therefore, the government considerably lowered the tariff to about 5%~6%, which could improve the enthusiasm of British domestic production, promote currency circulation and capture the market in international competition. Getting trading rights became the second priority. To be more specific, it mainly involved cabotage, inland navigation and inland trade rights. British merchants got the permission to conduct commercial activities without barrier according to the Treaty of Nanking; that was to say it allowed British ships to freely sail within the five Chinese ports (Guangzhou, Xiamen, Fuzhou, Ningbo and Shanghai). Afterwards, Treaty of Tientsin signed with both France and the U.S.A acknowledged the privilege that foreign merchantmen could freely transit at

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entrepots, thus, they did not need to pay the taxes repetitively. However, China, the real host country, was not allowable to enjoy such convenience. The right of inland navigation and inland trade were also main parts of the country’s sovereignty, and such invasion drastically damaged China’s independence and territorial integrity. Then, consular jurisdiction of China was their next step to strive for. After the First Opium War happened, each time when the treaty was signed, China had to make more commercial ports. Alongside China sea, Guangzhou, Shantou, Qiongzhou, Fuzhou, Xiamen, Taiwan, Ningbo, Shanghai, Zhenjiang, Yantai, Jiujiang, Hankou, Tianjin and Yingkou, these fourteen ports were added trade ports. In terms of land ports, China mainly opened Ili, Tarbagatai, Kashgar, Kulun (Mongolian city now) and Zhangjiakou, five ports for Russia. Due to the regulations of these treaties, China could not enforce its law in the regions where foreign government had the consular jurisdiction. The final privilege these foreign countries endeavored to get was the Most Favored Nation (MFN) treatment. China had successively signed the treaties with concluded MFN clauses, but they were merely unilateral MFN treatments. When a country extorted a right from China, other countries would enjoy the same treatment, and that was called equal profit sharing, not real most-favored-nation. Unexpectedly, there was little negative influence on China’s trade surplus with Britain (Table 2.10) during the time after the first Opium War and before the Second Opium War. China’s imports from Britain had modest growth, but its exports to Britain increased rapidly. Because the exports of Chinese tea kept a rapid growth after the First Opium War, however, due to unchanged China’s production model and consumption habits of Chinese people, British industrial products and textile could not be as welcome as Chinese exported goods to Britain. Table 2.10. Trade between China and Britain (Annual average) Value Unit: Pound Year Export to Britain 1833 – 1835 3,779,385 1837 – 1839 4,273,858 1842 – 1846 5,323,388 1854 – 1858 9,157,001 Source: Journal of Economic Research.

Import from Britain 850,159 911,560 1,783,888 1,964,242

The surplus continued until 1864 when the Movement of Taiping Heavenly Kingdom (the Taiping Rebellion) failed. It was worth mentioning that this movement was truly the most unprecedented peasant uprising in

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Chinese history and represented patriotism of anti-imperialism and antifeudalism. It happened in 1851, ten years after the First Opium War. Five years later, the Second Opium (Anglo-French expedition to China) was launched because Britain and France intended to further expand China’s market and even the Chinese colony. Thus, during 1850 to 1864, China went through a period of three existing political forces: they were Qing feudalism, foreign imperialism, and local anti-government power. Nevertheless, the reason that this movement finally failed mainly lied in its class limitations. More specifically, their governance thoughts and ideological cognition were only confined to the interests of peasants, which could not represent social productive forces and relations. It was hard for these peasants to overcome their long-time inherent limitations, such as lacking strategic thinking, leadership, solidarity, and practical guiding principle. Even the key leaders of this movement could not fully understand why they launched the revolutionary violence, and instead, they just blindly pursued the victory of establishing an imaginary kingdom. Under the joint coercion from both inside crackdown (the Qing government) and outside force (assistance of foreign capitalists to the Qing government), this movement ended in 1864. The first time when China faced the deficit was 1865, soon after the Taiping Rebellion ended. For foreign capitalist countries, the real purposes to help the Qing government repress this peasant movement consisted in their interests on China and religious faith. Although Hong Xiuquan, the leader of Taiping Rebellion, claimed that he would spend his whole life believing in Christianism and guide all of his people to become Christians, western missionaries totally could not accept the balderdash of Hong’s opinion on his identity of Jesus’ younger brother, god’s second son. Besides, Hong’s refusal attitude to the signed treaties, which was regarded as patriotic behavior, truly annoyed those involved western countries that attempted to grab the opportunities on China. Instead, the Qing government benefited from their hostile contradictions and arduously sustained its dynasty for the next five decades.

2.4. Transformational Development of Late Qing Dynasty Except the year 1872 and 1876, China had continued to suffer deficit and the gap between imports and exports became increasingly large (Table 2.11) since 1866. One of the reasons behind it was imported goods, such as cotton textile made by machines, gradually replaced Chinese traditional products. The other

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undeniable factor could be attributed to opium abuse, which not only destroyed the health of Chinese people, but also plunged the nation into grievous consequences of fiscal crisis. Taiping movement accelerated the progress of China’s modern history and propelled the Self-Strengthening Movement (Westernization Movement). It started on January 1st, 1861, aimed at promoting the national prosperity of China with powerful military forces, and mainly advocated learning science and technology of western countries. Because both the Qing government and Chinese people witnessed significant weakness of China when faced with the capitalist industrial civilization of modern western countries, thereby, this kind of movement became an inevitable choice. Western munitions threatened China, a self-sufficient agricultural country, and their economic operations lied in advanced industrial production. Thus, the Qing government adopted the Westernization education that was a reformation launched by Westernization Faction, intending to meet the needs of cultivating new-type talents. Its central idea emphasized ‘Chinese learning as a base, Western learning for practical application,’ which meant China only learned technical things from the West, but still insisted on its feudalistic political system. Although the Westernization Movement truly facilitated early capitalism and industrial development of Modern China, its theory and practice suffered strong opposition from the traditional force of the diehards. Table 2.11. Statistics of customs trade of China Value Unit: Thousand Haikwan Tael Year Imports 1864 46,210 1866 67,174 1868 63,282 1870 63,693 1872 67,317 1874 64,361 1876 70,270 1878 70,804 1880 79,294 1882 77,715 1884 72,761 1886 87,479 1888 124,783 1890 127,093 1892 135,101 1894 162,102 Source: Journal of Economic Research.

Exports 48,654 50,596 61,826 55,295 75,288 66,713 80,851 67,172 77,884 67,337 67,148 77,207 92,401 87,144 102,584 128,105

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From China’s exports in 19th century, agricultural goods accounted for the most of total export volume, where its silk and tea were always regarded as bulk commodities. However, due to the international competition and increasing Chinese categories of export goods, the proportion of tea decreased widely. Chinese cotton, beans, sugar and other farming categories had rapid growth on exports. This kind of growth could be ascribed to the development of industry demand on productive materials of the capitalist countries, which became the impetus that drove the transition of China’s exports. Large-scale conflicting wars between China and those western countries stopped about 30 years, because those countries that had signed treaties with the Qing government mainly focused on their Second Industrial Revolution (The Electric Age) at that time. Although western countries plundered a lot from China, meanwhile they also invested in China and exported capitals. It was estimated that foreign investment in China mainly focused on banking and transportation industries. The first bank set up by foreign investment was British Oriental Bank, established in 1845. Other foreign branch banks were Charted Bank of India, Australia and China (1858), Hongkong and Shanghai Banking Corporation Limited (1865), Yokohama Specie Bank (1893), Deutsch-Asiatische Bank (1890), Credit Agricole Corporate and Investment Bank (1894), Russo-Chinese Bank (1896) and etc. These banks controlled the imports and exports of China, manipulated the finance and functioned as hubs to export capitals to China. Among these foreign banks, HSBC had the most powerful strength and got the position of deciding trades, safeguarding the interests of foreign banks. Because of lacking trust between Chinese people and foreign businessmen, old-style Chinese private banks or called money houses became the intermediary agents for foreign banks to propagandize their products and purchase Chinese native products. Once Chinese merchants got tickets from money houses, it represented that they had credit to do business. Through this kind of fiduciary relationship, it was much more smoothly for foreign capitalists to dump their products and preempted China’s resources when they competed. With reference to transportation industry, foreign capitals attached the greatest importance to shipping industry. After the First Opium War, China lost the cabotage right, so foreign ships could freely navigate alongside the coastal China. And after the Second Opium War, western invaders further gained the right of inland navigation. As a result, these privileges provided these countries with the direct opportunities to expand China’s inland market and plundered raw materials and natural resources. They successively established shipping companies, such as Shanghai Steam Navigation (U.S.A,

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1862), Butterfield & Swire Co. (Britain, 1872) and Jardine Matheson (Britain, 1881). Soon, these shipping companies monopolized the oceangoing voyages and inland navigation of China. In contrast, before the year 1872 when China Merchants was established, there was nearly no Chinese shipping industry, all of the ships navigating in territorial sea or inland rivers came from foreign countries. Even after China Merchants was set up, the quantity of Chinese ships rose slightly every year and foreign steamships still accounted for 70% to 80% of ships’ quantity on China’s territorial waters, this situation continued to 1920s. Besides, foreign capitals invested various industrial enterprises. Most of them were set up to develop their shipping industries and further endeavored to grab Chinese materials and local products, so as to run their processing enterprises, such as tea factories, steam filatures, egg powder factories, sugar refineries, ginneries, packaging factories and so on. Moreover, these capitalists took advantage of cheaper Chinese local labor force compared with their domestic workers to manufactured products, thereby, they could conveniently sell products and seize the market of Chinese light industry. Before the year 1895 when foreign capitalists got the right to set up factories in China, foreign capitals had been invested in over a hundred illegal factories, including 63 British factories, 33 ones from Russia, France and Germany. Some were even survived until 1949 when the People’s Republic of China was founded, just like Farnham & Co. (shipping company), Jardine Matheson (embroidery factory), Swire (sugar mill), Watsons Pharmacy et cetera. Back to the international relations, the seemingly normal business operation mentioned above was far from the end of foreign invasion. When foreign capitalist countries ushered in the Electric Age, this meant they would be more capable of colonizing. In the late nineteenth century, world capitalism had developed into the stage of monopoly. By the end of the 19th century and the beginning of the 20th century, the world’s territories had been basically divided into the colonies of imperialists. The rest of incompletely occupied nations were mainly Persia, Turkey and China, those semi-colonial countries. Admittedly, a vast country with abundant natural resources but backward economy, like China, was particularly attracted by those advanced countries. Japan, an emerging oriental industrial country, also had the burning ambition to expand colony after its domestic Meiji Restoration implemented, thus, SinoJapanese War inevitably happened in 1894. Due to the over-reliance on western countries and the rottenness of feudalism, China failed again and signed the Treaty of Shimonoseki in 1895. Before this war broke out, foreign imperialists had exported capitals to China, but the total value for all of the years together only reached 200 million dollars to 300 million dollars, and

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industry merely accounted for 14 million dollars. After Sino-Japanese War happened, the volume of investment from those countries substantially increased, so the economic and fiscal lifelines of China were tightly controlled by foreign countries. However, the failure of Sino-Japanese War represented the failure of the Western Movement and also marked that China became a totally semi-colonial and semi-feudal society. For thousands of years, economic structure of ancient China had been based on the combination of small-scale peasant economy and family handicraft industry. That combination lied in farming and weaving, which occupied a major place in terms of peasant economy before the First Opium War broke out. After that, because of the invasion brought by foreign capitalists, this kind of traditional economic operation began to unravel. The process of that economic change was slow originally. Except several trading ports, like Guangzhou, Shanghai, Ningbo and Xiamen, truly suffered from great shocks, the traditional economic structure of peasant economy got little affected when taking the country as a whole. Because this kind of economic structure was based on ineradicable production models which had been inherited from generation to generation. Therefore, it was scarcely possible to largely open China’s market and transform Chinese economy soon after the war. However, what had to be acknowledged was that the successive signed treaties from the Second Opium War did change Chinese economic structure because of those involved privileges on politics, economy and jurisdiction. Therefore, capitalism could smoothly invade into Chinese society and influence the combination of farming and weaving progressively. First, Chinese traditional handicraft cotton and textile industries disintegrated. After 1860s, plenty of foreign yarns and cloths were sent into China with much lower prices, which caused the situations that foreign yarns replaced Chinese yarns and foreign cloths became the substitution of Chinese cloths. The decisive factor explaining it was the price. The price of foreign cotton yarns continuously declined after 1970s, which naturally squeezed the traditional ones out of the markets. And similar change happened likewise on cloth markets, which made both the urban residents and rural peasants reluctant to buy heavy and relatively expensive traditional cloths. Therefore, self-sufficient family handweaving had to face the consequence of a gradual decline. Second, foreign competition also generated huge shocks on Chinese handicraft industry. For those people who worked on handweaving industry, they had to accept the brutal reality that because their handmade cloth lacked enough competitiveness, and it was commonplace for them to face unemployment or even worse, bankruptcy. Besides, when cheap industrial

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products came into China, Chinese handicraft industry suffered more severe setbacks. For example, imported foreign iron gradually replaced the traditional iron because of its more favorable price. Although Chinese metallurgy industry was one of the well-developed industries in domestic sector, the workshops had to be closed when encountering intensified foreign competition. Because lighting intensity of kerosene had much more power than that of peanut oil, the oil industry accordingly began to go bankrupt. What’s more, imported foreign sugar squeezed Chinese sugar industry, imported matches replaced flintstones and sheet iron, foreign needles took the place of traditional ones, foreign fuels were substituted for local ones, soap superseded honey locust etc. As a result, Chinese people would certainly choose foreign goods on account of foreign preferential prices and high production efficiency. Finally, after the opium war, Chinese commercial agriculture truly had progressed, which principally lied in intensive demand or plunder on Chinese agricultural raw materials from foreign capitalism and rendered Chinese exported agricultural products largely increasing. For examples, foreign capitals were invested into Chinese agricultural products and processing manufacturing after 1850s, and Chinese national capitals were also used to manage a few of textile industry and food industry after 1870s. The establishment of these factories increased the demand of raw materials and stimulated the development of commercial agriculture to some extent. Cotton, mulberry silkworm, poppies, tea and other kinds of cash crops were the main cultivation objects of commercial agriculture at that time. Apart from cotton, sugar and textile industries, opium was the most noteworthy item to be mentioned. After the Second Opium War, importation of opium was acquired legal status, so opium smoking became a normal behavior that prevailed in the whole country. Besides, areas of domestic poppy plantation expanded ever-increasingly. Especially those government officials of the Qing, took boycotting imported cigarettes and avoiding the outflow of silver as excuses, encouraged farmers to plant poppies, so that they could overtly raise taxes and covertly corrupted. Within the expectation, expensively cultivating poppies occupied a mass of labors, lands, enormously poisoned the minds of Chinese people and severely jeopardized their health. Before 1880s, because of export growth of Chinese tea, areas of tea plantation gradually expanded. Especially during the 1860s to 1880s, Taiwan, Fujian, Anhui, Jiangxi, Hunan, Guangdong and other tea plantation provinces kept rapid growth on cultivating scale, and that period was known as the golden age of modern tea production. After that time, exports of Chinese tea were substantially impacted by international competition from other tea plantation

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countries such as India, Sri Lanka and Japan, so its export quantity of Chinese tea gradually declined. Opium cultivation occupied more and more areas where tea production was once prosperous. Likewise, peanut and sugar industries also suffered huge downturn because of occupied lands of opium and foreign competition. The process from prosperity to decline of these agricultural industries reflected the fact that consequences brought by capitalist countries had been rooted in China’s economic operations. Industry change, consumption preference changes and social custom changes jointly influenced the Chinese history. Western countries attempted to make China a member of their camps, so they could further develop a capitalist world and grab resources. Because China lacked basic competitiveness and was being controlled by foreign invaders on customs, these countries blatantly lowered the prices of Chinese agricultural goods and natural resources to the greatest extent when they purchased. It was this unequal exchange that intruded into the Chinese society and brought heavy disasters to Chinese farmers. The vicissitude of China’s agriculture sectors depended on imperialist demand, which manifested the semi-colonial nature of Chinese society. After the opium wars, it was the economic invasion and export demand of capitalists, but not the development of productivities or social division of labor that mainly accelerated the disintegration of Chinese natural economy and feudalism. Although such disintegration was somewhat conducive to the formation of a commodity economy, it still could not touch the essence of the feudal system of land ownership and also failed to alter the production way of the peasant economy whose quantities and prices were dominated by the international market. In conclusion, the result of this disintegration was that economic benefits created by peasants had slight growth, but production instability occurred at the same time, which largely exacerbated dependence on foreign business capitals. Those were the very features of the semi-colonial and semi-feudal society of China at that time. Chinese Westernization bureaucrats were the first faction to establish and develop the modern industry in China. Before the opium wars, they stuck to the value that the Chinese feudal political system reached the acme of perfection while western systems were barbaric and backward. Therefore, those bureaucrats maintained its feudalism at full stretch. However, after the failure of the opium wars and witnessing the repression of Taiping Movement, Qing bureaucrats deeply knew the formidable force of foreign firearms and weapons. At first, the Westernization Group just purchased firearms and guns, and then they established military industrial enterprises. Afterwards, when encountering a variety of setbacks on developing military industries, they

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came to realize that the reasons why western countries were so powerful lied not only in their advanced weapons, but also in their strong economic strengths. In addition to introducing western military technologies and equipment, they also actively set up private enterprises at the same time and hoped those behaviors would enrich China and strengthen the Chinese military. During the progress of the Westernization Movement, officials of the Qing government bought plenty of weapons and machines. When training the new-type armies, they were determined to arm troops with western weapons in order to cultivate strong fighting power. As a result, western made naval guns, cannons and machinery equipment were introduced into the North Marine Navy, Nanyang Fleet and Fujian Navy, which were all armed with western warships. These advanced equipment and devices were also introduced into Jiangnan Manufacturing Bureau, Jinling Manufacturing Bureau, Fuzhou Shipping Bureau, Tianjin Machinery Bureau, Hubei Gun Factory and other medium or small-scale military industrial enterprises. Military industry of the Westernization Group represented the earliest industry of modern China when China much fell behind the western world, so setting up these enterprises was bound to depend on foreign machinery equipment, production technologies and the credit mechanism. In addition, because China had little basic industries, metal equipment, assembly components, oil, coke and other materials had to be made to rely on imports. Military industry of the Westernization Group, thus, had strong dependence on foreign imperialism, which also reflected its nature of semi-colony. Meanwhile, the founders of those enterprises were mainly Chinese bureaucrats of the Westernization Group that adopted feudal management ways. Products and funds were gratis allocated to military enterprises by the government. With the market lacking maturity, the development of enterprises was not based on their operation at all. Although those military industries did not conform to operation ways of the markets, they were still the earliest industrial civilization of modern China, which could be marked as a milestone of the Chinese economy. Owing to the limitations of military industrial enterprises and financial deterioration of the Qing government, officials of the Westernization Group came to realize that it was imperative to develop civilian industry if they aimed at enriching and strengthening China, because developing the military industry alone could not attain the extent of self-improvement. Thus, they began to take official-merchant joint management as business measures, which meant government investment accounted for a portion of capitals and the rest parts were invested by businesspeople. However, this kind of collaboration was

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actually manipulated by the Qing government. These enterprises included the mining industry, metallurgical industry, transportation industry, textile industry, et cetera. Hence, under the social pressure of both outside competition and inside manipulation, most enterprises were badly run and came near to bankruptcy. Chinese private industry emerged in 1870s, and Chinese merchants, landlords, bureaucrats, and compradors were major investors. During the years 1872 to 1894, there were over 100 private factories which centered on textile, flour, matches, papermaking, printing, ship repair, machine building and mining industries, and the silk industry was the most important among them. However, it was extremely hard for Chinese infant industries to survive under the bureaucratic oppression and foreign capitalistic competition. Finally, because of its strong limitations and immature governance, the Westernization Movement was declared to have failed after being defeated by Japan in the Sino-Japanese War in 1984. Undoubtedly, this movement was of great historical significance, it created the earliest industry of modern China, and was perceived as the first time China has developed its national industry. Most strikingly, the governance principle of ‘Chinese learning as a base, Western learning for practical application’ proposed by the Westernization Faction had influenced the Chinese history for nearly a hundred years. Chinese people, at that time, aroused the very consciousness to save the nation and set off upsurge to revolutionize. Under the background of imperialism invasion, the reformists led by Kang Youwei and Liang Qichao proposed to Emperor Guangxu learning the western operations in the fields of scientific research, education system, military training, individual enterprises and most importantly, the political regime. Emperor Guangxu decided to replace absolute monarchy with constitutional monarchy. Therefore, the Hundred Days Reform, an ideological enlightenment revolution began to be implemented on June 11th, 1898, but just as its name implies, it only lasted for 103 days, ending on September 21st, the same year. An insurmountable barrier was the coup launched by Empress Dowager Cixi, such a backlash from the diehard ended the constitutional revolution and impeded the national capitalism, turning the Feudalist Qing Dynasty back.

2.5. The Society of the Republic of China With the increasingly deeper influences of capitalist development and the diffusion of western political thought theories in China, Chinese emerging

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bourgeoisie gradually entered the political arena. Twelve years later, The Revolution of 1911 launched by Sun Yatsen, a preeminent revolutionary in Chinese Modern history, overthrew the governance of the Qing dynasty with the guiding principle of Three People’s Principles (Nationalism, Democracy, and People’s Livelihood). It not only marked the historic revolution of China’s society, but also represented the finality of Chinese feudal monarchy for thousands of years. On February 12th, 1912, the Qing emperor issued a rescript on abdication to the public and the Republic of China started its era. Afterwards, with the foundation of the Republic of China, the national industry was substantially supported by the government, which generated the wave of setting up private enterprises. At that time, its development was featured by less capital investments, faster currency turnover and easier profitmaking operation. Goods that used to rely on imports could be produced by domestic enterprises. Revolutionary political party established a provisional government and the representatives from all provinces elected Sun Yatsen as the president. This significant revolution generated profound influences in Chinese history because China became a new nation, even the first Asian country, to pursue democratic republic and promulgate the Provisional Constitution of the Republic of China. However, it was just a provisional but not long-lasting government. All of the promising initiatives on revitalizing the Chinese nation were nearly ruined by the Northern Warlords. Yuan Shihkai, the first official president of the Republic of China, accepted the abdication from Sun and carried out imperial restoration. That restoration abolished the political systems of the Republic of China and went onto the path of feudal monarchy again, taking the name Chinese Empire, which meant Chinese revitalization failed once again. The weakness of Chinese bourgeoisie led to this failure and this could explain their character of fragility, that was, easy to compromise. Those bourgeois revolutionaries had the fantasy of receiving substantial support from foreign countries and never proposed a guiding line that was fundamentally opposed to feudalism. They hold unrealistic expectations on both foreign capitalism and Northern Warlord government, but never mobilized the masses to unitedly rejuvenate the Chinese nation. Because this book is not meant to focus on analyzing the social attributes and the reasons behind the historical events, the failure and ills of the Chinese Empire are not to be mentioned in detail here. The following paragraphs are going to introduce some representative things on economic operations during the Republic of China.

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To be more specific, in 1911, the Nanjing Provisional Government enacted a series of laws on encouraging and protecting bourgeoisie because from Sun’s view, the national capitalist class was the mainstay of economic development. The Ministry of Finance protocoled the Commercial Bank Ordinance which encouraged the public to establish nongovernmental banks. Besides, the government stipulated that the fee of registration had to be canceled in order to comply with its initiatives. Department of the Interior also formulated the regulation on prohibition of human trafficking, thus, the master-slave relationship was abolished while employment relations of capitalism replaced such bondage relations of feudalism. The provisional government vigorously advocated the National Goods Movement for the sake of reviving the national economy. In fact, although Yuan Shihkai carried out the feudalism again, he still enacted some legislations that were conducive to industrial and commercial development. First, industrial education should be widely promoted to improve national productivities and universities of engineering, business studies were established on the basis of it. Besides, professional schools were massively set up and employed excellent teachers both home and abroad. Second, the government cooperated with citizens on industrial enterprises such as laboratory, all kinds of factories, central steel plants, and chose textile, petroleum, and china as basic industry. Third, metrology was uniformly protocoled to promote circulation. Fourth, official organs and commercial laws were continued and improved. Fifth, society should improve productivities through gathering domestic and foreign capitals. Sixth, transportation and handicraft industries should be developed to make regions thrive. On the aspect of encouraging social investment, the government of the Republic of China not only awarded the entrepreneurs but also took the economic measures to encourage the public to set up business. From 1914 to 1919, Chinese national industry kept a booming tendency, and during that period, capitalist countries were primarily engaged in the First World War, so foreign products were greatly reduced on China’s market, which provided Chinese national enterprises with a heaven-sent opportunity to develop. As a result, Chinese capitals had established 375 factories and mines by 1919 and annually set up 63 factories on average. This record even outnumbered twice of the aggregate quantity of the previous 19 years. At those six years, foreign capitals grew mildly. When light industry sprung up, some infant industries also developed at the same time, such as salt making industry, alkali industry, rubber industry and so on. At first, refined salt was totally dependent on imports. With the development of national industrial enterprises, capitals were gradually

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invested into light industry. Therefore, a few companies were set up. The development of domestic light industry led to the starting of the repair industry and manufacturing industry and was followed by the steel industry. From 1903 to 1913, there were only 34 machine factories in Shanghai, while it reached 98 during 1914 to 1921. Coal mining industry was also one of the earliest national industries. In 1913, coals exploited by Chinese capitals were just 5,800 thousand tons and went up to nearly 11 million tons in 1920. However, most of them were exploited by traditional ways, machine exploiting accounted for less than 10%. Other mining industries also developed rapidly, especially the yields of tungsten and antimony, took the first place in the world. But overall, in the reign of the Northern Warlords, local wars occurred frequently and the whole society was in an extreme turmoil. Because wars of warlords needed a large amount of military expenditure, heavy taxes and extortion unavoidably increased a burden on the people. Besides, in order to launch the civil war and maintain the power, all the cliques of warlords asked for foreign loans. The aggregate of those debts from 1912 to 1919 reached over 800 million yuan both publicly and secretly, and they even mortgaged railways, steamships, big factories and diggings. These warlords even bartered away the national sovereignty. Therefore the increasing severe national crisis awakened Chinese people and promoted them to rebel against the stratocracy. Although Chinese national capitalism got further development during the First World War, it still could not get rid of the oppression from foreign imperialism (mainly from Japan) and domestic feudalism (the Northern Warlords). As mentioned above, among the national industry, Chinese light industry truly made progress, while heavy industry remained stagnant. In fact, heavy industry served as the basic safeguard that protected the economic independence and national defense. Even worse, Japan monopolized most of the Chinese heavy industry, such as railways, iron and coals. Both transportation and trades were manipulated by Japanese imperialists, which brought great barriers and difficulties to national industry. During that period, western countries were mainly occupied with the war, and had little focus on the Chinese market. Therefore, Japan seized the opportunity to colonize China. Although the Revolution of 1911 overthrew the regime of the Qing dynasty and then broke a path to improve social productivity, with the feudal governance of the Northern Warlords and the weakness of bourgeoisie, social conflicts were significantly aggravated. The May Fourth Movement launched by students and revolutionary intellectuals was a historical turning point which happened on May 4th, 1919.

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It was a movement that fought against foreign aggression (especially Japan) and warlord feudalism. After that, the influence of Chinese proletariat kept growing. Chinese national capitalism got further development and provided the material basis for the proletarian, who could enter the political arena as an independent class. Meanwhile, the ranks of Chinese revolutionary intellectuals expanded rapidly, and people of those groups saw the trends of world proletarian revolution and the coming of new hopes of national liberation. It represented the transition from the old-democratic revolution to the new-democratic revolution because the proletariat rather than bourgeoisie became the mainstay that led the Chinese revolution. Among the proletariat, the working class represented the new productive force of China with increasingly expanding ranks and power. Under the influence of the October Revolution of the Soviet Union in 1917 and patriotic movement, the working class went on strikes and resolutely struggled with the foreign imperialism and domestic feudalism, and finally got the victory of the May Fourth Movement. On July 23rd, 1921, the Communist Party of China (CPC) was founded and led Chinese revolution from then on, representing the vanguard of the Chinese working class. It was a new leadership that stood by people and relied on people, insisting on the value of seeking truth from facts. Another party, Kuomintang of China (KMT) as mentioned before, was founded by the revolutionary pioneer, Sun Yat-sen in 1919 (Actually it was founded in 1894 but named KMT in 1919). Afterwards, because both National Protection Movement (from 1915 to 1916) and Constitution Protection Movement (from 1917 to 1918) launched by Sun to overturn the rule of the Northern Warlords failed, the KMT decided to cooperate with the CPC to fight against the feudalism which was mainly directed at the Northern Warlords and foreign imperialism (Japan mainly). In June 1923, Sun held the national meeting in Guangzhou and proclaimed the first cooperation between the two parties, which marked the beginning of the period of Chinese National Revolution (the first civil war of China). However, Sun passed away in 1925 and then Chiang Kai-shek, the new leader of Kuomintang, launched a coup on April 12th, 1927. That was called April 12 Coup, representing Chiang Kai-shek’s anticommunist purge. Meanwhile, the Nanking National Government was established on April 18th, 1927. Although the Northern Expedition was finally victorious in 1928, it was a painful lesson for the CPC that lacked independence of armed forces and enough battle experience at that time. Therefore, the first cooperation between KMT and the CPC split. From then on, the two parties kept confrontation relationship until Japan comprehensively invaded China in 1937.

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After overturning the North Warlord government, Kuomintang unified the Republic of China in form and Chiang Kai-shek became the president. In terms of economic governance, some policies and measures made by the KMT government were truly conducive to the economic development. But at the same time, it also established the state monopoly capitalism through fiscal system, financial monopoly, the control of industrial and mining transportation, commercial manipulation, etc. During the year 1927 to 1937, it entered into a period of Agrarian Revolutionary War (the second civil war of China). The CPC mainly led by Mao Zedong shifted its priority from city to countryside, establishing rural revolutionary base areas and created a path ‘to encircle the city with the country and to seize power by armed force.’ The Communist Party of China created an economic form of new democratic economy in the base areas, which was the opposite of the old democratic economy that was carried out in KMT ruling areas. The new form of economy based on the actual conditions aimed at adapting to the development of social productivity. In this chapter, the economic transition during the period of the Republic of China is not one of the most emphasized parts. The main focuses of the next chapter (Chapter 2) are the collapse of the peasant economy that had existed for thousands of years in ancient China, and the development of modern industry and foreign business. Because the Republic of China was still a semicolonial and semi-feudal society, it failed to fundamentally alter the social nature under the leadership of national bourgeoisie. Therefore, the contents of social and economic background from the Revolution of 1911 to Agrarian Revolution are mainly the history introduction and play a foreshadowing role in the next chapter.

Chapter 3

The Chinese Economy in Wars This chapter contains two parts. It begins with the economic condition during the Chinese War of Resistance against Japanese Aggression, and then introduces the situation of China’s War of Liberation. The first part includes the social background of the Anti-Japanese War, the general economic conditions, the economic situation in Kuomintang ruling areas and economy under the leadership of the Communist Party of China. The second part introduces the social background of China’s War of Liberation, American influence in Kuomintang ruling areas, the collapse of Kuomintang areas and the victory of the new democratic economy. This chapter makes it clear for us to see the differences between the two parties on their governance.

Part I: The Economic Situation during the Anti-Japanese War (1937-1945) 3.1. A Social Background of the Anti-Japanese War The Chinese War of Resistance against Japanese Aggression (Anti-Japanese War) was waged when the whole world was fighting against fascist, and China inevitably became the main eastern battlefield in the global war. When the September 18th Incident of 1931 happened, Chinese people started their 14year tortuous resistance. It was a just warfare which reflected unwavering beliefs and indefatigable spirit of the Chinese nation. That victory in 1945 marked the end of Japanese militarist aggression, even the end of foreign imperialist invasion on China. Thus, the Anti-Japanese War meant the significant turning point of China’s modern history. Among those fourteen years, the first six years were fought as regional wars of resistance mainly in northern China, northeast China and Shanghai. The subsequent eight years were the extension of the war, fought as a nationwide resistance. These were years of decisive, full-scale nationwide war, during which it took the whole might of China to fight against the eastern fascist country and eventually defeated Japanese aggressors. Nevertheless,

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Kuomintang (KMT), the ruling party of China at that time, followed a policy of attending to internal pacification before resistance to foreign invasion when facing those large-scale acts of invasion. To be specific, the KMT government did not resist Japanese invasion on the northeast China, and even made concessions to Japan during the Battle of Shanghai, which directly led to the result that the Japanese army were able to successfully enter the mainland of China. Then, they quickly established a puppet state of Manchukuo and went on to force the Chinese government to sign the Shanghai Ceasefire Agreement, which made China fall into an extremely unfavorable position. On the contrary, the Communist Party of China (the CPC) held the resolute attitude on opposing to the policy of attending to internal pacification before resistance to foreign invasion and became the first leading force to call on all Chinese people to unitedly resist Japanese aggression. Besides, the CPC not only directly participated in the resistance, but also vigorously supported the efforts of Chinese civilians and soldiers throughout the country. Although the KMT government massively massacred the members of the CPC for many political reasons, the Xi’an Incident became the turning point that made two parties cooperate on fighting against Japanese aggression. The Xi’an Incident happened on December 12th, 1936, when Zhang Xueliang and Yang Hucheng, two KMT generals who were both influenced by the policy of the CPC on united anti-Japanese national front, coerced Chiang Kai-shek, the president of the Republic of China, to stop the slaughter of the CPC and fight against Japanese military aggression. Therefore, this incident laid the foundation for putting an end to the civil war between KMT and the CPC. Over half a year later, Japan launched the Lugou Bridge Incident on July 7th, 1937, which meant the start of full-scale invasion on China’s territory. During the Anti-Japanese War, the most remarkable policy shift was establishing a Chinese united front against Japanese aggression, which served as the very key to win the war. The meaning of the united front not only lied in the second cooperation between KMT and the CPC, but also the whole Chinese nations were closely united. In that special period, the KMT military mainly resisted large numbers of Japanese troops in the center stage battlefields and fought the battles of Shanghai, Wuhan, Xuzhou and Taiyuan, and the CPC army fought on the backstage battlefields. The result was that KMT army suffered huge casualties on center stage battlefields. Meanwhile, the armed forces led by the CPC marched to the frontlines to fight against the Japanese enemies, and finally attained the victory at the battle of Pingxingguan. For the CPC army, they mainly moved to the areas that were behind enemy lines so as to launch guerrillas and began to develop their

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strategies on the backstage battlefields. Such combination of center stage battlefields and backstage battlefields formed the general strategy of AntiJapanese War and finally shattered the Japanese government’s hope of a quick victory to subjugate China. Through the 14-year War of Resistance against Japanese Aggression, China not only recovered all the Chinese territory colonized by Japan after the Lugou Bridge Incident, but also recovered the territory that was occupied during the Sino-Japanese War from 1894 to 1895. In conclusion, the victory of that war wiped away the humiliation that China had kept suffering for half a century. Besides, September 3rd was regulated as the Memorial Day to mark the victory of Chinese People’s War of Resistance against Japanese Aggression in order to commemorate both the history and revolutionary martyrs.

3.2. The General Economic Conditions After the Lugou Bridge Incident broke out, Japanese imperialist strengthened the control and plunder on Northeast China in order to further launch invasive wars. However, the qualities and spirits reflected by the Chinese nation, such as tenacity and unyieldingness, unwaveringly resisted the Japanese enemies to the end, broke their aggressive fantasy of occupying China. Therefore, Japanese imperialists had to change their strategy to what was called ‘to make fighting support their fighting.’ To be more specific, once Japanese army battled with Chinese army, Japanese invader grabbed Chinese resources, workforce, capitals and political supports so that they could ensure the completeness of their war. And that strategy influenced the economy most because Japan made the plan of Productivity Expansion which was directed at Japan, Manchukuo and China, and also regulated the principle that regions divided by each regime should provide their own resource to support their economy. That was to say, Japan would plunder the important strategic supplies from Chinese territories that had been occupied, especially in Manchukuo, Northeast China which had abundant resources such as oil, coals and minerals in order to supply the demand of their invasive wars. Northeast China, historically known as Manchuria, was a geographical region of China and consisted of three provinces, they were Liaoning, Jilin and Heilongjiang provinces, known as the Three Northeastern Provinces, but broadly encompasses part of eastern Inner Mongolia now. Under such circumstances, intensifying the plunder and control on the economy and politics of Northeast

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China was taken as their war base, which became the primary economic measure of Japanese imperialist during the period of invasive war. During that time, Japan almost monopolized the whole industry of steel, light metal, coalmining, aircraft and automobile manufacturing, railway and transportation, and thoroughly manipulated the economic lifeline of Northeast China. Many Japanese companies like Mitsui, Mitsubishi, Sumitomo and Yasuda actively invested in Manchukuo and continuously expanded its power. In 1936, the total value of enterprise capitals that Japan invested was around 1,455 million dollars in Northeast China. However, from 1937 to 1944, it reached 5,740 million dollars, almost a tripling growth. The economic power of Japanese imperialist tremendously expanded in Northeast China, which brought huge shocks on Chinese national industry. And economic structure in Northeast China had also altered a lot compared with the situation before Japan invaded. During the War of Resistance against Japan, the colonialism nature of Japanese imperialist on resource plunder and industrial monopoly could be reflected in two aspects. The first one lied in the remarkable development of heavy industry, which could be clearly seen in Table 3.1. The second point was the operation of steel and iron industries, because the fact was that mining capacity was better than iron making capacity while iron making run a more efficient way than steelmaking did. Many raw materials needed to be sent to Japan for processing. All the situations above manifestly explained colonialism in Northeast China. Table 3.1 could show the situation of industry development in Northeast China. Under the governance of Japanese imperialist, due to the increasingly strengthening plunder on Manchukuo, industrial sectors relevant with military achieved significant development. From the year 1933 to 1943, the yield of steel increased 42 times and electricity had a 20 times growth, coal yield doubled, iron yield quadrupled, and cement yield nearly tripled. Even the index grew at a staggering speed. However, products made by light industries that were closely related to daily life, such as matches, cotton cloth, flour and cigarette merely had a steady growth. Therefore, its development structure was absolutely unreasonable with the intrinsic nature of colonialism. Clearly seen from Table 3.2, both coals and irons plundered by Japan were annually increased by a large margin. However, during the late years of the war, the amounts had obviously decreased in 1944 and 1945 due to the decay of Japanese army.

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Table 3.1. Situation of resource plunder by Japan in Northeast China (Year: 1933-1944) Category Coal

Unit

1933 1937 Quantity Index Quantity Index 10,888 100 14,387 132

One thousand tons Electricity Million 212 100 1,600 kilowatts Iron One 433 100 810 thousand tons Steel One 20 100 520 thousand tons Cement One 543 100 860 thousand tons Match One 362 100 402 thousand boxes Cotton One 88 100 174 Yarn thousand packs Cotton One 4,350 100 5,530 Cloth thousand bolts Flour One 9,000 100 28,670 thousand packets Cigarette One 200 100 294 thousand boxes Source: Economic History Statistics of Modern China.

1943 1944 Quantity Index Quantity Index 25,398 233 26,527 244

755

4,500

2123

4,500

2,123

187

1,700

393

1,180

273

2,600

870

4350

470

2,350

158

1,500

276

1,140

210

111

421

116

/

/

174

160

182

95

108

5,530

4,550

105

2,680

62

28,670 15,250

169

6,150

/

294

120

/

/

240

Japan regarded the Northeast China as its occupied colony that were not permitted to develop machinery industry, which caused the consequences that the industrial technical equipment of Northeast China wholly depended on Japan’s supply, and Japanese monopoly capitalist would rather employ a large number of cheap Chinese labors instead of machines due to manual demand of labor intensified industry. According to Manchukuo official statistics, the capital input of Japan on Northeast China was nearly 9 billion yen from 1932 to 1944, while its profits gained from Manchukuo reached 3.2 billion yen, equivalent to 35.6% of the capital amount.

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Table 3.2. Plunder from Japan on coals and irons of China Unit: ton Year Coals 1938 27,451,968 1939 36,578,974 1940 44,453,465 1941 56,275,591 1942 59,208,409 1943 50,075,141 1944 48, 280,463 1945 23,918,000 Source: Economic History Statistics of Modern China.

Irons 868,485 1,064,221 1,118,833 1,452,983 1,706,673 1,818,517 1,370,000 176,138

When it came to agriculture, Japanese imperialist further strengthened the monopoly and plunder on Northeast China because China was a great traditional agricultural country which had relied on peasant economy for thousands of years. Therefore, once Japan held the Chinese agriculture lifeline, it would become the dominator of the whole country. First, they grabbed the lands and launched large-scale immigration waves. Based on the plans of Japan, a substantial number of Japanese young people moved to Chinese territories that had been occupied by Japan so that they could directly devote themselves to Japanese army and compelled Chinese people to leave their hometowns. It was extremely brutal to oppress and exploit those Chinese who were forced by Japanese army to toil in the occupied territories with just little wages. Second, agricultural products were severely plundered. Northeast China was featured by food production. Therefore, that region became the main origin of Japanese imperialists to grab food. Before the Lugou Bridge Incident, Japan got agricultural products principally through commercial trades, however, after that happened, it strictly carried out monopoly policy which aimed at dominating and controlling the Chinese economy. Third, labor plunder was based on the law of Manchukuo which implemented strict conscription. The law regulated that the Chinese youth aging from 20 to 23 had the responsibility for Manchurian or Japanese enlistment. During the year 1940 to 1941, there were over 1.5 million Chinese youth enrolling in the Japanese army, served as cannon fodder for Japanese invaders. In addition, if those who were of appropriate age did not join the army, they had to industriously work for the public, involving military engineering, hydraulic engineering, railroading, highway construction, land development, forestation, crop harvesting, disaster relief and so on. Under the extreme oppression and maltreatment, nearly 20% of those kinds of Chinese workers

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died of illness or slaughter. And for those who worked for national defense of Manchukuo, all of them were killed once after the constructions were finished. Besides, Japan levied harsh duties and lent usurious loan. In 1938, the revenue of taxes and other levies accounted for 57.45% of the total income of Manchukuo. Therefore, under the plunder of Japanese imperialists, agricultural production in the villages of Northeast China dropped dramatically with the dwindling arable lands. For examples, compared with the year 1935, the yields of sorghum reduced 10.6% in 1943, and for soybeans, wheat, cotton, corns and rice the declines were 11.3%, 37.6%, 29.1%, 11.7% and 9.6%, respectively. Obviously, under the invasion of Japanese imperialist, the countryside in Northeast China suffered enormous economic damage. However, the aspects mentioned above were far from the end of the monopoly and plunder in Northeast China. Japan also strengthened the control on finance and trades after Lugou Bridge Incident. In terms of finance, overissue of paper currency by Japan directly brought impacts on inflation. At the very beginning of the Central Bank of Manchukuo established, it carried out deflation policy. With the expansion of Anti-Japanese War and the extension of time, the fiscal situation of the Manchurian government tended to increasingly deteriorate, thus they implemented inflation policy in order to make up for the financial deficiency. According to historical data of the Central Bank of Manchukuo, at the end of 1935, the amount of currency issued merely increased 31% compared with that of 1932 (151 million yuan). In 1936, the currency was substantially increased and at the end of 1941, the amount reached 1.317 billion yuan, nearly an eightfold growth. After 1942, the currency issue had a crazy increase that even reached to 8 billion yuan in 1945, almost 53 times of the amount in 1932. Until the collapse of Japanese imperialist, the final amount peaked at 13.6 billion yuan, approximately 96 times of the sum when Central Bank of Manchukuo was established. The main purpose of overissuing currency was to support the expenses of Japanese military that had financial burden on Japanese army especially Kwantung Army (in Manchukuo). The expenditure spent on army accounted for 30% to 40% of the total expenditure. Moreover, so-called industrial development was another use for overissuing currency. Manchukuo carried out a five-year plan of industry development and needed an enormous amount of money to invest in many monopoly enterprises. Because of the overissue problem, commodity prices were rocketing, which exacerbated the tortured lives of Chinese people. Then, the capitals were tightly manipulated by Japanese imperialist, and they could monopolize the credit system to back up the invasive war. The Central Bank of Manchukuo carried out a series of

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measures of compulsively accumulating funds so as to meet the demand of their invasion. Under the command of Japanese imperialists, the Manchurian government launched National Savings Movement which forced citizens, officials, enterprises and institutions to set up saving organizations or groups to reach the target of saving deposits. More specifically, wages of working staffs must be withheld in a certain proportion, and their real estates had to be sold and half of the revenue from it would be rigidly retained. Such an unreasonably mandatory saving rule was made to amass funds so that Japanese imperialists would be capable of providing enough financial support for their invasion war. The Manchurian government actively supported the large-scale monopoly enterprises and banks in order to expand the military production of Japan. The amounts of loans from thirty industrial and mining monopolies in 1945 increased 86 times that in 1938. When the Japanese government surrendered, its private industrial investment accounted for 99.5% of the whole private industrial investment in China, while the proportion of Chinese investment reached only 0.5%, so national capitals were utterly destroyed by Japan. On the aspect of trades, Japan tightened the control over the international business of Northeast China. In 1937, the Manchurian government implemented the policy that strongly forbade other countries to export their wheat, flour and sugar except Japan. Likewise, Manchukuo was not permitted to export their agricultural products to other countries. In general, if the Manchurian government wanted to import commodities, the amount of foreign exchange must be strictly limited by Japan once the goods could be purchased there. Those regulations and measures not only hindered the business relationships between Manchukuo and other countries like the US and the UK, but also severely influenced trade connections of Manchukuo with inland cities.

3.3. The Economic Situation in Kuomintang Ruling Areas After the Lugou Bridge Incident broke out on July 7th, 1937, Japanese imperialists launched the invasive war on the entire China. In 1938, Wuhan and Guangzhou successively became the enemy-occupied areas, so the Kuomintang government had to relocate its capital city to Chongqing and took the Southwest China as the base of Anti-Japanese War. At that time, the KMT government only had the regency of southwest areas, northwest areas, Hunan province, Guangxi Zhuang Autonomous Region and part of Hubei, Guangdong, Fujian, Zhejiang, Jiangsu, Anhui, Henan and Shanxi provinces

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which were deemed as home fronts, the ruling areas of the KMT government in the War of Resistance against Japanese Aggression. During the war, the KMT government implemented the policies of industrial migration, industrial construction and economic control. At the early stage of the war, it was truly conducive to develop the economic development of home front. However, because the KMT government represented the interest group of the upper layer of landocracy and bourgeoisie, it merely focused on developing bureaucrat capitals, but oppressed national capitals, exploited the workers, peasants and other small producers. As a result, during the later period of Anti-Japanese War, the economic depression appeared again in KMT ruling area because of its unreasonable governance that departed from China’s national condition that time. Back to the governance, as mentioned above, the KMT government carried out industrial migration and started the economic construction in the Southwest areas. Before AntiJapanese War, although capitalist economy had developed to some extent, its development structure was extremely unbalanced and the distribution of industry lacked reasonable planning because most of the pillar industries were concentrated on northeast regions and coastal provinces where Japan had controlled the development. According to industrial statistics of Ministry of Economic Affairs of the KMT government, most of the factories were in coastland and the middle and lower reaches of Yangtze River, 70% of them were located in Jiangsu, Zhejiang and Anhui provinces. The factories in Shanghai, Guangzhou, Wuxi, Wuhan and Tianjin accounted for about 60% of the total quantity in the whole country. At that time, there were 3,935 largescale factories in China, and 1,279 of them were located in Shanghai, which occupied a proportion of 32.5%, while the total number of those large-scale factories in southwest and northwest provinces was 237, only accounted for 6%. Southwest and northwest regions were mainly Sichuan, Yunnan, Guizhou, Shaanxi, Gansu, Hunan and Guangxi, these seven provinces and the numbers of their factories were 115, 42, 3, 10, 9, 55 and 3, respectively. The total territory of the seven provinces covered 2.7 million square kilometers with a population of 150 million people which accounted for one-third of the total population in China that time. However, the industrial production there had relatively much weaker positions. Obviously, the economy in those seven provinces lagged behind the average standard. Due to the frequent military threats and brutal invasion, factories in coastland regions were gravely destroyed, especially in Shanghai. As a result, the KMT government had to relocate its capital to Chongqing, a relatively stable and prosperous inland city, and took Southwest China as the military

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base fighting against Japanese army, protocoling the construction plan that those southwest areas were the key regions to develop industry in 1938. In the same year, Chiang Kai-shek, the president of the KMT government was determined to relocate factories from coastal cities to inland areas, which was proved to be a wise decision. Thanks to that government decision, it was not only conducive to expanding the productivities of home front and strengthening the fighting capacity, but also advantageous to prevent the production lines from being occupied by Japanese invaders. But things could not go so well, because of the rapid course of the war, it was too urgent for occupied areas to relocate all of the industrial factories. According to the statistics of Ministry of Economic Affairs of the KMT government, except that about three hundred factories in Shanghai and Wuhan were successfully moved, few could be smoothly migrated. In terms of the impacts on industrial development brought by this migration policy, it was really instrumental in industrial construction of Chinese inland regions. First, on account of those factories which were mostly equipped with imported advanced technology and facilities, they radically promoted the productivity and improved the standard of industrial mechanization. There were over 60 machine works migrated to inland from Shanghai, which nearly accounted for a half of the total private relocation factories of Shanghai. Afterwards, these factories served as mainstay of home front fighting capacity during the war. Many important machineries such as steam engine, cotton cleaner machine, diesel engine, air blower, road roller, ball mill, windlass and electric generator, were manufactured by migrated machinery factories, which played a key role in developing the industry of home front. For example, Chongqing used to produce on a small scale with low technical level and primarily focused on repairing before the war. However, there had been 83 machinery factories in Chongqing by 1938 and some of their scales were even as big as Daxin Steel Works and Wahson Electric Factory (Both had the most capitals among all of those migration factories at that time.). These machinery factories could manufacture machine tools of home front, which was much beyond the past productivity. Besides, textile industry of home front was also migrated from other regions and finally became the most powerful productivity to support the frontline. Second, the main machinery equipment of factories that were moved from coastland to inland significantly promoted the home front of southwest regions in developing national industry. Before the war, private machine factories were only ship repair plants with an employment scale of hundreds of workers, while in that period, they were

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transformed into large-scale manufacturers that produced boilers, machine tools, and river steamers with thousands of staffs. Third, migration factories not only brought raw materials that were prepared for making equipment, but also the professional and technical staffs that directly improved the working efficiency. According to the National Resources Commission, among the whole immigration staffs, there were more than 20 thousand engineering technical personnel and nearly 12 thousand technicians who were skilled at specific technique. Most of them came from Shanghai, Jiangsu and Zhejiang. They brought great efficiency and created huge values to home front. For instance, when scientific personnel arrived there, they did plenty of research, continued to discover the objective law of mineral and water resources and established hydroelectricity, coal, iron, industrial and mining enterprises. In addition, they kept developing new products that served as substitute goods for the needs of frontline. Under the harsh conditions of that war, those scientific gains exerted great positive influence on solving the emergency requirement. In a word, industrial migration significantly propelled the industry in southwest areas to develop and support the frontline. As mentioned above, the development of China was severely unbalanced and inadequate in wartime. Uneven development situation widely existed between the North and the South, between urban areas and rural areas, as well as between the coastland and the inland. Therefore, most of the industrial factories had to be primarily established in southeast coastal cities and ports along the river. For examples, 77% of textile factories were located in coastland, 62% of the flour factories and 53% of the match factories were also located there. What’s more, acid and alkali industries of national defense were all set up in those regions. Inland provinces had a very weak foundation in industry. To be more specific, Sichuan, Hunan, Guangxi, Shaanxi, Guizhou, Yunnan and Gansu, these seven provinces even had only 6.07% of the total industrial factories, 4.04% of the total capitals and 7.34% of the nationwide workers. Fortunately, owing to the industry migration policy, home front of southwest areas largely developed and fundamentally changed the backward situation. Capital inflow became the first benefit of industry migration, so it was able to provide large amounts of money to support the development of southwest areas. Second, it gradually formed an independent market that could offer prerequisite to develop industry. China was a semi-colonial and semifeudal country, and it always suffered from the hindering in developing national industrial products. Before the War of Resistance against Japan, the Chinese domestic market was filled with foreign commodities, which made

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national products unsalable and overstocked. When it broke out, the sources of foreign goods were nearly cut off in the home front of southwest areas because western countries reduced their exports to China. For examples, the German exports to China decreased from 6.64 million yuan in June 1937 to 1.2 million yuan at the end of the year, and when it was 1940, there was no commodity export. Britain reduced its export to China by 83% from June 1939 to June 1940, and the export volume of France also went down by 57% the same year. Besides, industrial products that used to be made by the coastland could not be sent to the inland because of the war. Hence, industrial migration created the condition to form an independent local market. Just like Sichuan province, more than half of its daily industrial necessities depended on imports before. However, large extent of decreasing imports compelled by foreign countries made the Southwest China capable of developing industry. In addition, Southwest China used to export cash crops and raw materials, such as tung oil, leather goods, bristles, law lacquer and so on. Take Sichuan as an example, its total export value reached over 55 million yuan in 1936, which included tung oil, bristles, leather goods, textile fibers, tobacco, crude drugs, raw lacquer, fuels and dyestuff with the value of 29 million yuan, 5.8 million yuan, 2.8 million yuan, 2.76 million yuan, 1.68 million yuan, 520 thousand yuan, 3.2 million yuan, 800 thousand yuan, 570 thousand yuan, and 1.78 million yuan, respectively. The export value of these categories accounted for 89% of the totality. When the war broke out, the export of cash crops and raw industrial materials met great difficulty, so these goods were utilized to supply the market for local industry. Because it was hard to export Chinese goods, the prices were correspondingly cheap. Both adequate demands for industrial products and low-cost materials brought the high profits as a consequence. Just like Yuhua Yarn Mill, whose annual rate of profit was 62% in 1938, two years later it even reached 381%. Handsome profits would inevitable stimulated people to invest and establish industrial enterprises. The third factor was large-scale immigration from occupied areas, which directly increased labor and created the social value. Among the workforce, there included many scientific technical talents that moved to the home front. Relevant scientific research achievements were thereby brought to Southwest China. Besides the professional instruction that could facilitate more rapid economic growth and industrial development, those scientific personnel also made special contributions to the home front. For example, irrigationists successively explored 45 rivers in the southwest regions, and finally established hydropower station in Sichuan, Guizhou and Gansu provinces. Geologists found oil deposits and succeeded to exploit petroleum. Chemists developed a

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wide range of chemical products like acid-base, rubber, cement, formaldehyde, acetone, calcium carbide and so on, which could cater to the urgent need of industry. Meanwhile, they developed gasoline substitute, modified all kinds of lathes and innovated the textile machinery. It was undeniable that the KMT government carried out a series of policies that supported the industry, which positively encouraged the southwest regions to develop. Especially during the Anti-Japanese War, the capital city of the KMT government moved to Chongqing with a large number of government employees and troops immigrating to the home front. At the beginning, industrial production in home front was truly backward and there was extreme material shortage without outside help. Therefore, the policies of the KMT government were made to stabilize the society of home front. The main measures were encouraging the factory migration, encouraging the resource exploitation, strengthening the transportation, offering low-interest or zero-interest loans and advocating innovation. On the aspect of economic development, the KMT government carried out the policy of economic control. More specifically, the government implemented trade monopoly, controlled procurement and distribution, price limit and monopoly of sale et cetera and set up specialized institutions to administer. The scope within the KMT governance was quite wide, including industrial and mineral industry, financial industry, foreign trade and domestic trade. Among those policies, controlled procurement and distribution policy was the most notable one. By this policy, the KMT government could wantonly lower the procurement price and then sold the products at a high price. Therefore, getting high profitability was just a doddle. For example, in 1943, the cost of tin in Yunnan was 30 yuan per ton, however, its procurement price was only 12.5 yuan per ton. In 1944, the official purchasing price of bristles per box was equal to 38% of the real cost. In April 1943, a hundred catties (per unit) of gauze could be procured at 1.26 thousand yuan, while that price was only 42% of its cost. Based on historical data, we can see in September 1944, inflation caused the rise in the price level. However, although the procurement price of gauze surged to 6 thousand yuan per unit, it was still merely 40% of the production cost. Even though it was purchased at the price of 10 thousand yuan, which was just 33% of the cost. This policy made some of the manufacturers seize every possible opportunity to escape from the control of the KMT government. Like textile mills in Chongqing, they privately went business and delivered their cotton yarn to the places that were out of KMT administration. Some of them overstated the number of workers and understated the yields, so these manufacturers could take the excuse of the

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rising cost to get higher subsidies from the government. Some of them cooked the books, so as to understate their profits and avoided high tax rate. Monopoly of sale was a policy implemented in January 1942. The specified goods were salt, sugar, alcohol, tea, matches and cigarettes. But actually, only salt, sugar, matches and cigarettes, these four categories were implemented. Monopoly of sale was administered by the Authority of the KMT government. This policy was to monopolize the commodities and gain profits by low-price purchase and high-price sale. Therefore, it had the same nature with controlled procurement and distribution policy. For example, the KMT government controlled the production and sales of salt after the war broke out. They regulated the official transport in order to weaken the system of long-lasting salt dealer monopoly. Because salt was one of the important daily necessities and everyone needed it, people had to follow the rules that made by KMT. All of the salt dealer monopoly systems and relevant private ownership of salt industry were abolished from January 1st, 1942. Through this policy, the KMT government could exploit both producers and consumers because they regulated the production plan, purchase price and selling price. Take Chongqing as an example, the KMT government revenue from salt was nearly 40% of the selling price, reached 24.5 billion yuan. Besides, price limit policy was made to stabilize the society because price rise severely influenced people’s lives. However, merely limiting the price could not alter the nature of inflation fundamentally; it just made the CPI steady for a short time. Although industrial migration truly had positive effects on the home front, the policy of economic control resulted in a range of negative consequences. Tin industry in Yunnan province used to be flourishing, but after the economic control policy carried out, its production suffered a disastrous decline because procurement price was too low to maintain the operation of the industry. The quantity of iron mine factories decreased from 5 thousand in 1938 to 673 in 1943 with a miner decline from 100 thousand to 2,230. There used to be more than 70 smelting furnaces, while by the year 1944, only 6 or 7 furnaces that continued to produce. On the aspect of salt production, plenty of factories were forced to go bankrupt. Cotton industry also went through serious setbacks. With the cultivating acreages increasingly shrinking, many cotton fields were changed to the planting of other kinds of crops. To summarize, industrial migration helped to develop the industry, but meanwhile, economic control policy also jeopardized the production structure and tremendously impeded economic growth, aggravated the unemployment situation and sharpened the social conflicts. All of these negative impacts described above could be perceived as the signs of failure of KMT in the liberation war.

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Japan launched the full-scale invasion against China, attempting to colonize the whole Chinese territory. Therefore, the principal contradiction during that time turned into national conflicts between the Chinese nation and Japanese imperialists. Domestic class struggle between Communist Party of China (CPC) and Kuomintang (KMT) was weakening and became the secondary contradiction instead. Chinese war lied in peasants because China was a great agricultural country and most of the Chinese people relied on their farming to support families. Fundamentally speaking, the War of Resistance against Japan depended on the vast Chinese peasantry which accounted for 80% of the total population. The land problem, thus, became a non-negligible political consideration. Since soldier sources and food production mainly came from the countryside, if the Chinese leadership could not formulate correct agrarian policies, it would adversely affect the process of war and the final victory. The CPC and other democratic governments jointly resisted the Japanese aggression. They ended the policy of confiscating lands from landlords and carried out the policy of reducing rent and interest instead. Specifically, this policy required the landowners to reduce 25 % of the previous tax taking from land tenants (most were peasants.) in liberated areas (CPC ruling areas). It aimed at alleviating the economic burden of those land tenants, which could be conducive to raising their enthusiasm of fighting against Japanese invaders and drive the formation of the Anti-Japanese united front. The KMT government also proposed some progressive agrarian policies. In March 1938, KMT pointed out that China was an agricultural country with a majority of peasants, so the basis of Chinese economy lied in the countryside. During the war, sustaining rural economy was put on the top agenda in order to develop the productivity. In its outline of land policy, it made a series of regulations such as improving agricultural production technique, making reclamation plans, helping and guiding the agricultural cooperation, organizing cadastral materials, implementing land value tax and inheritance tax, issuing land bond and so on. Besides, the KMT government mandatorily regulated that the lands of Chinese traitors had to be confiscated and poorly used lands were expropriated to be distributed to wounded soldiers and refugees. In regard to land allotment, the government put the policy of ‘land to the tillers’ into effect. Also, KMT stipulated that rent amount should not outnumber 7% of the land price. These policies effectively mobilized and organized the masses to rise up against Japanese imperialists. They devoted themselves to production so that they could do their best to provide support for the frontline. However, such situation only happened in limited areas, for

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most areas of the home front, KMT failed to put these land policies into practice. After the fall of Wuhan and Guangzhou, Anti-Japanese War reached the stage of stalemate, so land policies from the resolution of the Kuomintang Provisional National Congress could not be implemented. In April 1939, Chiang Kai-shek said the best opportunity to push forward the Principles of People’s Livelihood was the day when China won the war. Land Administration Institute passed Post-War Land Policy of China which took collating land rights, organizing cadastral materials and setting up homesteading farms as the key points. Nevertheless, most wartime land policies of KMT were suspended for many complicated reasons. As a result, since the war began, there had been little change on most of the KMT ruling areas except Shanxi and Zhejiang province. The serious prewar land problems kept its situation until the postwar period. Policies like confiscating the lands of Chinese traitors, implementing rent and interest reduction, just stayed in words. When concretely analyzing the rural economy of KMT ruling areas, the situation of land possession was worth mentioning. During the Anti-Japanese War, its relationship of land tenure was that landlord bureaucrats and merchants still held plenty of lands, and land centralization even developed faster because of serious land annexation. For example, Chengdu, a city that was featured by its fertile plain, had an extreme unbalanced man-land ratio. Landlords accounted for 20% of the population with a land occupation ratio of 50% before the war, but until the end of the war, landlords took up only 8% of the population and they occupied 80% of the lands. Another instance was inland provinces like Sichuan, Yunnan, Guizhou, Shaanxi, Gansu and Ningxia where the proportion of landlords was less than 3% but had 60% of the total lands. Most strikingly, in Chongqing, the percentage of landlords declined from 20% (prewar period) to only 2% (postwar period), but their land occupation rose from 50% to 95.6%. In the rural areas of the southwest, wartime class differentiation was further aggravated. There were three kinds of peasants, the rich, the middle and the poor peasants. The population of middle peasants significantly reduced, while the ratios of landlords, rich peasants and farmhands kept increasing. That phenomenon reflected the aggravated land annexation and intensified exploitation from landlords in the villages of home front during the war period. In such case, the life of those owner-peasants who had their own lands but still produced by themselves suffered huge instability, many ownerpeasants lost their lands because of various reasons. For example, in the East River area of Guangdong, owner-peasants who had the lands less than five

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acres successively sold or pledged their lands due to the high cost of living. In the KMT ruling areas, rents soared by an unbelievable extent at that time. In a country of Sichuan province, the tax rate of tenant farmers increased from 48% in 1938 to 94% in 1944. In Chengdu, the provincial capital city of Sichuan, its rent was added to 90% of the agricultural harvest. Since the second half of the year 1941, land tax, grain levies and grain purchase had unduly increased their burden. Moreover, natural disaster made the situation worse, severe catastrophes brought tremendous shocks to the rural economy and peasants. The Southwest continued to suffer from inundation, drought, plagues and infestation. Increasingly bankrupt peasants were resistless to face such calamities and the corruption of the KMT government. As a result, famine and diseases drove nearly 20 million people to death. All in all, the wartime rural economy in KMT ruling areas was on the wane. To retrospect the policies of the KMT government, they could be evaluated from two aspects. One was industrial migration of home front made in the early stage of Anti-Japanese War, while another was the economic control that developed from prosperity to great recession. At the beginning of the war, just a five-year industrial development exceeded that of the total past 30 years. By the end of 1944, seven provinces which were formerly backward in industry achieved incredible progress on it. To be more specific, the number of industrial factories in Sichuan, Hunan, Guizhou, Yunnan, Guangxi, Shaanxi and Gansu accounted for 88.63% of the nationwide quantity. Their contributed capitals reached the proportion of 92.52% and workers there occupied 85.61%. Especially in Sichuan province which took Chongqing as the central city, the whole province had 45.24% of the nationwide factories. The characteristics of industrial development of home front could be concluded as follows. The first one was the rule of national monopoly capital. In fact, national monopoly capitals of the KMT government got preliminary development, but it did not form a monopoly status in the whole national economy. In particular with the industry, private enterprises run better than state-owned enterprises did on the aspects of quantity, capitals and output value. After carrying out economic control, the KMT government expanded the state capitals drastically through suppressing and merging these private enterprises. By 1942, state monopoly capitals reached 69.58% of the total capitals, and the output value accounted for 43%. According to the Ministry of Economic Affairs of the KMT government, state-run industrial capitals (excluding munitions factories) increased from 30 million yuan in 1935 to 800 million yuan in 1941, about a 25-fold growth. And in 1942, that figure even reached 1.3 billion yuan, meanwhile the non-government capitals just went up

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from 220 million yuan to 800 million yuan. The second feature was that means of production sector developed much faster than means of subsistence sector. In terms of the prewar industry, means of subsistence sectors dominated in the industrial department. For example, the gross value of industrial production in 1937 was 2.07 billion yuan (including both Chinese and foreign factories), among which means of production sector was only 361 million yuan, less than 17.3% in the aggregate, and machine building industry contributed the least, just accounted for 0.9% of the total industrial production value. After AntiJapanese War broke out, since KMT carried out industrial migration, military industry and other kinds of industry in the southwest areas developed rapidly, which directly led to the growing demand of means of production sector. Therefore, metallurgy, machinery, chemical industry and other heavy industry sectors developed fast. Besides, from the changes in the number of workers, it was clear to see the proportion variation. In 1933, people working for light industry and heavy industry accounted for 64% and 36% in China except Manchukuo. Nevertheless, by 1942, workers of heavy industry had reached 48.69%, which reflected the situation that heavy industry gradually became the development tendency for China. Actually, it was understandable that the means of production sector developed faster than means of subsistence sector. Because only when heavy industry got adequate development especially in the machinery industry would other production sectors get enough machinery equipment and expand their production scale. It was a good sign that means of production sector was fastgrowing in the home front during the war. If the KMT government could seize this opportunity to unite Chinese people of all ethnic groups and all kinds of private enterprises, it was highly likely to realize prosperity within the whole national economy. It could not only strengthen the material basis for the war, but also lay a solid foundation for industrialization in the home front of KMT ruling areas. However, the KMT government did not choose that way, and instead, it aggressively expanded bureaucratic capitals, monopolize national economy and crack down on private capitals. They inflated the paper currency and caused hyperinflation, soaring prices, which made the ever-increasing economic situation drop suddenly and lose its opportunity in the end. The third characteristic of industrial migration lied in its small scale and poorly equipped facilities, which can be reflected in Table 3.3. From Table 3.3, private capitals were mainly invested in small scale enterprises. It reflected the fact that private enterprises developed very inadequately and most of them were run in a truly small size. Therefore, although industrial migration policy could promote the industrial development

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in the home front, its production model was too limited and lacked highefficient management. Furthermore, most of those factories were equipped with ordinary and old machines. Many of them still needed a large proportion of manual work, which was not like the western industrial factories at all. For example, even for the textile industry in home front, with a high level of mechanization, most of the yarn machines they used were introduced from foreign countries in 1920s, the oldest machine was made in 1895. Outdated equipment naturally led to low efficiency. Table 3.3. Statistics of private enterprises and employees in the Southwest Enterprise Scale (Number of Workers) Less than 30 30 ~ 50 50 ~ 500 500 ~ 1000 More than 1000 Source: General Economic History of China.

Proportion (%) 41.47 17.81 37.92 1.95 0.85

Unbalanced development of industrial sector was the fourth trait of industrial migration. During the war, industry in the Southwest areas once developed to a certain extent, but its structure was overly unbalanced. According to the statistics, mechanical industry in 1941 got a 700-fold increase based on that in 1936, 940-fold growth in electrical appliance industry, and textile industry increased 4 times. However, coals, petroleum, non-ferrous metals and electric industry (including hydroelectricity and thermal power industry) merely doubled the output in those five years. Actually, there were abundant natural resources in the Southwest regions, but private industrial and mineral enterprises suffered huge shocks from the policy of controlled procurement and distribution. Because the KMT government imposed strict control on the exploitation and selling of resource and minerals, it was not surprising to see that there was little progress on resource development and utilization in the southwest areas during the Anti-Japanese war. From the government actions on industrial migration policy, it could be anticipated that economic development of KMT ruling areas would face great setbacks. The economic control policy was made to develop the economy of home front in the Southwest during the war. It could be divided into three stages. The first one was from 1937 to 1938, at the beginning of Anti-Japanese War. And this stage was in the transition from Chinese normal economy to wartime

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economy. The second stage was from 1939 to 1941, which entered the period of developing the economy of home front, and its construction plans were comprehensively carried out. The third stage started from 1942 and ended in 1945, the latest three years of the war, the economy there went through boom to recession. During the first stage, the economy was once developing rapidly with a stable society in KMT ruling areas. However, such a good tendency had turned into a retrogressive evolution since 1942. After the Pacific War broke out, international transportations were blocked, which made the economy of KMT ruling areas steeply decline. In addition, inflation and soaring price of food caused agricultural crisis. Therefore, industrial production correspondingly went downhill because of both the food shortage and traffic disturbance. According to the Ministry of Economic Affairs of the KMT government, the number of factories had kept an obvious decrease since 1943. In 1938, 209 factories were set up in the home front, and then this situation continued and peaked at 1,133 factories in 1942. After that, the number of establishing factories dropped year by year. Until 1945, only 102 factories were set up. The number of establishing official-run enterprises also decreased from 128 in 1941 to 16 in 1944. Table 3.4 showed the index of establishing factories. In fact, after the year 1942, even though there were still new factories set up, the whole development tendency was suspending operation or slashing production, restructuring factories or even going bankrupt, which was clear from Table 3.5. Take Chongqing as an example, more than 270 factories halted their production among the 871 factories in 1943. In 1944, only 65% of the textile factories went into operation among the 365 machine factories, and there were 68 plants that shut down. Table 3.4. The index of establishing factories Year 1938 1939 1940 1941 1942 1943 1944 Source: Modern Industrial History of China.

Index 100 206.42 263.76 395.41 261.02 351.38 236.97

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Table 3.5. The index of industrial product production Year 1938 1939 1940 1941 1942 1943 1944 Source: Modern Industrial History of China.

Index 100 142.34 130.73 124.37 124.73 114.73 91.75

Table 3.6. The scale of industrial capital investment of KMT government ruling areas Year

Registered Factories (Quantity) 300

Average Capital of Each Factory (One Thousand Yuan) 393

Before 1936 1937 63 352 1938 209 414 1939 419 289 1940 571 103 1941 866 53 1942 1,138 9 1943 1,049 14 1944 549 6 Source: Chinese Capitalism and Domestic Market.

Index 100 89.6 105.5 73.5 26.3 19.5 2.1 3.6 1.5

From Table 3.6, the figures of registered factories, average capitals of each factory and index could be related with Table 3.4 and Table 3.5. Although there were factories continued to be set up before 1943, the production outputs and development prospects were not so optimistic. The reasons could be traced back to both the strengthening invasion by Japanese imperialists and unreasonable administration of the KMT government. First, Japan launched aggression war and occupied vast Chinese territories by extremely brutal military force. Even though the KMT government retreated its army to the home front of the Southwest, it was still under the attack of Japanese military. Especially after Japan launched the Pacific War in 1942 and occupied Myanmar, the traffic within KMT ruling areas was blocked and nearly cut off all the external logistics except air transport. Because of the shortage of foreign machine parts and raw material, industrial production of home front was severely affected. Furthermore, many industrial enterprises gave up their

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production and changed to do speculative business owing to the traffic, which directly resulted in economic recession. If the Japanese invasion was deemed as the external factor explaining the interference in economic development, then the incompetent governance of the KMT government could be regarded as the internal factor. Just as mentioned above, procurement price of economic control policy was extremely improper, so it caused a sharp decline in production efficiency. Like the tungsten ore production, in 1938 there was an output of 12,556 metric tons, but it decreased to 3,325 metric tons in 1944. Other similar situations like antimony and pure tin, the production of antimony went down from 14,597 metric tons in 1937 to only 204 metric tons in 1944, and output of pure tin decreased from 15,099 metric tons in 1940 to 1,517 metric tons in 1944. Therefore, a large number of mineral enterprises had to be shut down because there just existed a desperately unprofitable market. National monopoly capitals of the KMT government also oppressed and merged private capitals, which was one of the main reasons. Among those private enterprises that were merged by the KMT government, even the migrated industrial private enterprises were also faced with such misfortune. In the late stage of the war, many private-owned industrial and commercial enterprises successively went bankrupt. Just like Chongqing, the industrial central city, used to have 871 private industrial factories, but there were only 500 by 1943. Besides, the overissue of currency by KMT, extortion of excessive taxes and levies and other ruthless government behaviors made people live a miserable and full of hyperinflation life. Under that circumstance, although the economy and industry had a well-developed momentum, both external invasion and internal misgovernment caused great recession in the home front of KMT ruling areas.

3.4. The Economy under the Leadership of the Communist Party of China After the September 18th Incident happened, the three northeast provinces of China were occupied by Japan. Later, China lost the eastern part of Hebei province and most of the northern regions, which aggregated the conflicts between China and Japan. When the Lugou Bridge Incident broke out in 1937, China turned into the period of the Comprehensive Anti-Japanese War. However, KMT and the CPC had distinctly different attitudes toward it. Chiang Kai-shek mainly held the opinion that China should wait for the change of international situation and depended on outside force like the

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military support from the USA, so the KMT government he led always presented a negative attitude on fighting against Japanese aggression because Chiang thought China lacked the condition and power of resisting Japan at that time. Also, he moved the government and army to the home front because the Southwest areas were located in the inland with complex terrains, which increased the difficulty for Japanese army to assault. Therefore, such compromising attitude on the war undoubtedly made their troops of frontline battlefields retreat step by step. On the contrary, the Communist Party of China insisted on the policy of resolute armed resistance and devoted themselves to establish a national Anti-Japanese united front. During that period, opposing the Japanese aggression was at the top of the priority for Chinese nation. The CPC actively organized and led Chinese people to resist the invasion of Japanese imperialist, and the united front they established involved all walks of life, so that the whole Chinese nation could get united to fight against the enemies. That was a significant difference that distinguished from the guidelines of the KMT government. As Chairman Mao Zedong said, ‘We must unite with all the forces that can be united.’ Meanwhile, the strategic thinking of the CPC towards Anti-Japanese War also differed from the previous value. In the past (when it was the Northern Expedition), the CPC advocated the opposition of landlord class and bourgeoisie that oppressed peasants and laboring people. However, it was a timely moment to unit all the landlords and capitalists who could possibly became one of the members of the united front. Thus, the CPC focused on the guidelines from the perspectives of duality, both union and struggle. Union was embodied in the united front. Struggle meant it was necessary for the CPC to balance the interests of both proletariat and bourgeoisie. On the aspect of labor policy, it was important to improve the living standards of peasants and workers, but meanwhile, it was irrational to blindly impede the development of capitalists. Also, in regard to land policy, landlords were required to reduce the rent and interest for peasants who still had to pay the taxes and interests. In terms of politics, people who were on the Chinese United Front against Japanese Aggression had the same political rights and property rights, no matter they were workers, farmers, landlords or capitalists. Therefore, the development of laissez-faire capitalism economy in rural base areas was supported in order to resist the aggression by Japanese imperialists and overthrow the semi-feudal system influenced by the KMT government and corruptive local power. That was a ground-breaking revolutionary policy that unprecedentedly led all the people of united front to jointly carry on the revolution.

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The policy guidelines made by the CPC during the Anti-Japanese War were also instrumental to economic development in its base areas. Before the war, the CPC carried out the agrarian revolutionary policy that expropriated the lands from landlords and then gave these lands to those who were really in lack of lands based on equal distribution. However, after the war broke out, the CPC called up KMT and proposed that it was necessary to stop the policy of land confiscating from the landlord class on February 10th, 1937. That proposal was directed to consolidate and expand the Anti-Japanese united front so that the whole Chinese nation in all walks of life could be united as one. On August 25th, 1937, the CPC put forward the corresponding guidelines so as to implement the policy of reducing rent and interest rates. According to that policy, the Central Committee of the Communist Party of China clearly pointed out that rent and interest rate reduction must be carried out in the areas of the Eighth Route Army and the New Fourth Army (Both were the troops of CPC). And the policy explained that it was not the time to continue the agrarian revolution, thus the previous policies were not suitable for the present period. In brief, it focused on both rent and interest rates reduction and landlords’ ownership of lands and property. In terms of the specific provisions, the CPC regulated that the rents should be reduced by 25%, and the annual interest rate could not exceed 15% or 10%. However, it was not as easy as it said. Because the strong values of the ‘Left’ or the ‘Right’ truly existed, the policy had to face a series of value conflicts, either too progressive or too conservative. Although it was officially put forward in August 1937, the implementation situation was not optimistic in CPC base areas. In many places, it was just perceived as a new political slogan and consequently, that policy failed to be put into practice. Therefore, it did not fundamentally mobilize the masses and inevitably caused formalism. The Leftists firmly believed that they should oppose the landlord class and capitalist class to the end, so in those places where progressive policies were made to oppose the two classes above, it was nearly impossible for their leaders to accept the policy of reducing rents and interest rates that somehow support the landlords or capitalists. The Rightist always stuck to the former thoughts so they were not willing to change the situation or join in the revolution. Two years later, as the policy gradually raised the enthusiasm of proletarians especially peasants and workers to resist and fight against the Japanese aggression. In fact, it was truly implemented after the end of 1939, and there received great progress on proletarians’ wellbeing soon after the work of reducing rents and interest rates was pushed forward. For example, plenty of lands that were not officially registered (They were usually called

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dark lands.) were taken as excuses of selling or cultivating by landlords. At the same time, some dark lands were also owned by local bullies and rich merchants. However, these situations were not greatly improved until that policy was finally put into practice. Besides, reducing rents and interest rates fundamentally weakened the feudal exploitation and largely changed the land tenure relationship and economic status of all the social classes. Therefore, the ratio of landlord and bureaucrat households to acres of lands significantly decreased, which improved the status of poor peasants and farm laborers. Because a portion of poor peasants and farm laborers became the middle peasants, the households of those people correspondingly declined. As a result, the households of middle peasants increased by a significant extent with an obvious growth of owned lands, so there was a tendency of expanding the population of the middle peasants. The implementation of that policy impaired the feudal power, improved the economic and political status of those peasants. Most importantly, the policy raised their enthusiasm to participate in the production and motivated the proletarians to devote themselves to the revolution. During the war, Communist Party of China went through an extremely torturous history. Its revolutionary base areas suffered brutal military attacks and destruction by Japanese imperialists that attempted to make the whole areas of the CPC totally perish. At the same time, Chiang Kai-Shek, the president of Kuomintang government and the Republic of China, suddenly decided to exterminate the members of the CPC because he thought that party was still the most direct political threat to the KMT government once the AntiJapanese War finished and it was time to wipe out such a competitor. Thus, Chiang seized the opportunity of Japanese maltreatment on the CPC and launched massacre three times. The Eighth Route Army and the New Fourth Army were compelled to suffer starvation and the shortage of living substances because the KMT government ceased to supply food and living necessities to CPC. Therefore, the leaders of democratic government in base areas called on the masses to launch the production campaign and develop the production through mutual-aid and cooperation so as to provide enough living substances for both the CPC army and the people. In such harsh times, Chairman Mao pointed out that it was infeasible to simply increase the fiscal taxes or decrease the financial expenditure. Then the great production campaign became the only way to improve the efficiency of economic operation and yields of production. The fields of that campaign included agriculture, industry, handicraft industry, transportation business, animal husbandry and so on. Even the core

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leaders of the CPC, such as Mao Zedong, Zhou Enlai, and Zhu De participated in the campaign personally. They grew vegetables, raised poultry and tried textile production just like ordinary laborers. Their participation gave the masses great motivation to promote the development of the campaign. After it was comprehensively put into practice, there achieved great progress in revolutionary base areas. For example, in Shaanxi-Gansu-Ningxia Border Region, there were 699 thousand acres of land reclaimed in 1940, and the situation of land reclamation went up to 976 thousand acres in 1943. And the agricultural acreages increased from 11 million acres in 1940 to 13 million acres in 1943 and expanded to 15 million acres. The yields of grain went up from 1.1 million stones (Chinese unit of weight) in 1937 and reached 1.8 million stones. There used to have approximately 193 thousand oxen, 125 thousand donkeys and 1.7 million sheep, while when it was 1943, the quantity of those animals of stock farming reached 221 thousand, 168 thousand and 2 million, respectively. Besides the production campaign, the movement of mutual-aid and cooperation was also launched to improve the production models and forms of organization. One of the models was distributing the laborers among those peasants in the same village or group so as to flexibly carry on production and fully utilize the laborers. Other forms were like organizing the hired workers to participate in the production of handicrafts. Accordingly, those models and forms were significantly conducive to improving the labor productivity and properly utilizing the lands. The economy run by mutual-aid and cooperation was called cooperative economy which was of paramount importance in the following decades. In addition, during that period, many awarding policies were implemented in the base areas of the CPC so that peasants and workers there could further raise their revolutionary enthusiasm. Those policies included land reclamation rewards, three-year exemption from grains and offering agricultural loans to construct water conservancy, which were proved to be correct from the historical view. The contents above are the comparison on economic governance between Kuomintang government and the Communist Party of China during the Chinese War of Resistance against Japanese Aggression. Although migration policy made by the KMT government truly improved the industrial development in the southwest areas, its economic control policy failed to follow the market and pay attention to the people’s livelihood. Even worse, Chiang Kai-shek held the attitude of compromise on resistance against Japan to a certain extent, but never fundamentally trusted the cooperation with the Communist Party of China. On the contrary, the CPC cooperated with people

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of all classes, and finally drove the formation of Anti-Japanese national united front. It insisted on the mass line and chose the way of independence and selfreliance for both resistance against foreign aggression and Party building. The next part will introduce the economic situation during China’s War of Liberation, which includes the background and the comparison between the two Parties as well.

Part II: The Economic Situation during China’s War of Liberation (1945-1949) 3.5. The Social Background of China’s War of Liberation On August 15th, 1945, Chinese people won the war and savored the rewards of their own heroism. That day was perceived as a gloriously historic turning point which represented that China ended the history of suffering the inhuman bullying and cruel invasion from imperialists. However, it was still far from the end. In terms of the adversarial relationship between KMT and the CPC, it could be anticipated that there would have a civil war breaking out in the following years. China’s War of Liberation, the third revolutionary civil war, was led by the Communist Party of China and started in June 1946. Four years later, with the tenacious struggle of Chinese People’s Liberation Army, the CPC marvelously brought the era of peace to the whole Chinese nation and Chinese people in June 1950. What needs to be clearly explained is that October 1st, 1949, was the day when Chairman Mao Zedong proclaimed the foundation of the People’s Republic of China, and since then, October 1st has been designated and celebrated as the National Day of China. However, that did not mean China was completely liberated at that time because Tibet, Guangdong, Guangxi, Sichuan, Guizhou, Yunnan, Hainan and Taiwan still remained engaged in the civil war. China was not thoroughly liberated until May 23rd, 1951. However, that kind of expression was still not historically precise because Hongkong and Macao remained colonized by Britain and Portugal. And the most intractable problem was the liberation of Taiwan where KMT withdrawn the troops, even today Taiwan’s return has been one of the most controversial region and country-specific political discussions. Therefore, to be exact, that liberation was directed at Chinese mainland. Tracing back to the history, after the War of Resistance against Japanese Aggression, China entered the period of the confrontation between the

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Kuomintang and the Communist Party of China. When Chinese people were celebrating the triumph of Anti-Japanese War in April 1945, Kuomintang and the Communist Party of China went on the new struggle on how the two sides could reasonably govern the China’s territories. That was, simply speaking, what parts should be ruled by the KMT government and only the rest would be divided into the CPC areas. Actually, it was fairly easy to find that Chiang Kai-shek attempted to govern the whole country and root out the CPC. On account of the appeal of peace from both home and abroad, he sent three telegrams to Yan’an (one of the most important base areas of the CPC) in April 1945 and invited Mao Zedong to come to Chongqing for negotiating the political affairs. The incident was correspondingly called Chongqing Negotiations. The leaders of the CPC had a clear recognition of the domestic and international situation, and most importantly, they predicted the conspiracy of civil war that would be launched by Chiang. At the beginning, both sides expressed their aspirations of developing China in a peaceful way to avoid civil war. However, the audacious ambition of Chiang was totally revealed by Manuscript of Suppressing Bandits which aimed at wiping out the CPC. The history of China’s War of Liberation could be divided into three main stages (actually there were still some battles later). The first stage was from June 1946 to June 1947, which was called strategic defense, where both sides went all out to prepare for the war. The second stage started in June 1947 and ended in September 1948. It was the turning stage that the CPC had distinct advantages over KMT in the key battlefields. The third stage represented the period of decisive battle between the two parties, which began in August 1948 and ended up with the Liaoxi-Shenyang Campaign, the HuaiHai Campaign and Beiping-Tianjin Campaign in December 1949. Finally, the Communist Party of China won and established the New China, which thoroughly changed the course of the Chinese history. In regard to the economic development, there were also sharp contrasts between these two parties. Within the KMT ruling areas, the government still took the path of semi-colonial and semi-feudal society. Under the oppression and exploitation of feudalism and bureaucrat capitalism, the economy of KMT ruling areas had to go bankrupt and collapse. On the contrary, the regions led by the CPC (called the liberated areas) had good momentum of economic development and people’s livelihood was significantly improved. As a result, it was not surprising to witness that the new democratic economy led by the CPC achieved the ultimate victory, which also meant the Communist Party of China was no longer an opposition party of the Republic China but the sole ruling party of the People’s Republic of China.

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3.6. The American Influence in Kuomintang Ruling Areas There were lots of political and social changes which took place after the AntiJapanese War. Because Japan was beaten by China and unconditionally surrendered, its imperialistic and fascistic forces totally collapsed. China retook the lost territories which included Manchukuo, Taiwan and surrounding islands. Meanwhile, the influence of the Great Britain was also declining due to the anti-fascist war of European battlefield. The United States, therefore, was the only foreign power existed in China and became the biggest external obstacle for the CPC to overthrow the ruling position of KMT. When tracing back to the history of American influence on China, it was apparent that the American government always backed up KMT and acknowledged the position of KMT as the ruling party and the government of Republic China. When Chiang Kai-shek came into power in 1927, the US gave KMT aid from politics, economy and other aspects. Although America continued to export strategic materials to Japan before the Pacific War happened in 1941, the US government also offered a series of loans to the KMT government and hoped to utilize the powerful influence of Chinese nation to weaken the expanding military forces of Japanese imperialists. After the end of the Second World War (1939-1945), Britain and France were inevitably in severe decline and suffered tremendous losses because they had to oppose and struggle with the German and Italian fascists on European battlefields. Thus, America became the only country that not only suffered little losses (except the Pearl Harbor Incident) but also developed its productivity to a large extent. During the year 1939 to 1944, American industrial output increased 1.2 times, and there was a significant growth on export as well. Its gold reserves increased from 14.51 billion dollars in 1938 to 20.08 billion dollars in 1945 which accounted for 59% of the total quantities of the whole capitalist world. Most strikingly, foreign investments of the US went up by a remarkable rate. In 1945, the amount America invested outside was 166.9 million dollars, and it increased to 216 million dollars just one year later, then it successively reached 289 million dollars in 1947, 313 million dollars in 1948, and 325 million dollars in 1949. Therefore, the United States of America undoubtedly became the biggest world power. The KMT government once abrogated unequal treaties signed with western countries during the Anti-Japanese War. However, in the period of the Chinese Civil War, the KMT government still agreed to sign the similar but seemingly reasonable treaties with American government. Those treaties included company law, Sino-US bilateral agreement, Sino-US agricultural

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agreement, Sino-US commerce and navigation treaty, which granted the US a series of new privileges. The New Company Law regulated that America was permitted to set up companies in China and American investors did not need to report their amounts of capital, so American-owned companies were free to be established in China and Chinese markets would be easily filled with American products. The Sino-US Bilateral Agreement also brought Chinese economy, finance, trade and resource to a passive situation because America had the supreme rights and dominated the market. From the Sino-US Agricultural Agreement, America improved the production of Chinese agriculture, which seemed to be a kind help. But in fact, according to trade theory, which could merely make China an agrarian country that was only capable of providing raw materials to meet the demand of the US. The SinoUS Friendship Commerce and Navigation Treaty reflected the privileges of America most. From the treaty, American citizens or organizations could come to China for work, traveling, settlement and all kinds of activities or groups. They could enjoy almost all the same treatment and rights just as Chinese people, even on the acquisition of real property. Different from the previous unequal treaties, these treaties also gave Chinese people reciprocal rights, so American requirements and attitudes toward China were relatively kinder compared with the former countries. It seems that both China and the US were equally treated, but it was just the words. In fact, China still kept its semi-colonial and semi-feudal national condition and relatively backward development level, while it was no exaggeration to say that America was a capitalist superpower that could dominate the world in most fields. Therefore, China was not able to exploit minerals, set up enterprises, buy real estate and export Chinese commodities to America by sea at that time, which directly benefited the US because there was no bilateral competition, and the US had the overwhelming advantages. In general, America possessed the new privileges from politics to economy, resource acquisition to cultural exports. After the US got the privileges from KMT, American economic influence came into China rapidly. First, a large number of commodities were imported. During the Second World War, America achieved great progress on production. However, according to the official statistics, the annual yields of America reached 20 billion dollars, but its selling situation was only around 8 billion dollars, so the supply much exceeded the demand. Undoubtedly, it must be urgent to find the markets where could sell plenty of surplus commodities, and China was the very potential market that not only had huge demand but also had little international competition. Therefore, after signing a series of

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treaties, the US could successfully send their goods to China and dominated the trade relationship. Specifically speaking, American products were delivered into China through the following channels. The first one was the economic institutions controlled by the US. For the uses and purposes of giving aids or reliefs, America sent its products through the institutions like the General Administration of Customs and the Relief Administration. Those products were mainly the surplus goods and materials including military supplies, grains, medicine, milk powder, cotton, cigarettes, lipsticks and so on, which ineluctably brought severe shocks and sharp downturn to Chinese national industrial and commercial enterprises. The second channel was the facilitating conditions of America given by the KMT government. The Sino-American Treaty of Friendship, Commerce and Navigation granted the US lots of privileges which were convenient for American businessmen to monopolize the market due to the situation that time (China was in a much weaker position in terms of production compared with the US.). More and more American companies could be established in China was the third channel, which was a formal way for American products exported to the Chinese markets. That was based on the New Company Law which was enacted by the KMT government in April 1946. Also, Chinese enterprises that were run by bureaucratic capitals promoted the American products with the Sino-US joint ventures. The fourth Channel was, dark and secret, continuously smuggling a large quantity of merchandises. And the main ports for smuggling were Shanghai, Tianjin and Kowloon, these three cities. Those smuggled goods were transported through American warships (America was the ally of KMT.), airlift, international parcels, and individual smugglers. It was estimated that the aggregate quantity of contraband goods could double or triple that of the officially registered imported goods through customs. And other economists speculated that the American goods smuggled to China accounted for 90% of the market in the US. However, because the concrete figures were hard to obtain, the situation could only be the result of observation and unofficial statistics. Through smuggling, American goods flooded into Chinese markets, it was commonplace to see those products displayed and sold in big cities and small towns, even in many shops of the villages there were a few of novelty goods made in America. A lot of citizens felt that Chinese people lived in an Americanized life, from basic necessities to military equipment, which made Chinese national industrial and commercial enterprises shut down or go broke easily.

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The US exported large amounts of capitals to China, and its proportion continued to rise especially during the Chinese Civil War. In the old society of China, foreign countries invested in Chinese markets mainly in two ways. One was direct investment which was nearly equivalent to FDI today, and another was indirect investment which worked as a loan system offering financial aid. The latter one held the dominance during the period of liberation war within the KMT ruling areas. After the Second World War, there were great changes on the investment proportion of foreign countries. 76% of the former foreign capitals invested by Japan and Germany were taken over by the KMT government because these two imperialist countries were defeated on the anti-fascist battlefields. In addition, the forces and influences of both Britain and France were considerably weakened by the European battlefield, so they were not competent enough to afford huge overseas investment. By contrast, the US got only a little loss, and its surplus capitals were badly in need of being exported or invested, which could be seen as the primary reason why America never ceased to increase its investment in China. According to the White Paper of the USA, the loans and financial aids were over 50% of the total fiscal expenditure of the KMT government that time, and American capitals covered almost all the fields in China.

3.7. The Collapse of Kuomintang Areas 1948 was the year when the Kuomintang government thoroughly collapsed, which signaled that the Communist Party of China would be much more likely to govern the country. Its collapse could be reflected not only in economy but also in politics, military and social stability. Even the president, Chiang Kaishek had to acknowledge that the economic situation was in severe crisis and the government must take emergency measures to solve it. The most obvious and concentrated aspect was the bankruptcy of finance. After the Anti-Japanese War, the KMT government launched the civil war, which became the major reason for its economic failure. Behind the civil war, large military expenditures directly resulted in financial difficulties with the increasing government deficit. In the circumstances, the spending on a division averagely cost 120 thousand yuan, so the aggregate expenditure was approximately 24 million yuan per month if the whole army of KMT was calculated as two hundred divisions. The costs of ammunition were not yet involved, so the actual expenditure of military was just about 86% of its budget. With the expansion of the war, KMT had to spend more on military.

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Based on the record of Second Historical Archives of China, the deficit of the KMT government massively increased. In 1946, its fiscal revenue was 2.2 trillion yuan, while the government expenditure was about 8 to 10 trillion yuan. And the situation of deficit rose to 27 trillion yuan in 1947. The severe financial crisis in the year 1948 and 1949 immediately made KMT ruling areas confront the forthcoming collapse. The most unreasonable way to settle this problem was overissuing the currency without the improvement of production, which could only lead to hyperinflation and chaos. If the government only focused on the quantity of the economy instead of the economic structure and quality, this was equivalent to bring itself to the brink of fiscal disaster, and even worse, the alternation of regime. In fact, as mentioned before, when it was the period of Anti-Japanese War, the KMT government had always taken overissue of currency as the method. According to the statistics of Chinese Academy of Social Sciences, From the June of 1937 to May of 1949, the amount of fiat money had a 144.5-billion-fold growth, but the price index, meanwhile, increased 36.6 trillion times. It was extremely rare to witness such an abnormal surging price which unavoidably caused the depreciation of Chinese currency. Vicious circle like this situation led to the complete collapse of the economy within the KMT ruling areas. Take Shanghai as an example, the price of rice rose from 20.9 yuan per unit in November 1948 to over 175 million yuan per unit in May 1949. The drastic decline of national industry and commerce could be regarded as another feature of the economic collapse in KMT ruling areas. Because each sector of the social economy had common characteristics and operation mechanism, monopoly position of American products debilitated the domestic industries and made those enterprises and factories extremely hard to survive. Besides, the administrative incompetence could further explain the collapse of national industry. After China defeated Japan, KMT accepted a large number of the industrial factories that used to be run by Japan. Nevertheless, these factories were badly managed later and many equipment and facilities which were truly needful for the operation and production of national industry were unadvisedly sold out. The more outrageous point was that the KMT government never cared about the national capitals, bank loans were controlled by bureaucratic capitalists, so it was arduous and troublesome for private enterprises to get financial support from official institutions. Lack of funds would indubitably give rise to harsh survival conditions for privateowned enterprises. The most essential cause also should be attributed to the incompetent governance of the KMT government. Although those KMT leaders eagerly

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desired to find the salvation and bring harmony to Chinese people, its corruptive administration and improper measures that went against the law of social development and livelihood of the people. For example, the Ministry of Economic Affairs of the KMT government directly controlled the steels and coal for industrial use, which could not guarantee the adequacy of industrial materials. Moreover, the unduly burdensome levies and soaring interest rates aggravated the excessive costs and then the factories became unable to normally produce. Many factories would rather engage in all sorts of illicit trading and speculative activities to keep the business alive, therefore, these manufacturers rushed for goods and materials, and sought for any possible opportunity of arbitrage in foreign exchange. Based on the situations above, the financial condition of KMT ruling areas was deteriorating with the progress of the Liberation War. It was estimated by the report of Liberation Daily that there were over 27 thousand factories and shops going broke in Shanghai, Wuhan, Guangzhou and other cities in 1947. And in Shanghai, there were even less than one hundred factories in April 1949, compared with that quantity of more than one thousand before. Agricultural production also failed to escape the situation by sheer luck. When it was the period of Anti-Japanese War, Japan ruthlessly plundered considerable resources and cruelly oppressed Chinese people, so the agriculture was severely destroyed. Unfortunately, the KMT ruling areas had to suffer further agricultural damage mainly because the KMT government launched the large-scale civil war. First of all, farm tax was publicly raised, which included levy on grain, low-price procurement and confiscation of food (take the excuse of borrowing food.). All kinds of exorbitant taxes and levies imposed extremely heavy burdens on peasants. Besides, the KMT government pressganged many able-bodied men, and so many young men in the villages were enforced to join the army. Since rural laborers were taken away, agricultural production was naturally influenced. In addition, the market was full of American agricultural products with lower prices, which brought direct shock to domestic agricultural industry. Last but not least, natural disaster was also one of the main factors that brought harms to plant growth. In 1946, there were at least 6 million agricultural acreages suffering from floods with a floodhit population of over 30 million people. Such bad situation continued to occur, it had been registered that the farmlands affected by foods reached 121.6 million Chinese acres and victims from the disasters were over 40 million people. Table 3.7 could partly tell the extent of decline, and to one’s surprise, the general output of national agricultural industry had a 24.5% to 81.8% decline.

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Table 3.7. Comparison of agricultural yields between the year with the highest production and 1949

National Grain Output

The Year with the Highest Production (Before the Anti-Japanese War) 150 million tons (1936)

Cotton Output

849 thousand (1936)

Peanuts Output

3.17 million tons (1933)

Tea Output

225 thousand tons (1932)

The Year 1949

Decline (%)

113.18 million tons 444 thousand tons 1.27 million tons 41 thousand tons

24.5 47.6 60 81.8

Source: China Statistical Yearbook 1983.

Severe damages of agricultural production also fully reflected the economic collapse of the KMT government ruling areas. Actually, all the aspects above could tell the fact that people lived in a life filled with soaring prices, high unemployment rate, broken families, unreasonable levies and taxes and farm crisis. The next part will introduce the correctness of the guidelines and how the new-democratic economy led by the CPC developed, which makes a sharp comparison with the ruling situation of KMT.

3.8. The Victory of the New Democratic Economy The contents of social background on China’s War of Liberation (Chinese Civil War) and economic development of KMT ruling areas were stated above. This section is going to introduce and analyze the concrete policies made by the Communist Party of China and the achievements during that period. Also, today’s concepts and beliefs of governance of the CPC could find their traces at that time because it is a party that stands on the people’s side, with all the decisions directed to national conditions. Therefore, it is easy and obvious to understand that each step the CPC chose has been based on the principal contradiction and mass line. It is by such a strong ideology that China has overcome a series of major setbacks and achieved breakthroughs since the CPC was founded. After the War of Resistance against Japanese Aggression, class struggle escalated to the principal contradiction, so the leaders of the CPC changed to carry out confiscating lands from landlords rather than the policy of reducing

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rent and interest rates in the Anti-Japanese War. And that was one of the three economic programs of new-democratic revolution, with its confiscation being aimed at implementing land-to-the-tiller policy which meant the lands of landlords should be accordingly distributed to the peasants who worked for landlords but did not have their own lands. Therefore, even the poor peasants could possess their own lands to plant. The policy mentioned was known as agrarian reform which could mostly distinguish from other political measures. Because the majority of Chinese people were engaged in agricultural production, taking care of people’s interests roughly meant dealing with the living standards of peasants properly. The policy of reducing rent and interest rates had aroused dissatisfaction of peasants towards the feudal system of land ownership because they were excessively exploited by landlords. The formulation of agrarian reform was thus a key measure that could fundamentally meet the needs of peasants and safeguard their basic interests. To be precise, the policy of agrarian reform was proposed on May 4th, 1946, when the CPC issued the Instructions on Land Issues (The May 4th Instructions). Its main content could be generalized as three points. First, lands from squires, Chinese traitors and despotic landlords must be confiscated and allocated to the peasants. In that way, people who lived at the bottom could improve their living standards, while those who always monopolized the natural resources and exploited peasants were supposed to be dispossessed the properties. Second, the lands from the rich peasant class would be generally remained changed. The definition of rich peasants was that people who had some lands and hired long-term farm laborers but still participated in the agricultural production. That feature could distinguish between the rich peasants and landlords because the latter class just waited for the harvest and never did the work. For the purpose of protecting the interests of the masses, the lands of rich peasants were therefore remained. Third, with regard to the lands of enlightened open-minded gentries, the CPC also decided to remain those lands because people of this class cooperated with the CPC and often gave financial supports. After the KMT government launched the civil war, the May 4th Instructions was implemented more actively in many liberated areas, and peasant masses enthusiastically participated in agrarian reform. By October 1946, peasants in the liberated areas of Northeast China had got 26 million Chinese acres of lands which meant each person could averagely get six to seven units of lands. Two months later, there were more than 15 million peasants in Shandong, Jiangsu, and Anhui provinces that had been given farmlands. In fact, the May 4th Instructions worked as a transition from the

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policy of reducing rent and interest rates to equal distribution of lands. Because of the fast war process since the July of 1947, the Chinese People’s Liberation Army turned the strategic defense to strategic offense and the revolutionary situation developed rapidly. Then agrarian reform was required to be further pushed forward so that the broad masses of peasants could raise their revolutionary enthusiasm and join the army of the CPC. In September 1947, the Communist Party of China held a national conference that summed up the experience of agrarian reform, and formulated a new policy of agrarian reform, that was, Outline Land Law of China. The main purpose of that outline was to abolish the feudal system of land ownership and put the policy of land to the tillers into effect. Firstly, all the public lands and farmlands owned by landlords should be distributed to the total rural population regardless of age and gender. In that way, the whole village could be equally treated. Secondly, surplus lands of the rich peasants would be confiscated so as to take care of the interests of those who needed lands more urgently. Thirdly, interests of the middle peasants were supposed to be protected as well as the properties of industrialists and businessmen, and all the debts left before the agrarian would be canceled. That outline was based on the experience of agrarian revolution in the past 20 years and clearly corrected the unreasonable points in the May 4th Instructions. For example, from the instructions, landlords could get more lands and properties compared with the distribution situation of peasants, and the properties of the rich peasants were generally unchanged. Because the Outline Land Law of China aimed at eliminating the feudal system of land ownership, it was suitable for the actual situation of China and met the demand of vast peasantry. However, when implementing the policy from the outline, there still existed some political biases. Specifically, these biases were called ‘Left’ deviations which could be reflected from the infringement on the interests of the middle peasants, industrialists and businessmen. In order to rectify and reform, the CPC made the general line of this agrarian reform. It could be concluded that the revolution should rely on the poor peasants, unite the middle peasants, orderly eliminate the feudal system of exploitation and develop agricultural production. This general line of agrarian reform reflected the reality of Chinese rural economy, so it conformed to the objective requirements there. From the history, the poor peasants and farm laborers were the majority of Chinese people, and they were the groups that suffered the most severe oppression. Therefore, agrarian reform was mainly to satisfy the land requirements of those peasants. What needs to be illustrated here is that such distribution did not go to extremes in absolutization, which means that the land

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distribution was not absolutely equal. The middle peasants were the power that united all the peasant classes and worked as the basic laborers, so they would be distributed more lands compared with the poor peasants. New democratic revolution was directed at the struggle on feudalism and bureaucrat capitalism, rather than national capitalism. Under the leadership of the CPC, the agrarian reform developed rapidly. It was estimated that in the liberated areas, which covered 2.3 million square kilometers with 270 million of population, there were 150 million people who participated in the agrarian reform, and over 125 million peasants successfully got the lands. That reform fundamentally altered the land tenure relationships between the classes, so the significance of the reform was that the system of feudal exploitation in rural economy was abolished, and most notably, it emancipated the productive forces and inspired the vast peasantry to engage in agricultural production. The feudal system had oppressed the Chinese nation for thousands of years and largely impeded the development of democratization and industrialization, so the completion of agrarian reform in the liberated areas marked the victory of Chinese peasant revolution and laid the foundation for the nation building in the future. In the areas where the agrarian reform had completed, the Communist Party of China organized the peasants to join in mutual-aid and cooperation which was the specific way of agricultural development at that time. The essence of Chinese mutual-aid and cooperation was to effectively organize the rural laborers and solve the problem of manpower shortage in the villages. In that way, peasants could be united to plant the crops no matter whether the farmlands were of their own. As the civil war progressed, civilian war services were increasingly needed, therefore, a large number of rural labors were sent to work for the frontline, which inevitably resulted in the lack of work force in countryside. Such form of cooperation developed rapidly and truly improved the efficiency of agricultural production. By the end of 1945, there had been some mining areas in medium-sized cities like Yantai, Zhangjiakou, Linqing, Changzhi and so on. In addition to the stability of the political order, revitalizing the urban economy also became the major task of the Communist Party of China. Under the guidance of the CPC, many cities recovered their industrial production. Take Yantai, a city of Shandong province, as an example. When the Japanese puppet regime ruled it, over eight hundred shops went bankrupt and most factories had to face the economic depression. After the liberation of Yantai, a variety of measures were taken by the CPC government to improve the productivity and all the exorbitant taxes and levies were canceled.

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Moreover, business loans were strongly supported so that the capital flow could be effectively guaranteed, and finished products could be smoothly promoted as well. Just three months after Yantai was liberated, the number of shops increased from 3,216 (before the liberation) to 5,742. In industry, there used to have 57 textile factories, but only five or six of them went into production. By December 1945, 45 factories had resumed business and most of those textile factories reopened before 1947. The economic recovery of industry and commerce largely ensured the social production and employment. Many people got their jobs back and then were able to raise families, the stability and social order of the liberated areas led by the CPC could thus be improved. Many ills of the feudal systems were eliminated, productive forces were unleashed and most exploitation systems were abolished, which substantially raised workers’ motivation on social production. The economic policies made by the Communist Party of China were different between the bureaucrat capitals and national industry and commerce. The CPC implemented the policy of confiscation on the bureaucrat capitals, while national industry and commerce were protected. That decision was based on the nature of national bourgeois class and the roles they played in the whole national economy. Because the Chinese economy was backward at that time, national bourgeois class could provide huge potentials on job opportunity, financial support and economic operation. According to the economic distribution, the existence of that class was conducive to the development of economy in the long term. Therefore, national industry and commerce served as indispensable parts during that period, and it was widely acknowledged that the guidelines of new democratic economy should conform to the law of social development. To achieve the goals of economic prosperity, it urged the leaders of the CPC to take care of the interests of both public and private sectors. Under the guidance of the CPC and other democratic governments, national private industry and commerce developed fast. The registered number of established enterprises in Beijing got a 60% increase from 1948 to 1949. More than 90% of the private-owned factories in Tianjin put back on production two months after the liberation. There were just around 7 hundred factories of private industry and handicraft industry in Shijiazhuang in 1947, but the quantity rose to over 1,700 a year later and the situation of private shops increased from 1,500 in 1948 to 170,000 in 1949. Mudanjiang City also had an incredible transition. It used to be a city that was filled with tobacco houses which mainly sold opium. But after it was liberated, all of those houses

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were banned and legitimate industry and commerce were positively supported. By July 1948, there were 4,770 industrial and commercial enterprises, among which 1,238 enterprises were engaged in industrial production and operation including machine building, spinning and weaving, chemical engineering and so on. The liberation made Mudanjiang transition into an emerging city that was full of productive potentials. In general, as more big cities were gradually liberated, the Communist Party of China strongly supported legitimate industry and commerce, and rigorously cracked down on illegal and speculative business especially on hoarding and profiteering. Because those businesses would inevitably break the rule of markets and caused vicious competition, the leaders had to face such phenomenon and deal with the problems so as to stabilize the markets. Those measures were proved to be effective and prompted cities to develop the economy. During the period of Liberation War, the general economic principle was still developing economy and ensuring supplies. In order to solve various financial problems, the Communist Party of China implemented the policies that were aimed at production development, centralized leadership, decentralized management, taking care of the interests of the army and people and sustainable production. Especially after the year 1947, when the liberated areas were continuously expanding with the growing proportion of the Chinese People’s Liberation Army, fiscal expenditure greatly mounted up. Besides, it was urgent to construct transportation and improve production in the new liberated areas, which also needed financial support by the CPC. However, the expenses were much more than the fiscal revenue. In those cases, the People’s Government (established by the CPC) moderately raised the taxes in the old liberated areas and put people in the new liberated areas back into production. Although those measures would certainly put extra pressure on peasants and other laboring people, it still could be understood by people in such special circumstances where the CPC fought with the KMT and spared no efforts to struggle for national liberation and bring domestic peace. Finance was extremely important to a nation when a war or disaster occurred. The first way was to manage the financial business through setting up new banks by the CPC and local People’s Government. To be more specific, the financial institutions that used to be controlled by the enemy and the puppet regimes were taken over. According to the regulations, all of the banks or financial institutions that were directly managed or run by the Kuomintang government and bureaucrat capitalists would be confiscated. If national industrial and commercial entrepreneurs had relevant shares in these institutions, they could still hold their ownerships once after verification. With

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regard to the official-merchant joint banks, like Commercial Bank of China, Industrial Bank of China and New China Trust Bank were supervised by the People’s Government. When the work of takeover finished, all the branches of People’s Bank of China were established in big cities, regarded as financial hubs in each area. After that, organizations affiliated with those branch banks were set up to strengthen the financial administration, conduct businesses, eliminate the old power and build new financial orders. Besides, confiscating policy was one of the basic measures on nationalization that made those bureaucrat-capitalist banks owned by the whole people. After the expropriation of those banks, their capitals were transformed into government shares with the nature of joint state-private enterprises. Therefore, most financial institutions were reinvented based on different situations so as to crack down on speculative activities, support the production and serve for the industry and commerce. The second way was to unify financial service. With the expanding territories of the liberated areas, it was necessary to carry out the unified requirements of financial operations that could be a recipe for currency chaos. The two main kinds of currency that were directed at were the currency issued by Japanese puppet regime and legal tender used by the KMT government. Since the former one was prevalent in the Northeast China, rooting out that one was a matter of cause after the Anti-Japanese War. In terms of the latter one, the KMT government attempted to carry out the legal tender in the liberated areas so as to weaken the influence of the CPC there. To deal with the situation, the leaders of the CPC strongly insisted on the implementation of unified currency with a firm attitude even through military method. With the rapid expansion of the liberated areas from 1948 to 1949, the banking sector started to conduct businesses in an official way, the currency finally had a tendency of getting unified and was used in the social economic cycle. This part mainly introduces the governance of the Communist Party of China from agrarian reform, industrial and commercial development and the overhaul of financial industry. It is clear that the ruling of CPC was more concerned about the social development and people’s livelihood, while the KMT government primarily focused on the victory of the war and its political power. No matter in the Anti-Japanese War or the Chinese Civil War, the two parties had totally different attitudes on military strategy and concept of governance. History has proven that the value of the CPC could adapt to the national conditions of semi-colonial and semi-feudal society at that time, therefore, this great Party is destined to lead China and created brilliant miracles.

Chapter 4

Early Governance of the People’s Republic of China After the War of Liberation, China entered the period of economic recovery and socialist construction. Therefore, it was a transition from a new democratic country to a socialist country, and there were two stages led by the Communist Party of China and the government during the transition period. The first one was from the year 1949 to 1952, aiming at recovering the national economy and paving the way for the development of the next stage. The second one was to construct the system of socialism from 1953 to 1956, and meanwhile, the first five-year plan (1953-1957) was made to support it. In this chapter, there are two parts stating the economic policies and conditions of those years, each part corresponds with its stage and continues from the preceding chapter or context. Since the contents of this chapter are the initial phase of the construction of the People’s Republic of China, it can even help readers to understand the Chinese systems and the ways of economic development nowadays.

Part I: The Period of Economic Recovery (1949-1952) The foundation of the People’s Republic of China (PRC) on October 1st, 1949, marked the end of imperialist aggression on Chinese territory and feudalism oppression on Chinese people. However, China had been a semi-colonial and semi-feudal society for over a century, so it still needed unremitting efforts from both the leaders and people to build New China and completely eliminate the residual forces. At the beginning of New China, its economic condition and development models were truly backward. Because the economy of modern China used to consist of foreign capitals, bureaucrat capitals, national capitals, and feudal economic system, it was quite difficult to make effective policies and measures to govern such a big country with complicated economic structures and reconstruct the national economy. Under the leadership of the Communist Party of China, new democratic economy sprung

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up in the base areas and it represented a progressive economic form opposite to the semi-colonial and semi-feudal economy. Correspondingly, the People’s Republic of China was a new democratic country from 1949 to 1956, until socialist transformation was completed in 1956 when China officially entered the primary stage of socialism. To be precise, the years from 1949 to 1956 were called the transition period and divided into two stages. The first stage was from 1949 to 1952, aiming at the economic recovery and the elimination of residual forces from both the economic control of foreign countries and existing political influence of Kuomintang. The second stage started in 1953 and began its program of socialist industrialization, ended with the completion of three great transformations on agriculture, handicraft industry, capitalist industry and commerce in 1956. In this part of the chapter, the main contents are focused on wiping out the residual forces from two sides and concrete measures of economic recovery.

4.1. Elimination of Residual Forces According to the second Plenary Session of the Seventh Central Committee of the Communist Party of China in March 1949, any of the diplomatic establishments founded by Kuomintang would not be acknowledged the legitimacy by the Government of the People’s Republic of China. Similarly, all of the treaties signed between KMT and foreign countries were going to be canceled, so were the foreign propaganda authorities. The Chinese government controlled the foreign business and reformed the customs system, but still protected the legitimate interests of resident aliens and permitted some foreign economic and cultural undertakings to go on. As a result, the government regulated that foreign companies abiding by the Chinese law would be protected, and respected their property rights and autonomy in management as well. After the liberation of the whole country, the Chinese government immediately began its work on rooting out the foreign forces which were mainly their privileges in China. The primary task was to take back the customs and then all the unequal treaties were planned to be resolutely abrogated. Once a city with customs was liberated by the Chinese People’s Liberation Army, its customs would be taken back right away and waiting for the following reform. After the Central People’s Government of China took back all the customs, General Administration of Customs was established on October 25th, 1949, and was directly led by the Government Administration Council which managed the national customs in a unified

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manner. Any operation system of customs that was related to the interests of foreign countries was going to be abolished, but some reasonable and effective management techniques like customs inspection and statistics were still remained. In the past, the Chinese market was full of foreign products, which considerably hit domestic industry and commerce. Thus, China immediately controlled the foreign business and implemented the policy of independent foreign trade once after the customs was taken back for the purpose of radically altering the nature of semi-colonial and semi-feudal society. One of the main measures was to set up foreign trade organizations of New China based on the import and export enterprises confiscated from Kuomintang government and bureaucratic capitalists so as to establish the dominant position of the Communist Party of China. Other measures were strengthening customs supervision and management on imports and exports, controlled procurement and distribution on important goods, regulating the registration system, putting a ban on the imports and exports of goods prohibited by the government. Besides, foreign exchange was controlled by the state and the government wanted to rebuild the business relations with foreign countries on the basis of the equality and mutual benefit. There were 1,192 foreign enterprises with 126 thousand staffs and 1.21 billion yuan in assets when People’s Republic China was founded in 1949. Among those foreign assets, the aggregate proportion of Britain and the USA reached 89%. Due to the loss of privileges, their economic monopoly positions in China were successively weakening. Most of those enterprises shut down or withdrew the capitals, and the rest of them encountered many difficulties like production decline and adverse operating environment. For example, British-owned tobacco companies in Shanghai produced 59% of the national cigarette output when it was 1937, while the proportion dropped to only 5% in 1950. The yield of British cotton yarn was less than 20% that of prewar period. By the end of 1949, American banks including Citibank, Chase Bank, Bank of America, American Express Bank and Aia Bank closed their business one after another. Even worse, after these foreign countries imposed an embargo and blockade against China in December 1950, China proclaimed the decision of freezing relevant foreign assets. As a result, many foreign invested enterprises were not able to survive any more, especially those relying on import commodities and raw materials. Since May 1951, a lot of American companies declared the closure of business, so did the British and French companies. Bureaucrat capitals were also confiscated once after New China was founded because that economic form developed as monopoly capitalism

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through comprador bourgeoisie. It was characterized by the strong feudality and comprador capitalism, which absolutely monopolized the lifeblood of national economy and severely obstructed the development of social productivity. Before the establishment of the People’s Republic of China, bureaucrat capitals accounted for two-thirds of the whole capitals and 80% of the national industry and transportation industry. Besides, it monopolized 90% of the steel production, 67% of the electric energy production, 100% of the petroleum and nonferrous metals output, 59% of the total bank capitals and 100% of rails and roads. Once the Chinese People’s Liberation Army liberated a city, the work of confiscating bureaucrat capitals immediately started just as the situation of taking back customs. As a result, all the factories, diggings, railways, steamships, banks, shops and other enterprises that previously belonged to KMT were then managed by the government of New China which was led by the working class. Therefore, the work of confiscating bureaucrat capitals was soon finished in 1951, and the confiscated capitals, enterprises, properties became the main sources of socialist state-owned economy. Although China was not yet a socialist country, the government construction and general line of the first three years after its founding paved the way for the following establishment of the socialist system. After the bureaucrat capitals were confiscated, the influence of socialist state-owned economy was unprecedentedly powerful effect on social operation. The confiscation of bureaucrat capitals just changed the ownership of the enterprises. It did not mean that those enterprises had totally turned into the socialist nature because they needed further internal democratic and productive reforms. First, those enterprises would be supervised and indirectly managed by military representatives who were designated by the government which would then work as the factory managers to run the enterprises. Second, the systems of oppression and slavery left in the old enterprises must be fundamentally abolished. Third, any counterrevolutionary or residual feudal force must be purged. Fourth, all the colleagues in one enterprise should improve the relationships between staff and workers. Fifth, wages should be gradually adjusted based on the principle of distribution according to work. Moreover, the system of factory manager responsibility was carried out, which meant factory managers were responsible for the production and operation, and administration management which was combined with the model of democratization management. According to Financial and Economic Commission of the Central People’s Government Council, factory management committee was established to carry out the democratic reforms. The factory committee consisted of factory managers, assistant managers,

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chief engineers, staff and reasonable quantity of workers in each workshop. The tasks of the committee of each factory were to discuss the problems on management and production, and then find out the possible solutions and make the decision based on the instructions of higher authority and the practical situation. Those tasks were like production plan, business operation, management system, production organization, personnel reduction, wage and welfare, regularly checking up the performance and summarizing the work. If the managers thought the resolution passed by the committee was against the interests of factory or failed to meet the requirement of the top-down instructions, they were granted the rights to stop its execution and reported to their superiors at once. In the process of democratic reform of the enterprises, the division of labor was clear-cut. There were four departments in each enterprise: they were Party branch, administration, trade union and Youth League branch. The Party branch was mainly responsible for leading the correct political thinking and supervising the administrative work. The fundamental tasks were assigned by state plans for the purpose of developing socialist production. Therefore, factory managers were in charge of the work of production and administration. The responsibilities of trade union were encouraging organizing the workers and staff to put efforts into their work to ensure task progress, improving the living conditions and protecting their interests. Youth League branch was in charge of educating youth workers and the members of the Communist Youth League of China, motivating them to produce, study, and actively participate in the physical activities. As a result, such democratic reforms largely raised the class consciousness and labor enthusiasm of the masses, laying the foundation of the production reform. By the year 1952, residual forces were eliminated and socialist productive relations of enterprises were strengthened. The Party launched a campaign to raise production and practice economy on this basis, and continued to improve management so as to give full play to their initiative and creativity. In 1952, more than 2.38 million workers participated in the patriotic campaign of production drive. They gave reasonable suggestions and stimulated the production development. There were many progresses achieved from democratic reform and that campaign. For example, utilization rate of power equipment increased 82% in 1952 compared with the situation in 1949. The recovery percentage of state-owned coal mines went up from 30% to 75%, the productive capacity of all kinds of machine tools had a fourfold to fivefold increase. Therefore, the product yield from industrial sectors had sharply risen with gradual cost reduction.

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4.2. The Agrarian Reform As mentioned in the preceding chapter, agrarian reform was one of the major tasks during the period of new democratic revolution, and one of the key tasks during the transition period as well. It was continuously adjusted and carried out based on the conditions during the wartime, so it was supposed to move on after the founding of the People’s Republic of China. Different from the previous period, the completion of agrarian reform in transition period marked the improvement of national finance and economy. Historically, although capitalist economy got development to some extent in modern China, feudal land system was still prevailing in rural areas. Such feudal systems were the causes of oppression, poverty and backwardness. It was impossible to fundamentally boost the rural productivity if such situations continued, and hard to guarantee the interests and living quality of the general public especially the manual laborers. Thus, agrarian reform was implemented for the political purpose of radically changing the situation. In essence, the agrarian reform led by the Communist Party of China was to distribute the lands and properties from feudal exploiters to peasants who were in urgent need of basic living security. And most importantly, agrarian reform emancipated the productive forces from social constrains of feudalism, which greatly invigorated the national economy from agricultural production. Therefore, such agricultural development opened up a new way to the later industrialization process of New China. According to Agrarian Reform Law of the People’s Republic of China enacted by the government in June 1950, the implementation of land ownership of peasants was based on the abolishment of feudal exploitation of land ownership by the landlord class. The law regulated two basic principles, to meet the requirements of the poor peasants and farm laborers, and to forge a unity with the middle peasants. The lands, farm animals, farm implements and surplus crops and houses were confiscated from landlords, and then allocated to the peasants who desperately needed those means of production. What needs to be explained is that agrarian reform was not struggling with landlords but directed at eliminating the landlord class. Therefore, as far as the landlords themselves, their interests and basic livings should also be protected. Likewise, landlords could be distributed the lands and other things after confiscation, but other properties such as private industrial and commercial enterprises run by landlords were still remained. The law also regulated the lands and other properties of the middle peasants were not going to be confiscated because they were then perceived as the groups that could unite

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both the rich and poor peasants. As for the rich peasants, the policy shifted from confiscating the surplus lands regulated in the Outline Land Law of China in 1947 to maintaining the rich peasant economy. To be more specific, lands that were grew their own and by hired laborers should be reserved, and their leased lands would be expropriated just in some certain cases. The reason why the CPC carried out preserving the rich peasant economy was based on the change of social situations. Because the revolutionary war almost ended and democratic revolution got the final victory, economic construction became the fundamental task of the whole country. Meanwhile, people throughout the nation formed a political unity, so it was a timely moment to recover the economy, and the attitude towards the rich peasants should correspondingly change. Hence, adopting the policy of reserving the rich peasant economy was conducive to production recovery, economic development and social stability. If the rich peasants supported and coordinated the work of the CPC, then the landlord class would fall into deeper political isolation, which made it highly likely to urged landlords to accept the social transformation and obey the law. Besides, it could also allay some concerns of peasants especially the middle peasants on development process. The campaign of agrarian reform began in 1950 and basically completed at the end of 1952 with an over 90% participation of the nationwide peasants except those in minority regions like Xinjiang, Tibet, and Taiwan. The completion of agrarian reform truly had positive impacts on agricultural development. First of all, it significantly raised the enthusiasm of peasants to produce after getting the lands and other means of production. Therefore, the production recovery greatly improved the living standards of farmers. The population of China in 1952 was 575 million among which nearly 300 million peasants benefited from the agrarian reform. They were given 700 million Chinese acres of lands and other production goods, and were also exempt from the heavy rents which were about 35 billion kilograms crops. After the campaign, the poor and middle peasants hold over 90% of the whole agricultural acreage, the rich peasants and landlords only had about 8% of the lands. Therefore, the feudal system of land ownership was totally abolished, and peasants became the owners of the lands and other means of production, which considerably unleashed the productivity. Finally, the aggregate output of agricultural production in 1952 was 48.5% higher than that in 1949. During the three years, the average output of crops grew at 12.9% per year, the yield in 1949 was 113.2 billion kilograms and it reached 163.4 billion kilograms in 1952. In addition, agrarian reform largely raised political awareness of peasants, and the vast peasantry became pillar of people’s political power,

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which consolidated the people’s democratic dictatorship and the alliance of workers and farmers. Moreover, it also promoted the development of cultural and educational programs in the countryside. After the campaign was launched, it was common to see the phenomena of establishing the literacy classes and the newspaper groups. Many adults joined the study groups, and learning knowledge soon became a hot trend in the rural areas. The Communist Party of China always holds the opinion that peasants should be organized and joined in the mutual aid and cooperation. As mentioned in Chapter 3, the mutual aid and cooperation was a form set up to solve the problem of labor shortage in rural areas during the wartime. Therefore, after the agrarian reform was completed, it turned into a golden opportunity to avoid decentralized production and improve the efficiency. Most poor and hired peasants became the middle peasants that accounted for 80% of the rural population, which formed a favorable condition to develop the individual economy of small production. However, that situation went against the government plan of centralized production and seemed to have the trend of decentralization. On the other hand, it was irrational and abrupt to compel those peasants to suddenly take up concentrated production because their enthusiasm ran high just now. Therefore, the CPC insisted on uniting with the middle peasants that were already the majority of rural population and led them to go on a centralized way. The Party advocated and praised the agricultural production enthusiasm of peasants, but clearly said that there existed the problem of decentralization which would cause great difficulties to mass production. Therefore, peasants should be organized to develop mutual-aid and cooperation on the principle of voluntariness and mutual benefit. Under the leadership and demand of the CPC, there were more than 8 million mutual-aid groups established in 1952, and 40% of peasant households nationwide joined the groups. There were three forms of the agricultural mutual aid and cooperation. The first one was simple labor mutual-aid group which was featured by small scale and temporality. According to that form, one group included three to six households and group members only gathered when it was busy season. They worked together and helped each other, which was called common labor. That kind of mutual aid and cooperation organization had an important impact on agricultural production recovery, overcoming the shortage of rural labor and farm implements. The second one was all year-round form which had a much bigger scale. It was combined with production technologies so as to improve the productivity. Because this kind of organization made the simple labor and division more efficient, many peasants actively supported it. The third form

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was cooperatives. According to that form, peasants could take their lands as shares. Because of some certain work like water conservancy construction and land reclamation, large stretches of lands had to be used for these big projects. Hence, peasants could voluntarily participate in the programs and get some financial or material rewards if they were willing to take their lands for public use. That form represented a collective economic organization based on private ownership and had semi-socialist nature.

4.3. Unified Financial Management Admittedly, at the beginning of the founding of the People’s Republic of China, the Chinese government had to face the serious economic recession. Soaring prices and severe financial deficits were two major difficulties that the Party had to confront. In order to stabilize the prices, the Chinese government took the leadership from venture capitalists and then built a market environment of fair competition. Therefore, the government chose to develop state industry and set up state-owned enterprises in urban areas. As for the countryside, implementing cooperative economy was the main measure to develop the rural areas because it could facilitate the purchase and transport of industrial and agricultural products. Meanwhile, the market management system was under construction, combined with administrative measures like establishing the leadership position of the People’s Bank of China and underselling the staple commodity, so as to combat the speculative forces. Production recovery in both urban and rural areas played a key role in developing the economy. The first stage of transition period was also going through the Korean War when the capital turnover was needed to support the front line, so it was extremely difficult to improve the state finance. However, the Chinese government still put money into construction such as building farmland, water conservancy, transportation, and so on. Thus, production recovery was largely conducive to stabilizing the market prices. On dealing with the deficits, government managed the national revenue and expenditure, cash flow, foreign exchange, allocation and transport of material subsistence. Under the centralized and unified leadership on financial management, strengthened tax system and the issuing of public debt restored the financial balance, which could be known from the following tables.

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Table 4.1. Total revenue and expenditure of state finance Unit: 100 million yuan Year Total Revenue Total Expenditure 1950 65.2 68.1 1951 133.1 122.5 1952 183.7 176.0 Source: China Statistical Yearbook 1983.

Balance of Payment -2.9 +10.6 +7.7

Table 4.2. Composition of national financial revenue Unit: Percentage (%) Year

Revenue of Taxes of Various Kinds Enterprises Total Revenue Total Industrial Agricultural (%) from (%) and Tax (%) Industry Commercial (%) Tax (%) 1950 13.4 6.8 75.1 36.2 29.3 1951 22.9 9.1 60.9 35.6 16.3 1952 31.2 11.7 53.2 33.5 14.7 Source: China Statistical Yearbook 1983.

Revenue from Debts (%)

Other Revenue (%)

4.6 6.2 5.3

6.9 10.0 10.3

Table 4.3. Composition of national financial expenditure Unit: Percentage (%) Year

Infrastructure (%)

Appropriation Fund for Enterprises (%)

1950 18.4 / 1951 22.1 / 1952 26.5 10.6 Source: China Statistical Yearbook 1983.

Operating Expenses on Education, Science and Culture Programs (%) 7.4 8.6 7.7

National Defense (%)

Public Administration (%)

41.1 43.0 32.8

/ / 8.3

According to Table 4.1, thanks to the policies made by the CPC, the total revenue greatly increased in 1951, which could solve the tough problem of deficit. Among the composition of revenue in Table 4.2, the proportion of enterprises went up around 9% each year, and revenue from industry also grew by 2.5%, from which we could know the fact that industry and production recovery truly promoted the development and improved the economic situation. Meanwhile, the proportion of revenue from agricultural tax

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decreased from 29.3% to 14.7%, which reflected the effectiveness of agrarian reform and mutual aid and cooperation because the improvement of agricultural production largely supported the operations and efficiency of industrial and commercial enterprises. From the situation of expenditure shown in Table 4.3, the expense proportion of national defense dropped from 41.1% to 32.8%, which consisted with the closing stages of the Korean War. In general, the unified management of state financial work bolstered the economic development in both urban and rural areas, and paved the way for the national construction and transformation in the following years. During the first stage, both the Communist Party of China and the Chinese government made a series of policies that exerted positive influences on all aspects of national economy. As a result, the manufacturing industry, agriculture, transportation, domestic and foreign trade achieved great progress and people lived a much better life compared with that of wartime situation. In the old society, the aggregate value of modern industry output only accounted for 10% of the total value, while individual farming and handcraft industry occupied over 90%. Even in such little proportion, most of the industrial enterprises were invested and set up by foreign countries and bureaucrat capitals of Kuomintang, so the industry owned by national capitals was fairly weak. Besides, light industry produced more than 70% of the output, and the production of heavy industry accounted for less than 30%. Therefore, based on the production structure at that time, the majority of the industrial production was means of subsistence which were aimed at meeting the basic living needs of people, but the production of means of production was taken as the measures of productive force. That might be one of the major reasons why industry developed so slowly in modern China. After going through the massive devastation brought by war for several decades, the industrial output continued to plummet to record lows during the war. When the People’s Republic of China was founded, the CPC implemented the policies directed at canceling the privileges of foreign countries and confiscating the bureaucrat capitals of Kuomintang, which created a new business environment in which socialist state-owned enterprises emerged as the times required. As shown in Table 4.4, industrial output had a rapid growth during the first stage of transition period. The total value in 1952 increased 149% of that in 1949, and the average growth rate from 1950 to 1952 was 34.8% per year. In the past, the production was extremely unbalanced between the heavy industry and light industry, but the situation changed after the establishment of New China. The output proportion of the light industry gradually decreased

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while that of the heavy industry kept increasing. According to the official statistics, the proportion of light industry in total industry was 73.6% in 1949 while it went down to 64.4% in 1952. Moreover, there were also many changes in different kinds of industrial output (Table 4.5). Table 4.4. Recovery and development of industrial production Unit: 100 million yuan Index: 1949 = 100

Total Value of Industrial output Index Source: China Statistical Yearbook 1983.

1949 140.2 100

1950 191.2 136.4

1951 264.0 188.2

1952 349.0 244.9

From Table 4.5, it was clear that the five types of industrial output value greatly increased, but their proportion greatly changed. The first two types of industry represented the economy with socialist attributes: they went up from 26.7% in 1949 to 44.5% in 1952. And the industrial enterprises with publicprivate partnership were semi-socialist: its proportion also rose from 1.6% to 4.0%. However, the share of national capitalist industry decreased from 48.7% to 30.6% and individual, and the proportion of individual also had a 2.4% decline. Therefore, it was apparent that the development of socialist industrial construction had come even at the first stage. Table 4.5. The changes of different types of industry Unit: 100 million yuan Year

1949 1950 1951 1952 Source:

Total

Owned by The Whole People

Collective Ownership

Public-private Partnership

Value & Proportion (%) 140 36.8 0.7 2.2 (100%) (26.2%) (0.5%) (1.6%) 191 62.5 1.5 4.1 (100%) (32.7%) (0.8%) (2.1%) 264 90.8 3.4 8.0 (100%) (34.5%) (1.3%) (3.0%) 343 142.6 11.2 13.7 (100%) (41.5%) (3.3%) (4.0%) China Statistical Yearbook 1984.

Privateowned

Individual

68.3 (48.7%) 72.8 (38.1%) 101.2 (38.4%) 105.2 (30.6%)

32.2 (23.0%) 50.3 (26.3%) 60.1 (22.8%) 70.6 (20.6%)

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Under the leadership of the CPC and the government, agricultural production was truly improved through the efforts and cooperation of the rural residents. According to Table 4.6, the total output value grew from 326 million yuan in 1949 to 484 million yuan in 1952, almost a 50% increase. Table 4.6. Growth of agricultural output value Unit: 100 million yuan Index: 1949 = 100 Year Total Output Value 1949 326.0 1950 384.0 1951 420.0 1952 484.0 Source: China Statistical Yearbook 1984.

Index 100 117.8 128.8 148.5

First, it had to be acknowledged that agrarian reform fundamentally emancipated the productive forces and greatly raised the enthusiasm. The abolishment of feudal system of land ownership enabled the peasantry to live a much better and fair life. Therefore, they politically supported the CPC and government, and actively complied with the law. Then, the government supports on agricultural production largely contributed to the rural economic recovery. The issue of agricultural loans, reasonable procurement prices, the effective implementation of tax and reward mechanism and other measures considerably promoted the agricultural production and ensured the returns of peasants. Besides, the government led the peasants to overcome the natural disasters, which not only drove the rural productivity but also protected the safety of villagers. For example, water conservancy projects basically removed the threats of drought and water logging and expanded the irrigation areas. The campaign of insect disease prevention also reduced the loss of agricultural products, which could solve the long-standing problem of rural work. On the aspect of transportation, because of the massive devastation brought by the continuous war in the past, it almost fell into a state of paralysis and seriously affected the transport between the urban and the rural when New China was established during the early stages. At that time, the main northsouth railway lines like Beijing-Hankou, Canton-Hankou railway and eastwest railway lines like Lanzhou-Lianyungang, Zhejiang-Jiangxi railway were almost destroyed. Therefore, the work of transportation construction had been put on the top of the Party’s agenda because otherwise all of the social

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operations could not go on. The nationwide restoration of the railway started once after the founding of the PRC. At the call of the government, all the railroaders strove to construct and overcome the difficulties. At the end of 1949, over 8300 kilometers of the railways and 90.5 kilometers of the bridges were repaired. The rail mileages open to traffic increased from 21.8 thousand kilometers in 1949 to 22.9 thousand kilometers in 1952. In the past, the railway transportation was mainly open to the coastal regions while the inland situation was relatively closed and backward. After the restoration, some rail lines were newly built, and the situation gradually changed. Finally, the performance of railway became increasingly efficient. In 1949, the total volume of rail freight was 55.89 million tons and it reached 132.17 million tons in 1952. The goods trains could only run 278 kilometers per day in 1949 while it increased to 417 kilometers in 1952. As a result, the railway construction substantially facilitated the goods allocation and transportation, which exceeded the target of the transport of major goods and fulfilled the government plans ahead of schedule. The efficient transportation of coals, grains, salts, cotton, steels, wood, minerals and other important materials also had positive effects on stabilizing the prices. Thus, that construction was largely conducive to improving people’s living standards. Developing domestic trade was also one of the major tasks during that period because trade recovery accelerated the circulation of goods and funds and strengthened the interflow of commodities. It was regarded as a requisite for politically consolidating the alliance of workers and peasants. To begin with, establishing state-run economic system became the primary project. As mentioned before, the government implemented the policy of unified finance and the economy, and therefore it effectively combated the speculative phenomenon and local monopoly power. The government controlled the financial institutions so as to efficiently invest the funds into industrial construction and economic operation in the urban and the rural. In addition, the work of unified purchase, pricing, processing and ordering goods was further strengthened in order to ensure the interests of workers and peasants. Besides, assisting cooperatives and encouraging the private business to participate in the national economic construction promoted the communication between the urban and the rural to a large extent. Under the support of the Chinese government, the problems like inflation, unsalable goods and undercapacity could be solved through political measures. Stateowned economy kept developing and private economy were either protected or transformed into state-operated one at the same time. Although private commerce played an active role in economy recovery at the first stage, the

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proportion of socialist commerce in the value of retail sales gradually increased, it amounted to 42.8% by the end of 1952. With the development of industrial and agricultural production, China also made some significant achievements in foreign business. In 1950, the total value of imports and exports of China was 4.15 billion yuan, and it reached 6.46 billion yuan when it was 1952. The main partnerships were the Soviet Union, Eastern Europe and some Asian countries. Since China was still in its transition period, the foreign trade and international relations were not the main tasks that the CPC and the government focused. During the three years, people’s living standards greatly improved. First, employment expanded significantly. In the past, unemployment was quite serious because of the huge damages brought by the continuous war. However, there were over 2.2 million unemployed people back to work and a lot of new work force got job opportunities after going through the period of economic recovery. By the end of 1952, more than 15.8 million people were employed, which nearly doubled that in 1979. Second, the wages of staff nationwide were increased to a certain extent. In 1952, people who worked for state-owned enterprises could generally get a 60% to 120% raise in salary compared with the situation 1949, and those who worked for private enterprises also got higher paid. Third, peasants’ incomes were improved after the agrarian reform was completed. Because the heavy taxes and rents were gone, it was no longer necessary for those rural laborers to be exploited by landlords, and they could have much better harvest and higher incomes with the improvement of agricultural technologies. Fourth, labors could be effectively protected according to the law and policies. In the past, workers’ health and safety were often neglected by capitalists. Many workers lost their lives and got wounded in massive accidents and natural disasters like gas explosion and inundation. After the Draft Regulations on Labor Protection of the People’s Republic of China was issued by the central government in 1950, workers’ health and security got guaranteed, which included illness, injuries, giving birth, disabilities, death and other aspects. As a result, it greatly released the workers from heavy burdens and concerns, the overall casualties in 1952 were 70% less than that in 1949. Fifth, the educational level of the working people was considerably raised. A growing number of people received education, and the government established many vocational schools and publishing industry to cultivate workers and peasants and their descendants, so that they could devote themselves to national construction more efficiently and further improve the political cognition.

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To sum up, with the development of production and economic recovery, residual forces from both Kuomintang and foreign countries were completely wiped out. Meanwhile, feudal system of land ownership and local monopoly power were also abolished. Socialist economy considerably developed through establishing state-run industrial and commercial enterprises and cooperatives, national capitalist economy was adjusted by the CPC and the government as well. During the three years, the work of economic recovery was finished, which laid the solid foundation for the next round of construction and provided the favorable conditions of the establishment of socialist system. China entered the construction period of first five-year plan and the second transition stage.

Part II: The Second Transition Stage and the First Five-Year Plan (1953-1957) In 1953, the Communist Party of China proposed a general line towards the second transition stage (from 1953 to 1956). Its content was that the socialist transformation of China should be basically completed during that period. And the general task was to basically realize industrialization and transform the agriculture, handicraft industry and capitalist industry and commerce in a relatively long period. According to the principles of Marxism, the transition from new democracy to socialism had to solve the problems of private ownership. To be more specific, PRC should complete the transformation of productive relations, and change the private ownership of production into socialist public ownership. There existed two kinds of private ownership: one was capitalist system of tenure, and another was the private ownership of agriculture and handcraft industry on the basis of individual labor. The general line regulated that those two kinds of private ownership had to be transformed into socialist nature. Therefore, the government made the first five-year plan (from 1953 to 1957) according to the general task and China started its socialist transformation based on the requirements of general line.

4.4. Industrialization At that time, Chinese industry was comparatively backward, but the socialist construction needed the powerful industry to ensure its operation. The

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construction of Chinese socialist took industrialization as the main body, the transformation of agriculture, handcraft industry and capitalist industry and commerce were perceived as the essential compositions, which were called ‘One Industrialization and Three Transformations’, among which the industrialization was taken as the central task during that period. Because industry served as the material basis of the national economy, its development could directly give rise to the productivity improvement. In the process of industrialization, the construction of heavy industry was taken as the key task. Modern industry like iron and steel industry, machine-making industry, electric power industry, fuel industry, non-ferrous metal industry and so forth were all heavy industry which could supply the modern agricultural machines and fertilizer, and produced advanced means of transportation. Therefore, it was not necessary to overemphasize the importance of industrialization, especially the construction of heavy industry. The concrete task of industrialization was to establish and expand the power industry, coal-mining industry, petroleum industry, non-ferrous metal industry, chemical industry, and manufactured metal-cutting machine tools, generating equipment, metallurgical equipment, mining equipment, automobiles, tractors and airplanes. These were the construction of heavy industry. Undoubtedly, transportation and postal service were mainly based on the construction above. As to the light industry, the main purpose of its development and establishment was to support the agricultural production, and provide materials for small and medium-sized industrial enterprises. In the first fiveyear plan, the expected proportions of four kinds of industrial output in 1957 were shown in Table 4.7. From Table 4.7, the total proportion of state industry and cooperative industry was planned to predominate the industrial output value, while the share of private industry was expected to have an obvious decrease. During the period of the first five-year plan, industrial production developed rapidly. By the end of 1957, the total industrial output value reached 70.4 million yuan, which nearly increased by 128.6% of that in 1952, and the growth of main industrial products could be known in Table 4.8. According to the official statistics, the main industrial products had prodigious growth rates and the technical force was also improved in those five years. There were more than 175 thousand engineering technicians in 1957 which tripled that in 1952. Nearly 10.2 million people worked for industrial and construction department in 1957, which was a 66% increase compared with 1952. Industrial labor productivity had an average annual growth of 9.9%.

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Table 4.7. Expected proportion of industrial output value

State Industry Cooperative Industry Public-private Joint Industry Private Industry Source: The First Five-year Plan China.

1952 (Real Proportion %) 1957 (Expected Proportion %) 52.8 61.3 3.2 4.4 5 22.1 39 12.2 of National Economic Development of the People’s Republic of

Table 4.8. Growth of main industrial products Product Unit Steel 10 thousand tons Pig Iron 10 thousand tons Raw Coal 10 thousand tons Power Generation 100 million kilowatt hours Crude Oil 10 thousand tons Cement 10 thousand tons Wood 10 thousand cubic meters Sulfuric Acid 10 thousand tons Sodium Carbonate 10 thousand tons Caustic Soda 10 thousand tons Chemical Fertilizer 10 thousand tons Penicillin Kilograms Metal-cutting Machine Tools number Power Machinery 10 thousand horsepower Electromotor 10 thousand kilowatts Generating Equipment 10 thousand kilowatts Haulage Motor 10 thousand kilowatts Automobile number Civil ships Load capacity (10 thousand tons) Source: China Statistical Yearbook 1984.

1952 135.0 193.0 6649 72.6 43.6 286 1,120 19.0 19.2 7.9 18.1 46 13,734 3.5 63.9 / 20 / 1.6

1957 535.0 594.0 13,000 193.4 146.0 686 2,787 63.2 50.6 19.8 63.1 18,266 28,000 69.0 145.5 19.8 167 7,500 5.4

By the end of 1957, socialist industrialization of China was preliminarily established. First, the proportion of socialist industrial (mainly state-owned industry) output value kept increasing in the whole industrial production, going up from 44.8% in 1952 to 71.6% in 1956. Although capitalist industry accounted for 30.6% in 1952, it actually transformed into socialist form in 1956 because the state capitalist industry carried out public-private partnerships. Therefore, it was almost the same as of socialist essence except paying the interests to capitalists. Second, the scale of industrial capital construction continued to expand in those five years. The capital input of industrial department reached 56% of the total amount, and heavy industry

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accounted for 87% of industrial investment. Third, a large number of new established enterprises started production, which fundamentally altered the backward condition of old Chinese industry. At the end of the first five-year plan, industrial department got some complicated and advanced technologies like aircraft manufacturing, automobile manufacturing, machine tool manufacturing, mining equipment manufacturing and so on. Fourth, industrial technology was greatly improved. Workers could use much better equipment to produce, which considerably boosted the efficiency and promoted the growth of industrial output value. Fifth, the regional distribution of industrial construction became more reasonable. In the past, the industrial development was mainly in coastal cities of eastern China, which caused an extremely unbalanced phenomenon and tremendously widened the gap between the east and the west, coastland and inland. After the industrialization, a growing proportion of enterprises were set up in inland areas, so the industrial development tended to be more balanced.

4.5. The Transformation of Agriculture According to the first five-year plan, it clearly regulated that the transformation of agriculture should be carried out through the way of cooperative which was mentioned in the first stage. And its transformation went through a transition from a junior form to senior form. The task of agricultural transformation was developing agricultural cooperation by uniting with the poor and middle peasants so as to improve the backward situation of decentralized individual farming economy. The Central Committee of the Communist Party of China pointed out that the way of cooperative should be transformed from mutual-aid teams to semi-socialist agricultural producers’ cooperatives (junior form) and then reached complete socialist agricultural producers’ cooperatives (senior form). Therefore, this way of transformation was aimed at transitioning the nature of agricultural economy step by step, not a sudden change. The junior form of agricultural producers’ cooperatives was characterized by pooling of land as shares and unifying management. Lands, livestock and farm tools were still owned by the peasants, but there existed a system of community property that was made up of joint-stock funds and the public accumulation funds of cooperatives. Although peasants could still possess means of production, it was stipulated that the use of those things should be based on the centralized management instead of the personal willingness and

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demands. Therefore, cooperatives could organize people to do the farm work collectively and coordinate the labor force effectively. On the aspect of product distribution in agricultural cooperatives, the members could get reward as long as they took their lands, livestock and farm tools as share. Considering that it was hard to immediately remove the perceptions of private ownership and it was also essential to adjust the relationship between the poor the middle peasants, so such kind of cooperative form could increase the income of the two classes of peasants and transformed the private rural economy into public ownership. Therefore, members who lacked labor, lands or other means of production could solve their living problems. The total revenue of cooperatives consisted of two parts, one was tax payment, and another was labor payment, and members of the cooperatives could get paid based on their outputs. Although there existed public properties, land, livestock and other production tools were still privately owned. Therefore, the junior form of cooperatives was a combination of socialist economy and private ownership, which became the main contradiction of agricultural transformation. As the transition moved on, it was unavoidable that the junior form would develop into a senior one, that was, public ownership. To be more specific, the senior form of cooperatives was a system in which all the lands, livestock and other production tools given by the members turned to be owned by the public. But it should be based on the agreement of the members and respect their choices. After they handed over the ownership of means of production, it could be guaranteed that their interests and incomes would not be reduced. If someone got less than before, the cooperatives would arrange their work and appropriately took care of their living according to the regulations. That form was on the basis of collective ownership of means of production, implemented the policy of collective labor and paid the members according to personal work and output. With the increasing enthusiasm of socialist transformation, more and more peasants actively supported the senior form of cooperatives and joined it. Though they would never get the interests from their lands which had been owned by the public, most of the members still positively accepted that transition, therefore many senior cooperatives were set up and the socialist economy kept expanding. As for those rich peasants and landlords, they also participated in the cooperative movement and supported the agricultural transformation after their sales of agricultural products were greatly limited by the government. Therefore, they gradually accepted the situation and finally became self-supporting labors.

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Table 4.9. Participation of cooperatives By The End of January 1956 153

By The End of June 1956 99

The Total Number of Cooperatives Nationwide (Unit: 10 thousand) Senior Cooperatives 13.6 31.2 (Unit: 10 thousand) The Peasant Households That Joined 9,555 11,171 The Cooperatives (Unit: 10 thousand) (1) The Proportion of (1) Among The 80.3 91.9 Whole Peasant Households (%) The Proportion of The Peasants Who 30.7 63.2 Joined The Senior Cooperatives (%) Source: Historical Materials of Agricultural Cooperative Movement of China.

By The End of December 76 54 11,783

96.3 87.8

When it was in 1956, a growing proportion of junior cooperatives transformed into senior cooperatives. According to the statistics of Table 4.9, although the total number of cooperatives throughout the country was decreasing, the senior form was booming. By the end of December 1956, 96.3% of the peasant households joined the cooperatives among which 87.8% joined senior cooperatives. Those situations could indicate that agricultural cooperation and transformation were basically achieved in 1956.

4.6. Transformation of Handicraft Industry Handicraft industry occupied an important position in national economy of China, played a constructive role in meeting the needs of agricultural economy like producing the farm implements and necessities and provided the goods of export. The transformation of handicraft industry had the similar steps and nature with that of agriculture because of its backward way of production, decentralized management, small scale and low efficiency. Besides, the individual economy of handicraft industry would probably develop into capitalist form of production if just let it rip because it was a kind of small commodity economy. Therefore, the CPC implemented the transformation policy that advocated the way of cooperative on handicraft industry so that people could be organized to work collectively and start mass production. The task of the transformation of handicraft industry was to achieve the significant growth from 1952 to 1957. To be more precise, the total value of its outputs was expected to increase from 7.31 billion yuan to 11.77 billion yuan with an

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average annual growth rate of 9.9%. The output value of cooperatives was planned to rise from 250 million yuan and to 4.55 billion yuan. It was also anticipated that the number of cooperatives members would go up from 218 thousand to 2.1 million, an 8.6 times growth. The first five-year plan required that the way of cooperative on handcraft industry should also go through a transition from junior to senior form based on the willingness of the handicraftsmen. According to the plan, its concrete way began from the form of supply and marketing cooperatives and developed into production cooperation. To be exact, it grew from the handicraft supply and marketing groups, supply and marketing cooperatives and producers’ cooperatives. To begin with, the handicraft supply and marketing groups were organized through purchasing raw materials, selling products, processing and accepting orders from state-owned business, it represented the junior form of transformation. After the crafts persons joined the groups, they could still possess their means of production and independently produced their products. Therefore, it did not change the previous relations of production, but truly had some connections with socialist economy and accumulated some public properties. Then, it developed into the supply and marketing cooperatives. At first, the means of production was still owned by the members, but with the development of the handcraft production, it increasingly needed centralized management and clear division of labors afterwards. Hence, it gradually turned to the public production based on the specific technologies not the individual methods. In the meantime, a part of the revenue gained from it would be taken to buy some means of production, so the form of supply and marketing cooperatives were more socialistic than the groups. However, it merely functioned in some certain circulations; there were still a proportion of individual producers and vendors insisting on their own ways, which impeded the application of new technologies and the expansion of the production scales. Therefore, it was bound to become the producers’ cooperatives as long as the socialist construction moved on. When it entered the stage of the producers’ cooperatives (the senior form), all the means of production belonged to the cooperatives, and the members who owned them before could get paid according to the levels of depreciation. Therefore, the producers’ cooperatives were collective ownership, and carried out unified management and calculated the profits and losses. As for the revenue distribution, after the taxes were paid to the government, a part of the revenues would be reserved as public accumulation funds and welfare funds. Members could get wages from the rest of the revenues based on their work output. For those who owned the production tools before, the cooperatives

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would also extract a part of the revenues to give extra money to them as rents or dividends. Due to the rapid development of the senior form of cooperatives, there were 228 million people who joined the cooperatives just by the end of 1952 and over 6 million people became the members by 1956. The expected total value was 11.77 billion yuan in 1957, and it reached 13.37 billion yuan. As a result, the task of the transformation of handcraft industry was fulfilled ahead of the schedule.

4.7. Transformation of Capitalist Industry and Commerce The first five-year plan regulated that the capitalist industry and commerce was mainly transformed through the way of developing state capitalism. It needed to be clearly explained that in the socialist transition period of China, the state capitalism was under the dictatorship of the proletariats. Once the capitalist economy was transformed into the state capitalism, it would generate a close and stable connection with the socialist state-owned economy. Therefore, through weakening the influence of private capitalist economy, it was conducive to completing the transformation of industry and commerce and construct the system of socialism. According to the tasks set on the basis of the policy, the first step was to transform the national capitalist economy into different forms of state capitalism, and the second step was to transform the state capitalism into socialism. The development of state capitalism during the transformation period went through two stages. The first one was a junior form which was still the capitalist nature but established a close connection with socialist state-owned economy. Different from the situation of agriculture and handicraft industry, the junior form of state-capitalism stage was from 1950 to 1953, while the senior form started in 1954 and ended in 1956. Because the state-owned business controlled the purchase of raw materials and product sales of capitalist enterprises, this directly made them dependent on the socialist economy. At that time, capitalist enterprises were greatly limited on the aspects of production, targets, intensity of exploitation on workers, pricing and so on. Therefore, it was actually planned to incorporate the capitalist business into the part of the state-owned economy. The profits of those enterprises were going to be divided into four parts, which were income tax, public accumulation funds, welfare funds of workers and the profits of capitalists that included dividends and bonuses. However, the owners of those enterprises could not get the whole profits any longer, they could only gain one-fourth of

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the surplus. In general, the junior form of state capitalism had been effectively influenced by socialist economy, but its profit motives and production targets still existed. Therefore, it needed the further development, which was the second stage, senior form of state capitalism. The senior form of state capitalism was private-public partnership and it also had two stages, the former one was directed at individual enterprises, and the latter one aimed at the entire industry. The private-public partnership of individual enterprises added the government shares and were managed by the officials or cadres appointed by the government. Thus, the socialist economy influenced the enterprises from the outside market circulation to inside production management, which gave rise to major changes in the production relations of the enterprises. The means of production were not exclusively possessed by the capitalists but owned by both the government and the capitalists. In fact, the disposition rights of means of production, management and administrative, and personnel deployment were all transferred to the government. Although the shares of capitalists were still their capitals, the way of management taken by the government was gradually based on meeting the demands of people and state plans not the capitalists’ decisions. Hence, they did not have the independent decision-making rights. In terms of the profit distribution, the capitalists could not get one-fourth of the surplus like the stage of junior form but only a specific proportion of the dividends and bonus, therefore they were further limited and so was the capitalist economy. These situations could indicate that the enterprises with private-public partnership had socialist nature to a large extent, and workers’ enthusiasms were also greatly raised because they were much less exploited after those changes. In addition, government continued to invest in these enterprises and expand their production scales, which significantly boosted the production efficiency. However, the private-public partnership of individual enterprises still admitted the private-ownership of the means of production, so it needed the further development and then entered the next stage of transformation. The private-public partnership of the entire industry was the final stage of the transformation of capitalist industry and commerce. The redemption of those enterprises changed from the system of profit distribution to the system of fixed rate. That was to say, within a certain number of years, capitalists could get 5% of the total capitals of the enterprises measured by the government departments before its transformation, as the revenue of the fixed rate. After implementing the system of fixed rate, the capitalists did not have the rights to decide on the production plans and to use the means of production anymore. The management of the enterprises was completely based on the

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principle of socialism as well as the state plans. Although the capitalists still arranged the jobs, they would not hold the position or identity of ‘capitalists,’ and work just the same as other ordinary labors. To put it simply, there were no bosses anymore. As a result, they had little difference with the state-owned enterprises and all of the private-owned enterprises turned into the privatepublic partnership by the end of 1956. The changes of capitalist industry and commerce could be seen from both Table 4.10 and Table 4.11. Overall, the transformation of capitalist industry and commerce were directed at both the private-owned enterprises and the capitalists. Also, the capitalists would receive relevant ideological and political education to make them support the transformation. Although the policies were mandatory, its methods were not rude, the CPC and the government adopted a gentle way to persuade those capitalists to gradually accept the socialist transformation and handed over the management rights and ownership of their enterprises. Actually, both the Party and the government understood those capitalists’ efforts on running their enterprises and contributions on creating job opportunities and providing the tax revenue. As a result, based on the construction in the first stage of the transition period, the transformation was highly successful by the end of 1957. Table 4.10. Changes of different economic sectors in industry Unit: Proportion (%) (Take the total value of industrial output as 100%) Year

Socialist Industry

Statecapitalism Industry

1949 34.7 9.5 1950 45.3 17.8 1951 45.9 25.4 1952 56.0 26.9 1953 57.5 28.5 1954 62.8 31.9 1955 67.7 29.3 1956 67.5 32.5 Source: Ten Great Years.

Among The State-capitalism Industry PrivateProcessing and public Ordering partnership Goods 2.0 7.5 2.9 14.9 4.0 21.4 5.0 21.9 5.7 22.8 12.3 19.6 16.1 13.2 32.5 /

Private Capitalist Industry (The Part of Self-Production and Sales) 55.8 36.9 28.7 17.1 14.0 5.3 3.0 /

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Table 4.11. Changes of different economic sectors in commerce Unit: Proportion (%) (Take the total value of retail sales as 100%) Year

Socialist Commerce 1950 14.9 1951 24.4 1952 42.6 1953 49.7 1954 69.0 1955 67.6 1956 68.3 1957 65.7 Source: Ten Great Years.

State-capitalism and Cooperative Business 0.1 0.1 0.2 0.4 5.4 14.6 27.5 31.6

Private-owned Business 85.0 75.5 57.2 49.9 25.6 17.8 4.2 2.7

Table 4.12. Improvements of people’s living standards and securities Year

Total Employment (Unit:10 thousand people)

1952 1580.4 1953 1825.6 1954 1880.9 1955 1907.6 1956 2423.0 1957 2450.6 Source: Ten Great Years.

Average Annual Wage (Unit: yuan)

Average Household Consumption Level (Unit: yuan)

Number of Employees with labor insurance (Unit:10 thousand people)

446 496 519 534 610 637

76 87 89 94 99 102

330.0 483.0 538.0 571.0 741.7 1150.0

Number of people who received higher education (Unit:10 thousand) 19.1 21.2 25.3 28.8 40.3 44.1

The most important tasks after the People’s Republic of China was founded at that time were wiping out the residual forces of both the Kuomintang regime and foreign monopoly power, and establishing the system of socialism. The industrialization and transformation of agriculture, handcraft industry, capitalist industry and commerce were the contents of the general line in the transition period. To be precise, the completion of the general line in September 1956 marked the establishment of Chinese socialism, which meant public ownership of the means of production dominated the national economy. And the first five-year plan from 1953 to 1957 was made to implement the general line. It was aimed at developing the industrial construction centralized on heavy industry, and greatly improving the agricultural production, the efficiency of handcraft industry, and transforming

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the capitalist business into state-owned economy. As a result, there were great improvements of people’s living standards and securities during the first fiveyear plan, as Table 4.12 shows. The first five-year plan and the establishment of socialism laid the solid foundation for the economic development and socialist construction of following several decades. However, the process was full of twists and turns, the Communist Party of China and Chinese people suffered a lot in the next 20 years. And in the next chapter, this book is going to introduce the setbacks and lessons of socialist construction when the CPC and the government made decisions.

Chapter 5

Twists and Turns of the Socialist Economic Construction After the first five-year plan was completed in 1957, China made a lot of progress in the socialist construction, both the national economy and people’s living standards greatly improved. However, China soon entered the stage of chaos and crisis in 1958 and continued to suffer the huge damages until October 1976. This chapter introduces three phases. The first phase was the Movement of Great Leap Forward and People’s Commune starting in 1958. The second phase was the economic recovery under the adjustment policies from 1960 to 1965, and the Movement of Cultural Revolution was the last phase, which began in May 1966 and ended in October 1976. In this chapter, China was going through a history of turmoil, recession and internal strife. Finally, with the completion of the first generation of the core leadership of the Party Central Committee and the collapse of the anti-Party clique, the country turned back to normal operation. Since this book focuses on the economic situations, it will concisely state the development and reasons behind through statistical data instead of through a lengthy discussion of the complicated political conflicts.

5.1. The Movement of Great Leap Forward and People’s Commune In March 1958, Chairman Mao Zedong proposed the general line of socialist construction in the Central Conference of the Communist Party of China. Its content was to ‘go all out, aim high and achieve greater, faster, better and more economical results in building socialism.’ Two months later, it replaced the Second Five-year Plan (1958-1962) made in 1956 and was implemented into the practical work. However, at the beginning of 1956, Premier Zhou Enlai and other officials found that there truly existed many problems in the progress of the socialist construction. To be more specific, the economic development overvalued its output growth and always neglected the quality and economical

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production ways. Hence, they criticized such phenomena and strongly opposed to the grandiose but impractical plans, insisting on the realistic and steady developments. On the contrary, Chairman Mao thought it was wrong to discourage people’s initiatives on economic production and socialist construction. Therefore, those Party officials who were ‘opposed to rash advance’ were seriously criticized. More unfortunately, the Movement of Great Leap Forward in 1958 finally became the result due to their opposition to rash advance. Then, China started its blind production plan which directly brought huge damages to Chinese people at that time. In fact, the original proposal of second five-year plan had regulated various reasonable policy objectives of national economy. For example, the total value of industrial output in 1962 was expected to double that in 1958, and the planned growth of agricultural output should reach 35%. The gross output of steel, coals, grains and cotton were anticipated to increase to 10.5 million to 12 million tons, 190 million to 210 million tons, 250 million tons and 2.4 million tons, respectively. Besides, the investment in infrastructures was going to double, and the national income was expected to increase by 50%. Those plans were actually realistic and feasible through the efforts of the whole country. However, the new second five-year plan regulated that by the year of 1962, the output of steel, coals, grains and cotton should reach 80 million tons, 900 million tons, 750 million tons and 3.7 million tons. In addition, to further support the Movement of Great Leap Forward, the output of steel was planned to amount to 10.7 million tons in 1958, which was an absolutely impossible task due to the production level of China in 1950s. The extremely unrealistic thing was that the central leaders believed that it was possible to surpass Britain in seven years and catch up with the US in ten years on the steel production side. That thought came from the strategic idea of the Soviet Union when Chairman Mao visited there in 1957 and brought it back to China. Later, the central leaders thought it even feasible to exceed that of Britain in only two or three years just because of the production plan. Therefore, with the increasing goals on many economic indicators, it largely drove the trend of advocating the Great Leap Forward and further aggravated the economic crisis in China. In order to achieve the goals set in the Great Leap Forward, the concrete measure was to launch mass movement. According to the decisions made by the conference, the first secretaries of the Party in each province, city, and autonomous region must take the production of steel and iron as the primary task. Other industries should also consider the production situation of steel and iron. Once there existed some conflicts or problems between the steel and iron

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industry and other industries, then the production of the steel and iron industry was supposed to be ensured first. However, the fact was far from satisfactory. The output of steel in the first half of the year 1958 was only 3.12 million tons, so it was nearly impossible to reach the target of 10.7 million tons at the end of 1958. And the planned output of iron in 1958 was 16.8 million tons, while it just reached 5.3 million tons by August. Besides, due to the limited transport capacity, there were more than 6.5 million tons of goods that were overstocked and needed rail transportation. Therefore, it could not guarantee the completion of producing 10.7 tons of the steel and provide the urgent transport service. To confront the situations above, an unprecedented movement was launched, that was the Great Steelmaking and Ironmaking Campaign. Since the medium and large steel and iron enterprises were not able to accomplish the production targets, the masses were called on to use indigenous ways of steelmaking and ironmaking. Because the steel and iron produced by modern blast furnaces could only account for 25% of the planned output, various indigenous methods which were actually backward and unreasonable ways of steel and iron making were put into practice to supply the rest 75%. For example, people were required to use clay and bricks to build small furnaces, and even took their iron pans and iron tools as the materials of steelmaking. In many regions, the first secretaries and other high officials personally commanded and organized the campaign. At that time, almost all the Chinese people, men and women, young and old, officials and peasants, participated in it. However, that kind of mass movement simply pursued the production quantity regardless of the quality and safety. The Great Steelmaking and Ironmaking Campaign failed to respect the objective law and used equipment blindly, which made the whole country fall into severe chaos and crisis. For example, in order to reach the target of steel production, plenty of additional capital investment was put into the construction of infrastructure in 1958, increasing from the original planned 14.5 billion yuan to the final 22.1 billion yuan. Besides, about 2.35 billion yuan of funds were self-raised in many regions and enterprises, so the total investment in infrastructure in 1958 reached 26.9 billion yuan, a 97% growth compared with the situation in 1957. The rapid expansion of investment in infrastructure caused the lengthy delays of construction and the supply shortage of materials and equipment. As a result, there were only 170 projects finally finished among the 1,587 planned ones. Moreover, the national capital flow was severely disrupted because all the banks and commercial enterprises had to invest in the production of industry so as to support the Great Leap Forward. At that time, banks

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excessively offered the loans to commercial and industrial enterprises, which caused substantial backlogs and waste. Although the total output of steel reached 11.08 million tons by the end of 1958, only 8 million tons of them were qualified. The Movement of the Great Leap Forward brought disastrous consequences to the government and Chinese people. To begin with, its targets pursued the quick results which were extremely against the objective law and deviated from the realistic level of production. For example, even in the northwest regions with low annual yields, it was required that the average grain output per person should reach at least 550 kilograms in 1958, one ton in 1959, and 1.5 tons in 1962. Therefore, deep ploughing and close planting were taken as the measures to improve the agricultural productivity and the yields from lands. That was absolutely unscientific and severely jeopardized the harmony of ecosystem. Inevitably, it soon led to the false declaration of output. Then, the proportional relationship of all the departments became seriously unbalanced. According to the economic theory, it is vital for a society to effectively adjust the relationship with each department, so that the production, circulation, marketing, consumption and other parts would coordinate well to go on the economic operation. In the process of the Great Leap Forward, the production of industry was overvalued, so it had a huge impact on the economic effects of other industries and departments, which was much beyond the burden they could bear, like the supply shortage of agricultural production and incapacity of industrial transportation. In addition, it considerably lowered people’s living standard and caused enormous waste of resources. During the Great Steelmaking and Ironmaking Campaign, a great deal of manpower and material resources were invested, but overexploitation of minerals, the damage of woods, iron production tools severely influenced the normal life and ruined people’s health. Because of the disproportionate production of heavy industry, the general production of national economy tremendously declined. And the supply shortage of light industry and agricultural products made people’s incomes obviously decrease (see Table 5.5 coming later). Therefore, the Movement of Great Leap Forward exerted too much pressure on people and dampened their enthusiasm of production. When the Movement of the Great Leap Forward was launched in 1958, in the meantime, there existed a kind of organization that called on people to work with each other and mess together in the countryside. Then, the Movement of People’s Commune started and further emphasized the public sector of the economy. To be more specific, the proposal of the Movement of People’s Commune was passed by the Political Bureau of the Central

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Committee of the CPC in August 1958. It implemented the alliance of industry, agriculture, business, education and militia, which meant all the workers, farmers, merchants, students, educators, and soldiers should join in the people’s communes near their residences. It represented both an economic and political organization, usually there was just one commune established in one village. At first, people’s communes were developed from senior form of agricultural cooperatives, and then small communes were gradually established through merging small cooperatives. With the development of the movement, small communes were also merged into big communes in both urban and rural areas. In fact, the original purpose of establishing people’s commune was to construct the infrastructures and meet the needs of people’s living, like water conservancy projects. However, it finally turned into a collective organization that failed to respect the objective law of the production against the background of the Great Leap Forward. The people’s communes were significantly different from the previous agricultural cooperatives, the structure of ownership, labor organization and distribution system all changed a lot. First, the scale and scopes of people’s communes were much larger than that of cooperatives. Because this organization integrated five spheres (industry, agriculture, business, education and militia), there were usually more than four thousand people in one commune, while even in a super big cooperative, there were merely two hundred households, less than two thousand people. Second, in terms of the ownership of means of production, people’s communes had much higher degree of socialization. In agricultural cooperatives, it was still permitted to somewhat preserve the private ownership of lands, livestock and family sideline production. However, in the people’s communes, all the means of production must be owned by the public. The previous state-owned shops, banks and other enterprises were also compulsively run by the communes, so it implemented the unified policies on production, accounting, and distribution regardless of the economic standard or production level. Therefore, such egalitarianism inevitably reduced the efficiency of production and incentives to work. Third, people’s communes integrated both government administration and economic management, which meant that communes represented the organization of production and politics, so there was no system of autonomous management right and personal responsibility. As a result, the disordered administrative and economic management caused lax discipline and low economic effects.

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5.2. The Adjustment Policies Attempting to Recover the Economy In fact, the Central Committee of the Communist Party of China found the severe problems brought by the Movement of Great Leap Forward and People’s Commune and attempted to take measures to rectify the situations. However, the new Great Leap Forward was implemented after the Lushan Conference held in July 1959, so the relationship of all the departments in the national economy was further disproportionate in the following years. But fortunately, after the CPC and the government adjusted the polices on economic production in August 1960, China still made some progress in its economic development and socialist construction, and ended the Movement of the Great Leap Forward by the end of 1960. According to the latest issued instruction at that time, the development of the next stage was to ‘adjust, consolidate, fulfill and improve’. To be specific, the main tasks of the following years were directed at adjusting the relationship between the departments, consolidating the achievements that gained in the reform, fulfilling the new national projects and improving the economic efficiency. The primary thing was to recover the agricultural production. Since the movement wasted too much on steel and iron industry, rural economy had suffered a lot. Therefore, it was urgent to adjust the relation between the ownership of people’s communes and distribution. The communes could not impose constraints or interference on production and operation but negotiate and give suggestions. All the production work should be based on the people’s voluntary participation and mutual benefits, and the principle of equivalent exchange. Both the means of subsistence and the means of production previously owned by the members still belonged to them, and no one could violate private interests. Besides, it was permitted to develop family sideline and handcraft production and reopen the rural market trade. In terms of income distribution, members got paid due to their labor output, and more than 90% of them could receive higher income than before. The next step was to alleviate the burden of the peasants. It reduced the agricultural tax from 11.6% in 1957 to 10% in 1961. The volume of grain purchase decreased from 51.1 billion kilograms in 1960 to 40.4 billion kilograms in 1961, and the purchase prices averagely increased 5% throughout the country. What’s more, the centralized and unified management was further strengthened so as to improve the social operation and cover the financial deficit. As a result, those measures above soon stabilized the markets, recover the rural production and ensure the people’s living needs.

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On the basis of lessons and experience of the movement, the Central Committee of the CPC held the conference in May 1962 and further adjusted the measures on economic construction. First, the scale and the planned time of capital construction were greatly cut down. The amount of investment was reduced from 12.74 billion yuan in 1960 to 7.12 billion yuan in 1962, so the number of construction projects declined from 1,409 to 1,003. With the decrease of investment, the national saving rate also significantly went down from 19.2% to 10.4%. Hence, the state could provide more financial support to strengthen the weak links of economic development. Second, it was planned to slow down the industrial production and adjust the industrial structure. To be precise, compared with the situation in 1960, the total industrial output value in 1962 was expected to drop 59%, and a 63% decrease in heavy industry, 68% in steel output. With the decrease of industrial production index, the problem like excess production capacity inevitably occurred. Therefore, some of the industrial enterprises that consumed too much resource or badly run were required to shut down or transform, the industrial structure became more and more reasonable and gradually improved the national industrial production. Besides, since the production index of heavy industry was reduced, some of the funds and materials could be used for the agricultural production, the daily necessity production and the geological exploration. Those measures above further adjusted the production relation in the countryside, which was greatly conducive to rural productivity and peasants’ living standards. And the proportional relations between the industry and agriculture, heavy industry and light industry were greatly improved and more balanced than before, so the social circulation could operate much better. Most importantly, the situation of government revenue and expenditure got great improvement. In 1962, the financial revenue reached 31.4 billion yuan and the total expenditure was 29.5 billion yuan, so it had a surplus of nearly1.9 billion yuan and reversed the deficit situation since 1958. With the economic recovery, people in both urban and rural areas had better living standards, and their average annual wages increased from 510 to 551 yuan. Although the national economy had achieved positive progress and some of the difficult situations got improved, the transformation was still preliminary and could not fundamentally alter the production ways. For example, there were 154.4 billion kilograms of grain output in 1962, which was just 79.2% of the grain output in 1957. Therefore, China had to import a large number of agricultural products every year during that period because domestic production could not meet the demand of light industry. Besides, the internal structures of the industry were not reasonable enough, so some basic

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industries like coal industry, non-ferrous metal industry and wood industry still lacked balanced relationship of development. Therefore, plenty of equipment needed repair and upgrading, transportation industry was still not convenient enough to allocate and transport the goods and materials, and the prices kept rising. The problems above reflected the fact that the country needed further adjustment. In September 1962, the tenth Plenary Session of the Eighth Central Committee pointed out the general principle that the agriculture was the basis of the national economy, and the development should be oriented by industry. After the policy adjustment, the overall economic situation obviously improved in the first half of the year 1963. Specifically, the production of industry and agriculture steadily increased (Table 5.1), and price rise was effectively under control (Table 5.5). In 1963, the Central Committee of the CPC decided to spend the next three years to continuously solve the existing problems and strive for the fundamental improvement. Therefore, those three years (1963-1965) were regarded as the transition from the second five-year plan to the third one (1966-1970). Table 5.1. Gross output value of agriculture and industry from 1957 to 1965 Year

Gross Agricultural Output Value Gross Industrial Output Value (Unit: 100 million yuan) (Unit: 100 million yuan) 1957 537 704 1958 566 1,083 1959 497 1,483 1960 457 1,637 1961 559 1,062 1962 584 920 1963 642 993 1964 720 1,164 1965 833 1,402 Source: The Compilation of Statistical Data of Sixty Years of New China.

Although there still existed overaggressive ‘Left’ political value and guidelines which restrained the economic vitality, the general development truly achieved progress from 1963 to 1965. In agriculture, its total output value had an average growth of 12.5% per year (Table 5.1), and the yield of major farm crops also increased significantly in those three years, like the situation of grain, cotton, oil-bearing, sugar and tea shown in Table 5.2. It was clear that after the Movement of the Great Leap Forward, agriculture production suffered a lot, which could be reflected by the data in 1957 when comparing

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with the figures of following years. Since 1963, both the agricultural output and industrial output had considerably increased and kept the good development trend. In addition, after the adjustment of the policies on industry, its development structures in those three years were relatively more reasonable than when it was going through the Movement of Great Steelmaking and Ironmaking. The outputs of pig iron and steel greatly decreased in 1961 after the adjustment policies and steadily increased again after 1962 (Table 5.3). Therefore, it could balance the relationships between the departments and effectively improve the situation of extreme production of steel and iron, which was quite instrumental in the developing the whole national economy. Table 5.2. Yield of major farm crops from 1957 to 1965 Year

Grain (Unit: 10 thousand tons)

Cotton Oil-Bearing Sugar (Unit: 10 (Unit: 10 (Unit: 10 thousand thousand tons) thousand tons) tons) 1957 19,504.5 164.0 419.6 1,189.3 1958 19,765.0 196.9 477.0 1,563.1 1959 16,968.0 170.9 410.4 1,214.7 1960 14,384.5 106.3 194.1 985.5 1961 13,650.0 80.0 181.4 506.5 1962 15,441.0 75.0 200.3 378.2 1963 17,000.0 120.0 245.8 832.0 1964 18,750.0 166.3 336.8 1,346.5 1965 19,452.5 209.8 362.5 1,537.5 Source: The Compilation of Statistical Data of Sixty Years of New China.

Tea (Unit: 10 thousand tons) 11.2 13.5 15.2 13.6 7.9 7.4 8.4 9.2 10.1

Table 5.3. Output of major industrial products from 1957 to 1965 Year

Coal (Unit: 100 million tons)

Pig Iron Steel Coke (Unit: 10 (Unit: 10 (Unit: 10 thousand thousand thousand tons) tons) tons) 1957 1.31 594 535 830 1958 2.70 1,369 800 2,174 1959 3.69 2,191 1,387 4,504 1960 3.97 2,716 1,866 5,647 1961 2.78 1,281 870 2,809 1962 2.20 805 667 1,342 1963 2.17 741 762 1,106 1964 2.15 902 964 1,113 1965 2.32 1,077 1,223 1,333 Source: The Compilation of Statistical Data of Sixty Years of New China.

Cement (Unit: 10 thousand tons) 686 930 1,227 1,565 621 600 806 1,209 1,634

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The government fiscal situations in those three years were much better than before, so the adjustment played a key role in economic recovery and was highly conducive to the future development and socialist construction. From Table 5.4, both the government revenue and expenditure continuously had a significant growth in the three years, which meant that the adjustment policies were truly effective, and could largely improve people’s living standards. Table 5.4. Balance between government revenue and expenditure from 1957 to 1965 Year

Government Revenue Government Expenditure (Unit:100 million yuan) (Unit: 100 million yuan) 1957 303.20 295.95 1958 379.62 400.36 1959 487.12 543.17 1960 572.29 643.68 1961 356.06 356.09 1962 313.55 294.88 1963 342.25 332.05 1964 399.54 393.79 1965 473.32 459.97 Source: The Compilation of Statistical Data of Sixty Years of New China.

Balance (Unit:100 million yuan) +7.25 -20.74 -56.05 -71.39 -0.03 +18.67 +10.20 +5.75 +13.35

Table 5.5. The overall economic situation from 1957 to 1965 Year

Gross Domestic Product Gross National Consumer Average (Nominal GDP, Income (GNP Unit: Price Index Annual Wage Unit: 100 million yuan) 100 million yuan) (1950 = 100) Unit: Yuan 1957 1,069.3 1,069.3 126.6 624 1958 1,308.2 1,308.2 125.2 536 1959 1,440.4 1,440.4 125.6 512 1960 1,457.5 1,457.5 128.8 511 1961 1,220.9 1,220.9 149.6 510 1962 1,151.2 1,151.2 155.3 551 1963 1,236.4 1,236.4 146.1 576 1964 1,455.5 1,455.5 140.7 586 1965 1,717.2 1,717.2 139.0 590 Source: The Compilation of Statistical Data of Sixty Years of New China. The difference between the Gross Domestic Product and the Gross National Income was the net factor income from abroad. Since there was no net income from abroad until the year 1981, the data of GDP were the same as GNP.

According to the statistics in Table 5.5, the overall situation of economic development trend was rather positive from 1963 to 1965. GDP and GNP kept increasing, prices were effectively under control and the average wages

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steadily grew. In general, because of the incorrect political values and guidelines, the Movement of Great Leap Forward and People’s Commune brought severe shocks to national economy, which could be reflected from the data in the tables above. Although some economic indexes seemed to keep increasing in the year 1958, 1959 and 1960, the development structures and relationships between the departments behind actually went to extremes, so it started to collapse in 1961. Fortunately, the subsequent adjustment policies reversed the situation and formed a positive trend, so it was necessary to draw lessons from the past. The first and foremost point was that the targets should be based on the law of production and objective conditions. Even if it was under the background of socialist construction, the implementation of planned economy should still take the real level of productivity into account. In the 1950s, the economic pattern that could coexist with diverse economic forms was suitable for the development of the productive forces of China. Unrealistic pursuit of public ownership brought nothing but huge damages to the whole country. Then, it could not be neglected that the development of national economy should consider the situation of all the departments and industries. According to the economic theory, the departments influenced each other all the time, so it was rather important to balance their own development so as to stabilize the market and ensure the economic circulation. Those two movements caused the serious imbalanced production relationships in the whole economic system. Last but not least, in the primary stage of socialism, the economic development should enable the markets to work under the guidance of the state. The Great Leap Forward failed to consider the market mechanism, so it overly consumed the labor, resource, materials and capitals. On the contrary, the adjustment polices recovered diverse economic forms, such as opening the free markets, which was truly helpful in improving the production and people’s living conditions.

5.3. The Great Cultural Revolution After the adjustment policies were carried out, the country achieved a lot in economic recovery from the year 1963 to 1965. And in April 1964, the State Development Planning Commission of China protocoled the Preliminary Ideas of the Third Five-Year Plan from 1966 to 1970. Its planned tasks were (1) to basically solve the problems of basic necessities of life through the vigorous development of agriculture, (2) to develop the national economy in

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a planned and balanced way through appropriately strengthening the national defense and basic industry, continuously improving the product quality, increasing the variety and output of products, developing transportation, commercial, cultural and scientific undertakings. In fact, the plan accorded with the actual situation of China at that time, and it was anticipated that the economy would have rapid growth if the third five-year plan could be put into practice. However, China soon encountered an unprecedented civil strife in May 1966, that was, the so-called Great Cultural Revolution. Table 5.6. Gross output value of agriculture and industry during the Great Cultural Revolution Year

Gross Agricultural Gross Industrial output The Total Output Value of Output Value value Agriculture & Industry (Unit: 100 million yuan) (Unit: 100 million yuan) (Unit: 100 million yuan) 1965 833 1,402 2,235 1966 910 1,624 2,534 1967 924 1,382 2,306 1968 928 1,285 2,213 1969 948 1,665 2,613 1970 1,021 2,117 3,138 1971 1,068 2,414 3,482 1972 1,075 2,565 3,640 1973 1,173 2,794 3,967 1974 1,215 2,792 4,007 1975 1,260 3,207 4,467 1976 1,258 3,278 4,536 Source: The Compilation of Statistical Data of Sixty Years of New China.

The reason of launching the Great Cultural Revolution could be traced back to the Party officials who were ‘opposed to rash advance’ in 1956. The leaders of the CPC thought that the Party, politics, military, economy, culture and all the sectors of the society were under the leadership of the ‘counterrevolutionary revisionists’ and ‘representatives of the bourgeoisie’. Therefore, the Great Cultural Revolution must be launched to struggle against them and took back the ‘leadership’. Actually, most of the people who were criticized and struggled against merely put forward their proposals on economic development and insisted on the objective law of production. However, the wrong ‘Left’ thoughts stuck to the opinion that those people were attempting to develop capitalism and take over the power from the proletariat. Since this book focuses on the economic development of China,

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the specific political class struggle of the Great Cultural Revolution is not going to be mentioned in this chapter. Table 5.7. The yield of major farm crops during the Great Cultural Revolution Year

Grain Cotton Oil-Bearing Sugar (Unit: 10 (Unit: 10 (Unit: 10 (Unit: 10 thousand thousand thousand thousand tons) tons) tons) tons) 1965 19,452.5 209.8 362.5 1,537.5 1966 21,400.0 233.7 391.9 1,403.5 1967 21,782.0 235.4 398.5 1,524.1 1968 20,905.5 235.4 343.2 1,249.6 1969 21,097.0 207.9 333.1 1,288.3 1970 23,995.5 227.7 377.2 1,556.0 1971 25,014.0 210.5 411.3 1,526.4 1972 24,048.0 195.8 411.8 1,873.8 1973 26,493.5 256.2 418.6 1,964.3 1974 27,527.0 246.1 441.4 1,872.1 1975 28,451.5 238.1 452.1 1,914.3 1976 28,630.5 205.5 400.8 1,956.3 Source: The Compilation of Statistical Data of Sixty Years of New China.

Tea (Unit: 10 thousand tons) 10.1 10.6 11.3 11.8 12.2 13.6 15.3 17.0 18.2 19.8 21.1 23.3

To concisely analyze the situations during the period, the year 1967 and 1968 suffered most because the social value, social morality and national economy were extremely influenced by the shocks of the Great Cultural Revolution. The whole country was in chaos, and it was believed that it was right to blindly rebel and struggle with the so-called revisionists and capitalists through mobilizing the masses. After going through two years of social chaos, the Central Committee of the Communist Party of China held the Ninth National Congress of the CPC in April 1969 which was aimed at reversing the economic mess and ended the chaotic governance. One year later, the government implemented the stable policies of agricultural development, industrial development capital construction and so on. Therefore, the measures taken in 1970 were based on the economic situation in 1969, and the general development returned to normal and achieved the target of the original third five-year plan. However, there still existed some big problems that even influenced the development over the next several years, like excessively expanding the production and managing the enterprises through administrative control. In the year 1971, China entered the stage of the fourth five-year plan (1971-1975), and its main task was to establish an independent

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and complete industrial and economic system. Nevertheless, the targets set by the plan still pursued the quick results of production and neglected the reality and people’s living conditions, and finally caused unbalanced industrial development structures. Then, the Party Central Committee of the CPC further adjusted the economic policies and attempted to find a reasonable way to develop the economy in 1972 and 1973. Meanwhile, Premier Zhou and other key officials strongly resisted the Gang of Four, the biggest anti-Party clique that insanely stuck to the class struggle. Therefore, the overall economic development was relatively better than that in previous years. However, as the Movement of Condemning Lin Biao and Confucius was officially launched by the Gang of Four in 1974, the country turned into chaos again, which brought damages to economy and threatened the political stability. Although Premier Zhou and Deng Xiaoping (the vice president of the CPC Committee at that time) made concrete plans on rectifying the economic order in 1975, the implementation was still largely impeded by the anti-Party clique in November 1975. As a result, the economy kept suffering the huge damages and obstacles from 1974 to 1976. Fortunately, with the opposition of the masses against the Gang of Four, the anti-Party clique finally collapsed in October 1976, which marked the end of the ten-year Great Cultural Revolution. The following tables could reflect the economic situation under the background of political changes during those ten years. Table 5.8. The output of major industrial products during the Great Cultural Revolution Year

Coal (Unit: 100 million tons)

Pig Iron Steel Coke (Unit: 10 (Unit: 10 (Unit: 10 thousand thousand thousand tons) tons) tons) 1965 2.32 1,077 1,223 1,333 1966 2.52 1,334 1,532 1,634 1967 2.06 963 1,029 1,102 1968 2.20 857 904 1,098 1969 2.66 1,280 1,333 1,676 1970 3.54 1,706 1,779 2,330 1971 3.92 2,100 2,132 3,023 1972 4.10 2,355 2,338 3,437 1973 4.17 2,490 2,522 3,451 1974 4.13 2,062 2,112 3,104 1975 4.82 2,449 2,390 3,680 1976 4.83 2,233 2,046 3,570 Source: The Compilation of Statistical Data of Sixty Years of New China.

Cement (Unit: 10 thousand tons) 1,634 2,015 1,462 1,262 1,829 2,575 3,158 3,547 3,731 3,709 4,626 4,670

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Table 5.9. Balance between government revenue and expenditure during the Great Cultural Revolution Year

Government Revenue (100 Government Expenditure million yuan) (100 million yuan) 1965 473.32 459.97 1966 558.71 537.65 1967 419.36 439.84 1968 361.25 357.84 1969 526.76 525.86 1970 662.90 649.41 1971 744.73 732.17 1972 766.56 765.86 1973 809.67 808.78 1974 783.14 790.25 1975 815.61 820.88 1976 776.58 806.20 Source: The Compilation of Statistical Data of Sixty Years of New China.

Balance (100 million yuan) +13.35 +21.06 -20.48 +3.41 +0.90 +13.49 +12.56 +0.70 +0.89 -7.11 -5.27 -29.62

Table 5.10. The overall economic situation during the Great Cultural Revolution Year

Gross Domestic Product Gross National Consumer (Nominal GDP, Unit: Income (GNP Unit: Price Index 100 million yuan) 100 million yuan) (1950=100) 1965 1,717.2 1,717.2 139.0 1966 1,873.1 1,873.1 137.3 1967 1,780.3 1,780.3 136.4 1968 1,730.2 1,730.2 136.5 1969 1,945.8 1,945.8 137.8 1970 2,261.3 2,261.3 137.8 1971 2,435.3 2,435.3 137.7 1972 2,530.2 2,530.2 137.9 1973 2,733.4 2,733.4 138.0 1974 2,803.7 2,803.7 138.9 1975 3,013.1 3,013.1 139.5 1976 2,961.5 2,961.5 139.9 Source: The Compilation of Statistical Data of Sixty Years of New China.

Average Annual Wage Unit: Yuan 590 583 587 577 575 561 560 588 587 584 580 575

The first two years of turmoil brought severe consequences to national economy. To begin with, the aggregate value of agricultural and industrial output suffered huge losses. Although the agricultural production was generally stable, the industrial output was in sharp decline. Because the agriculture and industry almost dominated the Chinese economy, it was inevitable that GDP and GNP in 1967 and 1968 decreased, so did the

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government revenue and expenditure. With the decline of production and economic benefits, people got less paid in 1968. Besides, transportation industry and investment in capital construction were also affected. The volume of freight decreased from 1.3 billion tons in 1966 to 1.1 billion tons in 1967 and 10.3 tons in 1968. Through the new policies and efforts of economic recovery, the general economic situation truly improved in 1969. Just like the data in those tables, the indexes of agricultural and industrial output value, the yield of major crops and industrial products, government revenue and expenditure and national income all went up, which could reflect the fact that the government policies of economic recovery were effective. However, as mentioned in the last paragraph, the over-expansion of production made much more people get employed, while the economic benefits just normally grew. Therefore, the average wage was relatively lower than that in 1969. The economic situation in 1971 was generally in a stable increase, while the production quality, labor productivity and operating conditions were far below the expectation according to the official statistics. As mentioned above, the chaotic situation throughout the country was controlled to some extent, so the production and economic operation were obviously improved in 1972 and 1973. Unfortunately, the good tendency could not be kept because of the strong political struggle since 1974. The outputs of major agricultural and industrial products were influenced correspondingly, followed by the fiscal deterioration. Because of the severe damages brought by the Gang of Four, the national economy kept suffering losses, agricultural and industrial production developed quite slowly, and the government financial deficit even reached over 2.9 billion yuan in 1976. The data from these tables above could reflect the real economic and social situation of each year in the Great Cultural Revolution combined with its social background. In general, those ten years brought the heaviest cost since the PRC was founded. The ten years caused many irreversible damages to the Party, the government and Chinese people. The proportional relationship of national economy among all the sectors was extremely unbalanced, which even needed several decades to improve and cover the losses. Then, many enterprises used to run in a reasonable and scientific way but had to face huge difficulties and political interference after the Great Cultural Revolution was launched. Therefore, a large number of enterprises went bankrupt, and the managers were brutally and innocently denounced, which directly caused the decline of industrial production and people’s living standard. The Movement of Great Leap Forward had already made the national economy fall into a disordered

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condition. Although a series of adjustment policies were made to reverse the situation, those ten years not only followed the same disastrous road but also became further intensified in political class struggle. Different from the past movement, the Great Cultural Revolution caused the worst hit in people’s education. The saddest thing during that period was the cruelty to the intellectuals because most of them were wronged and doubted of their political stand. The whole society was filled with rebellion and struggle, which made both the intellectuals and managers of enterprises hard to survive. Look at the Table 5.11, during that period, it was nearly impossible to make people normally receive the higher education until the year 1977 when China resumed the college entrance examination, so it caused a ten-year gap in cultivating the new scientific talents, which was truly a national tragedy. Table 5.11. Number of student enrollment by level and type of schools during the Great Cultural Revolution Unit: 10 thousand people Year

Regular Institutions of Senior Secondary Junior Secondary Higher Education Schools Schools 1965 67.4 130.8 803.0 1966 53.4 137.3 1,112.5 1967 40.9 126.5 1,097.2 1968 25.9 140.8 1,251.5 1969 10.9 189.1 1,832.4 1970 4.8 349.7 2,292.2 1971 8.3 558.7 2,568.9 1972 19.4 858.1 2,724.4 1973 31.4 923.3 2,523.2 1974 43.0 1,002.7 2,647.6 1975 50.1 1,163.7 3,302.4 1976 56.5 1,483.6 4,352.9 Source: The Compilation of Statistical Data of Sixty Years of New China.

Primary Schools 11,620.9 10,341.7 10,244.3 10,036.3 10,066.8 10,528.0 11,211.2 12,549.2 13,570.4 14,481.4 15,094.1 15,005.5

In general, the Great Cultural Revolution was a great tribulation to Chinese people. Although there were some adjustment policies and good development trends during those ten years, like the economic situation in 1969 to 1973, the Movement of Condemning Lin Biao and Confucius in 1974 severely destroyed the national economy again. Finally, the forces of antiParty clique led by the Gang of Four crumbled in 1976 under the strength of the masses. The Great Cultural Revolution brought severe damages to the country, but there were still some achievements during the ten years. For example, the mechanization level in agricultural and industrial production was

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greatly improved, which could be reflected in figures of the aggregate output value of the two industries. Besides, there was progress in the construction of government infrastructure, like big hydroelectric stations, railways and oil pipelines were established in inland provinces. And it was undeniable that the most outstanding contributions during that period were the projects of ‘Two Bombs, One Satellite’. Specifically, the first atomic bomb of China succeeded to explode in October 1964, and the first hydrogen bomb successfully exploded in June 1967. Then, China launched the first artificial satellite in April 1970. Therefore, such brilliant achievements marked the new level of Chinese scientific research fields and laid solid foundation for the future scientific development, and meanwhile significantly enhanced the confidence and spirit of Chinese people. The contents above are the general situations from the year 1958 to 1976, and the process was filled with numerous setbacks. From the history of that period, the construction of socialist system of China went through many twists and turns, so the future development drew the lessons from it. Thankfully, after the end of the Great Cultural Revolution, China soon got back on track when it decided to carry out the Reform and Opening-up Policy in 1978. Therefore, this big eastern country returned to the world in a new way. In the next Chapter, we are going to introduce that great turning point that keeps developing China and brings earth-shaking changes.

Chapter 6

A Great Turning Point: The Reform and Opening Up After going through the wrong exploration of socialist construction and huge setbacks, China finally found a great way that reversed the situations and brought bright future. Under the second generation of core leadership of the Party Central Committee, the reform and opening up policy implemented in 1978 has greatly developed China and made it become one of the major big countries throughout the world, so it is regarded as the turning point of contemporary Chinese history. Under that policy, China keeps developing the socialist construction, insists on the path of socialism with Chinese characteristics and unprecedentedly set up the system of socialist market economy. Since then, China has been gradually connected with the outside world and kept expanding its openness. This chapter is divided into three parts that introduce the main strategic plans and concrete policies of China’s economy from 1976 to 2000. The first part is going to state the transition of reform and opening up policy, and the contents of the second part are the early achievements mainly from the sixth and seventh five-year plans. Finally, it is going to analyze the progress in the 1990s and the prospect of the next century.

Part I: The Great Transition 6.1. Reform and Opening Up After the collapse of the Gang of Four, the whole nation was in jubilation and actively came back to the normal production and construction. However, it was beyond dispute that the economic gap between China and the world was ever-increasingly widening because many countries developed quite fast in the 1960s and 1970s while China was going through the great recession and chaos. The countries and regions near mainland China, like the four Asian Tigers, i.e., Republic of Korea, Singapore, Hongkong China and Taiwan China,

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effectively adjusted their economic policies and utilized their comparative advantages, which soon made their economy booming. The Party and the government implemented a series of measures to make quick recovery soon after the end of the Great Cultural Revolution. Primarily, the leaders brought order out of chaos, which meant they resolutely guarded against and corrected the ‘Left’ tendency in the guiding ideology, and insisted that the production plans must be based on the capacity and respect the objective law. Second, the work of agricultural and industrial production, and transportation construction was re-planned so as to ensure the economic operation and circulation. Third, both domestic and foreign businesses were going to be recovered through circulation channels. Because the government strove for the rapid economic circulation at home and abroad, its following policies were directed at opening the markets and increasing the trade volume. Fourth, the economic management system would be gradually reformed. Since the Great Cultural Revolution caused huge damages to national economy, the further adjustment and reform should move on step by step, like the construction of infrastructures and the system of enterprise management. Fifth, a lot of measures were taken to stabilize the market prices and improve people’s living standard. Because the price reflected the situation of supply and demand, government interference, currency value and so on, it was directly related with the people’s purchase power and welfare. Through the measures above, the overall economic situation was improved though there still existed some ‘Left’ wrongs in guiding ideology. What needs to be precisely explained is that China still continued the former ways to develop the economy from October 1976 to November 1978, so the government plans were not reasonable enough to fundamentally promote the comprehensive strength. Many economic targets were still unrealistic and blind, and emphasized too much on collective system. Fortunately, a historically significant conference was convened in December 1978, correcting the long-standing mistakes in guidance. That was, the Third Plenary Session of the 11th Central Committee of the Chinese Communist Party which marked that China entered the new era of reform and opening up. Deng Xiaoping became the core leadership of the Party Central Committee and constantly pushed forward the reform and opening up. The purpose of the economic reform was to develop the social productivity through establishing a vigorous socialist economic system with Chinese characteristics. The Chinese economic reform gradually transformed the old rigid system, which could be reflected from the following measures.

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1. Separating government functions from enterprise management. Based on the principle of separating the ownership and management, the state-owned enterprises could be run as relatively independent economic entity. Therefore, it was up to the enterprises instead of the government to make the production plans and be responsible for the profits and losses. 2. Implementing the policy of separating the management right from ownership in rural areas, and carrying out the contract system of remuneration responsibility. Under the combination of such unified and decentralized management, people could choose the way of rural production according to their willingness. 3. Promote the development of joint economy. It aimed at making cities play a full role in constructing the modern economy and accelerating the social operation. 4. Establishing a system containing both planned economy and market regulation. Therefore, the government changed the management of enterprises from the former over-regulation way into comprehensive macro-regulation way. 5. Developing diverse forms of ownership with public ownership remaining dominant. The reform of economic form was to change the single form of socialist public ownership and then develop the diverse forms like urban and rural cooperative economy, individual economy, private economy, joint Chinese-foreign economy and foreign-owned economy, etc. They were developed as supplementary forms of socialist public ownership for the purpose of promoting the socialist economy of China. 6. Implementing the distribution system that took the distribution according to work as the main body and coexisted with diverse modes of distribution. The former system emphasized too much on the national interests and always neglected the individual interests of laborers and enterprises. Therefore, the reform fully considered the balance of the state, collectivity and individuals, encouraging those who were talented at managing enterprises and worked industriously to become well-off first, and meanwhile avoided the extreme income disparity. Those measures above were the main targets and requirements of economic reform of China, and it could be anticipated that new problems

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would constantly come out when pushing forward the reform, so it needed continuous improvement.

6.2. The Household Contract Responsibility System China started its economic reform in rural areas first because people living in the countryside accounted for 80% of the whole population. Once rural society was not stable, the whole political situation would get into trouble. And China would not fundamentally eliminate poverty as long as the peasants lived a poor life. The rural economic reform empowered the peasants and grassroots communities, so their initiatives could be largely raised. The concrete reform direction was to change the system of people’s commune into household contract responsibility system with remuneration linked to output which meant that peasants took family as a unit to contract for the means of production and production tasks. Therefore, peasants could be allocated lands according to their own family population or labor ratio. Then they were permitted to produce and manage their agricultural products by their own based on the contracts. As for the revenues, peasants could get all of the profits after paying the taxes to the state and organizations. That rural reform was proposed in 1978 and with the gradual development of the household contract responsibility system with remuneration linked to output, people’s commune completely ended in 1985. The household contract responsibility system with remuneration linked to output has been implemented since 1978, so Chinese peasants still obey its rules even today. As a basic system of the countryside, it truly has advantages in developing Chinese rural economy. Firstly, it adapts to the rural productivity of China at present stage. In the past, over collective rural production caused huge damages, and China has learned painful lessons and experience from it since the Movement of Great Leap Forward in 1958. Therefore, a system that enables peasants to positively engage in agricultural production is the one sought by the government. Secondly, the household contract responsibility system with remuneration linked to output combines both socialist public ownership and the management of self-raised funds of peasant households. It not only ensures their rights to use the means of production, but also allows peasants to invest their self-raised funds in agricultural production and buy various production tools if necessary. Thirdly, peasants can manage their agricultural production by their own. Hence, the immediate producers can proceed from the reality, arrange the work and

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organize the production according to their situations, which can significantly promote the agricultural development. Fourthly, it combines the labor income and self-investment funds of peasants. Because after paying the whole taxes and expenses, farmers can get the rest of the revenue, the more they invest in the production, the more likely they can gain higher profits. Therefore, it can avoid equalitarianism on distribution and considerably raise their initiatives, which is conducive to the agricultural development in the long term. Fifthly, its implementation helps to reverse the stagnant situation of agricultural production and accelerate the transformation from self-sufficient or semi-selfsufficient economy to large-scale commodity production, traditional agriculture to modern agriculture. As a result, with the implementation of the household contract responsibility system with remuneration linked to output, it finally led to the disintegration of the system of People’s commune in 1985. The rural circulation system was also involved in the reform. Since circulation was closely linked with the production, exchange and consumption, it was essential to develop the circulation channels of rural commodities. One of the main measures was to change the single circulation channel to multiple channels. In the former economic system, the main circulation channel in rural areas was controlled procurement and distribution. And its economic organizations were the state-owned institutions like commercial bureaus, bureaus of materials and equipment, bureaus of agricultural materials, food bureaus, foodstuffs companies, medicinal materials companies, purchasing stations of silkworm cocoon and fruits or the supply and marketing cooperatives. However, such simple circulation channel was no longer suitable for the new rural economic situation after the system of rural production management was reformed. According to the regulations of the contract responsibility system, the production was managed by the peasant households that contracted for its work instead of the production teams. In addition, with the diversified management in agriculture and the development of agricultural specialization, many products which could not enter the rural markets in the past were permitted the entry. Besides, peasants became increasingly richer, so they had more products used for exchange. Since the consumer demand on both the product quantity and quality greatly increased, it was urgent to develop the system of diversified commercial economic forms so as to establish multiple circulation channels to meet the requirements of rural reform. Therefore, the policies were made to ensure that the work of controlled procurement and distribution could be managed through multiple channels. For example, Peasants were encouraged to go out of the countryside and promote their products to other regions especially the

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urban areas. Most of the local specialties and agricultural products were mainly managed by local collective enterprises or individual business. Since the rural economic reform was rapidly promoted, new circulation system with multiple channels was gradually formed. In addition to the formation of multiple channels, another important measure was to implement the reform on the purchasing and marketing system of agricultural and sideline products. Under the policy of controlled procurement and distribution, agricultural and sideline products were purchased and sold only by the government, and it had been one of the major policies for a long time. Meanwhile, the prices could be made by the government only and usually lower than the market prices. Although that policy was conducive to the economic construction to some extent, it still largely restricted the development of commodity economy and curbed peasants’ enthusiasm of production. After the Third Plenary Session of the 11th Central Committee of the Chinese Communist Party was held, some measures were taken to reform the policy of controlled procurement and distribution. (1) Raising the purchase prices of agricultural and sideline products. The general price rise of those products was about 20%, and it would increase by an additional proportion once the government purchased above the quota. (2) Reducing the variety of purchased products by government. It was regulated that products could be freely sold in the market once after the central procurement. Therefore, many product prices were decided by the market rather than the government interference. Besides, the government would give price subsidies to urban residents if the prices went up by a relatively large extent. As a result, after getting the autonomous rights in production and management, peasants could also freely sell their products. Such big adjustments in rural planting enriched the market and significantly facilitated the development of agricultural production and industrial structures.

6.3. Township and Village Enterprises The township and village enterprises were the new economic form during the rural reform of economic system, so it was closely related with the rural economy. With the development of the reform of economic system, it was also connected with the urban industry and gradually became a vital part of the whole industrial development. The township and village enterprises were established by rural organizations or individuals in the countryside. Usually, they were small-scale enterprises with simple production technique and low

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operating costs, which could be flexibly managed and adapt to the market changes. Besides, most workers they employed were farmers who did not have high requirements on income and treatments. The reform of those enterprises took several measures. (1) Adjusting the product positioning. The township and village enterprises should make the production plans according to their product features. (2) Setting up the specialized corporations and appropriately centralizing the management of those decentralized enterprises. (3) Making reasonable production plans and avoiding blind production. The plans should be based on the situations of local resources and social demand. (4) Carrying out technological transformation. It was important to improve the production efficiency and promote the economic reform. The township and village enterprises developed rapidly after the reform was implemented and finally formed two typical models. One was Southern Jiangsu pattern, and another was Wenzhou pattern. The Southern Jiangsu region took advantage of the solid industrial foundation and powerful economic strength in Yangtze River Delta and strove to develop rural industry. The Southern Zhejiang region carried forward its traditions of commerce and handcraft industry, so it developed an extensive operating form which combined with labor-hiring management and joint-stock management on the basis of cottage industry and household industry. That pattern was directed at specialized markets and innovating a new business model that could develop the commodity economy, especially in Wenzhou, a south city in Zhejiang province. Besides, the township and village enterprises with local characteristics sprung up throughout the country, which was one of the major achievements of China in the 1980s. The expansion of those enterprises not only developed the rural economy and improved the peasants’ living standards, but also pioneered a new path of rural modernization which considerably boosted national economy. First, many advanced scientific technologies were introduced by those enterprises and then utilized for the agricultural production, so the efficiency could be largely improved. Second, more people got employed because setting up the enterprises could create plenty of job opportunities. Therefore, rural labor resources could be reasonably utilized. Third, peasants could gain much more wealth than before and had more work choices because those enterprises were established by peasants themselves. Fourth, rural production could then provide more material supply for national industrial construction, changing the whole economic pattern and helping the Chinese government to alleviate the poverty.

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In general, both the household contract responsibility system with remuneration linked to output and the establishment of township and village enterprises were the main aspects of the rural reform of economic system in the late twentieth century. In fact, the rural reform truly created a path for China to develop the economy based on the national condition of the primary stage of socialism. So far, it has played an indispensable role in the rural development of China.

6.4. A Reform of Urban Economic Systems The reform of economic system was first implemented in the rural areas, which provided favorable conditions and valuable experience for urban economic reform and development. The Party Central Committee and the Chinese government continued to explore a way to reform the cities and carry out opening up. However, since the opening up policy was mainly implemented in relatively advanced cities, it had to accelerate the urban economic reform and improve the system that had many drawbacks. The concrete measures mainly focused on the following aspects. 1. Enlarging the decision-making powers of the enterprises and strengthen enterprise vitality. China used to implement the socialist planned economy, and that system failed to separate the government functions from enterprise management, so the economic management power was controlled by the state, and enterprises were just affiliated by the administrations. Therefore, it urged the government to change the situation and effectively develop the urban economy. First, on the premise of fulfilling the state plans, enterprises were encouraged to increase their production and organize the processing if markets needed. Second, enterprises could innovate in new products and sell by themselves, which increased the product variety and made the markets more competitive. Third, employees could get certain proportion of bonuses and dividends if they more than fulfilled the work, so the whole staff was more motivated to engage in the production. Fourth, liquidity was used to provide loans and introduce new technologies and equipment, and it was also permitted to utilize foreign capitals to assemble and process the products.

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2. Carrying out the system of economic responsibility throughout the nation. It combined the economic responsibility with economic rights and benefits. Therefore, its implementation could closely connect the responsibility with rights and benefits among the state, enterprises and individual workers. It adopted the assessment mechanism of rewards and punishments based on the distribution according to work, which could significantly raise the producers’ initiatives, promote the development of enterprises and increase the workers’ incomes. 3. Implementing the system of tax for profits. To be specific, tax for profits meant the government would levy a certain proportion of enterprise income taxes and local taxes, and then the after-tax profits were going to be reasonably distributed between the state and enterprises in many forms. Since June 1983, the government has levied income tax of state-owned enterprises, and the tax rate of those profit-making large and medium-sized enterprises was 55%. As for the after-tax profits, part of them would be given to the state, and another part was supposed to be owned by the enterprises based on the policies. In general, it was a new measure that could solve the problem of the distribution relationship between the state and enterprises. Through improving the tax system and applying its regulating effect, it was much more convenient to balance the relationship between the state and enterprises and conducive to improving fiscal revenue. 4. Developing multiple economic forms and management ways. Under the guidance of the CPC and the Chinese government, a series of concrete measures were taken to develop the economic system that coexisted with multiple economic forms and management ways on the premise of taking public ownership as main body. Therefore, such economic system was established to support the urban collective economy and individual economy. Besides, it allowed individuals to cooperate with the state-owned economic organizations. Meanwhile, it was also planned to carry out the policy of opening up, so it encouraged to develop the joint Sino-foreign and wholly foreignowned enterprises. As a result, this economic system could keep the national economy booming. 5. Reforming the circulation system. For a long time, China had adopted the simple circulation system whose purchasing and supplying were managed only by the government. Because it had few commodity channels, the circulation became fairly inconvenient. Therefore, it

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failed to adapt to the product production and exchange after implementing the nationwide economic reform. In terms of the stateowned business, its reform insisted on the separation of ownership and management on the basis of the public ownership of means of production. When establishing diverse channels of commodity circulation, it could break the limits and then most enterprises and individual commerce could better cooperate with the state-owned business, which also facilitated the economic exchange between the urban and the rural. 6. Reforming the planned economic system and fiscal system. Through the socialist transformation, the planned economic system of China was based on the public ownership of the means of production. And after the rural production responsibility system was put into practice throughout the country, the production teams and peasants were empowered to arrange the production once after completing the state purchase quotas, so the government reduced the variety and proportion of purchased agricultural and sideline products. In industry and commerce, the economic responsibility system was also implemented to expand the power of enterprises. Therefore, enterprises could plan the production, distribute the profits and apply the funds more flexibly, which greatly improved the whole economic system, employed the effect of market and promoted the integration of the urban and rural areas. For the purpose of giving full play to people’s initiatives, the reform of fiscal system was mainly reflected in properly dealing with the relationship between the central and local governments, the state and enterprises. 7. Promoting the economic integration and implement pilot comprehensive reform of urban economic system. The pilot work on industrial restructuring was started mainly in Beijing, Shanghai, Tianjin, Liaoning province and other cities and provinces in 1978. Therefore, it was more efficient to adjust the production structure, and reasonably utilize the resources and energy so that all the sectors could integrate with each other and operate jointly. The comprehensive reform of economic system has been implemented since 1981, and the concrete measures were to streamline the administration and delegate power, facilitate the circulation reform, establish capital market, promote the application of scientific technology, set up central cities in different regions.

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6.5. The Opening-Up Policy The economic system of China before 1978 was quite closed, so it simply adhered to an independent foreign policy of maintaining peaceful foreign relations but neglected the economic cooperation and technological exchange with foreign countries. As a result, excessive closed policy restricted the economic development of China to a large extent. After the Third Plenary Session of the 11th Central Committee of the Chinese Communist Party was held in 1978, China decided to carry out opening up policy and took it as one of the basic state policies. It strove to actively establish the economic cooperation with foreign countries and exchange with them based on the selfreliance. Since then, China has entered the new era of participating in international business and kept opening up. With the development of commodity economy, many countries established close economic relations with each other in 1980s. Especially after the Second World War, the internationalization of production became a popular trend in the world. Therefore, many countries took opening up as their basic strategy of developing economy. For example, the United States, the Federal Republic of Germany, Japan and other capitalist countries boosted their economies because of opening to the outside world. Even some developing countries, such as Singapore and Republic of Korea, took advantage of the favorable international conditions like technology spread, trade exchanges and mutual learning to develop themselves, so that their national economies grew at an amazing speed. Undoubtedly, opening up has been an inevitable trend of social development since 1970s. At that time, each country had its own comparative advantages, so they could cover the shortages and develop their economies through international cooperation and learning advanced scientific technology and management from those developed countries. Because each country had its own advantage on resource endowment which were needed for the modern production, international trades usually relied on the division of labor based on specialization. For example, America produced Boeing jets but actually the production was finished by six countries, which involved more than 1500 big enterprises and 15 thousand small and medium-sized enterprises. Therefore, only if engaged in the international economic and technological exchanges can the country further develop its national economy. In addition, utilizing the foreign capitals, advanced technology and talents could largely improve the efficiency and save a lot of time in exploring the development ways. For example, Japan spent nearly six billion dollars on

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introducing advanced patent technologies and promoting the applications from 1950s to 1970s. It was anticipated that if Japan chose a closed way of development and did everything by itself, then the total expenses on scientific research, experiments and designs would be over 180 billion dollars, and it would take the country a much longer time to finish the same projects. Therefore, new technological revolution and spread throughout the world at that time was both an opportunity and challenge to China. If China failed to seize the golden opportunity of cooperating with foreign countries, it was highly likely that its backward productive force would be remained. Thankfully, the opening up policy of China was truly a wise decision, so the world has continued to witness the successful Chinese transition and great achievements. After the opening up policy was carried out in 1978, its concrete measures were mainly three steps. The first step was to implement distinctive policy in Guangdong Province and Fujian Province in 1980, and set up four special economic zones in Shenzhen, Zhuhai, Shantou and Xiamen, respectively. The second step was to open fourteen coastal cities and Hainan Administration Region in 1984. And the third step was to open Yangtze River Delta, Pearl River Delta and Southern Fujian Golden Triangle in 1985. Those three steps above were put into practice through the following measures. 

The First Step 1. Allowing both Guangdong and Fujian provinces to implement the policy of the fixed lump sum in finance and foreign exchange rates. The increased fiscal revenue of the two provinces within 5 years (1979-1984) was going to be left there. 2. Expanding the role of market regulation under the government guidance of materials and commerce circulation. For example, the provincial governments had the rights to adjust the prices of local products. 3. Expanding the local administration authority in the foreign economic work. For example, provincial governments could decide the production plans, international business cooperation, commodity circulation, labor wages and other aspects. 4. Establishing special economic zones so as to absorb and utilize advanced foreign technologies and learn efficient management experience from foreign countries.

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Therefore, the implementation of special policy empowered the two provinces to get relatively big autonomous rights, which brought the rapid economic development. The foreign economic work further opened the regions, so people in the two provinces lived a much better life than before. 

The Second Step 1. Expanding autonomous rights of those fourteen cities. Specifically, the approval rights of introducing foreign capitals, technologies and construction projects were broadened there. 2. Implementing preferential policies on foreign investments. For example, if the amount of investment reached over 30 million dollars or the funds were invested in technology-intensive projects, then the income tax rate would be only 15%. The materials used in foreign investments were tax free. And it also provided convenient entry and exit for foreign business.

The fourteen cities were Tianjin, Shanghai, Dalian, Qinhuangdao, Yantai, Qingdao, Lianyungang, Nantong, Ningbo, Wenzhou, Fuzhou, Guangzhou, Zhanjiang and Beihai. Later, the government decided to open Hainan Island. These cities and regions were coastlands where economies and transportation systems were much more developed compared with those in inland areas, so they could provide favorable conditions for foreign business. 

The Third Step 1. Setting up new economic and technological development zones. More favorable policies were carried out in certain regions, so as to attract foreign investments of advanced technologies, knowledge-intensive and emerging industrial projects. 2. It was allowed to issue special bonds or stocks in economic zones lied in Yangtze River Delta, Pearl River Delta and Southern Fujian Golden Triangle. The Bank of China gave priority to provide concessional loans for promising projects.

The Yangtze River Delta involved Jiangsu Province, Zhejiang Province, Anhui Province and Shanghai. There were five cities involved in the Pearl River Delta, which were Guangzhou, Foshan, Jiangmen, Shenzhen and Zhuhai. As for the Southern Fujian Golden Triangle, Xiamen, Zhangzhou, Quanzhou and towns and villages nearby were involved. These three regions were coastlands along the rivers with convenient transportations and solid

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industrial foundation. Considering the economic levels there, the government decided to open these areas and expand the autonomous rights of foreign economic and trade cooperation. In general, after the Third Plenary Session of the 11th Central Committee of the Chinese Communist Party was held, the opening up policy preliminarily formed a circulation pattern. It started from special economic zones to coastal open cities, then reached open coastal economic areas, and finally reached inland. It was promoted from the east to the west, the south to the north. Therefore, through forming the regional pattern of opening up, China could make both the coastland and inland, the urban and the rural develop together, and greatly push forward the construction of socialist economy. To better implement the policy of opening up, the system of foreign trade management was also under the reform. There were many problems and drawbacks existing in the former system of foreign trade. First, Chinese domestic export enterprises used to separate from international markets, so they were not capable of producing competitive products. Second, due to the excessive interferences by the administrative department of foreign trade, many enterprises lacked autonomous rights to operate production. Besides, those enterprises did not undertake any economic responsibility and just waited for the profit distribution by the government. As a result, such outdated system of foreign trade had to be reformed if China wanted to integrate into the world. In order to adapt the ever-changing international market, the concrete measures of the preliminary reform of opening up were concluded as follows. 1. Streamlining administration and delegating power to lower levels. Just like the reform of rural and urban economic systems, the central government decided to separate the government functions from business management. Hence, foreign trade enterprises were given more autonomous rights, which provided favorable conditions for those enterprises to go outside and conveniently cooperate with the world. 2. Strengthening the combination of industrial departments, technologies and trade. Therefore, the relationship between the production enterprises and export sectors would be significantly improved, which not only helped to produce the export products, but also promoted domestic economic circulation. 3. Implementing the import and export proxy system. Therefore, foreign trade enterprises were responsible for the work of production, and the

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ordering department handled the import and export orders and charged some fees accordingly. Besides, customers or users could freely choose agents to meet their demands according to the business scopes of the enterprises, and production enterprises with autonomous rights could also organize the imports and exports. 4. Narrowing down the mandatory plans and expand the scope of guiding plans in pushing forward the system of foreign trade. It was permitted to set up trans-regional companies, so Chinese foreign trade enterprises increasingly integrated into international markets. 5. Implementing the policy of unified management on foreign trade so as to avoid price inequality and obey the rule of purchasing power parity. 6. Reforming the foreign exchange administration system and adjusting the foreign exchange rate of Renminbi (RMB). On the one hand, it could change the prices of Chinese export products and strengthen the competitiveness in the international market. On the other hand, the system could appropriately restrict the import, so as to ease the foreign exchange constraints. Since then, China has achieved great progress in foreign business and entered the world stage. More and more countries got familiar with China and Chinese characteristics in economic management and political diplomacy. Therefore, the opening up policy made in 1978 truly paved the way for the future development of China.

Part II: Initial Success of the Reform and Opening up The 12th National Congress of the Communist Party of China was held in September 1982, and its general tasks were to gradually achieve the modernization of industry, agriculture, national defense and scientific technologies, and build China into a highly civilized and democratic socialist country through uniting with the people of all ethnic groups and self-reliant development. The concrete target was to quadruple the aggregate production value of industry and agriculture of 1981 by the end of the 20th century. It was planned to reach 710 billion yuan in 1981 (it actually amounted to 758 billion yuan), so the following 20 years emphasized on the strategic development of agriculture, energy, transportation, and scientific education, and the strategic target was going to be realized through a two-step plan. The first step was from

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1981 to 1990, and its main economic work was to reform the economic management system, adjust economic structure, strengthen the construction of agriculture, energy, transportation, and improve the development of science, technology and education. The goal of the second ten years (from 1991 to 2000) was to strive to enter an economic revitalization period. In the 13th National Congress of the CPC in 1987, it further proposed the economic deployment of the three-step development strategy. The first step was that the Gross National Product (GNP) of 1990 was expected to double that of 1980 so as to ensure people’s basic living needs. In the second step, the figure was planned to double that of 1990 by the end of the 20th century, so people could live a moderately prosperous life. According to the third step, it was anticipated that the per capita GNP would reach the level of mid-ranking developed countries by the middle of the 21st century when Chinese people are expected to live a rich life and the country can basically realize the socialist modernization.

6.6. The Theory of the Primary Stage of Socialism Most importantly, the 12th National Congress of the Communist Party of China proposed the path of socialism with Chinese characteristics. Since then, the national economy of China has been developed in a right path, among which the theory of the primary stage of socialism is a vital guiding ideology in the development of Chinese economy. It clearly defines the history position of socialist construction of China and points out the correct direction of the development of national development. Today, China is still in the primary stage of socialism, so its proposal has kept guiding the development. 1. The leading position of the national economy is the socialist ownership by the whole people, and the basic economic system is that public ownership is the mainstay and coexists with diverse ownership. In the primary stage of socialism, although China has established the leading position of the socialist ownership by the whole people, its degree of public ownership is not high enough to efficiently develop the national economy. Therefore, it is necessary to separate ownership rights from management rights, and the system should allow the existence and development of non-socialist economic forms which are conducive to improving the productivity and meeting the people’s needs of materials and education.

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2. The distribution system takes the principle of distribution according to work as the main body and coexists with multiple distribution ways. The economic system has diverse forms of ownership and management ways, but distribution according to work exists only in socialist economy. Therefore, it is permitted to have other kinds of income, like individual labor income, capital allocation income (profits from stocks, bonds, deposit interests, bonus and dividends), labor value income (from private-owned enterprises, foreign-invested enterprises and Sino-foreign joint ventures) and risky income. 3. Implementing the economic operational mechanism of market economy based on central planning. Developing the system of commodity economy is the prerequisite of developing social productivity. If commodity economy remains stagnant, then it is quite difficult to develop the productive forces. Since the basic economic system coexists with diverse forms of ownership and ways of business operation, it is highly necessary to allow and encourage the commodity economy, such as individual economy, capitalist economy and state-capitalist economy. As a result, China finally formed an economic pattern with both socialist and non-socialist attributes which keep jointly promoting the social productivity. 4. It encourages and allows some people and regions to become prosperous sooner than others through honest work and legitimate management with the goal of common prosperity. Meanwhile, it also advocates that those who get well-off first should help other people and regions and play a leading role in promoting the common prosperity of China. That strategy can not only avoid the inefficient equalitarianism that regulates all the people must get rich at the same time, but also protect the legitimate income and adjust the exorbitant profits through taxes. 5. Making full use of the law of commodity economy and market mechanism so as to develop socialist economy and carrying out macro regulation. With the expanding effect of market mechanism, people can adapt to both the planned economic system and market adjustment, which significantly improves the productivity and boosts the national economy. The 12th National Congress pointed out that China’s modernization drive must proceed from the reality and should learn from foreign experience suitable for the national conditions of China. However, China had learned

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many painful lessons from copying the experience of others, like the model of the Soviet Union. Therefore, the country has insisted on its own path since the Third Plenary Session of the 11th Central Committee of the Chinese Communist Party, and finally chose the path of socialism with Chinese characteristics. According to basic national condition of the primary stage of socialism, the main contents about economic development path included:

6.6.1. Ownership of the Means of Production and Economic System Socialist economy should insist on public ownership of the means of production. However, it should be noted that diverse forms of ownership are also supposed to exist due to the national conditions of the primary stage of socialism. Hence, the economic system of China develops a certain proportion of private economy, individual economy, joint Sino-foreign economy, foreign-owned economy and other forms of economy on the premise of socialist public ownership. The economic system separates the government functions from enterprise management, streamlines administration and delegates power to the lower levels. In order to enliven the market, the system fully uses the economic lever and combines the planned economy with commodity economy.

6.6.2. Mode of Business Operation and Distribution System China generally implements the unified management and the system of distribution according to work. To be specific, the household contract responsibility system with remuneration linked to output implemented in countryside gives full play to raising peasants’ initiatives. Such combination of unified management and household decentralized management is suitable for agricultural productivity of China and can truly put the distribution according to work into practice. Besides, socialist state-owned enterprises separate the ownership from management and become independent economic entity. Within an enterprise, it has clear and strict employee evaluation systems which can involve all the departments, production chains and personal work contribution. Therefore, employees get paid according to their actual work and efficiency.

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6.6.3. Foreign Relations The construction of socialist system of China mainly relies on the persistent efforts of Chinese people and insists on the guiding principle of independence and self-reliance, but meanwhile, it still needs economic and technological exchanges with foreign countries. Therefore, China holds an active attitude on learning advanced technological experience from outside and takes opening up as one of the basic state policies. Since the country attaches great importance to the opening up policy, China keeps expanding exchanges and cooperation with foreign countries on the basis of the principle of equality and mutual benefit. To be specific, it actively utilizes foreign capitals, introduces advanced technologies and management ways, sets up Sino-foreign joint ventures and foreign-owned enterprises, establishes special economic zones, and opens both coastal and inland regions to develop foreign trades.

6.6.4. The Relationship between National Economic Construction and People’s Living The reform takes both economic development and people’s living into account, changing the previous situation of simply emphasizing on improving national economy but neglecting the people’s willingness or life quality. Hence, it requires that when dealing with the conflicts between production and people’s life, it should guarantee the basic needs of living first, but ensure the process of economic development at the same time because economic improvement contributes to the quality of life. In general, the national conditions of primary stage of socialism and the path of socialism with Chinese characteristics were proposed by the CPC and government on the basis of historical experience, which have been of great significance since the Third Plenary Session of the 11th Central Committee of the Chinese Communist Party was held. In the future, the national condition and path will guide all kinds of work and plans of China for a long period. In the next part of the chapter, we are going to introduce the early economic achievements that could prove the effectiveness of the reform and opening up policy.

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6.7. The Sixth Five-Year Plan The fifth five-year plan was from 1976 to 1980, since those five years mainly went through the period of bringing order out of chaos, the general economic conditions were just in adjustment. However, Chinese economy has developed rapidly after the sixth five-year plan (1981-1985). Its basic tasks were to keep adjusting, reforming, rectifying and improving, so it was required to further solve various problems left in economic development and strive for the fundamental improvement. In the sixth five-year plan, it was planned to hit various targets of agriculture, industry, transportation, capital investments, people’s living and education. The following tables can compare the concrete situations between the fifth five-year plan (1976-1980) and sixth five-year plan (1981-1985). Table 6.1. General economic situation of the fifth and sixth five-year plan Year

Gross National Nominal Product GDP (GNP, Unit: (Unit: 100 100 million million yuan) yuan) 1976 2,961.5 2,961.5 1977 3,221.1 3,221.1 1978 3,645.2 3,645.2 1979 4,062.6 4,062.6 1980 4,545.6 4,545.6 1981 4,889.5 4,891.6 1982 5,330.5 5,323.4 1983 5,985.6 5,962.7 1984 7,243.8 7,208.1 1985 9,040.7 9,016.0 Source: China Statistical Yearbook.

Average Annual Wage (Unit: yuan) 575 576 615 668 762 772 798 826 974 1148

Total Investment in Fixed Assets (Unit: 100 million yuan) / / / / / 961 1,230.4 1,430.1 1,832.9 2,543.2

Consumer Price Index (1950 = 100)

139.9 143.7 144.7 147.4 158.5 162.5 165.8 169.1 173.7 189.9

From Table 6.1, the general economic development was quite fast. GDP in 1985 nearly doubled that of 1980, and the average wage also had a 50.66% growth. In the sixth five-year plan, the government attached great importance to investment in fixed assets, so the amount greatly increased every year. However, it was acknowledged that the national economy was booming, and its circulation was much faster than before, so it could not avoid the price rise. That was the reason why consumer price index kept increasing.

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6.7.1. Agriculture and Industry During the period of sixth five-year plan, the government took a series of measures to support agricultural production. Based on the implementation of household contract responsibility system with remuneration linked to output, agriculture developed fairly well. In industry, the relationship between the heavy industry and light industry tended to be more balanced than before under the reform, and its output value outstripped targets. As a result, the total output value of agriculture and industry in 1985 nearly doubled that of 1980 (Table 6.2), and most of the major products had an obvious increase (Table 6.3 and Table 6.4). Table 6.2. Total output value of agriculture and industry of the fifth and sixth five-year plan Unit: 100 million yuan Year

Gross Output Value of Gross Output Value Total Output Value of Agriculture of Industry Agriculture and Industry 1976 1,258 3,278 4,536 1977 1,253 3,725 4,978 1978 1,397 4,237 5,634 1979 1,698 4,681 6,379 1980 1,923 5,154 7,077 1981 2,181 5,400 7,581 1982 2,483 5,811 8,294 1983 2,750 6,461 9,211 1984 3,214 7,617 10,831 1985 3,619 9,716 13,335 Source: The Compilation of Statistical Data of Sixty Years of New China.

Table 6.3. Yield of major agricultural products of the fifth and sixth five-year plan Unit: 10 thousand tons Year Grain Cotton Oil-Bearing Sugar 1976 28,630.5 205.5 400.8 1956.3 1977 28,272.5 204.9 401.7 2020.8 1978 30,476.5 216.7 521.8 2381.9 1979 33,211.5 220.7 643.5 2461.3 1980 32,055.5 270.7 769.1 2911.3 1981 32,502.0 296.8 1020.5 3602.8 1982 35,450.0 359.8 1181.7 4359.4 1983 38,727.5 463.7 1055.0 4032.3 1984 40,730.5 625.8 1191.0 4780.4 1985 37,910.8 414.7 1578.4 6046.8 Source: The Compilation of Statistical Data of Sixty Years of New China.

Tea 23.3 25.2 26.8 27.7 30.4 34.3 39.7 40.1 41.4 43.2

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Table 6.4. Output of major industrial products of the fifth and sixth five-year plan Year

Coals Crude Oil (Unit: 100 (Unit: million 10000 tons) tons) 1976 4.83 8,716 1977 5.50 9,364 1978 6.18 10,405 1979 6.35 10,615 1980 6.20 10,595 1981 6.22 10,122 1982 6.66 10,212 1983 7.15 10,607 1984 7.89 11,461 1985 8.72 12,490 Source: China Statistical Yearbook.

Natural Gas (Unit: 100 cubic meters) 101.0 121.2 137.3 145.1 142.7 127.4 119.3 122.1 124.3 129.3

Electricity (Unit: 100 million kwh) 2,031 2,234 2,566 2,820 3,006 3,093 3,277 3,514 3,770 4,107

Pig Iron (Unit: 10000 tons) 2,233 2,505 3,479 3,673 3,802 3,417 3,551 3,738 4,001 4,384

Steel (Unit: 10000 tons) 2,046 2,374 3,178 3,448 3,712 3,560 3,716 4,002 4,347 4,679

6.7.2. Transportation Industry According to the requirements, the government adjusted the transportation structure, so railways, highways, waterways and civil aviation were constantly under construction. Because transportation system determines the economic circulation, the whole country has kept focusing on its construction since 1978. Table 6.5 & Table 6.6 illustrate the situation of transportation development, and it is clear that these four means of transportation developed fast from their volume of passenger traffic and freight traffic. Therefore, the trend laid a solid foundation for the future transportation construction and economic development. Table 6.5. Railways and highways of the fifth and sixth five-year plan Year Length (Unit: 10 thousand kilometers)

1976 1977 1978

4.91 5.06 5.17

Railways Volume of Passenger Traffic (Unit: 10 thousand people) 7,1249 79,471 81,491

Volume of Freight Traffic (Unit: 10 thousand tons) 84,066 95,309 110,119

Length (Unit: 10 thousand kilometers)

82.34 85.56 89.02

Highways Volume of Passenger Traffic (Unit: 10 thousand people) 108,718 122,919 149,229

Volume of Freight Traffic (Unit: 10 thousand tons) 74,256 80,833 85,182

A Great Turning Point Railways Highways Volume of Volume of Length Volume of Passenger Freight (Unit: 10 Passenger Traffic Traffic thousand Traffic (Unit: 10 (Unit: 10 kilometers) (Unit: 10 thousand thousand thousand people) tons) people) 1979 5.30 86,389 111,893 87.58 178,618 1980 5.29 92,204 111,279 88.83 222,799 1981 5.39 95,219 107,673 89.75 261,559 1982 5.33 99,922 113,495 90.70 300,610 1983 5.46 106,044 118,784 91.51 336,965 1984 5.48 113,353 124,074 92.67 390,336 1985 5.52 112,110 130,709 94.24 476,486 Source: The Compilation of Statistical Data of Sixty Years of New China.

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Year

Length (Unit: 10 thousand kilometers)

Volume of Freight Traffic (Unit: 10 thousand tons) 371,036 382,048 363,663 379,205 401,413 533,382 620,113

Table 6.6. Waterways and civil aviation of the fifth and sixth five-year plan Year

Waterways Civil Aviation Volume of Volume of Length Volume of Passenger Freight (Unit: 10 Passenger Traffic Traffic thousand Traffic (Unit: 10 (Unit: 10 kilometers) (Unit: 10 thousand thousand thousand people) tons) people) 1976 13.74 21,298 35,528 9.78 146 1977 13.74 22,542 38,861 13.21 165 1978 13.60 23,042 43,292 14.89 231 1979 10.78 24,360 42,676 16.00 298 1980 10.85 26,439 41,490 19.53 343 1981 10.87 27,584 44,329 21.83 401 1982 10.86 27,987 45,058 23.27 445 1983 10.89 27,214 46,892 22.91 391 1984 10.93 25,974 63,322 26.02 554 1985 10.91 30,863 82,962 27.72 747 Source: The Compilation of Statistical Data of Sixty Years of New China. Length (Unit: 10 thousand kilometers)

Volume of Freight Traffic (Unit: 10 thousand tons) 5.3 5.3 6.4 8.0 8.9 9.4 10.2 11.6 15.0 19.5

6.7.3. Government Revenue and Expenditure The total government revenue in the sixth five-year plan nearly reached 740.3 billion yuan, a 45% increase compared with that of fifth five-year plan. Because the government kept allocating funds to capital construction, innovation programs, science and technology research, so it inevitably suffered deficit. However, since the revenue maintained its increase, the

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overall situation of the latter five years was much better than that of the former ones. Although China had to face financial deficit, its expenditure was used as the investment funds of economic construction. Hence, the overall Chinese economy showed positive signs. Table 6.7. Government revenue and expenditure of the fifth and sixth five-year plan Unit: 100 million yuan Year

Government Revenue Government Expenditure (Unit: 100 million yuan) (Unit: 100 million yuan) 1976 776.58 806.2 1977 874.46 843.53 1978 1,132.26 1,122.09 1979 1,146.38 1,281.79 1980 1,159.93 1,228.83 Total 5,089.61 5,282.44 1981 1,175.79 1,138.41 1982 1,212.33 1,229.98 1983 1,366.95 1,409.52 1984 1,642.86 1,701.02 1985 2,004.82 2,004.91 Total 7,402.75 7,483.84 Source: The Compilation of Statistical Data of Sixty Years of New China.

Balance (Unit: 100 million yuan) -29.62 30.93 10.17 -135.41 -68.90 -192.83 +37.38 -17.65 -42.57 -58.16 -0.09 -81.09

Table 6.8. Main government expenditure by item of the fifth and sixth five-year plan Unit: 100 million yuan Year

Expenditure for Innovation Funds and Science Expenditure for Capital and Technology Promotion Supporting Agricultural Construction Funds Production 1976 311.25 34.34 46.01 1977 300.88 39.45 50.68 1978 451.92 63.24 76.95 1979 443.68 71.79 89.97 1980 346.36 80.45 82.12 1981 257.55 65.30 73.68 1982 269.12 69.02 79.88 1983 344.98 78.71 86.66 1984 454.12 111.77 95.93 1985 554.56 103.42 101.04 Source: The Compilation of Statistical Data of Sixty Years of New China.

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6.7.4. Domestic and Foreign Trade Because of the increasing output of agriculture and industry, total retail sales of consumer goods kept booming. With the rapid development and recovery of commodity economy, private-owned economy and distribution channels, the total retail sales of consumer goods in the sixth five-year plan had an 86.8% increase, among which the average annual growth in the countryside reached 16.3% (the planned growth was merely 7.5%), so it proved the effectiveness of the household contract responsibility system with remuneration linked to output. Table 6.9 can reflect the fact that the policy of opening up significantly expanded the foreign trade. The volume of total imports and exports of the sixth five-year plan nearly tripled that of the fifth five-year plan. Since China insisted on introducing foreign products and technologies, the balance of trade was deteriorating during that period. However, it is beyond dispute that China has established a favorable reputation with foreign countries and paved the way for the future opening up since 1978. Table 6.9. Domestic and foreign trade of the fifth and sixth five-year plan Unit: 100 million yuan Year

Domestic Trade Foreign Trade Total Retail Sales of Total Total Total Imports & Consumer Goods Exports Imports Exports 1976 1,339.4 134.8 129.3 264.1 1977 1,432.8 139.7 132.8 272.5 1978 1,558.6 167.6 187.4 355.0 1979 1,800.0 211.7 242.9 454.6 1980 2,140.0 271.2 298.8 570.0 Total 8,270.8 925 991.2 1,916.2 1981 2,350.0 367.6 367.7 735.3 1982 2,570.0 413.8 357.5 771.3 1983 2,849.4 438.3 421.8 860.1 1984 3,376.4 580.5 620.5 1,201.0 1985 4,305.0 808.9 1,257.8 2,066.7 Total 15,450.8 2609.1 3,025.3 5,634.4 Source: The Compilation of Statistical Data of Sixty Years of New China.

Balance +5.5 +6.9 -19.8 -31.2 -27.6 -66.2 -0.1 +56.3 +16.5 -40.0 -448.9 -416.2

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6.7.5. People’s Living At the early stage of economic adjustment, the government emphasized on both economic development and people’s life quality. Because of the increasing prices of agricultural and sideline products and financial support on agricultural production, per capita annual disposable income of rural households grew faster than that of urban households. Besides, per capita living spaces in both urban and rural areas had an obvious increase, so it could reflect that people’s living standard truly got improved. Table 6.10. The living quality of urban and rural households of the fifth and sixth five-year plan Year

Urban Households Rural Households Per Capita Per Capita Per Capita Per Capita Living Annual Building Space in Annual Space in Rural Disposable City Areas (Unit: Disposable Areas (Unit: Income (Unit: square meters) Income (Unit: square meters) yuan) yuan) 1976 / / / / 1977 / / 117.1 / 1978 343.4 6.7 133.6 8.1 1979 405.0 6.9 160.2 8.4 1980 477.6 7.2 191.3 9.4 1981 500.4 7.7 223.4 10.2 1982 535.3 8.2 270.1 10.7 1983 564.6 8.7 309.8 11.6 1984 652.1 9.1 355.3 13.6 1985 739.1 10.1 397.6 14.7 Source: The Compilation of Statistical Data of Sixty Years of New China.

6.7.6. Expenditure and Investment on Scientific Research and Education Since the ten-year Great Cultural Revolution left enormously negative impacts on the whole country especially the intellectuals and education undertakings, it has been regarded as an intellectual tragedy painful lesson. Therefore, once after China implemented the policy of reform and opening up, both the Party and government emphasized on the development of scientific research and education. From Table 6.11, it could be clearly found that the government expenditure and investment on those programs greatly increased in the sixth

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five-year plan, which paved the way for providing talents for the future construction. Table 6.11. Growth of expenditure and investment in scientific research and education of the fifth and sixth five-year plan Expenditure Total The Proportion (Unit: 100 Occupied in the million yuan) Fiscal Expenditure (%) 56.3 9.5

Investment Total The Proportion (Unit: 100 Occupied in million yuan) Infrastructures (%)

Average Annual 9.4 from 1953 to 1980 Average Annual 23.4 16.9 59.2 of the Sixth Five-Year Plan Source: The Compilation of Statistical Data of Sixty Years of New China.

3.6

8.7

6.8. The Seventh Five-Year Plan China achieved great success in 1980s after the economic reform was implemented. However, the overheated economy accelerated the price rise, so the inflation came out in the second half year of 1986 and could not be truly curbed until 1989. Meanwhile, the period from 1986 to 1990 was the seventh five-year plan, and its main tasks were to further transform the system, develop the path of socialism with Chinese characteristics and improve people’s living standards. Therefore, in those five years, the government had to deal with inflation, overcome the existing difficulties, ensure the economic development and guarantee people’s living. To begin with, the inflation was caused because the aggregate demand much exceeded the aggregate supply. At the beginning of the reform and opening up, China made great progress almost in all aspects, so the whole country believed that such economic reform was truly effective and could lead China into a promising future. However, if the soaring price was beyond what people, enterprises and the country could bear, it would definitely lead to widespread concern and social instability, even worse, the doubt on reform and opening up. The main ways of curbing price rises were to (1) reduce the investment in fixed assets, (2) alleviate the contradictions of the unbalanced relationship between aggregate social demand and supply, (3) adjust the

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economic structure of agricultural and industrial production, (4) set up economic laws and regulation system and macro regulation control system, (5) increase effective supply, (6) tighten fiscal policy, (7) rectify the market order, and (8) control the development scale and speed of industry. Then, the concrete measures of achieving the targets of the seventh five-year plan were as follows. 

Improving the Economic Reform System 1. To keep improving the contract management system of industrial and commercial enterprises. It was required to explore contracting systems that could handle the relationship between the administration and enterprise management appropriately. It emphasized on both strengthening the political leadership and raising the labor productivity, and insisted on the shareholding system with dominant position of public ownership as well. 2. To balance the relationship of all the sectors of national economy. The reform focused on the economic growth, but its structure and quality could finally determine the trend. Therefore, it was quite important to adjust the system of non-socialist economy, and promote the balance of economic quantity and quality, which could form favorable conditions to develop socialist commodity economy. 3. To further strengthen the function of macro-control of the central bank. Since the reform and opening up policy brought inflation, it was urgent to strictly control the currency issue and the scale of credit. Government should make full use of economic means, such as interest rates, reserve ratios and excess reserve ratios so as to ensure the savings of both urban and rural residents, and increase the withdrawal of currency from circulation. 4. To deal with the fiscal relationship between the central and local governments. Because taxes played an indispensable role in government revenue and largely determined the possible expenditure, the reasonable tax system was of great importance and needed the efficient coordination of local government on levies.



Improving the Opening Up System 1. To keep implementing the development strategy of coastal regions. Since China began to develop an open economy, it was

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essential to improve the competitiveness with its comparative advantages of abundant labor and promote Chinese exports. Therefore, the coastal regions were required to adjust their advantageous industries and balance the relationship with inland areas so as to achieve common prosperity. 2. To prohibit the imports of luxuries and high-end consumer goods. The foreign exchange reserves were mainly used for importing the raw materials, advanced technologies and key equipment of agricultural and industrial production. At that time, China was accelerating the economic development, so it strove for expanding its frontier trades, international tourism, and international market of contract labor. 3. To continue to utilize foreign capitals and introduce advanced technologies. The opening up policy was implemented to strengthen the exchanges and cooperation of technologies, so the relevant departments actively coordinated with the government and established a number of Sino-foreign joint ventures. Besides, they directly cooperated with foreign countries to reform the domestic enterprises and develop domestic industries through absorbing foreign direct investments. The overall economic situation from 1986 to 1990 was better than that of the sixth five-year plan. In Table 6.12, the GDP, consumption level and per capita amount of savings all had an obvious increase, which indicated that it had a good developing tendency after the further reform and adjustment. The following tables can tell the specific situations of output value of agriculture and industry, government revenue and expenditure, total investment in fixed assets, imports and exports, utilization of foreign capitals, which mainly reflected the effectiveness and results of the reform and opening up policy. Table 6.12. General economic situation of the seventh five-year plan Year

GNP (Unit: 100 million yuan)

Nominal Annual Household Consumer GDP (Unit: Consumption Price Index 100 million Level (Unit: yuan) (last year = 100) yuan) 1986 10,274.4 10,275.2 497 106.5 1987 12,050.6 12,058.6 565 107.3 1988 15,036.8 15,042.8 714 118.8 1989 17,000.9 16,992.3 788 118.0 1990 18,717.3 18,667.8 833 103.1 Source: The Compilation of Statistical Data of Sixty Years of New China.

Per Capita Amount of Savings 210.1 285.2 348.5 466.2 622.9

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Table 6.13. Total investment in fixed assets of the seventh five-year plan Unit: 100 million yuan Year

Total Investment

1986 3,120.6 1987 3,791.7 1988 4,753.8 1989 4,410.4 1990 4,517.0 Source: China Statistical Yearbook.

Total 2,300.4 2,730.6 3,431.9 3,134.0 3,274.4

Urban Real Estate 101.0 149.9 257.2 272.7 253.3

Rural 820.2 1,061.1 1,321.9 1,276.4 1,242.6

Table 6.14. Government revenue and expenditure of the seventh five-year plan Unit: 100 million yuan Year

Government Government Balance Percentage of Government Revenue Expenditure Revenue to GDP (%) 1986 2,122.0 2,204.9 -82.9 20.7 1987 2,199.4 2,268.2 -68.8 18.2 1988 2,357.2 2,491.2 -134 15.7 1989 2,664.9 2,823.8 -158,9 15.7 1990 2,937.1 3,083.6 -146.5 15.7 Source: The Compilation of Statistical Data of Sixty Years of New China.

Table 6.15. Main government expenditure by item of the seventh five-year plan Unit: 100 million yuan Year

Expenditure for Capital Construction

Additional Appropriation for Circulating Capital of Enterprises

Innovation Funds and Science and Technology Promotion Funds

1986 596.08 9.94 129.85 1987 521.64 12.06 124.93 1988 494.76 9.59 151.01 1989 481.70 12.09 146.30 1990 547.39 10.90 153.91 Source: The Compilation of Statistical Data of Sixty Years of New China.

Expenditure for Supporting Agricultural Production 124.3 134.16 158.74 197.12 221.76

Although many statistics and data of the indicators are not mentioned in the chapter, it cannot be denied that China achieved amazing success in almost all the aspects after implementing reform and opening up policy. In fact, since

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its establishment in 1949, China had made huge progress and went through earth-shaking changes in those 40 years. Substantial increase in agricultural and industrial output, efficient transportation construction, exploitation of energy resources, domestic and foreign trades, the development of scientific and educational undertakings, and improvement of people’s living standards. All of these aspects could reveal the fact that China truly opened a new era and gradually entered the world stage. Table 6.16. Total output value of agriculture and industry of the seventh five-year plan Unit: 100 million yuan Year

Gross Output Value of Agriculture 1986 4,013 1987 4,676 1988 5,865 1989 6,535 1990 7,662 Source: China Statistical Yearbook.

Gross Output Value of Industry 11,194 13,813 18,224 22,017 23,924

Total Output Value of Agriculture and Industry 15,207 18,489 24,089 28,552 31,586

Table 6.17. Total value of imports and exports of the seventh five-year plan Unit: 100 million yuan Year Total Exports Total Imports Total Imports & Exports 1986 1,082.1 1,498.3 2,580.4 1987 1,470.0 1,614.2 3,084.2 1988 1,766.7 2,055.1 3,821.8 1989 1,956.0 2,199.9 4,155.9 1990 2,985.8 2,574.3 5,560.1 Source: The Compilation of Statistical Data of Sixty Years of New China.

Balance -416.2 -144.2 -288.4 -243.9 +411.5

Table 6.18. Utilization of foreign capitals of the seventh five-year plan Unit: 100 million dollars Year

Direct Foreign Investments Total Amount of Foreign Capital Actually Utilized Number of Projects Value 1986 14,98 33.30 76.28 1987 2,233 37.09 84.52 1988 5,945 52.97 102.26 1989 5,779 56.00 100.60 1990 7,273 65.96 102.89 Source: The Compilation of Statistical Data of Sixty Years of New China.

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Part III. Progress in the 1990s In the past ten years, China went through three major transformations. First, the development targets changed from the former quantity-oriented growth to quality-oriented production distribution. Blind pursuit of economic growth would cause a lot of negative consequences like severe pollution, health damage, inflation and so on. Second, the economic system got rid of the previous excessive control, and transformed into an efficient one that was suitable for the socialism with diverse forms of economy. Third, China has started its integration with the world economy and established good relationships with foreign countries since 1980s. In general, the economic reform was implemented from countryside to cities, coastlands to inlands during 1980s. Therefore, the overall economic strength was considerably improved, and political situation was greatly stabilized, which laid a solid foundation for the future socialist construction and further implementation of reform and opening up policy. The period from 1991 to 2000 was the second step of strategic development of China and went through two five-year plans, the eighth (1991-1995) and ninth one (1996-2000), regarded as the key stage of socialist modernization.

6.9. The Socialist Market Economy System One of the major decisions in the 1990s was to establish the socialist market economic system. In December 1990, Deng Xiaoping pointed out that the fundamental difference between capitalism and socialism was not up to whether it was planned or market economic system. Since then, when China faces the doubt from both domestic and foreign critics on the system it actually develops, it has seriously and firmly held the opinion that both capitalism and socialism can have planned economy and market economy. In July 1991, Jiang Zemin, the Party’s third generation of central collective leadership, pointed out that both planned and market economic system just served as measures to develop national economy, they were established on the basis of socialized mass production. Therefore, the country strove for an economic system combining both of them, and the concrete governance and future adjustment should be based on practical situations. Finally, President Jiang proclaimed that the objective was to set up the socialist market economic system which could play a fundamental role in resource allocation under the macro control by the government in the 14th National Congress of the Communist Party of

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China which was held in 1992. Then, the system was supposed to follow the law of value and automatically adapt to the changes of supply and demand, so the resources could be distributed more efficiently through the price lever. And such economic operation would inevitably bring huge pressure to enterprises because they had to compete fiercely in the market and get prepared to face sudden decline or bankruptcy once they were badly operated. Hence, great challenges would also come out after the socialist market economic system was established. Moreover, it was really necessary to strengthen and improve the macro control of the government because there existed many weaknesses and drawbacks in the market mechanism. The 14th National Congress proclaimed that the target of economic system reform was to establish the socialist market economy, and the core problem was to correctly deal with the relationship between plans and markets, which needed constant exploration for a long time. In ownership structure, the public ownership played the dominant role with the common development of multieconomic sectors like individual economy, private-owned economy, foreigninvested economy serving as supplement forms. In 1993, the system of socialist market economy was officially set up with the goal of making the market play a fundamental role in resource allocation under the state macro control. Therefore, it required to (1) further transform the operation mechanism of state-owned enterprises, (2) establish modern corporate systems that could adapt to the market economy with clearly established ownership, well defined rights and responsibilities, and separation of government administration from enterprise management, and scientific management methods, (3) establish nationwide unified open market system and promote close connection between urban and rural areas, (4) make domestic market linked with the international market and optimize the resources allocation, (5) transform the government functions of economic management and set up indirect policy instrument of macro-regulatory system, (6) establish the income distribution system which took distribution according to work as the main body on the principle of ‘efficiency in priority and fairness in consideration’, (7) encourage some people and some regions to get rich first and then realize common prosperity, and (8) establish multi-level security system. In addition, the system reforms on finance, tax, foreign trade, foreign exchange rate, investment, price, circulation, housing and other fields were implemented at the same time and continuously adjusted the measures to improve the socialist market economy system.

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6.10. Reform of State-Owned Enterprises The transformation of state-owned enterprises (SOEs) was an important part of Chinese economic system reform. After the socialist market economic system was established, enterprises also had to be reformed. Since state-owned enterprises held a dominant position in national economy of China, its reform was of great importance to the establishment of socialist market economic system and the consolidation of Chinese socialism. Most of the SOEs could adapt to the market under the policy of reform and opening up, but there still existed many problems and difficulties which largely impeded their further development. For example, high asset-liability ratio, backward product structure, inadequate technological innovation, inefficient management ways, rigid capital structure, all of these problems brought huge losses to SOEs. By the end of 1995, the asset-liability ratio of SOEs had reached 65.5%. Even worse, the ratio of small-sized SOEs even amounted to 71.5%, and their average rate of return on sales was -0.87%, so they had severe loss of assets. Therefore, it was urgent to take effective measures to reverse the situations of SOEs and implement concrete reform on them. As the pillar of national economy, Chinese state-owned economy occupied 70% of the social economic resources, but these resources were not fully utilized. And the extensive operating losses and asset losses largely influenced the stability of national economy. The reasons could be concluded from three aspects.

6.10.1. The Overall National Economy With the development of marketization and the change of distribution structure, the state-owned capitals could not effectively support the whole national economy and ensure its normal operation. Since 1980s, the government has kept investing trillions of household savings in national economy via state-owned banks, but the utilization of these capitals was not efficient enough, which caused the rapid accumulation of non-performing loans (NPL) and finally increased the bubbles.

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6.10.2. The Distribution of State-Owned Economy Because the state-owned capitals were decentralized in too many enterprises and industries, it was nearly impossible for each company to get enough capitals and achieve scale economy. Thus, it was quite difficult to innovate in major technologies and improve the competitiveness in the international market.

6.10.3. Enterprise Management Because SOEs used to integrate the political administration with enterprise management, the sudden separation between government functions and enterprise management sharpened the contradiction between incentive and constraint mechanism rather than improve the efficiency of resource utilization. Therefore, plenty of SOEs kept suffering huge losses, and even worse, some industrial enterprises brought severe pollution because of the chaotic management and sharp contradictions. The three problems above were actually interconnected with each other, so the Party and government finally took some effective measures to reform SOEs.

6.10.4. Optimizing the Layout and Structure of State-owned Economy State-owned assets were required to be centralized from all kinds of SOEs, so the capitals could be controlled and invested in enterprises and fields that could lead the market and develop national economy. Therefore, through narrowing the scope of state-owned economy, it was much more convenient to solve the problem of decentralized economic layout, overextended construction and lengthy programs. Then, the capitals would flow from low profit fields to high profit ones, which not only ensured the quantity of state capitals, but also probably achieved appreciation. In general, appropriate intervention by government could guarantee the efficiency and pay more attention to survival of the fittest.

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6.10.5. Transforming the Operating System The situations of SOEs at that time were integration of government administration with enterprises or unclear representative system of stateowned assets which meant the functions of owners of SOEs were not effective, and it was hard to truly establish operational mechanism. Therefore, shareholding structure was set up in most SOEs. One of the concrete measures was to transform the wholly state-owned enterprises into state diversified holding enterprises and shareholding enterprises through massively introducing non-state shareholders which included corporate shareholders and individual shareholders. Specifically, obligatory rights of SOEs owned by residents were transformed into their stock equities. Another way was that the system of sole shareholder in wholly SOEs was changed into the system of diversified corporate shareholders. Hence, it was anticipated that diversified shareholding structures would be more likely to overcome the defects of lacking owners and establish effective governance structure.

6.10.6. Developing High and New Technologies Since science and technology constitute the primary productive force, the development of advanced technologies was of great importance. Therefore, those large-scale SOEs which produced heavy industrial products were taken seriously by government, and the state capitals would be mainly invested in these industries because they were in Chinese strategic fields and determined the comprehensive development level of China.

6.10.7. Properly Using Non-Renewable Resources Many large-scale development projects like oil fields, colliery, natural gas etc. needed large sums of funds, so non-state capitals could not afford the investment. As a result, non-renewable resource industry became one of the major natural monopolies which were basically controlled by the state. Since the socialist market economy was established, non-public sectors of the economy were also permitted to exploit the non-renewable resources and develop the industries within certain limits.

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These four points were the main parts of the reform of SOEs in the 1990s, and there were many other specific measures that supported the reform directions. In general, the reform of SOEs has kept moving since then, and it cannot be denied that SOEs hold the dominance in China, which is totally different from the situation of other countries. However, it still encouraged to develop and reform the non-public sectors of the economy at the same time. Both individual and private economy used to serve as the supplements to socialist public ownership of the economy, but they have been important parts of the socialist economy since the 1990s because they significantly boost social productivity, promote employment and prosperity, increase government revenue and accelerate the reform of public sector of the economy.

6.11. The Return of Hongkong to China On July 1st, 1997, the People’s Republic of China successfully retook Hongkong from the UK and restored its administrative sovereignty. The return of Hongkong was of far-reaching significance for China. To begin with, this great event marked the comprehensive rejuvenation, and totally ended the national humiliation of semi-colonial and semi-feudal society which started from the First Opium War. The whole nation celebrated its return, and the masses received a profound patriotism education. Hence, it largely enhanced national cohesion and confidence on the leadership of Communist Party of China and the path of Socialism with Chinese Characteristics. Meanwhile, the basic state policy of ‘One Country, Two Systems’ was truly put into effect in Hongkong’s return, and enhanced China’s reputation internationally. Then, its return was greatly conducive to socialist modernization drive and completely eliminated political doubts from both Hongkong citizens and international investors. So far, the Hongkong Special Administrative Region (HKSAR) has been closely related with mainland China in all respects. The development of HK relies on mainland support to a large extent, and it helps mainland further strengthen international cooperation especially in introducing foreign capitals, technologies and advanced management ways. Besides, the cooperation between mainland and HK on economic plan, infrastructure construction, and structural adjustment can give full to their own comparative advantages and promote common prosperity. Its significance is much deeper and wider than a historical milestone, because that return not only implements the policy of ‘One Country, Two Systems’, but also sets an example on dealing with the Taiwan issue and upholds the One-China principle.

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After its return, both political and economic situations of mainland China and HKSAR were quite stable. On the aspect of economy, it considerably facilitated the economic construction of mainland China. Because HK is located in the very south of China, it has been the major force propelling the reform and opening up. In terms of the economic situation in the late 20th century, HK served as an indispensable link that promoted mainland China to integrate into the world, and absorbed the international capitals and advanced technologies. Some researchers even held the opinion that one of the main reasons why China’s development was much more successful than that of the former Soviet Union and Eastern Europe was that HK kept intimate connection with both the world and mainland China. And the major influences were concluded as the following points.

6.11.1. Further Promoting the Construction and Development of Socialist Market Economy of Mainland China Hongkong was a highly free capitalist city. Theoretically, its economic operational mechanism followed the liberal economic thought of classical school, and implemented the positive non-interventionist policies. It had welldeveloped free market mechanism and a great number of talents who were familiar with both the capitalist economy of Hongkong style and the operation of western modern capitalism. After it returned, with the increasing economic cooperation, the socialist market economy of mainland China was considerably improved. At the early stage, special economic zones like Shenzhen and Zhuhai carried out the policies, laws and regulations based on the relevant economic regulations of HK, and then the whole country pushed forward the reform based on that. Therefore, its return actually provided a reference system for the establishment of socialist market economy of China.

6.11.2. Strengthening the Development and Opening Up of the Central and Western Regions and Shanghai According to the Ninth Five-Year Plan, the government would further strengthen the implementation of opening up on attracting foreign businesses and investment in the central and western regions. Under the guidance of the state macroeconomic policies, the construction and operation of BeijingKowloon Railway enabled businessmen of HK to enormously increase investment and resource exploitation. Hence, those regions where economic

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development was relatively backward could also cooperate with foreign countries and became increasingly open. As the core city of Yangtze River Economic Belt, Shanghai developed with a stunning speed through the economic exchanges with HK especially in finance, trade and shipping. It soon brought huge positive impacts on Jiangsu and Zhejiang, and greatly drove the national economy. So far, China has become increasingly well-known all around the world, and it is undeniable that HK brought great opportunities of economic development to mainland.

6.11.3. The Formation of Economic Circle of South China The economic circle of South China was formed based on the southern regions and regional integration, including Guangdong, Guangxi, Fujian, Hainan, Hongkong, Macao and Taiwan. That is to say, this economic cooperation between mainland and Taiwan Strait was through the transmission mechanism of Hongkong and Macao. As a result, those regions became increasingly connected with each other on economic cooperation, and the core city of that economic circle was HK because it established extensive contact with the world, well-developed market system with good infrastructure and convenient transportation. It could generate radiation effect in the southern region, which would significantly boost the economic development of mainland China. In addition, the economic circle of South China facilitated the formation of economic circle of the whole country, so it undoubtedly had a profound effect on mainland China.

6.12. Achievements in the 1990s The completion of the sixth and seventh five-year plans provided favorable conditions for implementing reform and opening up and developing the path of socialism with Chinese characteristics. In the 1990s, China was faced with huge challenges from both domestic transition and complicated international situations. From one side, the end of cold war made the whole world develop towards multi-polarization. Hence, China was confronting the intensifying international competition with the booming of high-tech industries. From another side, the fundamental problems in economic operation of China remained unsolved. During the period of governance and rectification, whether the policy of reform and opening up, the path of socialism with Chinese characteristics and the system of socialism market economy were

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feasible and effective became the major concerns. Meanwhile, the fall of Communism in Eastern Europe and collapse of the Soviet Union had negative impacts on China, so a lot of doubts on China’s basic lines, major decisions of systems and polices, and the future development came out. However, the Party and government firmly insisted on the choices and path, and the achievements made in the 1990s (which can be seen from the following tables) not only reached the targets but also laid a solid foundation for the development in the 21st century. Table 6.19. General economic situation of the 1990s Year

GNP (Unit: 100 million yuan)

Nominal GDP (Unit: 100 million yuan)

Annual Household Consumption Level (Unit: yuan)

Consumer Per Capita Price Index Amount of (last year = Savings 100) 1990 18,718.3 18,667.8 833 103.1 622.9 1991 21,826.2 21,781.5 932 103.4 798.3 1992 26,937.3 26,923.5 1,116 106.4 1,003.2 1993 35,260.0 35,333.9 1,393 114.7 1,281.9 1994 48,108.5 48,197.9 1,833 124.1 1,794.7 1995 59,810.5 60,793.7 2,355 117.1 2,447.1 1996 70,142.5 71,176.6 2,789 108.3 3,147.1 1997 78,060.8 78,973.0 3,002 102.8 3,744.3 1998 83,024.3 84,402.3 3,159 99.2 4,279.8 1999 88,479.2 89,677.1 3,346 98.6 4,739.4 2000 99,066.1 100,280.1 3,632 100.4 5,077.5 Source: The Compilation of Statistical Data of Sixty Years of New China and China Statistical Yearbook.

Table 6.20. Total investment in fixed assets of the 1990s Unit: 100 million yuan Year

Total Investment

Urban Total Real Estate 1991 5,594.5 4,057.9 336.2 1992 8,080.1 6,079.7 731.2 1993 13,072.3 10,303.4 1,937.5 1994 17,042.1 13,534.3 2,554.1 1995 20,019.3 1,563.7 3,149.0 1996 22,974.0 17,627.7 3,216.4 1997 24,941.1 19,194.2 3,178.4 1998 28,406.2 22,491.4 3,614.2 1999 29,854.7 23,732.0 4,103.2 2000 32,917.73 26,221.8 4,984.1 Source: The Compilation of Statistical Data of Sixty Years of New China and Yearbook.

Rural 1,536.6 2,000.4 2,768.9 3,507.8 4,375.6 5,346.3 5,746.9 5,914.8 6,122.7 6,695.9 China Statistical

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Table 6.21. Government revenue and expenditure of the 1990s Unit: 100 million yuan Year

Government Government Revenue Expenditure 1991 3,149.5 3,386.6 1992 3,483.4 3,742.2 1993 4,348.9 4,642.3 1994 5,218.1 5,792.2 1995 6,242.2 6,823.7 1996 7,408.0 7,937.7 1997 8,651.1 9,233.6 1998 9,876.0 10,798.2 1999 11,444.1 13,187.7 2000 13,395.2 15,886.5 Source: China Statistical Yearbook.

Balance -237.1 -258.8 -293.4 -574.1 -581.5 -529.6 -582.4 -922.3 -1743.6 -2491.3

Percentage of Government Revenue to GDP (%) 14.5 12.9 12.3 10.8 10.3 10.4 11.0 11.7 12.8 13.6

Table 6.22. Main government expenditure by item of the 1990s Unit: 100 million yuan Year

Expenditure for Capital Construction

Additional Appropriation for Circulating Capital of Enterprises 1991 559.62 13.08 1992 555.90 10.63 1993 591.93 18.48 1994 639.72 17.33 1995 789.22 34.80 1996 907.44 42.93 1997 1,019.50 52.20 1998 1,387.74 42.36 1999 2,116.57 56.41 2000 2,094.89 71.06 Source: China Statistical Yearbook.

Innovation Funds and Science and Technology Promotion Funds 180.81 223.62 421.38 415.13 494.45 523.02 643.20 641.18 766.05 865.24

Expenditure for Supporting Agricultural Production 243.55 269.04 323.42 399.70 430.22 510.07 560.77 626.02 677.46 766.89

According to the economic indicators shown in the tables, it could be easily found that there was a trend of accelerative economic expansion especially the increase of GDP. After 1993, China took a series of macro policies which were called ‘Economic Soft Landing’ to control the overheating economy. To be specific, the ‘Economic Soft Landing’ means after the country takes tightening policies to curb inflation brought by the excessive growth, the economy increases by a steady rate without massive deflation and unemployment. In the process of reform and opening up, there existed many blind pursuit and comparison of growth rate in some regions and sectors, especially in fixed assets investment, stocks, bank credits and

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currency supply, industrial production, real estates and development zones, etc. Therefore, these situations made the investment out of control, increased pressure on transport and product inventory and roiled financial market. Thanks to the moderately tight fiscal policy and monetary policy based on the rectification of market and circulation, and the strengthening control of investment scales and price supervision, China realized ‘Economic Soft Landing’ and successfully curbed the inflation in the 1990s. After going through the overheating economy that started in 1993, China unfortunately suffered the shocks brought by the Asian financial crisis in 1997 and damages caused by severe floods in southern regions in 1998. Therefore, the economic growth rate obviously declined. To avoid deflation, the government took proactive fiscal policy and prudent monetary policy in the late 1990s. To be concrete, the government moderately expanded investment demand, increased the capital input in infrastructure construction, high-tech industries and technological upgrading in 1998. Then, it promoted the increase of consumer demand through exploiting the domestic markets especially the rural market. Besides, the government resolutely cracked down on illegal imports and smuggling so as to expand exports and maintain reasonable import volume. It also accelerated the adjustment of industrial structure and transformation of traditional industry for the purpose of strengthening the competitiveness of Chinese products. In addition, the enterprises especially small and medium-sized ones were encouraged to further develop and expand production scales. Table 6.23. Total output value of agriculture and industry of the 1990s Unit: 100 million yuan Year

Gross Output Value of Agriculture 1991 8,157 1992 9,085 1993 10,996 1994 15,750 1995 20,341 1996 22,354 1997 23,788 1998 24,542 1999 24,519 2000 24,916 Source: China Statistical Yearbook.

Gross Output Value of Industry 26,625 34,599 48,402 70,176 91,894 99,595 113,733 67,737 72,707 85,674

Total Output Value of Agriculture and Industry 34,782 43,684 59,398 85,926 112,325 121,949 137,521 92,279 97,226 110,590

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Table 6.24. Total value of imports and exports of the 1990s Unit: 100 million yuan Year Total Exports Total Imports 1991 3,827.1 3,398.7 1992 4,676.3 4,443.3 1993 5,284.8 5,986.2 1994 10,421.8 9,960.1 1995 12,451.8 11,048.1 1996 12,576.4 11,557.4 1997 15,160.7 11,806.5 1998 15,223.6 11,626.1 1999 16,159.8 13,736.5 2000 20,634.4 18,638.8 Source: China Statistical Yearbook.

Total Imports & Exports 7,225.8 9,119.6 11,271.0 20,381.9 23,499.9 24,133.8 26,967.2 26,849.7 29,896.3 39,273.2

Balance +428.4 233.0 -701.4 +461.7 +1,403.7 +1,019.0 +3,354.2 +3,597.5 +2,423.3 +1,995.6

Table 6.25. Utilization of foreign capitals of the 1990s Unit: 100 million dollars Year

Foreign Direct Investments Number of Value Projects 1991 12,978 119.77 1992 48,764 581.24 1993 83,437 1,114.36 1994 47,549 826.8 1995 37,011 912.82 1996 24,556 732.76 1997 21,001 510.03 1998 19,799 521.02 1999 16,918 412.23 2000 22,347 623.80 Source: China Statistical Yearbook.

Total Amount of Foreign Capital Actually Utilized 115.54 192.03 389.60 432.13 481.33 548.05 644.08 585.57 526.59 593.56

Table 6.26. Foreign exchange rate of RMB of the 1990s Unit: yuan Year 100 USD 1991 532.33 1992 551.46 1993 576.20 1994 861.87 1995 835.10 1996 831.42 1997 828.98 1998 827.91 1999 827.83 2000 827.84 Source: China Statistical Yearbook.

100 Yen 3.96 4.36 5.20 8.44 8.92 7.64 6.86 6.35 7.29 7.69

100 HK Dollar 68.45 71.24 74.41 111.53 107.96 107.51 107.09 106.88 106.66 106.18

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The active measures above were taken by the government to stimulate the economy and reverse the situations. However, China had to confront the Asian financial crisis that broke out in Thailand in 1997. Because of bubble economy, imperfect financial system and inappropriate polices, Thai Baht was under heavy selling pressure since February 1997. Afterwards, The Thai government was forced to abandon the fixed exchange rate and changed to implement floating system on July 2nd. Then, The Thai Baht devalued by 16% that day and soon generated a domino effect to East Asian regions, like Singapore, Taiwan China, Hongkong China, Republic of Korea and Japan. Many financial institutions there went bankrupt with substantial currency devaluation and suffered huge losses brought by stock slide. Moreover, Russia had to suspend the stock market because of the Asian financial crisis and its long-lasting economic downturn. As one of the nearby countries of Thailand, China was adversely impacted by it as well. In 1997, China’s export grew slowly, and the inflow of foreign capitals also correspondingly decreased, which increased the pressure of the devaluation of the RMB. Therefore, the government was committed to maintaining the stability of the RMB against the impact of Asian financial crisis through expanding exports as much as possible and efficiently utilizing the foreign capitals, which was mainly reflected in the following aspects. 1. Increasing the export rebate rate and reduce the loan interest rate. 2. Adjusting the structure of export products and improving their quality, especially the electromechanical and high value-added products. 3. Expanding the world market diversification and exploiting the emerging markets like Latin America, Middle East and Africa. 4. Encouraging the powerful enterprises to go outside and exploiting foreign markets. 5. Deepening the reform of foreign trade system and further enlarging the rights of independent management. 6. Granting foreign-invested enterprises national treatment and attracting multinational companies to invest Chinese markets through stable political environment. 7. Setting up reward mechanism for high-tech industries, basic industries and agriculture, and opening up the service industry. 8. Strengthening the management of foreign exchange through improving the laws and regulations, and increasing the punishment intensity on illegal behaviors.

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As a result, because the Chinese government took effective measures based on both domestic and international economic situations, and correctly analyzed the potential influence of the foreign exchange of the RMB against the background of the crisis, its foreign exchange rate remained relatively stable through a series of policies. Since the RMB would firstly affect Hongkong’s economy once it was suddenly depreciated, it would inevitably raise doubts and generate disputes in China’s economic system safeguard. Thus, the devaluation of the RMB was not only harmful to the stability of balance of payments, but also made people from home and abroad lose confidence in Chinese currency and economic development, which would definitely impede the progress of socialist construction and the implementation of the strategic plans. Fortunately, China successfully got through the crisis and turned the economy back to a booming trend in the end of the 1990s. On December 20th, 1999, Macao returned to China, and it has become another Special Administrative Region (SAR) of the People’s Republic of China since then. Therefore, the basic state policy of ‘One Country, Two Systems’ has been further implemented, and the central government of PRC carried out the high autonomy of ‘Hongkong people govern Hongkong and Macao people govern Macao’, which was of great significance to One-China principle. According to Table 6.1 and Table 6.19, the GNP of 1990 even quadrupled that of 1980, and the GNP of 1999 nearly quintupled that of 1990, so China much overfulfilled the former two plans of the three-step development strategy by the end of the 1990s. With the proposal of the important thoughts of Three Represents which represent China’s development requirements of advanced productive forces, direction of advanced culture, and the fundamental interests of the overwhelming majority of the people, in February 2000 China officially entered the new stage of economic development and socialist construction in the 21st century. The accomplishments since the reform and opening up in 1978 laid a solid foundation for the socialist construction and economic development in the next century.

Chapter 7

Developments in the 21st Century Since the policy of reform and opening up was implemented in 1978, China has achieved great success in economic development. It established the path of socialism with Chinese characteristics and socialist market economy, implemented further rural and urban economic reform, set up special economic zones, opened coastal cities, defused the Asian financial crisis, and recovered Hongkong and Macau. At the beginning of the 21st century, China was faced with new economic situations from home and abroad. With the accession to the WTO in 2001, China was increasingly integrated into the world and deepening the opening up. Meanwhile, the task of building a moderately prosperous society of 2020 required the whole country to further transform the reform system, and the socialist modernization drive also urged China to improve its strength from all aspects. The main contents of this chapter are about the new stage of China’s economy, new development strategies, completion and prospect, and the achievements of the first 12 years into the new century.

7.1. The New Stage of China’s Economy 7.1.1. Accession to the WTO Since the 21st century, China has gained many new breakthroughs in economic development. One of the major achievements was that China joined the World Trade Organization (WTO) on October 11th, 2001, and became the 143rd member. Because the WTO makes the international rules and supervises the economic contacts, its member countries can negotiate with each other on open market and establish dispute settlement mechanism. Joining the WTO has been regarded as whether a country is connected with the world since the 1980s, thus, with the development of reform and opening up, China strove to become one of the members. Since the socialist market economy system was established in 1992, China had made great progress in many fields in the 1990s. However, due to the long period of protection policy, China left an

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impression of closed and overprotective development model, so it was understandable that a lot of countries cast doubt on China’s ability to integrate itself into the world. Although there existed many international controversies and disagreements at that time, China still held the attitude that if it wanted to get rid of backward and isolated situations, conforming to the economic globalization trend became a must. In fact, it took 15 years for China to prepare for joining the WTO and it went through three stages. The first one began in the early 1980s and ended in July 1986, the main thing was to prepare for rejoining the General Agreement on Tariffs and Trade (GATT). The next stage was from February 1987 to October 1992, and China was required to answer the key question of whether it was developing market economy or planned economy. Then, China entered the final stage from October 1992 to September 2001. It was the substantive negotiation that was directed at discussing bilateral market access of China and drafting legal documents on multilateral negotiation. During those 15 years, there were 25 rounds of Sino-US negotiations and 15 rounds of Sino-Europe negotiations. The core problem of bilateral negotiations was how to ensure China’s accession to the WTO as a developing country. And the core problem of multilateral negotiations lied in the balance between rights and obligations, its main objectives were tariffs, non-tariff measures, agriculture, intellectual properties, service industry and other series of problems, among which agriculture and service industry were difficult to compromise by both sides. After going through tough negotiations, the European and American developed countries finally agreed the flexible and practical ways to face the situation of China’s position of developing country. Meanwhile, China promised that it would firmly abide by international rules and regulations, and gradually open the market. As a result, China was agreed to join the WTO on November 10th, 2001, in Doha Qatar, and a month later, it officially became one of its member countries. Joining the WTO could be regarded as a milestone for China’s participation in economic globalization and marked the new stage of reform and opening up. It meant that China could participate in global cooperation and competition on a much larger scale and open its domestic market from all aspects instead of limited fields and scopes. China’s accession to the WTO was not only conducive to pushing forward the reform and opening up and modernization drive, but also conducive to promoting it to further integrate into economic globalization, which gained much broader prospects for development and brought new opportunities and patterns for world economy. Therefore, China was no longer a country that only focused on its own

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situation; it should be responsible for global cooperation and international affairs. Since then, China has actively put the concepts of free trade into practice, comprehensively fulfilled its commitments and largely opened market, to realize mutual benefits and win-win results.

7.1.2. The Transformation of Guiding Thoughts The Sixteenth National Congress of the Communist Party of China was held in November 2002. Its main contents were supporting Deng Xiaoping Theory, fully implementing the important thoughts of Three Represents, building on past achievements and striving for new progress, keeping up with the times, building a moderately prosperous society in all respects, accelerating socialist modernization and striving for the development of socialism with Chinese characteristics. According to the national congress, the first 20 years of the 21st century were the important transition period, because it served as a connecting link between the past achievements and the following development. The GNP of 2000 reached the target of doubling that of 1990, so it entered the third stage of the three-step development strategy, striving for realizing the socialist modernization by the middle of 21st century. It was expected that China would complete the task of building a moderately prosperous society in all respects by 2020. And its concrete objectives were to construct and reform political, economic and cultural systems, build up powerful national defense and armed forces, achieve China’s full reunification, plan the strategic deployment of external relations and so on. Unfortunately, when China moved on its plan of 16th National Congress of the CPC, a severe acute respiratory syndrome (SARS) suddenly occurred in February 2003. Its widespread revealed the long-standing problems and deficiencies in China’s economic and social development. To be specific, the public hygiene lagged behind and its system was not reasonable enough to deal with emergencies and crises, and the economic and social development of urban and rural areas was rather uncoordinated. Although SARS was finally eliminated by the efforts from the whole country, this big event was worthy of profound reflection on the problems of China’s development. In August 2003, the president of China and the core of the fourth generation of central collective leadership, Hu Jintao clearly proposed the idea of ‘Scientific Outlook on Development’ and pointed out that China should stick to the principle of putting people first, and set up comprehensive, coordinated and sustainable development outlook. According to the Scientific Outlook on

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Development, it required that China should promote all-round development between economic society and people’s livelihood, and coordinate the development between the urban and rural, regional and national, humankind and nature, home and abroad. The formation of Scientific Outlook on Development then became the guiding ideology and important content of the theoretical system of socialism with Chinese characteristics. After entering the 21st century, there were a series of essential features of the development in the early stages. Although the overall situation of economic growth improved significantly, its level of productive forces was still not developed enough to fundamentally alter the extensive economic growth model. Besides, people’s living standards generally reached the level of moderately prosperous society, but the income gap kept widening, so substantial numbers of people living in the countryside were still suffering poverty. The weak foundation of agriculture also failed to change the situation of development lag in rural areas. In addition, China had to face increasingly fierce international competition as the opening up policy was further implemented. After the 16th National Congress of the CPC was held, China put forward new concepts for development, which could be reflected in the tenth and eleventh five-year plan. And on target setting, the 17th National Congress proposed three ways of accelerating the transformation. (1) It was mainly dependent on consumption, investment and export to promote economic growth. (2) Industry development relied on the primary, secondary and tertiary industry instead of merely the secondary industry. (3) It encouraged developing the society mainly through scientific and technological advancement, the improvement of labor qualities and management innovation instead of merely material consumption.

7.1.3. The Tenth and Eleventh Five-Year Plans As the first five-year plan of 21st century, the tenth five-year plan started the work of the third stage of three-step development strategy. From 2001 to 2005, those five years emphasized on giving full play to the role of market mechanism when implementing plans, and the government should reasonably use the measures of economic lever, policies and laws through macro control. The main targets were to achieve remarkable results of structural adjustment, improve the economic growth and efficiency, and lay a solid foundation for the GDP of 2010 which could double that of 2000. Therefore, the tenth five-

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year plan was of great importance to national strategy since it represented the beginning of economic construction of 21st century. Its main tasks included: 1. Strengthening the position of agriculture as the foundation of the national economy. Specifically, it was required to promote the rural economy comprehensively, adjust the economic structure, keep the production capability of grains and broaden the channels where farmers could increase their incomes. 2. Optimizing industrial structure and enhance international competitiveness. To accelerate the industrial growth, it was urgent to transform traditional industries through utilizing and developing advanced technologies. Besides, the organizational structures of enterprises were supposed to be optimized based on the principle of specialized division of labor and scale economy. 3. Implementing the strategy for large-scale development of western China. To promote the coordinated regional development, it was quite necessary to carry out that strategy and accelerate the development of central and western regions. 4. Strengthening the infrastructure construction and improve layout and structure. Since infrastructure was indispensable for economic development and safety guarantee, its construction always determined the overall operation of a country. 5. Deepening the reform of the educational system and improve people’s quality. It was required to enhance the innovation ability and implement talent strategy. 6. Adhering to the One-China principle, the basic policy of ‘One Country, Two Systems.’ China would resolutely combat the separatists of Taiwan independence and strive for national reunification as soon as possible. 7. Strengthening the construction of socialist spiritual civilization and democratic legislative system. It was essential to form common ideals and spiritual pillars through ideological and moral cultivation. Therefore, it could lay a solid foundation for the development of socialist legal system. 8. Keeping on improving the system of socialist market economy. To be specific, the reform should accelerate the strategic adjustment of distribution of state-owned sector, make state-owned economy play a leading role, develop factor market, set up a nationwide unified and

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well-ordered market system, and deepen the reform in financial and tax sectors. 9. Implementing greater opening up and developing open economy. It encouraged actively utilizing foreign capitals and improving the competition with comparative advantages. 10. Balancing efficiency and equity. The social security systems were as important as economic growth and production increase. In general, the tenth five-year plan was faced with both opportunities and challenges at home and abroad. In terms of domestic situation, although market economic system was established, the balance between efficiency and equity became the major controversy in sustainable development because of the leading role of market in resource allocation. The income gaps between regions, industries, urban and rural were increasingly wider, especially in competitive and monopoly industries. Therefore, how China could seize the opportunity brought by reform and opening up and deal with the problems appropriately in the process became the great challenges for the country. With the accession to the WTO, China was more closely linked with the outside world through economic globalization and got many good international opportunities which were conducive to the operation of market economy system and the implementation of reform and opening up. Global resource allocation greatly promoted the adjustment and optimization of economic structures of China and industrial upgrading. However, China had to meet severe challenges and overcome the difficulties, such as the financial safety brought by Asian financial crisis in 1997. Hence, it urged China to reform the administration system and transform government functions so as to integrate into the world better. The eleventh five-year plan was from 2006 to 2010, its background and overall situations of requirements and problems were similar to those of the previous five years, but still had some new challenges, problems, opportunities and transformations. The main tasks were to keep rapid and stable economic growth, accelerate the economic transformation, improve the capacity for independent innovation, promote the coordinated development between urban and rural areas, strengthen the construction of harmonious society and deepen the reform and opening up. The eleventh five-year plan was under the background of socialist market economy, economic globalization, and the process of building a moderately prosperous society in all respects. According to the guiding thoughts of Scientific Outlook on Development, China should adhere to domestic-demand-led development strategy and focus on industrial

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technology development and institutional innovation at this stage. The main problems could be concluded as follows.

7.1.3.1. Sustainable Development Since China was going through the stage of rapid economic growth, it inevitable increased burden caused by energy consumption and environment damage. From one side, with the acceleration of industrialization and urbanization, the ever-increasing economic growth not only created wide prospect and good opportunities, but also brought high consumption of resources. From another side, the extensive economic growth model whose high input and consumption led to low production and benefits would definitely cause the rising costs and make it hard to maintain the growth. Therefore, the fundamental problems in sustainable development lied in such extensive economic growth and inefficient operation. Besides, the low technology level restricted the effectiveness of growth potentials as well. 7.1.3.2. Economic System The fundamental reason of economic growth with low quality lied in imperfect systems of market economy system. 1) The reform of investment system lagged behind, which not only hampered the economic benefits, but also increased social costs brought by the market failures. 2) Because the fiscal and tax management still lacked orderly and efficient ways, it was hard to reduce government interference immediately. 3) The financial mechanism was still not well-developed, so it was difficult to optimize and upgrade domestic industrial structures and improve the efficiency of resource allocation. 4) The costs of using resources and natural environment were too low to form effective incentive and restraint mechanisms of conserving resources and protecting environment. 5) The allocation of land resource lacked orderly and long-lasting management system, so it was highly likely to cause blind investment and social conflicts. 7.1.3.3. Social Utilities China was in the period of unprecedented transformation, so it would inevitably generate new social problems. Although economy grew at an amazing speed, the development in social fields was relatively slower, which could be reflected from many aspects. 1) The resource allocation in public health and education tended to be unfair in different regions. 2) The present public finance and social coordination mechanism failed to adapt to the new challenges. 3) The development trend of population brought huge pressure to

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the society that was going through the transformation of sustainable development. 4) The gap between urban and rural was expanding, so it was difficult to guarantee adequate public service and effective social security system in rural and underdeveloped areas.

7.1.3.4. Coordinated Development The long-time extreme unbalance in regional development was one of the major fundamental realities of the country. Under such circumstances, it considerably promoted the mobility of production factors through market economy system, so it was unavoidable that the economic gap between regions continued to be expanding. The key point of unbalanced development between regions was not the economic gap but the effective and reasonable policies that could provide adequate and equal public service and all kinds of resources. The present government transfer payment was not enough for some underdeveloped regions, and the effectiveness of relevant policies were still unsatisfactory, so it was urgent to improve the infrastructures and welfares in those regions. 7.1.3.5. The Situation of Opening Up There were many uncertainties when China further implemented opening up and integrated into the world. 1) With the enhancing international cooperation, China had to confront the situation of the prevailing trade protectionism and trade conflicts. 2) Chinese market was increasingly connected with international market and global resources, so its future economic development would be more likely to be influenced by economic cyclical fluctuations throughout the world. 3) After the transitional period of joining the WTO, China had to face greater international challenges and competition, such as green standards, technical standards, labor standards, corporate social responsibility standards and other new trade barriers. 4) Globalization brought a series of new economic risks, but China still lacked effective macro adjustment measures and well-developed mechanism for preventing systemic financial risks. 5) Global turmoil like terrorism increasingly caused great disruptions to economic globalization, and regional instabilities such as the situation across Taiwan Straits and the nuclear issue on North Korea, all posed grave challenges to the socialist modernization drive of China. The eleventh five-year plan comprehensively implemented the Scientific Outlook on Development and served as the transitional period of socialist modernization drive. As China continuously strove to improve its international right of speech and comprehensive strengths, those five years actually paved

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the way for the subsequent development. Although the whole country was faced with increasing challenges and crisis, China always insisted on its path of socialism with Chinese characteristics and socialist market economy system.

7.2. New Development Strategies 7.2.1. Coordinated Development between Urban and Rural Areas and Different Regions During the year 2002 to 2012, China was striving for the transformation of economic operation ways and coordinated development between urban and rural areas, and between different regions. It was widely acknowledged that the unbalanced development trend enormously constrained the development of socialist market economy, thus, the Party and government kept exploring and took many measures to solve the long-lasting problems. As a result, China achieved breakthroughs in many aspects through the adjustment policy towards coordinated development. After the 16th National Congress, the Party Central Committee and central government focused on the strategic deployment on building a moderately prosperous society in all respects and harmonious socialist society according to the Scientific Outlook on Development. The strategy for the Large-Scale Development of the Western Region of China was firstly carried out in 2000 with the goal of achieving sound and fast economic development there. And that strategy involved 15 provinces, autonomous regions and municipality. They were Sichuan Province, Shaanxi Province, Gansu Province, Qinghai Province, Yunnan Province, Guizhou Province, Hubei Province, Hunan Province, Jilin Province, Chongqing City, Guangxi Zhuang Autonomous Region, Inner Mongolia Autonomous Region, Ningxia Hui Autonomous Region, Xinjiang Uygur Autonomous Region, and Tibet Autonomous Region. The major projects included the construction of Qinghai-Tibet Railway, West-East natural gas transmission project, West-East electricity transmission project, etc. West-East natural gas transmission project was finished and started the operation on December 30th, 2004. This project has made great contributions to the reduction of carbon dioxide release and energy saving since its completion. On July 1st, 2006, the world-renowned Qinghai-Tibet Railway was completed and fully opened to the traffic, and the line has brought great convenience and economic efficiency to Qinghai and

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Tibet since then. Although there was abundant water resource in the southwest regions of China, the development there still lagged behind in the early stage of 21st century. Therefore, the West-East electricity transmission project was aimed to develop the hydropower construction in the southwest regions and regarded as one of the strategic initiatives to develop the manufacturing industry, electricity industry, building materials industry and so on. Since the major economic plans were mainly focused on the southeast regions especially after the reform and opening up, the development of the northeast China was also relatively backward. According to the instructions made by the State Council in October 2003, a series of relevant policies were made to support the reform on northeast China, and that strategy was called the reinvigoration of the old industrial bases in northeast China and other places, involving Liaoning Province, Jilin Province, Heilongjiang Province and Inner Mongolia Autonomous Region. After its implementation, the transition of resource-based cities and SOEs in those regions, and the reform of state-owned forest zones and reclamation areas were stably pushed forward. To be specific, the structural adjustment of industries continued to be improved so as to eliminate the outdated industries and avoid repeated construction. To largely enlarge the market share, the advantageous industries and major brands there were reformed through informatization and industrialization, such as large nuclear power equipment, wind turbines, shipbuilding and oceanography engineering, large agricultural machinery, high-grade machine tools and etc. For example, Shenyang, the provincial capital city of Liaoning Province, is now well-known for its equipment manufacturing industry because of the strategy of revitalization of the northeast China. Through technological reserve and continuous independent innovation, the adjustment of product structures was focused on high-end production. After the strategy was carried out, old industrial bases of the northeast are gradually becoming one of the most competitive global regions with top-notch equipment manufacturing industry. The regional coordinated development made obvious progress. The western, central and northeast regions all had an accelerative trend. In 2007, the economic growth rate of western regions firstly exceeded that of eastern regions. In 2008 and 2009, the economy in central, western and northeast regions grew faster than that of eastern regions for two consecutive years. In 2011, the GDP of central and western regions accounted for 22.1% and 21.2%, and had a 3.2% and 3.8% increase, respectively. Some areas with obvious comparative advantages were further reformed and developed, thus, new regional economic growth poles were formed. Special economic zones,

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Pudong New District of Shanghai and the Binhai New Area of Tianjin were also further opened to the outside world and the Yangtze River Delta, Pearl River Delta and Beijing-Tianjin-Hebei Region have been regarded as ‘Three Engines’ of economic development of China because these three metropolitan circles are the main forces of economic growth. Therefore, they can largely generate economic radiation effect of core cities, and then drive the economic development of central, western and northeast regions. Just like Chengdu, Chongqing, Wuhan and Changsha-Zhuzhou-Xiangtan (CZT) Pilot Zone, they have been greatly influenced by the development model of ‘Three Engines’ and then have gradually become the newly emerging forces. Hence, the achievements made by regional coordinated development strategy have largely pushed forward the construction of a moderately prosperous society in all respects.

7.2.2. Mechanisms and Institutions for the Integrated Development of Urban and Rural Areas Although many great changes occurred in the countryside of China after the reform and opening up was implemented, it failed to fundamentally alter the separate urban-rural structures, so the development gap between urban and rural areas kept widening. As a result, the new rural reform was still the key part of the reform and opening up policy and socialist market economy system. The concrete measures during that period were as follows. 1. Improving the rural land system and push forward the reform of collective forestry property right system. The new land contract law implemented on March 1st, 2003, was aimed at stabilizing and enhancing the two-tier operation system combining centralization and decentralization based on household contract management. Therefore, peasants were granted the long-term and guaranteed ownership, and it was required to safeguard the legitimate rights and interests of rural land contracting parties so as to promote the development of agriculture, rural economy and social stability. After the collective forestry property right system was implemented, there were over 2.5 billion Chinese acres of collective forestry successfully contracted to the households, and trillions of forest assets were correspondingly registered and distributed to them. By 2012, the main

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tasks of clarifying of property rights and ensuring the rights of households were basically finished. 2. Deepening comprehensive rural reform. It was mainly based on the reform of tax and fee system which was perceived as one of the major decisions on solving the issues relating to agriculture, rural areas and farmers (Three Agricultural Questions). For the purpose of alleviating the burden of farmers, the reform was stably implemented throughout the nation. It achieved obvious success after the year 2003 and basically reached the expected targets. Although it considerably promoted the development of rural economy, the problems existing in the pilot reform of taxes and fees were unsolved, so farmers still had to bear heavy burden before the reform lag could be improved, such as inefficient operation mechanism of rural organizations and inadequate investment in non-profit utilities. To solve these problems, the State Council proposed a whole range of reforms in July 2005 and required promoting the public finance system to cover the whole countryside of China. Finally, agricultural tax, animal husbandry tax, slaughterhouse tax and taxes on agricultural specialty products were all canceled. More than 900 million peasants were no longer responsible for those taxes. According to the statistics, the tax reduction amounted to 125 billion yuan each year, which could significantly raise their initiatives, increase their incomes, and most importantly, promote the relationship between the government and peasants. In addition, according to the regulations of compulsory education in rural areas, students from poor families were allowed to receive education without paying book fees and extra fees and get subsidies on their accommodation fees and living expenses. With the implementation of those policies, a growing proportion of students could receive the nine-year compulsory education, and all the students from poor rural families throughout the country could enjoy the policy privileges. 3. Improving the reform of circulation market system of agricultural products. In 2004, the State Council proposed that it was necessary to liberalize the grains market especially for its purchasing prices. It encouraged developing and regulating the diversified market of grains purchasing and management. Therefore, once the grains price mechanism was formed, the market mechanism could come into effect under the state macro-economic control. To be concrete, government implemented the minimum purchase price policy, and

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temporary purchase and storage policy. The minimum purchase price policy was that within the regions and execution dates, the state would purchase the grains without limitation when the market price of grains was lower than the minimum purchase price. Afterwards, rice and wheat were also involved, and both of them would be executed just several months after grains appeared on the market. In February 2008, government made the plan of temporary purchase and storage of corns. And later, it included beans, colza oil, cotton and other major crops. Moreover, there were some new systematic measures to improve the construction of rural market, which included 1) to develop circulation industry through utilizing rural collective construction lands, 2) to accelerate the construction of non-profit circulation equipment and the circulation of agricultural products through information system, 3) to implement the policy of green channels of agricultural products transportation, 4) to implement the system of VAT exemption on fresh agricultural products, 5) to exempt the tax of agricultural products from wholesale market as well as the housing property tax and land use tax of farm market, 6) to regulate the circulation of the charges on agricultural products, suppliers and retailers. 4. Pushing forward the rural financial reform. During the transformation of rural economy from traditional extensive growth model to modern intensive one, the demand on agricultural capitals increased sharply and put forward higher requirement for financial service industry. To improve the capability of providing rural financial services, the reform on rural financial service system was further strengthened. Therefore, a series of policies were implemented to improve China’s capability of providing credits for agriculture and reverse the adverse situation of severe capital outflow in rural areas. Since the reform of rural financial system was consistently getting improved, the government took ‘Three Agricultural Questions’ as the fundamental direction of the reform and required to take maximum advantage of policy-based finance, commercial finance and cooperative finance in rural areas. The main measures included 1) to promote the property right reform of rural credit cooperative and stabilize the status of their legal persons, 2) to push forward the share-holding reform and explore the new model suitable for serving ‘Three Agricultural Questions’, 3) to expand the autonomous application scope of reserve funds, 4) to facilitate the development of rural financial organizations

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and micro-finance organizations, 5) to subsidize the villages and towns without basic financial services, 6) to encourage the China Development Bank to provide financial support for the construction of modern agriculture and modern countryside. Those major measures mentioned above were taken to narrow the economic gap between urban and rural areas. Since it was called integrated development, both urban and rural areas were perceived as a unity of China. The position of agriculture has been regarded as the foundation of the national economy, rural production and labors are of great importance to China. Therefore, agricultural development is largely conducive to the construction of socialist modernization and harmonious society. It has been taken as one of the major national strategies since then.

7.2.3. ‘Bringing In’ and ‘Going Out’ Strategy The Chinese economy has been increasingly connected with world after the reform and opening up policy was implemented, and has gradually formed an all-directional, multi-level, wide-ranging pattern of opening to the outside world. China used to focus on ‘Bringing In’ which means introducing foreign capitals, advanced technologies, talents, management, systems and other fields into domestic market, so it could develop much faster through learning mature ways. However, as China has gradually become one of the most important countries in the world, the pattern of its opening up was transformed into both ‘Bringing In’ and ‘Going Out’, which means introducing the development model of China to outside world is equally important. The ‘Going Out’ strategy was firstly proposed in the ninth five-year plan, and then went through a process of further improvement and concrete implementation. In 2002, the 16th National Congress pointed out that China should adapt to the economic globalization and the new situations after joining in the WTO, and participate in the international economic and technological cooperation on a larger scale and higher level. The concrete measures included: 1. To promote the reform and opening up, it was required to take full advantage of domestic and foreign markets, optimize resource allocation, expand the space for development and further tap development potentials.

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2. To enlarge both merchandise and service trade, it needed to give full play to comparative advantages of China and diversified market. 3. To exploit new market and expand export on the basis of consolidating traditional market. Meanwhile, it was supposed to ensure the quality and improve the competition. 4. To optimize the import structure and emphasize on introducing advanced technologies and key equipment instead of ordinary production tools. 5. To deepen the reform of foreign trade and economic system, improve the relevant taxation mechanism and trade financing mechanism. 6. To further attract foreign direct investment and raise the efficiency and quality of utilizing foreign capitals. Then, the foreign capitals were combined with domestic economic structure adjustment and the reorganization of SOEs so as to encourage multinational enterprises to invest in Chinese agriculture, manufacturing industry and hightech industry. 7. To improve the investment environment, grant the national treatment to foreign investment and improve the transparency of regulations and policies. 8. To support all kinds of Chinese enterprises with comparative advantages to invest outside and expand export. 9. To encourage Chinese enterprises to contract overseas projects and labor service for the purpose of expanding mutual beneficial cooperation and common development. Different from the previous stage, China actively carried out ‘Going Out’ strategy during the period of 2002 to 2012 and achieved great success in foreign investment cooperation. With the rapid expansion of the ‘Going Out’ scale, China gained increasing opportunities and profits. In 2003, nonfinancial outward foreign direct investment was only 2.9 billion dollars, and it reached 77.8 billion dollars in 2012. The accomplished turnover of China’s foreign contracted projects reached 116.6 billion dollars, a 9.4-fold increase of that of 2002. Therefore, the foreign economic cooperation of China became increasingly competitive with ever-expanding business scope of technological fields, with both economic and social benefits and international influence significantly improved. It should be admitted that China’s accession to the WTO considerably accelerated its integration into the world economy and improved its capacity of absorbing the foreign capitals and seizing the opportunities brought by globalization. In addition, the new policies of foreign

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exchange administration during that period provided great financial support for enterprises to ‘go out’. China eliminated the review system of overseas investment risk and margin system of profit repatriation of overseas investment. Meanwhile, the censorship of foreign capital sources was simplified, and a series of new policies and measures on capital increase and overseas reinvestment of foreign enterprises were implemented to protect their interests and rights. The trade in goods of China developed fastest in that decade (2002-2012). The total volume of its import and export amounted to 3.8671 trillion dollars in 2012 and had a 6.2-fold growth, ranking second in the world (among which its export volume, 2.0487 trillion dollars, ranked first). However, such good development trend of ‘Bringing In’ and ‘Going Out’ Strategy was severely damaged by international financial crisis whose breakout and widespread brought the great recession to the whole world economy. Then, the external demand of China sharply declined because of the suddenly weak aggregate global demand. To confront the adverse impacts caused by international financial crisis, both the Party Central Committee and Chinese State Council made timely decisions that adopted a proactive fiscal policy and moderately easy monetary policy, and implemented ten strong measures to promote the economic development. They were (1) to accelerate the construction of lowincome housing projects, (2) to accelerate the construction of rural infrastructures, (3) to accelerate the major infrastructure projects such as railways, highways and airports, (3) to accelerate the development of medical treatment and public health, cultural and educational utilities, (4) to accelerate independent innovation and structure adjustment, (5) to accelerate the postearthquake (the Wenchuan earthquake in 2008) reconstruction work, (6) to strengthen the ecological environment construction, (7) to improve the income of both urban and rural residents, (8) to comprehensively implement the reform of value added tax (VAT) transition throughout the country, (9) to strengthen the financial support on economic growth, (10) to remove the restrictions of credit scale on commercial banks, and (11) to strengthen the technological transformation. The Party Central Committee emphasized that although China was facing many difficulties, its huge potentials of internal demand, robust financial system, enterprises’ awareness of market changes and the adjustment of world economy could protect the domestic market to a large extent and could still have the advantages of introducing foreign advanced technologies and talents. It was finally proved that the measures of response to the international financial crisis were effective, so the ‘Bringing In’ and ‘Going Out’ strategy

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was a wise decision whose gains outweighed losses. Although it inevitably made China involved into the great crisis, the overall benefits it created were much more than the costs. Meanwhile, the GDP during that period achieved annual average growth of 9.2% under such difficult circumstances, which could fully prove the effectiveness of the policies and measures of that strategy.

7.3. Experiences from the Tenth and Eleventh Five-Year Plans Since the reform and opening up policy was implemented in 1978, there have been continuous doubts and controversies on its effectiveness and feasibility from home and abroad. However, the history has proved that China’ economy keeps booming and become increasingly powerful under the leadership of the Communist Party of China and the policy of reform and opening up. This chapter has mainly introduced the policy transformation and further reform on the system of socialist market economy, and we can fully foresee the possible achievements at the early stage of 21st century that can be made under such circumstances. In this part, we are going to summarize the experience gained from both the tenth and eleventh five-year plans and introduce the start of the twelfth one. During the period of the tenth five-year plan, the GDP increased by 59.3% with an annual average growth rate of 9.8%, and its ranking rose from the sixth to fourth in the world. The overall situation of the development from 2001 to 2005 was quite good. (1) The fiscal revenue had a 1.4-fold increase and grew 365 billion yuan approximately per year. (2) Agricultural production especially the grains situation got largely improved on the aspects of both output and management. (3) The output of major industrial products increased significantly, and high-tech industries developed rapidly. (4) Basic industries and infrastructures made great progress through the constant transformation and informatization. (5) The systems of social security and socialist market economy played important roles in rural reform, SOEs reform, investment mechanism reform, fiscal and tax reform, etc. (6) The total volume of imports and exports of 2005 tripled that of 2001, which could be attributed to China’s accession to the WTO to a large extent. (7) The per capita disposable income of urban and rural areas during the five years increased 58.3% and 29.2%, respectively. All of the achievements above could reflect the fact that Chinese development model was truly suitable for the national situations.

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However, there were still many problems in the social development during that period, such as unreasonable economic structures, difficult employment, unbalanced relationship between investment and consumption, the expanding income gap between the regions, urban and rural areas, and slow development of social undertakings. Therefore, the eleventh five-year plan was made to better construct the socialist market economy system based on the former foundation and overcome the existing problems. It emphasized on the development on the basis of Scientific Outlook on Development which insisted on implementing the reform and opening up and constructing the socialist market economy through scientific ways. For example, the economic growth should develop fast but stably because the blind pursuit of quantity could only cause severe market disorder and huge uncertainties. According to its requirements, it urged the whole country to improve the independent innovation capacity to the greatest extent otherwise China would continuously face the backward situation of technologies and major industrial production ways. As a result, the guidelines of the eleventh five-year plan emphasized on the structure optimization, benefit improvement, energy conservation and consumption reduction. Finally, per capital GDP of 2010 doubled that of 2000 and reached the target. ‘Per Capita’ was firstly used as the measure of economic development during the tenth five-year plan, so it was regarded as a more reasonable indicator that could comprehensively evaluate the development compared with GDP and GNP. According to the guidelines of the eleventh five-year plan, one of the new proposed concepts was the resources use efficiency. It was expected that the resources consumption of per unit of GDP would have a 20% decrease compared with that of the tenth five-year plan. It was proposed because of the increasingly severe environment damages, resource and energy crisis. Hence, to realize the sustainable development, constructing a resource-conserving and environment-friendly society became one of the major tasks. In addition, the guidelines also proposed the construction of a new socialist countryside, harmonious socialist society, socialist political democracy, socialist culture, national defense and armed forces, and the promotion of coordinated development, institutional reform, mutually beneficial strategy of opening up. Therefore, the main tasks and measures of the eleventh five-year plan were not only closely connected with the targets of building a moderately prosperous society in all respects, but also reflected the features of development and objective requirements at that period. To briefly summarize, China succeeded to deal with all kinds of crisis and challenges brought by the natural disasters and global instabilities. GDP from

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2005 to 2010, the GDP averagely grew by 11.3% per year with an annual increase of 1.5% compared with that of the former 5 years. In 2010, the GDP reached over 40 trillion yuan, so its rankings rose from the fourth in 2005 to the second and successively exceeded that of the UK, France, Germany and Japan. Since then, China has kept its position of the second largest economy, and consistently improved its economic structure and quality. By the end of 2010, the government revenue reached 8.31 trillion yuan and the total foreign trade volume amounted to 2.97 trillion dollars. All kinds of national projects and utilities were accelerating, people’s livelihood, and per capita disposable income in both urban and rural areas were greatly improved. Through unremitting endeavors of the whole country, social productive forces and comprehensive strength of China were enhanced significantly. As a result, China made great progress under the policy of reform and opening up during those five years, and its path of socialism with Chinese characteristics has widely aroused attention from the developed countries and provided development experience for developing countries. The 17th National Congress of the Communist Party of China was held in October 2007. It proposed that economic growth would be shifted from the previous investment-and-export-led model to consumption-investment-andexport-led one. The industrial development used to rely on the secondary industry mainly, but now it adopted the coordinated development of primary industry, secondary industry and tertiary industry. Besides, the scientifictechnical improvement, labor quality improvement, management innovation and transformation gradually replaced the material consumption. During the twelfth five-year plan, China attached more attention to the comprehensive economic development rather than its growth merely. Because economic growth lies in the input of resources, capitals, labors and other factors, its output is just related to the efficiency and effectiveness. However, economic development not only involves the growth, but also includes structure optimization, ecological environment improvement, and the reasonable distribution of achievements. Therefore, accelerating the transition of economic development has been a profound reform since then, and China was no longer pursuing the growth rate only. The American subprime mortgage crisis occurred in 2007 and soon evolved into the global financial crisis in 2008. It not only directly impacted the global finance, but also rapidly brought huge shocks to the real economy throughout the world. Because of the downturn and sharp demand decline, China suffered serious difficulties in foreign trade especially the exports, and then its domestic economy had to face a series of setbacks and adverse factors

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that considerably impeded the production and operation. To prevent the negative and irreversible impacts from the spread of financial crisis, in July 2008, the central leaders adjusted the government macro control which clearly regulated the main tasks of maintaining the stead and fast economic growth as well as curbing rapid price rises. Influenced by the global financial crisis, China’s economic growth rate decreased from 9.0% of the third quarter to 6.8% of the fourth quarter in 2008. A large number of enterprises shut down or went bankrupt, which immediately caused huge employment pressure. To reverse the complicated and severe situations, in October 2008, the Central Committee of the CPC and the State Council took flexible and prudent macroeconomic policies, among which the main points were to focus on expanding the domestic demand especially the consumption demand, and maintain the economic and financial stability which involved the product market, monetary market and capital market. Therefore, the government implemented pro-active fiscal policy and moderately loose monetary policy. It decided to increase government investment on a large scale and started the two-year plan of investing four trillion yuan. At the beginning of 2009, a new series of policies were carried out, including increasing government investment, adopting structural tax reduction, adjusting the plans of invigorating ten key industries like automobile and steel industries, promoting the scientific-technological innovation, improving the social security level etc. Through the unremitting efforts, China achieved economic upturn in 2009 with a 9.2% increase of GDP. The economy reflected its surprising resilience in the face of global financial crisis and world economic recession, not only overcome the difficulties but also ensured and improved the people’s livelihood. When dealing with the crisis, it was also experiencing an important period of deepening reform and expanding opening up. The Central Committee of the Communist Party of China emphasized that the development should be closely combined with the basic role of the market in resource allocation as well as the system of macroeconomic regulation. During that stage, China achieved new breakthroughs in economic system reform. On the aspect of ownership reform, the strategic adjustment of state-owned economy and SOEs were accelerating. The number of central state-owned enterprises supervised by State-owned Assets Supervision and Administration Commission (SASAC) decreased from 159 to 117 in 2011, and over 80% of the assets were concentrated on petroleum and petrochemical industries, electricity industry, communication industry, transportation industry, mining industry, metallurgical industry, national defense, and other key fields. Besides, private-owned capitals were allowed to be invested in energy

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industry, military industry, telecom industry, aviation industry and other traditional monopoly industries, so the non-public economic system was further improved. To adapt to the ever-changing situations, China also implemented the reform on finance and tax systems. The reform of VAT was transformed from production type to consumption type after January 1st, 2009, so it could eliminate the factors of duplicated tax and considerably alleviate the burden of taxpayers. The individual income tax was also reformed to reduce the burden of low-to-middle earners and encouraged consumption. In the financial system, the biggest reform was that the trial of RMB settlement of crossborder trade transactions was established in Shanghai in April 2009, and then expanded throughout the nation. Therefore, it could largely stabilize the foreign exchange rate for the import and export enterprises and defend against potential risks. In the same year, the Growth Enterprise Market (the second board) was officially launched in October, which strongly promoted the combination of capital resources and technology innovation. The twelfth five-year plan from 2011 to 2015 was made mainly for building a moderately prosperous society in all aspects in 2020 because those five years were regarded as the key stage of realizing that magnificent task. Meanwhile, China entered a crucial period of deepening reform and opening up, accelerating the transformation of economic growth model. For the purpose of adapting to the new changes of domestic and international situations, and responding to the wishes of people, the plan adhered to the path of socialism with Chinese characteristics, took Deng Xiaoping Theory and the important thought of Three Representatives as the guiding thoughts, and thoroughly applied the Scientific Outlook on Development. To be specific, the economy was required to increase in a steady and relatively fast way based on the previous experience and important guiding thoughts that constantly improved the theoretical system of socialism with Chinese characteristics. The nature of economic development of contemporary China at that stage lied in taking the measures insisting on scientific ways so as to promote the comprehensive, balanced and sustainable development on the basis of peopleoriented thoughts.

7.4. Major Achievements During the period from 2001 to 2012, China strove for pursuing the economic transition and coordinated development to construct socialist market economy

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and develop the theory of socialism with Chinese characteristics. The implementation of reform and opening up policy insisted on the guiding thoughts of Deng Xiaoping Theory, the important thoughts of Three Representatives, and Scientific Outlook on Development. It started at the tenth five-year plan and ended at the beginning of the twelfth one. Undoubtedly, the amazing development of those 12 years made China an increasingly powerful big country, and its concrete development situations could be reflected from the following tables. Most strikingly, both GNP and GDP of 2010 quadrupled the situations of 2000 (Table 7.1), and per capita GDP also increased by 2.8 times, much overfulfilled the set target. Table 7.1. The general situation of economic development Year

GNP (Unit: 100 million yuan)

GDP (Nominal, Unit: 100 million yuan)

The Primary Industry (Unit: 100 million yuan)

2000 99,066.1 100,280.1 14,714.4 2001 109,276.2 110,863.1 15,502.5 2002 120,480.4 121,717.4 16,190.2 2003 136,576.3 137,422.0 16,970.2 2004 161,415.4 161,840.2 20,904.3 2005 185,998.9 187,318.9 21,806.7 2006 219,028.5 219,438.5 23,317.0 2007 270,704.0 270,092.3 27,674.1 2008 321,229.5 319,244.6 32,464.1 2009 347,934.9 348,517.7 33,583.8 2010 410,354.1 412,119.3 38,430.8 2011 483,392.8 487,940.2 44,781.5 2012 537,329.0 538,580.0 49,084.6 Source: The Compilation of Statistical Data of Yearbook.

The The Per Secondary Tertiary Capita Industry Industry GDP (Unit: 100 (Unit: 100 (Unit: million million yuan) yuan) yuan) 45,663.7 39,899.1 7,942 49,659.4 45,701.2 8,717 54,104.1 51,423.1 9,506 62,695.8 57,756.0 10,666 74,285.0 66,650.9 12,487 88,082.2 77,430.0 14,368 104,359.2 91,762.2 16,738 126,630.5 115,787.7 20,494 149,952.9 136,827.5 24,100 160,168.8 154,765.1 26,180 191,626.5 182,061.9 30,808 227,035.1 216,123.6 36,277 244,639.1 244,856.2 39,771 Sixty Years of New China and China Statistical

Table 7.2. Agriculture development Year

2001 2002

Gross Agricultural Output Value (Unit: 100 million yuan) 26,180 27,391

Irrigated Areas (Unit: 1000 hectares) 54,249.4 54,354.9

Total Power of Agricultural Machinery (Unit: 10000 kw) 55,172.1 57,929.9

Consumption of Chemical Fertilizers (Unit: 10000 tons) 4,253.8 4,339.4

Electricity Consumed in Rural Areas (Unit: 100 million kwh) 2,610.8 2,993.4

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Gross Irrigated Agricultural Areas Output Value (Unit: (Unit: 100 1000 million yuan) hectares) 2003 29,692 54,014.2 2004 36,239 54,478.4 2005 39,451 55,029.3 2006 40,811 55,750.5 2007 48,893 56,518.3 2008 58,002 58,471.7 2009 60,361 59,261.4 2010 69,320 60,347.7 2011 81,304 61,681.6 2012 89,453 63,036.4 Source: China Statistical Yearbook.

Total Power of Agricultural Machinery (Unit: 10000 kw) 60,386.5 64,027.9 68,397.8 72,522.1 76,589.6 82,190.4 87,496.1 92,780.5 97,734.7 102,559.0

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Consumption of Chemical Fertilizers (Unit: 10000 tons) 4,411.6 4,636.6 4,766.2 4,927.7 5,107.8 5,239.0 5,404.4 5,561.7 5,704.2 5,838.8

Electricity Consumed in Rural Areas (Unit: 100 million kwh) 3,432.9 3,933.0 4,375.7 4,895.8 5,509.9 5,713.2 6,104.4 6,632.3 7,139.6 7,508.5

Table 7.3. Yield of major agricultural products Unit: 10000 tons Year Grains Cotton 2001 45,263.7 532.4 2002 45,705.8 491.6 2003 43,069.5 486.0 2004 46,946.9 632.4 2005 48,402.2 571.4 2006 49,804.2 753.3 2007 50,160.3 762.4 2008 52,870.9 749.2 2009 53,082.1 637.7 2010 54,647.7 596.1 2011 57,120.8 659.8 2012 58,958.0 683.6 Source: China Statistical Yearbook.

Oil-Bearing Crops 2,864.9 2,897.2 2,811.0 3,065.9 3,077.1 2,640.3 2,568.7 2,952.8 3,154.3 3,230.1 3,306.8 3,436.8

Sugar 8,655.1 10,292.7 9,641.6 9,570.7 9,451.9 10,460.0 12,188.2 13,419.6 12,276.6 11,988.5 12,516.6 13,485.4

Tea 70.2 74.5 76.8 83.5 93.5 102.8 116.5 125.8 135.9 147.5 162.3 179.0

Since the accession to the WTO in 2001, China has been well-known for its ‘Chinese Model’ and closely integrated into the world. During the period of rapid economic growth, the country achieved amazing success in almost all the fields. In agriculture, ‘Three Agricultural Questions’ were regarded as the key tasks and the government strove for socialist agricultural modernization drive, so more and more rural residents could live a modern life including modern machinery production, modern infrastructure and utilities, convenient transportations, labor security, nine-year compulsory education and so on.

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Table 7.4. Environment protection and energy Year

Afforestation Areas (Unit: hectare)

Investment in Environmental Pollution Control (Unit: 100 million yuan) 2001 4,953,038 1,106.7 2002 777,0971 1,367.2 2003 9,118,894 1,627.7 2004 5,598,079 1,909.8 2005 3,647,942 2,388.0 2006 2,717,925 2,566.0 2007 3,907,711 3,387.3 2008 5,354,387 4,937.0 2009 6,262,330 5,258.4 2010 5,909,919 7,612.2 2011 5,996,613 7,114.0 2012 5,595,791 8,253.5 Source: China Statistical Yearbook.

Investment in Industrial Pollution Control (Unit: 10000 yuan) 1,745.280 1,883,663 2,218,281 3,081,060 4,581,909 4,839,485 5,523,909 5,426,404 4,426,207 3,969,768 4,443,610 5,004,573

Total Energy Production (Unit: 10000 tons of standard coals) 143,875 150,656 171,906 196,648 216,219 232,167 247,279 260,552 274,619 296,916 317,987 331,848

Conversion Rate of Energy Processing (%) 69.34 69.04 69.40 70.91 71.55 71.24 70.77 71.55 72.01 72.83 72.32 72.43

Table 7.5. Output of major industrial products Year

Gross Coal Industrial (Unit: Output Value 100 (Unit: 100 million million yuan) tons) 2001 43,581 13.8 2002 47,431 14.6 2003 54,946 17.2 2004 65,210 19.9 2005 77,231 22.1 2006 91,311 23.7 2007 110,535 25.3 2008 130,260 27.9 2009 135,240 29.3 2010 160,722 32.4 2011 188,470 35.2 2012 199,671 36.5 Source: China Statistical Yearbook.

Crude Oil (Unit: 10000 tons) 16,396 16,700 16,960 17,587 18,135 18,477 18,632 19,001 18,949 20,241 20,288 20,748

Natural Gas (Unit: 100 million cubic meters)

Pig Iron (Unit: 1000 tons)

Steel (Unit: 10000 tons)

303.29 326.61 350.15 414.60 493.20 585.53 692.40 789.32 852.69 948.48 1,026.89 1,071.53

15,554 17,085 21,367 26,831 34,375 41,245 47,652 47,067 55,284 59,733 64,051 66,354

15,163 18,237 22,234 28,291 35,324 41,915 48,929 50,092 57,218 63,723 68,528 72,388

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Table 7.6. Total investment in fixed assets Unit: 100 million yuan Year

Total Investment

Total 2001 37,213.49 30,001.20 2002 43,499.91 35,488.80 2003 55,566.61 45,811.70 2004 70,477.40 59,028.19 2005 88,773.62 75,095.10 2006 109,998.20 93,368.70 2007 137,323.94 117,464.47 2008 172,828.40 148,738.30 2009 224,598.80 193,920.40 2010 278,121.90 241,430.90 2011 311,485.1 302,396.10 2012 374,694.70 364,854.10 Source: China Statistical Yearbook.

Urban Real Estate Development 6,344.11 7,790.92 10,153.80 13,158.25 15,909.30 19,422.90 25,288.84 31,203.19 36,241.80 48,259.40 61,796.90 71,803.80

Rural 7,212.3 8,011.1 9,754.9 1,1449.3 13,678.5 16,629.5 19,859.5 24,090.1 30,678.4 36,691.0 9,089.0 9,840.6

Table 7.7. Basic situation of foreign trade Year

Total Exports Total Imports (Unit: 100 (Unit: 100 million yuan) million yuan) 2001 22,024.4 20,159.2 2002 26,947.9 24,430.3 2003 36,287.9 34,195.6 2004 49,103.3 46,435.8 2005 62,648.1 54,273.7 2006 77,594.6 63,376.9 2007 93,455.6 73,284.6 2008 100,394.9 79,526.5 2009 82,029.7 68,618.4 2010 107,022.8 94,699.3 2011 123,240.6 113,161.4 2012 129,359.3 114,801.0 Source: China Statistical Yearbook.

Balance (Unit: 100 million yuan) +1,865.2 +2,517.6 +2,092.3 +2,667.5 +8,374.4 +14,217.7 +20,171.1 +20,868.4 +13,411.3 +12,323.5 +10,079.2 +14,558.3

Total Amount of FDI Actually Utilized (Unit: 100 million USD) 496.72 550.11 561.40 640.72 638.05 670.76 783.39 952.53 918.04 1,088.21 1,176.98 1,132.94

Infrastructure and basic industries developed fast as well, among which the total fixed assets investment reached 182.4 trillion yuan from 2003 to 2012 with an annual growth rate of over 20%. Qinghai-Tibet Railway, China’s South to North water diversion project, Beijing-Shanghai high-speed railway, the Yangtse Gorges project and other major national projects all proceeded smoothly and efficiently. Because of the advocating of sustainable development, energy production capacity steadily improved.

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Table 7.8. People’s living standard Year

Urban Households Per Capita Engel Consumer Disposable Coefficient Price Income (%) Index (Unit: (Last Year yuan) = 100) 2001 6,859.6 38.2 100.7 2002 7,702.8 37.7 99.0 2003 8,472.2 37.1 100.9 2004 9,421.6 37.7 103.3 2005 10,493.0 36.7 101.6 2006 11,759.5 35.8 101.5 2007 13,785.8 36.3 104.5 2008 15,780.8 37.9 105.6 2009 17,174.7 36.5 99.1 2010 19,109.4 35.7 103.2 2011 21,809.8 36.3 105.3 2012 24,564.7 36.2 102.7 Source: China Statistical Yearbook.

Per Capita Disposable Income (Unit: yuan) 2,366.4 2,475.6 2,622.2 2,936.4 3,254.9 3,587.0 4,140.4 4,760.6 5,153.2 5,919.0 6,977.3 7,916.6

Rural Households Engel Consumer Coefficient Price (%) Index (Last Year = 100) 47.7 100.8 46.2 99.6 45.6 101.6 47.2 104.8 45.5 102.2 43.0 101.5 43.1 105.4 43.7 106.5 41.0 99.7 41.1 103.6 40.4 105.8 39.3 102.5

Table 7.8. Transportation construction (operating mileage) Unit: 10 thousand kilometers Year Railways Highways 2001 7.01 169.80 2002 7.19 176.52 2003 7.30 180.98 2004 7.44 187.07 2005 7.54 334.52 2006 7.71 345.70 2007 7.80 358.37 2008 7.97 373.02 2009 8.55 386.08 2010 9.12 400.82 2011 9.32 410.64 2012 9.76 423.75 Source: China Statistical Yearbook.

Inland Waterway 12.15 12.16 12.40 12.33 12.33 12.34 12.35 12.28 12.37 12.42 12.46 12.50

Airlines 155.36 163.77 174.95 204.94 199.85 211.35 234.30 246.18 234.51 276.51 349.06 328.01

Pipelines 2.76 2.98 3.26 3.82 4.40 4.81 5.45 5.83 6.91 7.85 8.33 9.01

In 2012, the total energy production amounted to 3.32 billion standard coals and had a 1.2-fold increase compared with that of 2002. Therefore, China has become the world’s largest producer of energy with the self-sufficiency rate of above 90% since then. Besides, due to the progress of informatization, post and telecommunication industries were booming. Emerging industries

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like express delivery services continuously came out, and the number of Internet users increased from 60 million in 2002 to 560 million in 2012. Table 7.9. The situation of financial industry Year

The Total Number of Listed Companies

The Amount of Stock Issue (Unit: 100 million shares)

2001 1,160 141.48 2002 1,224 291.74 2003 1,287 281.43 2004 1,377 227.92 2005 1,381 567.05 2006 1,434 1,287.77 2007 1,550 637.24 2008 1,625 180.34 2009 1,718 400.05 2010 2,063 920.99 2011 2,342 272.36 2012 2,494 299.81 Source: China Statistical Yearbook.

The Amount of raising capitals of stocks (Unit: 100 million yuan)

The Growth Rate of Money Supply

1,252.34 961.75 1,357.75 1,510.94 1,882.51 5,594.29 8,680.17 3,852.21 6,124.69 11,971.93 5,814.19 4,134.38

( ) (%) 14.4 16.8 19.6 14.7 17.6 17.0 16.7 17.8 27.7 19.7 13.6 13.8

Foreign Exchange Reserves (Unit: 100 million dollars) 2,121.65 2,864.07 4,032.51 6,099.32 8,188.72 10,663.40 15,282.49 19,460.30 23,991.52 28,473.38 31,811.48 33,115.89

Table 7.10. The situation of R&D development Year

R&D Expenditures and its proportion of GDP (Unit: 100 million yuan)

2001 1,042.5 (0.95%) 2002 1,287.6 (1.07%) 2003 1,539.6 (1.13%) 2004 1,966.3 (1.23%) 2005 2,450.0 (1.34%) 2006 3,003.1 (1.42%) 2007 3,710.2 (1.49%) 2008 4,616.0 (1.47%) 2009 5,802.1 (1.70%) 2010 7,062.6 (1.76%) 2011 8,687.0 (1.84%) 2012 10,298.4 (1.98%) Source: China Statistical Yearbook.

The Number of R&D Employees (Unit: 10 thousand people) 95.7 103.5 109.5 115.3 136.5 150.2 173.6 196.5 229.1 255.4 288.3 324.7

The Total Volume of Exports and Imports of High-tech Products (Unit: 100 million dollars) / 1,507 2,296 3,267 4,160 5,288 6,348 7,574 6,868 9,050 10,120 11,080

The Number of Granted Patents 114,251 132,399 182,226 190,238 214,003 268,002 351,782 411,982 581,992 814,825 960,513 1,255,138

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Table 7.11. Educational expenditures and average students enrollment of all types of schools among every 100 thousand people Year

Educational Primary Expenditures Schools (Unit: 100 million yuan) 2001 4,637.67 9,937 2002 5,480.03 9,525 2003 6,208.27 9,100 2004 7,242.60 8,725 2005 8,418.84 8,358 2006 9,815.31 8,192 2007 12,148.07 8,037 2008 14,500.74 7,819 2009 16,502.71 7,584 2010 19,561.85 7,448 2011 23,869.30 7,403 2012 27,695.97 7,196 Source: China Statistical Yearbook.

Middle Schools (Unit: people)

High Schools (Unit: people)

5,161 5,240 5,209 5,058 4,781 4,557 4,364 4,227 4,097 3,955 3,779 3,535

2,021 2,283 2,523 2,824 3,070 3,321 3,409 3,463 3,495 3,504 3,495 3,411

Higher Education Institutions (Unit: people) 931 1,146 1,298 1,420 1,613 1,816 1,924 2,042 2,128 2,189 2,253 2,335

In general, China achieved unprecedented economic success during that period. However, the country still had to face unprecedented challenges and crisis because it increasingly integrated into the international affairs and economic cooperation, and truly met some bottlenecks after the rapid growth for several decades. For example, there were many constraints that impeded the development such as unbalanced and unsustainable development between regions, and relatively weak scientific and technological innovation capability, which made many people live in poor conditions. Some of these problems were left by the previous development right after the founding of the PRC, while some were newly generated from the social transformation in the process of reform and opening up. Therefore, how China can deal with those problems and seek the ways to break through in the new stage are the major tasks. In the next chapter, the book will introduce the economic situations of the most recent years and analyze the new strategic adjustment.

Chapter 8

The Breakthroughs of the New Stage China has been in the new stage since the 18th National Congress of the Communist Party of China was held in November 2012. After that, the fifth generation of central collective leadership led by President Xi Jinping made a major judgment that China has developed into a new stage called the New Normal, so the future polices should be made to adapt to it. Although the economy has been increasingly booming after the reform and opening up policy was implemented, its development is faced with many new problems and almost passed the stage of rapid growth. This final chapter of the book is going to introduce the concrete features and measures of economic new normal, and the socialism with Chinese characteristics for a new era, so the contents start from the end of 2012 and run the timelines through until nowadays. These ten years are different from any previous decades, because the country achieved the first Centenary Goal (The 100th anniversary of the CPC, from 1921 to 2021) and has laid a solid foundation for the second Centenary Goal (The 100th anniversary of People’s Republic of China, from 1949 to 2049). In spite of the widespread of the COVID-19, China still successfully overcame the difficulties and built the moderately prosperous society in all respects in 2020. In the future, the whole country will continue to make breakthroughs under the leadership of the Communist Party of China.

8.1. The New Normal of China’s Economy According to the 18th National Congress, China would unswervingly take the path of socialism with Chinese characteristics and strive for building a moderately prosperous society in all respects in 2020. To finish that historical mission, it required to keep sustainable and healthy development, expand people’s democracy, improve the cultural soft power, raise people’s living standards, and construct a resource-conserving and environmental-friendly economy. The GDP and per capita income of 2020 were expected to double those of 2010 on the basis of sustainable development. The contribution rate of scientific and technological progress was required to have a big increase,

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which would lead China to enter the ranks of innovative countries. It was also planned to basically realize industrialization, form the regional coordinated development system, and improve the level of informatization and urbanization as well as international competitiveness. Because the global financial crisis has brought huge shocks to the world economy since 2008, China has also suffered from it and entered the new normal economy. The concept of new normal is different from the meaning of new stage, new times or new order. From international perspective, new normal was initially linked with economic recession. In 2002, it was defined by western researchers as the economic recovery without employment growth. However, it has become a terminology that described the new features of crisis era since the global financial crisis broke out. Generally speaking, it still refers to the economic rebound without employment increase mainly. In China, the widespread characteristics of new normal also emerge from its economic development, but meanwhile, the unique features of economy reflect its transition of new stage. To be specific, China kept its high-speed growth from 1978 to 2010, so the country never ceased to create economic legends in the past 32 years. However, its growth rate has an obvious decline after 2010, shown in Table 8.1, compared with the previous growth of over 10%. Table 8.1. The growth rate of GDP Year

Nominal GDP (use current prices) Unit: 100 million yuan 2010 412,119.3 2011 487,940.2 2012 538,580.0 2013 592,963.2 2014 643,563.1 2015 688,858.2 2016 746,395.1 2017 832,035.9 2018 919,281.1 2019 986,515.2 2020 1015,986.2 2021 1143,670.0 Source: China Statistical Yearbook.

Growth Rate of GDP (based on the constant price) 10.5% 9.3% 7.7% 7.7% 7.3% 6.9% 6.8% 6.9% 6.8% 6.0% 2.30% 8.10%

Per Capita GDP (Unit: yuan) 30.808 36,277 39,771 43,497 46,912 49,922 53,783 59,592 65,534 70,078 72,000 80,976

Growth Rate of Per Capita GDP 17.7% 17.6% 9.6% 9.4% 7.9% 6.4% 7.7% 10.8% 10.0% 6.9% 2.7% 12.5%

In 2010s, the average of growth rate of China was approximately 7.7%, although it reached 8.1% in 2021, the main reason was due to the economic rebound after 2020 when COVID-19 first swept the globe, and it is anticipated

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to have just around 6% growth in 2022. Meanwhile, there are many prominent problems that have impeded the economic operation to some extent, such as unbalanced, uncoordinated and unsustainable development between the regions, increasing resource and environmental constrains and weakening traditional comparative advantages. Therefore, under the circumstances of persistently depressed international market and slow-growing domestic demand, supply much exceeds demand in some industries and the traditional manufacturing industries have excess production capacity. The ways to realize the new tendency and adjust the policies can determine whether the economy will develop continuously and healthily. After the 18th National Congress, President Xi pointed out that it was urgent to accelerate the strategy of economic adjustment. If China failed to advance with the times, it would definitely lose global opportunities and initiatives. Hence, China has been no longer a country that only faces the opportunities of global division of labor, and expanding exports and foreign investment. The international trend has prompted China to expand domestic market, improve innovation capacity and promote economic transformation. In spite of the complicated and ever-changing international economic situations, China has been confident in its long-term positive fundamentals and kept adjusting its policies to change the economic structure since it entered the new normal. In November 2014, President Xi pointed out three characteristics of China’s new normal of economic development in APEC CEO Summit. (1) The former high-speed economic growth turned to mediumto-high speed of growth now. (2) With the continuously optimized economic structure, the tertiary industry and consumer demand gradually became the main body of China’s economy, and the gap between urban and rural was narrowing. (3) The economic growth changed from factor-driven and investment-driven to the innovation-driven model. To be more specific, the economic growth rate decreases from approximately 10% to 7%, so the development is changing from the extensive growth model concentrating on growth speed and scale to the intensive growth model emphasizing on quality and efficiency. The economic structure is transformed from quantitative increase and capacity expansion to stock adjustment and increment optimization. And the motive force of economy is turning from traditional growth poles to new ones. Therefore, the features reflected by the present stage of new normal decide China’s future strategic adjustment of economic development. From a global perspective, the new normal is related with negative development of world economy. However, it is regarded as a more positive

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and advanced stage of economic evolution in China. After the global financial crisis occurred in 2008, the whole world economy was greatly influenced, so almost all the countries throughout the world have entered the new economic stage since then. In terms of Chinese economy, it naturally started to change the tendencies of consumer demand, investment demand, exports, balance of international payments, production capacity, industrial organization modes, comparative advantages of production factors, market competition traits, resource and environment constraints, risk accumulation and solution, resource allocation, and macro control. Hence, China had to adapt to the new situation and adjust its polices and measures to go on its path of socialism with Chinese characteristics and socialist market economy. To seize the opportunities in the future global competition, China explicitly pointed out that the key point of deepening the comprehensive reform lied in the transformation of economic system, and the core problem was to deal with the relationship between the government and the market. To put it simply, the concrete development path is to give play to the role of both the market and the government at the stage of new normal.

8.1.1. The Decisive Role of the Market From the history of the construction of socialist market reform, the key point has always been the relationship between the market and the government. Since the market plays a decisive role in resource allocation, the high efficiency and profits brought by the market mechanism will not damage the social equity, which means it is unnecessary for the government or social organizations to interfere in the economic operation. To push forward the reform of socialist market economy, it urges China to maximize the benefits through complying with the market rules of fair competition and market price signals. Therefore, it requires widely reducing the direct allocation from the government and promoting market-oriented reform. Under the circumstance of the new normal, the decisive role of the market in resource allocation seems increasingly weak due to the transition of economic driving force. As a result, the economic reform is implemented from the following aspects. 1. Unleashing market vitality through comprehensively deepening the reform. Mixed-ownership economy has been officially established as an important form of basic socialist economic systems and provided brighter development prospect and greater potentials for non-public

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sectors of economy. Thus, it is an effective path of amplifying the functions of state-owned capitals, strengthening the competitiveness and the influence of state-owned economy. The transformation of the government functions is being accelerated, and it requires invigorating the market through the reform to ‘streamline administration, delegate powers, improve regulation, and strengthen services’ which means the government should respect the law of market and provide fair competitive environment as much as possible. Therefore, the new reform focuses on both delegating power to lower levels, strengthening regulation and optimizing government services. 2. Optimizing the market structure through supply-side structural reform. To adapt to the new situations and lead the economic development, supply-side structural reform is a major innovative decision. Different from demand-side reform which mainly depends on investment, consumption, exports, the supply-side structural reform focuses on labors, lands, capitals, systems, innovative technologies and other factors. It aims at adjusting economic structure and realizing the optimal allocation of factors. Although China has achieved rapid growth since the reform and opening up and become the world major economy, its development has met a series of troubles with the decline of demographic dividend and the risk accumulation of middle-income trap. Hence, it urges the country to solve the problem of structural disequilibrium especially in the real economy, finance and real estates. That structural problem has been one of the major obstacles that cause unmatched supply and demand. From one side, surplus production capacity has considerably constrained the economic transition of China. From the other side, the excess production capacity is mainly in middle-and-low-end products, and there still exists serious supply shortage of high-end production. As a result, the government took concrete measures to cut overcapacity, reduce excess inventory, deleverage, lower costs, solve the unbalanced relationship between supply and demand, and accelerate the transition of economic driving forces. 3. Strengthening endogenous driving force through implementing the innovation-driven development strategy. In the past three decades, China mostly relied on capitals, labors, resources and other factors to expand the economic scales and boost its growth. However, it was nearly impossible to keep the former development model at the stage of new normal because the resources and environment could no

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longer bear the extreme burden as before. Hence, it urged the whole country to transform from factor-driven growth to innovation-driven development as so to better adapt to the new situations and challenges. Besides, it was required to speed up the construction of information infrastructure and develop modern service industry, among which there were eight regional pilot reforms for all-round innovation and 28 bases of national demonstration centers for business startups and innovation. In addition, the government paid more attention to the development of many emerging industries like mobile internet, integrated circuits, internet finance, high-end equipment manufacturing, electronic commerce, new energy automobiles, logistics and express delivery services. Since then, China has started a trend of innovation and strongly advocated independent research and development. 4. Improving the competitiveness of China’s economy in the international market through expanding openness. Since China has been deeply integrated into the world economy, it becomes increasingly important to utilize the international resources and capitals and realize the sustainable development. The problem of production overcapacity would be likely to be solved through foreign transfer and international market. Since the 18th National Congress, China has been actively building an open economic system that can further accelerate opening up. After China (Shanghai) Pilot Free Trade Zone (FTZ) was first set up in 2013, other 20 FTZs were successfully established in Guangdong, Tianjin, Fujian, Liaoning, Zhejiang, Henan, Hubei, Chongqing, Sichuan, Shaanxi, Hainan, Shandong, Jiangsu, Guangxi, Hebei, Yunnan, Heilongjiang, Beijing, Hunan and Anhui. Besides, Hainan Free Trade Port was set up in 2020 to provide services for both domestic and foreign investors and promote the reform of emerging industries through developing information technology and digital economy. In addition, with the proposal and implementation of the Belt and Road Initiative since 2013, China has strove for constructing bilateral and multilateral mechanisms and regional cooperation platforms. With the inclusion of Renminbi (RMB, CNY) in Special Drawing Right (SDR) in 2016, it significantly promoted the internationalization of Chinese currency and high-level opening up.

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These reforms aimed at making market play a decisive role in resource allocation at the stage of new normal. Currently, and it is vital to stabilize the economy and adjust development structures through invigorating the market and generating internal growth momentum. A series of measures were made to improve the fair competitive environment and promote the industrial transformation, so that new driving forces were expected to stimulate the enthusiasm of innovation and business startup and offset the effect brought by weakening momentum of traditional industries. At the same time, it was also required to transform the government functions.

8.1.2. The Role of Government Functions Compared with the invisible hand of the market, the visible hand of the government is bound to be connected with political guide and macro regulation. It is nearly impossible to see a country developing its economy without any government control in the modern economic system. As the technologies and ways of economic operation are getting increasingly complicated, how should the government correctly react and adjust the policies become the major concerns for a country. In the modern economic system, total laissez-faire or anarchism is destined to be utopia because market mechanism is not perfect. Since market failure is always caused by monopoly power, information asymmetry, and other externalities, government control is of great importance. In general, it is the government’s responsibility to exercise effective macroeconomic regulation, maintain the stability of macro economy, avoid great fluctuations, strengthen the market supervision, maintain market’s fair competition order, strengthen social governance, provide good public services and promote social harmony and progress. In contemporary China, the government includes the ruling party in a broad sense because the Communist Party of China is the core leadership of socialism with Chinese characteristics and the economic construction. Therefore, the concrete government guiding principles contain the concept of the Party’s governance, which can be reflected by the following points. 1. Improving the quality of economic development. At the stage of new normal, it is required that the economic development should keep a certain speed but meanwhile it must follow the economic laws. As mentioned before, it is a timely moment to develop the economy that relies on the transformation of scientific and technological

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innovation. On the aspect of opening up, China has focused more on delivering Chinese voice, leading the new trend in international economic cooperation and striving for rulemaking in the global governance instead of just being a participant. Since the world has entered the new stage, China, as a major power throughout the globe, is responsible for maintaining the common interests of people from all countries and making its accomplishments shared by the world. Besides, coordinated and green development is one of the key tasks during this period because the problems of economic gap and environmental damages are truly serious. Thus, the five concepts of innovative, coordinated, open and sharing development were all concluded into the Fifth Plenary Session of the 18th CPC National Congress in 2015. 2. Improving people’s living standards. The CPC is a Party that adheres to the people-oriented principal. However, with the further implementation of reform and opening up, income gap and unbalanced development between regions have become great problems. According to the poverty alleviation plan of the thirteenth five-year plan, the government would pay more attention to the improvement of people’s livelihood especially those living in rural areas and impoverished regions. For the purpose of targeted poverty reduction, the programs of poverty alleviation and relocation were finally implemented in 22 provinces and autonomous regions, such as hydropower construction, utilization of mineral resources, cooperation between the east and the west. As the income and welfare keep increasing, people who live in those regions are getting more satisfied now. 3. Following the general principle of making progress while working to keep performance stable. That means the government’s macro regulation should ensure both economic stability and development, so that it can provide a relatively stable and good macro environment to adjust the structures and deepen the reform and opening up. In order to reach the expectations of the governance, targeted and well-timed regulations have been always strengthened since the 18th National Congress by the Party and the government according to the everchanging economic situations. For example, targeted cuts to required reserve ratios and interest rates are regarded as a combination, and the government takes the initiative in cutting taxes and administrative fees as well as balancing the liquidity and financial risks.

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4. Accelerating the formation of economic growth poles and growth zones. The thirteenth five-year plan regulated cooperation development of Beijing-Tianjin-Hebei region which is directed at the construction of subcenter of Beijing. Therefore, it is conducive to form the functional dispersal from the capital city to other cities and realize integrative development, just like the construction of the Xiongan New Area. Besides, the guidelines on building the economic development belt along the Yangtze River required promoting the construction of green ecological corridor and setting up provincial consultation and cooperation mechanism covering the whole areas. In the thirteenth five-year plan for the large-scale development of the western regions, a new series of strategies and measures of revitalizing northeast China were made to undertake industry transfers and strengthen the connection between western and eastern regions. Therefore, the transformation of East China can largely drive the economic development in western regions. Moreover, the Yangtze River Delta, Chengdu-Chongqing Economic Zone and Guangdong-Hongkong-Macao Greater Bay Area have been constantly under the construction since then. In general, because China has entered the new stage of new normal, how should the country adapt to the changes has been put at the top agenda since the 18th National Congress was held in 2012. Both the ‘invisible hand’ and ‘visible hand’ are of great importance to the economic development during this period. The Party and the government have greatly emphasized on the decisive role of market in resource allocation and the government functions of macro regulation. It is anticipated by some economists that new normal will come to an end in 2022, but it still needs to be proved by the actual situations. However, it could not be denied that the task of building a moderately prosperous society in all respects in 2020 was ongoing, so China’s further transformation became the key point.

8.2. The New Vision on Development 8.2.1. The Completion of the Twelfth Five-Year Plan During the period of the Twelfth Five-Year Plan from 2011 to 2015, China entered the new normal and the world was undergoing profound changes.

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From an international view, the whole world economy was in an adjustment phase after going through the global financial crisis with the characteristics of low growth, imbalanced development and great risks. Besides, with the aggravating influences of geopolitical uncertainties, China had to face the increasingly complicated external environment. Domestically, multiple difficulties and challenges brought by the economic transformation of new normal made it harder to push forward the national programs and tasks. Therefore, the government kept fine-tuning its macro-regulative policies, implementing the structure adjustment and upgrading its development models so as to stimulate new driving forces, and thus laid a solid foundation for building a moderately prosperous society in all respects. Although the average growth rate of GDP during those five years was below 8%, it still much exceeded that of the world figure, 2.5%, and stably kept its second position in the world. From Table 8.1, the per capita GDP maintained a certain increase, which could comprehensively reflect that people’s living standards truly got improved even under the medium-to-high speed of economic growth. Therefore, innovation-driven development strategy was really conducive to face the economic changes brought by the new normal and ensure people’s wellbeing during that period. Table 8.2. The composition of industries Year

The Primary Industry The The Proportion Contribution of Employed Rate (%) People (%)

2011 34.8 4.2 2012 33.6 5.2 2013 31.4 4.3 2014 29.5 4.7 2015 28.3 4.6 Source: China Statistical Yearbook.

The Secondary Industry The The Proportion Contribution of Rate (%) Employed People (%) 29.5 52.0 30.3 49.9 30.1 48.5 29.9 47.8 29.3 41.6

The Tertiary Industry The The Proportion Contribution of Rate (%) Employed People (%) 35.7 43.8 36.1 44.9 38.5 47.2 40.6 47.5 42.4 53.7

According to the composition of industries shown in Table 8.2, both the proportion of employed people and contribution rate of the tertiary industry dominated the national economy after 2011. With the improvement of economic development level, the demand for producer services and consumer services kept increasing. Therefore, the service sector has been the biggest industry in China since then, which is consistent with the policy requirements.

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China’s economy has moved toward a medium-high level of development and its structure has obviously got improved. As a result, it has kept transforming and adjusting the development direction and governance system to better adapt to the changes of the new normal. Table 8.3. General situation of urban and rural areas Year

Urban Areas Per Capita Household Disposable Consumption Income Level (Unit: (Unit: yuan) yuan) 2010 49.95 19,109.4 16,570 2011 51.27 21,809.8 19,219 2012 52.57 24,564.7 20,869 2013 53.73 26,955.1 22,620 2014 54.77 29,381.0 24,430 2015 56.10 31,790.3 26,119 Source: China Statistical Yearbook. Proportion of Population (%)

Proportion of Population (%) 50.05 48.73 47.43 46.27 45.23 43.90

Rural Areas Per Capita Household Disposable Consumption Income Level (Unit: (Unit: yuan) yuan) 5,919.0 4,782 6,977.3 5,880 7,916.6 6,573 8,895.9 7,397 9,892.0 8,365 10,772.0 9,409

Since urbanization has been stably implemented, urban population firstly outnumbered rural population by the end of 2011. In Table 8.3, the urbanization rate kept rising and reached 56.1% in 2015, so it could be estimated that the new urban labors largely promoted investment and consumption. Meanwhile, with the development of urban and rural integration, residents of both areas were able to afford more household expenses because their disposable incomes grew steadily every year. Therefore, under the policy of expanding domestic demand, the increasing consumption drove the investment growth against the background of urbanization. Besides the development of transportation, the communication industries were also significantly improved. Since 2012, it has become a common phenomenon that most Chinese people have cell phones to keep social relationship with others. In addition, informatization construction began to enable a growing proportion of people to surf the Internet during that period, and the use of Internet is already indispensable to today’s life. Moreover, one of the typical Chinese emerging industries, express delivery, started to boom in 2013 and paved the way for the development of digital economy in the coming years. The Further implementation of opening up during the twelfth five-year plan aimed at forming a new system that could help China to gain the

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initiatives in international competition. On the aspect of trade in goods, the total volume of imports and exports kept growing with a gradually widening surplus. Although the world economic recovery was slow after influenced by the global financial crisis, China’s imports and exports kept stable growth and ranked first when it was 2013. Since then, China has basically been the biggest country in foreign goods trade, which should be attributed to the development of diversified structure among which private-owned enterprises have become the major business entities. Besides, the service trades also had a rapid growth after 2012, which could be related with the emphasis on the development of service sector and industrial transformation to a large extent. Table 8.4. The development of communication industries Year

Total Volume of Post and Telecommunications (Unit: 100 million yuan)

2011 13,333.49 2012 15,019.28 2013 18,432.24 2014 21,834.41 2015 28,425.02 Source: China Statistical Yearbook.

Express Delivery (Unit: 100 million packages) 36.73 56.85 91.87 139.59 206.66

Number of Mobile Phone Subscribers including 3G & 4G Users (Unit: 100 million people) 9.87 11.12 12.30 12.86 12.71

Number of Internet Users (Unit: 100 million people) 5.13 5.64 6.16 6.49 6.88

Table 8.5. The situation of foreign trade Year

Trade in Goods Total Volume of Balance (Unit: Import and trillion dollars) Export (Unit: trillion dollars)

2011 3,641.9 +154.9 2012 3,867.1 +230.3 2013 4,159.0 +259.0 2014 4,301.5 +383.1 2015 3,953.0 +593.9 Source: China Statistical Yearbook.

Total Import and Export Volume of Trade in Service (Unit: trillion dollars) 419.1 470.6 539.6 604.3 713.0

Foreign Direct Investment Actually Utilized (Unit: trillion dollars)

116.0 111.7 117.6 119.6 126.3

Since the structure of service industry was gradually improved, high value-added service trade such as computer science, insurance, finance and consultancy had great potential in export growth. Moreover, the development of foreign capitals investment has been transformed from expanding quantity

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scale to improving the effective utilization rate. In 2014, the FDI actually utilized of China reached 119.6 billion dollar and firstly ranked first in the world, its involved fields were no longer just general manufacturing but high technology, finance, insurance and other service industries. Table 8.6. The structure and composition of commodity imports and exports Year Total Volume (Unit: trillion dollars) 2011 3,641.9 2012 3,866.8 2013 4,160.3 2014 4,303.0 2015 3,956.9 Source: China Statistical Yearbook.

Commodity Imports and Exports Manufactured Products Total High-Tech Proportion (%) Products (%) 80.6 27.8 81.0 28.7 81.6 29.3 82.3 28.2 85.4 30.4

Primary Commodities (%) 19.4 19.0 18.4 17.7 14.6

From Table 8.6, the structure of foreign trade was constantly improving during those five years. The proportion of primary commodities kept decreasing, while the manufactured products especially the high-tech ones had increasing proportion in imports and exports. Therefore, it could reflect the fact that China was accelerating its transformation of economic structure comprehensively and committed to adapt to the changes of new normal. Besides, it has started to expand its business partners, like emerging countries, on the basis of consolidating the trade relationships with the US, EU and Japan.

8.2.2. The Thirteenth Five-Year Plan China successfully stood up to the major challenges from 2011 to 2015, and the progress made in those five years laid a solid foundation for the thirteenth five-year plan. In 2020, it was expected to complete the building of a moderately prosperous society in all respects, so the years from 2016 to 2020 were regarded as the final period of reaching all kinds of the targets. However, in spite of the stable economic growth and the improvement of comprehensive strength, there still existed some institutional ills and structural contradictions, so how could China respond to the domestic problems and global great changes became the key points of government management. The thirteenth

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five-year plan coordinated the implementation of the Five-Sphere Integrated Plan including the construction of economy, politics, culture, society and ecological civilization. When analyzing the opportunities and challenges in those five years, the main measures could be concluded as the following aspects. 1. To further emphasize on the development of people’s livelihood, such as employment, education, social security, housing, medical treatment and other indicators. 2. To seize the opportunities brought by the global scientific and technological revolution and strive to make progress in key technologies. 3. To increase the weight of green indicators when measuring economic situations, such as Green GDP and emission reduction target. 4. To further promote the openness of inland regions especially the central and western areas so as to stimulate the economic development there. 5. To devote the public resources mainly to improving social security system and make specific measures of targeted poverty alleviation. In general, the targets of the thirteenth five-year plan were to (1) keep the medium-to-high speed of economic growth based on the balanced, inclusive and sustainable development, (2) the GDP and per capita income of both urban and rural residents were expected to double those of 2010, (3) further transform the industrial development from low-end production to mediumand-high-end production, (4) expand domestic consumption and its contribution to economic growth, (5) accelerate the urbanization construction and agricultural modernization, (6) improve the ecological civilization construction, (7) realize targeted poverty alleviation throughout the country according to the current standards. Based on the former experience and achievements, the thirteenth five-year plan insisted on the five concepts for development—innovative, coordinated, green, open, and shared. In order to realize the transformation of these five concepts, there were five concrete measures pertaining to them respectively. 1. The development way was required to change from factor-driven and investment-driven model that were highly dependent on demographic dividend and land dividend to innovation-driven growth. To be specific, it is strongly encouraged to cultivate innovation power in theories, systems, science and technology, culture and other fields.

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Since then, both business startups and innovation have become the new driving forces of developing national economy, especially in the ‘Internet Plus’ model, Artificial Intelligence and national big data strategy. Besides, the innovative development was supposed to be implemented from coastlands to inlands and covered the whole country through constructing north-south and east-west economic axial belts. In building new industrial systems, it required transforming China from a manufacturing giant into a world manufacturing power through implementing ‘Made in China 2025’ strategy. Moreover, China was also carrying out its ‘Internet Power’ strategy, ‘Internet Action’ plan, sharing economy construction and big-data strategy. The innovation-driven development required market-oriented model, so the government functions were indispensable but also needed to be appropriate. 2. The economic development used to be incoordinate, unbalanced and unsustainable, so it was required to transform according to the thirteenth five-year plan. The coordinated development was aimed at dealing with the major relationships between the regions, sectors and other aspects. Specifically, under the background of industrialization, urbanization, informatization and agricultural modernization, the development of urban-rural integration, cultural-ethical and material progress, economic and national defense construction were all perceived as a whole. For a long time, China has focused on the GDP, infrastructure, military strengths and other objectives which are called ‘hard power’, but the ‘soft power’ has also been emphasized by the government since then. Thus, cultural development, moral advancement and the improvement of people’s quality and awareness have been equally valued. 3. The former extensive growth model that caused severe pollution and blindly pursued GDP was planned to be replaced by the green development which would be based on the basic state policy of resource conservation and environmental protection. China started to build a new pattern of modernization drive balancing the harmonious development between humankind and nature, so it has been committed to building a sound ecological system and realizing the sustainable development on the premise of laws of nature. Based on the market roles and macro regulation, the concrete measures were to set up green and low-carbon industrial system, safe and efficient modern energy system. These two systems aimed to establish the

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distribution mechanism through improving the rights of energy utilization, water use, pollution discharge and carbon emissions. Therefore, it required to intensify the environmental protection and promote the modernization of its governance system. 4. The further opening up was directed at building a strong community of common interests in the world so as to enable China to integrate into the trend of world economy more deeply. During the twelfth fiveyear plan, China was already the biggest country of the total foreign trade volume, so it strove to further expand high-level openness in the next five years. According to the plan, the country started to build a new pattern of all-round opening up, that was ‘Links running eastward and westward, across land and over sea’ which means China’s opening up would be planned according to its geographic location and aim at solving the problem of unbalanced development between the east and west through the construction of the Belt and Road Initiative. So far, China has turned the former opening up way that mainly relied on attracting foreign investment to capital export and the ‘Going Out’ of Chinese enterprises. 5. The unbalanced development and widening gap were required to be improved through developing sharing economy. Since peopleoriented development is fundamentally required by the moderately prosperous society in all respects, the key point of sharing the development at that time lied in how to lift over 70 million Chinese people out of poverty. Therefore, the program of poverty alleviation was implemented to increase the transfer payments and improve the service system to impoverished rural areas. In sharing economy, the development should focus on education, employment, income distribution, social security, medical treatment and other aspects of people’s livelihood. To solve the aging problem, the Chinese government ended its One-Child policy and permitted families to have two children. It improved people’s initiatives of giving birth to another child through increasingly providing public goods and reducing the fertility cost. During the implementation of the thirteenth five-year from 2016 to 2020, the 19th National Congress of the Communist Party of China was held in October 2017. It took Marxism-Leninism, Mao Zedong Thought, Deng Xiaoping Theory, Important Thoughts of Three Represents, Scientific Outlook on Development and Xi Jinping Thought on Socialism with Chinese

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Characteristics for a New Era as guiding thoughts. After reviewing the past development and analyzing the changes of domestic and international situations, the congress made two major judgments: the new stage of socialism with Chinese characteristics and the change of principal contradiction.

8.3. A New Era of Socialism with Chinese Characteristics 8.3.1. The 19th National Congress of Communist Party of China Since the 19th National Congress was held in 2017, China has entered the new era of socialism with Chinese characteristics which is a new historical position of China’s development. Most importantly, the principal contradiction in this new position has changed. After establishing the socialist system in 1956, the principal contradiction was between the growing material and cultural needs of people and the backward productive forces. However, thanks to the unremitting efforts on developing the country by the whole nation, China has already been a manufacturing giant with efficient productivities. Therefore, it has been the contradiction between people’s ever-growing needs for a better life and unbalanced and inadequate development after 2017. With regard to the change of the principal contradiction, the main basis could be concluded as two aspects. First, with the continuous implementation of the reform and opening up policy for nearly 40 years at that time, social productivity of China was significantly improved in general. After 2010, its GDP kept the second position, the total import and export volume of goods and service trade also kept ranking second in the world. The value added of the manufacturing industry had been the highest for seven years, and the infrastructure construction began to lead the world in some fields such as the operating mileages of high-speed railways, the total mileage of expressways and the aggregate port capacity, which all occupied the first place. The industrial and agricultural production capacities were improved enormously with over 220 major products whose productivities and outputs stably ranked first, some of them even had overcapacity. Therefore, the long-lasting situations of China’s backward production and supply shortage were fundamentally changed, and the former principal contradiction was inconsistent with the reality. Second, since people’s living standards have been significantly improved, they begin to pursue a better life. At present, their wishes are no longer just the material and cultural needs, but an all-round improvement in the

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construction of democracy and legal systems, the treatment of justice and equity, social security, environmental governance and so on. Since China had solved the problem of basic living needs of billions of people by 2017 and basically realized the level of a moderately prosperous society at that time, the masses had much higher requirements on living standards. To be concrete, they began to pursue better education, more stable jobs, higher incomes, more reliable social security, better medical and health services, better housing conditions and environment, and richer spiritual life. Their awareness of all respects kept enhancing, so the material and cultural needs could not reflect people’s requirements anymore. Instead, their ever-increasing diversified needs have attached more importance to balanced development in all industries and regions. Based on the two points above, the principal contradiction of China has changed since then. What needs to be precisely stated is that the new historical position of socialism with Chinese characteristics does not mean that China has entered the next stage of socialism. Its basic national condition is still the primary stage of socialism, and China is still the biggest developing country in the world. Therefore, the future development and policy making would still be grounded in realities and social attributes. The 19th National Congress made new deployment and clearly pointed out the new strategies and targets based on the two major judgments of the socialism with Chinese characteristics for a New Era and the new principal contradiction. According to the congress, the period from 2017 to 2020 was the final stage of building a moderately prosperous society, and China would start its plan of second Centaury Goal after 2020. The period from 2020 to the mid-century will go through nearly 30 years, and the process is divided into two stages. The first stage is from 2021 to 2035, planning that China will basically realize the socialist modernization based on the already built moderately prosperous society. Then, China is expected to be built into a great modern socialist country which is prosperous, strong, democratic, culturally advanced, harmonious and beautiful in the second stage, from 2036 to the middle of the century. Therefore, the latest congress planned to fulfill the task 15 years ahead of schedule because the former plan was to basically realize the socialist modernization by the mid-21st century. The economic situation of China has shifted from the former stage of rapid growth to the stage of high-quality development, so the new concept of reform should be constructing modern economic system which is regarded as the urgent requirements and strategic target of China. To be specific, the future tasks are deepening the supply-side structural reform, accelerating the

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construction of innovative country, implementing the strategy of rural revitalization, and forming the new pattern of all-round opening. In general, China’s rise has long been inexorable. The whole country is changing quite fast no matter in the cities or the countryside. With the deepening implementation of reform and opening up, its economic achievements are witnessed by the whole world. Soon, China celebrated the 70th anniversary of its founding in 2019, completed its great historical task of building a moderately prosperous society in all respects in 2020, and achieved the first Centenary Goal (100th anniversary of the CPC) in 2021.

8.3.2. The Achievements of the First Centenary Goal and the Future Prospects The year 2020 represented the final year of both building a moderately prosperous society and the thirteenth five-year plan. Both of them required high-quality economic development, the significant improvement of people’s living standard, national quality, civilization degree, the ecological environment and management systems. Most importantly, China targeted at comprehensively overcoming the poverty problem and fundamentally solved the problem of extreme poverty that had existed for thousands of years. Based on the Five-Sphere Integrated Plan, China was expected to fulfill the targets of the construction of economy, politics, culture, society and ecological civilization. Since building a moderately prosperous society was regarded as one of the greatest strategies and historical missions in the former decades, the thirteenth five-year plan was made according to its requirements. Although the COVID-19 unexpectedly swept the world and brought huge shocks in 2020, China still stood the test of the times and completed the historical mission. The following tables reflect the development situation during the thirteenth five-year plan and the completion of building a moderately prosperous society. From Table 8.7, Table 8.8 as well as Table 8.1 earlier on, it realized a sound and fast economic development in those five years. China made great progress in transformation since it kept on optimizing the structure, improving economic returns, reducing consumption and conserving the environment. Its per capita GDP of 2020 reached 72,000 yuan which nearly decupled that of 2000, 7,542 yuan. With the continuous improvement of the socialist market economy system, China gradually formed the consumption-investmentexport-driven growth pattern. Although the pandemic resulted in huge losses

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and the contribution rate of final consumption expenditure was only -22% in 2020, the long-term fundamentals of economy remained positive. Therefore, the per capita disposable income from Table 8.8 still had a 4.7% increase (based on base price) in 2020 when the poverty was completely eliminated. As the coordinated development of urban-rural integration and the strategy of rural revitalization were further implemented, China made great progress in the construction of new socialist countryside. Table 8.7. The contribution rate of three key demands towards GDP (%) Year

Final Consumption Expenditure 2016 66.0 2017 55.9 2018 64.0 2019 58.6 2020 -22.0 Source: China Statistical Yearbook.

Gross Capital Formation 45.7 39.5 43.2 28.9 94.1

Imports and Exports of Goods and Services -11.7 4.7 -7.2 12.6 28.0

Table 8.8. People’s living standards Year

2016 2017 2018 2019 2020

Average Per Capita Disposable Income (Unit: yuan) 23,821.0 25,973.8 28,228.0 30,732.8 32,188.8

Average Per Capita expenditure (Unit: yuan) 17,110.7 18,322.1 19,853.1 21,558.9 21,209.9

Poverty Population (Unit: 10 thousand people) 4,335 3,046 1,660 551 All Out of Poverty

Poverty Incidence (%) 4.5 3.1 1.7 0.6 All Out of Poverty

Source: China Statistical Yearbook.

Since the socialist democracy kept expanding, people could be better guaranteed their rights and interest as Chinese citizens. In spite of the large downward economic pressure these years, the Party and the government still adhered to the governing concept of putting people first, so a growing proportion of Chinese people could enjoy more reliable and greater treatment of various social insurance from Table 8.9. With the improvement of public service system provided by the government, the socialist economy construction got better ensured. Since China has achieved great success in ‘hard power’ in many fields such as economic growth, infrastructure construction and national defense, it is also important to strengthen the construction of cultural programs, improve

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people’s quality and build their confidence in Chinese culture and core values of Socialism. Therefore, the government continued to construct public places of art performances and advocated that people go to the libraries, cultural centers and museums in those five years, for the purpose of promoting the cultural industries and adapting to people’s higher demands for cultural products. Table 8.9. Basic information of social insurance Unit: 10 thousand people Year

Unemployment Basic Medical Insurance Insurance 2016 18,088.8 74,391.6 2017 18,784.2 117,681.4 2018 19,643.5 134,458.6 2019 20,542.7 135,407.4 2020 21,689.5 136,131.1 Source: China Statistical Yearbook.

Work-related Injury Insurance 21,889.3 22,723.7 23,874.4 25,478.4 26,763.4

Maternity Insurance 18,451.0 19,300.2 20,434.1 21,417.3 23,567.3

Table 8.10. The development of cultural industry Year

The The Number of Number of Public Cultural Libraries Centers 2016 3,153 44,497 2017 3,166 44,521 2018 3,176 44,464 2019 3,196 44,073 2020 3,212 43,687 Source: China Statistical Yearbook.

The Number of Museums

The Number of Art Performance Troupes

The Number of Art Performance Venues

4,109 4,721 4,918 5,132 5,452

12,301 15,742 17,123 17,795 17,581

2,285 2,455 2,478 2,716 2,770

Table 8.11. The situation of higher education Year

The Students The Enrollment of Number of Higher Students Education Studying (Unit: 10 Abroad thousand (Unit: people) people) 2016 2,695.8 544,500 2017 2,753.6 608,400 2018 2,831.0 662,100 2019 3,031.5 703,500 2020 3,285.3 / Source: China Statistical Yearbook.

The Number of Students Returning from Abroad (Unit: people) 432,500 480,900 519,400 580,300 /

R&D Expenditures of Institutions of Higher Education (Unit: 100 million yuan) 1,027.2 1,266.0 1,457.9 1,796.6 1,882.5

Total Educational Funds Expenditure (Unit:100 million yuan) 38,888.4 42,562.0 46,143.0 50,178.1 53,012.4

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Table 8.12. Health services and subsistence allowances for residents Year

Per Capita Health Expenditure (Unit: yuan)

The Proportion of Total Health Expenditure Accounting for GDP (%) 2016 3,328.61 6.21 2017 3,756.72 6.32 2018 4,206.74 6.43 2019 4,669.34 6.67 2020 5,112.34 7.10 Source: China Statistical Yearbook.

The Population with the Minimum Subsistence Allowances Urban Residents Rural Residents (Unit: 10 thousand (Unit: 10 people) thousand people) 1,480.2 4,586.5 1,261.0 4,045.2 1,007.0 3,519.1 860.9 3,455.4 805.1 3,620.8

Regarding the construction of social programs, the national educational system was greatly improved. Nowadays, besides the nine-year compulsory education, more youngsters, even the middle-aged, hope to receive postgraduate education from home and abroad (Table 8.11). In order to meet such demand, the educational funds expenditure by the government stably rose with increasing R&D expenditure of institutions of higher education. The more the government spent on education and scientific research, the more returns of innovation the country would get, so China has achieved significant breakthroughs in innovative technologies such as communication satellites, digital economy, biotechnology and semiconductor. In addition, the social security system covering the whole country was basically established, which could be reflected from Table 8.12. As a result, people were guaranteed their living standard like health insurance and subsistence allowances. Since the poverty alleviation was thoroughly implemented, the number of those who needed basic living allowances generally had a declining trend. Table 8.13. Ecological construction Year

Per Capita Afforestation Water Areas Resources (Unit: (Unit: cubic hectares) meters/ person) 2016 2,339.4 7,203,509 2017 2,059.9 7,680,711 2018 1,957.7 7,299,473 2019 2,026.9 7,390,294 2020 2,239.8 6,933,696 Source: China Statistical Yearbook.

Pest Control Operation of Forestry (Unit: 10 thousand hectares) 1,211.34 1,253.12 1,219.52 1,236.77 1,278.45

Energy Consumption of each 10 thousand GDP (Unit: tons of standard coals/10 thousand yuan) 0.60 0.58 0.56 0.55 /

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Different from the development direction in the early stage of 21st century, the importance of constructing ecological civilization was always emphasized in both the twelfth five-year plan and thirteenth five-year plan. According to the requirements, the system of energy-conserving and environmental protection was supposed to be basically established so as to transform the industrial structure, growth model, consumption pattern and facilitate the formation of circular economy. From Table 8.13, it is clear that per unit GDP needed less and less and energy consumption in those five years, so the overall situation of ecological environment obviously got improved owing to the policy of pollution control and the concept of green development. The contents above were the general situation of the development during the thirteenth five-year plan. However, although China successfully completed the historical mission of building a moderately prosperous society and reached all kinds of targets, the outbreak of COVID-19 pandemic brought unprecedented shocks and challenges to China in the final year of the thirteenth five-year plan. In those years, China was already faced with economic downward pressure, so the coming of that epidemic forced it to immediately adjust its policies. To stabilize the employment rate, CPI and the output value of industries, a series of bailout policies were made accordingly. In the first Quarter of 2020, the Chinese government largely increased its fiscal expenditure, among which the total amount of general public budget and government-funded expenditure had a 16.2% increase compared with that of 2019. In addition, the government continued to cut taxes and administrative fees so as to protect the market and ensure people’s livelihood. Meanwhile, the central bank considerably released liquidity and gave play to the role of monetary policy in making counter-cyclical adjustments. After the Spring Festival, the central bank provided the financial market with 1.7 trillion yuan of short-term liquidity to stabilize the market confidence. According to the different periods of the world pandemic, the central bank increased rediscount amount in the incipient stage, preliminary control stage, and stable control stage by 300 billion yuan, 500 billion yuan, one trillion yuan, respectively. Besides, it implemented the targeted reduction of required reserve ratio three times in the whole year. Such policy mix aimed to help resume work and production especially for those small and micro enterprises. Different from the global financial crisis, the widespread of the COVID19 directly impacted the consumption and production, so it brought huge shocks to low-income groups. Because of the socialist market economy, the government mainly focused on market means to centralize policy resources and overcome the difficulties. Although most of the countries throughout the

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world were reducing their interest rates when facing such uncertainty and risks caused by the pandemic, China still insisted on proactive fiscal policy and prudent monetary policy and implemented the policy mix in a more flexible and reasonable way. Therefore, such macroeconomic policies were made to stimulate investment in the next quarters and then make economic operation shift from policy-driven growth to endogenous growth. Thanks to the leadership of the Party and the government, China reflected its strong resilience in economic recovery and huge potential markets in emerging industries. Although the pandemic caused huge losses in the first half year of 2020, it also brought new opportunities and promoted new development models. For example, the booming trend of those industries supported by Internet technologies paved the way for the development of digital economy in the following fourteenth five-year plan, which would definitely promote the innovation of high-tech manufacturing, software development, information technology and so on. In addition, a further transformation of financial service industry started in 2020 with zero negative list, so more foreign-invested institutions began to enter the Chinese financial market. Since then, China has participated in the global financial governance more actively and strove for the further internationalization of the Renminbi, which is regarded as the second breakthrough after its Special Drawing Rights (SDR) officially came into effect in 2016. The fourteenth five-year plan started in 2021 and will end in 2025, so China is going through a new period now. According to its requirements, the country will further deepen the supply-side structural reform and improve the supply-demand system through innovation-driven and high-quality development. Moreover, it also requires setting up effective systems to expand domestic demands and strengthen demand-side management. Besides the further implementation of reform and opening up, China is establishing a ‘dual circulation’ development pattern in which domestic economic cycle plays a leading role while international economic cycle remains its extension and supplement. Most importantly, the whole country celebrated the one hundredth birthday of the Communist Party of China on July 1st, 2021. Reviewing the last hundred years, the CPC led the Chinese nation to found the People’s Republic of China, set up the socialist system, implement reform and opening up policy, create the new path of socialism with Chinese characteristics, establish socialist market economy, enter the new era of socialism with Chinese characteristics, make many earth-shaking changes and unprecedented progress that has been acknowledged throughout the world. In the future development, the whole Party will unwaveringly uphold Marxism-

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Leninism, Mao Zedong Thought, Deng Xiaoping Theory, the Important Thoughts of Three Represents, and the Scientific Outlook on Development and fully implement Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era. Since China has completed the historical mission of the first Centenary Goal, now the country is striving for the second one-- realizing the Great Rejuvenation of the Chinese Nation by the middle of the century. Besides, China has promised to unite with the people throughout the world to build a community with a shared future for mankind. Finally, let’s look forward to the upcoming 20th National Congress of the Communist Party of China in 2022 and its future breakthroughs.

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About the Authors Yanqing Jiang Yanqing Jiang is a Professor of Economics at the School of Economics and Finance, Shanghai International Studies University in Shanghai, China. He received his PhD in Economics from Hanken School of Economics in Helsinki, Finland. Professor Jiang’s recent research interests include international economics, development economics and China’s growth. His recent academic works include over fifty journal articles and more than ten research monographs published in English by well-known academic publishers in Finland, the US, the UK, Germany and Singapore. Professor Jiang is also a part-time inline speed skater. Email: [email protected]

Yun Sun Yun Sun is a postgraduate student of economics at the School of Economics and Finance, Shanghai International Studies University. Her current research interests include economic development and integration. She writes academic papers both in English and in Chinese, with several of them to be published in Chinese and international journals. She currently works on economic integration in the Yangtze River Delta and global economic governance. Yun Sun received intensive training in painting when she was younger. She is now an excellent portrait and landscape painter. Email: [email protected]

Index

A

CPC ruling areas, 55

Agrarian Reform Law of the People’s Republic of China, 88 Agrarian Revolution, 5, 15, 40 Anglo-French expedition to China, 27 Anti-Japanese War, v, ix, 6, 7, 41, 42, 47, 48, 49, 53, 56, 57, 58, 59, 62, 63, 64, 65, 68, 69, 72, 73, 74, 75, 76, 81 April 12 Coup, 39

D

B

economic damage, 47 economic development, 2, 11, 12, 37, 40, 49, 53, 59, 62, 64, 68, 75, 83, 89, 93, 109, 111, 116, 117, 120, 121, 122, 124, 139, 141, 146, 147, 148, 150, 154, 155, 157, 167, 173, 175, 179, 182, 183, 185, 190, 192, 193, 195, 196, 204, 205, 207, 209, 211, 212, 216, 217, 221, 233 export, 4, 17, 22, 29, 32, 33, 48, 52, 69, 70, 85, 103, 142, 143, 172, 178, 189, 190, 193, 195, 214, 218, 219, 221

Beiping-Tianjin Campaign, 68 ‘Bringing In’ Strategy, 188, 190 British Industrial Revolution, 16

C capitalism, 1, 4, 5, 6, 7, 25, 28, 30, 31, 32, 35, 36, 37, 38, 39, 40, 63, 68, 78, 85, 105, 106, 107, 108, 122, 160, 166 Centenary Goal, ix, 13, 203, 221, 227 Central Committee of the Communist Party of China, 64, 84, 101, 116, 123, 194 Central People’s Government of China, 84 China (Shanghai) Pilot Free Trade Zone, 208 Chinese Civil War, 69, 72, 75, 81 Chinese National Revolution, 39 Chinese War of Resistance against Japanese Aggression, 6, 41, 66, 231 Communist Party of China, v, 1, 2, 5, 7, 10, 12, 13, 39, 40, 41, 42, 55, 62, 63, 65, 66, 67, 68, 72, 75, 77, 78, 79, 80, 81, 83, 85, 88, 90, 93, 98, 109, 111, 143, 144, 161, 165, 177, 191, 193, 203, 209, 218, 226, 227 Constitution Protection Movement, 39 COVID-19, 13, 203, 204, 221, 225, 230

deficit, 3, 19, 20, 21, 22, 23, 27, 72, 73, 92, 116, 117, 126, 151 Deng Xiaoping Theory, 12, 177, 195, 196, 218, 227

E

F feudal regime, 2, 15 feudalism, 5, 7, 15, 27, 30, 33, 36, 37, 38, 39, 68, 78, 83, 88 finance, 6, 7, 29, 47, 70, 72, 88, 91, 92, 96, 140, 161, 167, 181, 186, 187, 193, 195, 207, 208, 214 Financial and Economic Commission of the Central People’s Government Council, 86 Five-Year Plan, vi, vii, 98, 121, 148, 155, 166, 178, 191, 211, 215, 230

236

G General Agreement on Tariffs and Trade, 176 ‘Going Out’ strategy, 188, 189, 190, 218 governance, ix, 7, 15, 27, 35, 36, 38, 40, 41, 44, 49, 53, 62, 66, 73, 75, 81, 123, 160, 164, 167, 209, 210, 213, 218, 220, 226, 233 Great Britain, 16, 17, 18, 19, 69 Great Cultural Revolution, vi, 8, 121, 122, 123, 124, 125, 126, 127, 128, 130, 154

H Household Contract Responsibility System, vi, 132 Huai-Hai Campaign, 68

I import, 3, 17, 48, 85, 117, 142, 143, 170, 189, 190, 195, 219 Instructions on Land Issues, 76

K Kang-Qian Flouring Age, 15 KMT ruling areas, 7, 40, 56, 57, 58, 59, 60, 61, 62, 68, 72, 73, 74, 75 Kuomintang, v, 2, 5, 39, 40, 41, 42, 48, 55, 56, 65, 66, 68, 69, 72, 80, 84, 85, 93, 98, 108

L landocracy, 49 Lugou Bridge Incident, 6, 42, 43, 46, 47, 48, 62 Lushan Conference, 116

M Manchukuo, 5, 42, 43, 44, 45, 46, 47, 48, 58, 69

Index Manchuria, 43 Manchurian government, 47, 48 May 4th Instructions, 76, 77 May Fourth Movement, 38 migration, 6, 49, 50, 51, 53, 54, 57, 58, 59, 66 Ming Dynasty, 1, 16 Ministry of Economic Affairs of the KMT government, 49, 50, 57, 60, 74 monopoly, 4, 5, 6, 7, 19, 20, 22, 30, 40, 44, 45, 46, 47, 48, 53, 54, 57, 62, 73, 85, 96, 98, 108, 180, 195, 209 Most Favored Nation (MFN) treatment, 26 Movement of Condemning Lin Biao and Confucius, 124, 127 Movement of Cultural Revolution, 111 Movement of Great Leap Forward, vi, 111, 112, 114, 116, 121, 126, 132 Movement of People’s Commune, 114

N Nanjing Provisional Government, 37 National Congress of Communist Party of China, 219 National Resources Commission, 51 New Normal, vii, 203 Ninth National Congress, 123 Northeast China, 5, 43, 44, 45, 46, 47, 48, 76, 81 Northern Warlords, 2, 4, 36, 38, 39

O Opening-Up Policy, vi, 139 Opium War, v, ix, 1, 3, 15, 19, 24, 25, 26, 27, 29, 31, 32, 165 Outline Land Law of China, 77, 89

P Pacific War, 60, 61, 69 peasant, 3, 4, 15, 26, 27, 31, 33, 40, 46, 76, 78, 89, 90, 103, 132, 133 peasantry, 55, 77, 78, 89, 95

Index Post-War Land Policy of China, 56 Provisional Constitution of the Republic of China, 36

Q Qing Dynasty, v, ix, 1, 3, 4, 15, 24, 27, 35 Qing government, 3, 15, 16, 19, 20, 24, 25, 27, 28, 29, 34

R reform, ix, 2, 5, 8, 9, 10, 11, 12, 76, 77, 78, 81, 84, 87, 88, 89, 90, 93, 95, 97, 116, 129, 130, 131, 132, 133, 134, 135, 136, 138, 142, 144, 147, 149, 154, 155, 156, 157, 158, 160, 161, 162, 163, 165, 166, 167, 169, 172, 173, 175, 176, 177, 179, 180, 181, 184, 185, 186, 187, 188, 189, 190, 191, 192, 193, 194, 195, 196, 202, 203, 206, 207, 208, 210, 219, 220, 226, 231 Reform and Opening Up, vi, 129 Republic of China, v, vi, ix, 1, 4, 5, 7, 15, 30, 35, 36, 37, 40, 42, 65, 67, 68, 83, 84, 86, 88, 91, 93, 97, 100, 108, 165, 173, 203, 226, 230

S SARS, 11, 177 Scientific Outlook on Development, 11, 12, 177, 180, 182, 183, 192, 195, 196, 218, 227 Second World War, 69, 70, 72, 139 Sino-US Agricultural Agreement, 70 Sino-US bilateral agreement, 69 Sino-US Friendship Commerce and Navigation Treaty, 70 Socialism, vii, 2, 165, 219, 223

T Taiping Rebellion, 26, 27

237 Theory of the Primary Stage of Socialism, vi, 144 Third Plenary Session of the 11th Central Committee of the Chinese Communist Party, 9, 130, 134, 139, 142, 146, 147 Three Agricultural Questions, 186, 187, 197 Three People’s Principles, 36 Times of Prosperity, 15 Township and Village Enterprises, vi, 134 trade, 3, 4, 6, 10, 15, 16, 17, 19, 21, 22, 23, 24, 25, 26, 28, 48, 53, 70, 71, 85, 87, 93, 96, 116, 130, 139, 142, 143, 153, 161, 167, 172, 177, 182, 189, 190, 193, 195, 199, 214, 215, 218, 219 transformation, 8, 11, 12, 84, 89, 93, 98, 99, 101, 102, 103, 104, 105, 106, 107, 108, 117, 133, 135, 138, 162, 170, 178, 180, 181, 183, 187, 190, 191, 193, 195, 202, 205, 206, 207, 209, 211, 212, 214, 215, 216, 221, 226 transition, ix, 1, 8, 12, 29, 39, 40, 59, 76, 79, 83, 84, 88, 91, 93, 97, 98, 101, 102, 104, 105, 107, 108, 118, 129, 140, 167, 177, 184, 190, 193, 195, 204, 206, 207 Treaty of Nanking, 3, 24, 25 Treaty of Shimonoseki, 30 Treaty of Tientsin, 4, 25 Treaty of Whampoa, 3, 25

W Westernization Faction, 28, 35 Westernization Movement, 4, 28, 34, 35 White Paper of the USA, 72 World Trade Organization, 175

X Xi Jinping Thought on Socialism with Chinese Characteristics, 12, 219, 227