Chinese Economy: Introduction

Junhui Qian2014 September

Chinese Economy

• The most populous country (1.3 billion)• The most rapidly growing economy (10% since 1978)• The largest trading nation in the world (USD 3.87 trillion in volume)• In terms of aggregate output, China is second only to the US. • In terms of output per cap, China is still a “lower middle income

country” (The World Bank).

Transition and Development

• Before 1978, the key words were revolution, socialism, Maoist radicalism.• After 1978, the key words were gradualist reform (“crossing the river

by groping for stepping stones”), opening, and development. • The first stage of reform and opening achieves the transition from a

socialist command economy to a market economy.• The second stage, which is ongoing, would achieve sustainable

development from a middle-income country into a high-income country.

Why China Grows So Fast?

• Rapid growth of inputs (capital, labor)• Successful transition from socialism to market economy• The market works• Gradualist reform is superior over “shock therapy”

• A revival of traditional economic relationship• Value on education, social trust, connection with oversea Chinese, etc.

The Geographical Setting

Provinces and Regions

• China has 31 province-level administrative units, including 22 provinces, 4 municipalities under national supervision, and 5 autonomous regions of ethnic minorities. • There are large and small ones, old and new ones, rich and poor ones. • Macro-regions:• North China (“the center plain”, 中原 )• Lower, Middle, and Upper Yangtze’s• Northeast (Manchuria)• Northwest• Far South, South East (“the maritime China”)• Southwest

The Maritime China

• John King Fairbank suggested that “maritime China” was a distinct region and subculture within Chinese civilization.• Homeland of most of the overseas Chinese who left China before

1949.• Include Guangdong, Fujian, and part of Zhejiang. • Four special economic zones (SEZs): Shenzhen, Zhuhai, Shantou, and

Xiamen.• Important links with Hong Kong and Taiwan.

The Chinese Economy Before 1949

Historical Division

• Dynasties (before 1911)• Republic of China (1911-1949, 1949- on Taiwan)• People’s Republic of China (from 1949, on mainland)

The Traditional Economy

• High-productivity traditional agriculture • The commercialized countryside• Sophisticated institutions (Money, large organizations, advanced commercial

procedures, legal and customary institutions, banks)• Competitive markets (competitive markets for products, land, and labor;

social mobility)• Small-scale household economy

Paper money of Ming Dynasty A Traditional Bank A Certificate of Tax

Crisis of the traditional economy

• Population growth on the limited land and stagnant technology• “The Chinese peasant is like a man standing on tiptoe up to his nose in water

—the slightest ripple is enough to drown him.” (Tawney, 1930s)

• Failure of government• Cycle of dynasties• Too small (around 1800, one government worker per 32,000 people)

• Challenge from the west• The opium import caused a monetary deflation.

Why the Industrial Revolution Did Not Originate in China?• Needham’s puzzle: Why was China's science and technology so far in

advance of other civilizations historically, only to fall in modem times? • Justin (Yifu) Lin points to the missing scientific revolution in China,

which in turn may be due to the contents of civil service exams and the criteria of promotion. • Read Lin (1995).

1912-1937

• Rapid industrialization (8%-9% annual growth in factory production)• Treaty ports (e.g., Shanghai)• Manchuria

• There were two good intervals: • 1914-1918 (WWI)• 1927-1937 (“The Nanjing Decade”)

• Modern education expanded rapidly. • Open to the world

• About 100,000 Chinese students went abroad (Japan, US, Europe)• As of 1936, around 370,000 foreigners were resident in China• Shanghai was the financial center of the far east.

1937-1949

• War-time economy• Increased State Intervention• Before the war, there had been no significant public sector• By the early 1940s, state-run firms accounted for 70% of all capital and 32% of

all labor in unoccupied area.

• Hyperinflation (See the tables in next two slides, from《中国中央银行研究》 )

Summary

• Geographically, China is big, rugged, and diverse.• The traditional economy is household-based and agricultural. The

modernization of Chinese economy had been bumpy, frequently interrupted by wars and revolutions. • People’s Republic of China was founded in desperate economic

situation.