China's Government Economy-The Most Bizarre Economy In The World

[Polly]

http://www.yanlongonline.com/xingyi/chenjing.pdf

I think as China becomes more and more successful in its economic and social growth, there will be greater interest around the world on "how'd they do that?".  This paper by Chen Jing is the best I have read so far, being a bit of a finance and economic buff myself.  True, it requires a certain background understanding of modern Chinese history and the author's thinking and delivery is very typical mainland Chinese, but it is for the same reason that it affords a China little understood by the general public and should be a good read.

Of course any mistakes and shortcomings remind entirely my own.

1.   Introduction
China’s economy is a pretty interesting subject.  From my own observation, China’s economy is proceeding in a way unseen in the economic history of mankind.  The root and source of this economy, is China’s government economy.  For this reason, the government economy can be called the most bizarre economic phenomenon in the world.

Government economy is different from planned economy as well as market economy.  Its precise definition should be the regime of economic conduct of different levels of the Chinese government.  This is quite a bizarre thing in itself, because the Chinese government has actually adopted the methodology of market economy in its economic endeavor!  This alone has brought forth a great many result with far reaching consequences, enabled China to become a phenomenon in the economic arena of the world and overturned a lot of economic“rules”.

For instance, by observation of the empiricists, “it is impossible for a country to sustain continuous growth for 30 years”.  This rule” will be easily terminated by China’s government economy.  Currently people are talking about another 20 years of growth.

For another instance, China is a poor country by all kinds of reasonable standards, yet she is also a super money bag in the global marketplace.  Many people are shocked in these two years by and cannot accept her “deep pocket and abrasive manners”.  Neither could they fathom the reason behind.  This is also an unseen phenomenon, and its root is also found in the government economy.

Yet for another instance, according to both official and unofficial estimates, the amount of bad debts incurred by the financial institutes in China has exceeded all levels by any standard of reasonableness, and all these hair-standing data should not have been allowed by any standard of regular fiscal theory.  And according to some of the conjecture, were the public to know the “truth”, they will surely run and bust the banks and the government will find itself in huge trouble.  Trouble indeed there is.  But it is trouble of the reverse kind.  People fight to put their money into these banks with staggering level of bad debts as if they are fighting for their lives.  And this is further compounded by many foreigners who “do not understand the truth”.  This is also a bizarre phenomenon of the government economy.

Yet for another instance, the stock market. China has been growing by 15 years at a rate that is top of the world.  If it were to happen in another country, its stock market would undoubtedly undergo the most bullish growth.  But the bear has been ravaging the Chinese stock markets for 4 years now, cutting the indexes by half.  The “thousand point theory” has come true.  Were we to discount the uplifting effects of new IPOs, the indexes have in substance fallen by two thirds of their value.  The paradox is also one of the feats of government economy.

The list of bizarre phenomena can go on and on.  I think all of these instances can illustrate one point:  China’ economy is a super bizarre animal.  Both Chinese and foreigners have had sufficient lessons and understanding in recent years.  On the one hand the “China to collapse” theory has bankrupt many times and out of embarrassment, (foreigners) are slowly coming to understand that they have to analysis China with new eyes, and that they cannot let their estimate go wild.  On the other hand, the Chinese government has got the short end of the deal as well.  Not knowing fully themselves how to make projection on the basis of their very own government economy, they got themselves a massive shortfall in the electricity estimate.

Some Chinese “mainstream economists” were quick to come to epiphany and realized the profound efficacy and effectiveness of government economy.  Acting in the brain trust of the central government, they concocted the older-than-time blanket description of “macro-adjustment”.

However it will be a misnomer to call it anything other than “Government Economy opus magnum” because this is going to be a long-term grinding and adjusting process rather than a panacea manoeuvre.

Next to come:



Mao: A surname, also means "hair"
Ze: means boon and nourish
Dong: means the east


Hua: A surname, also means splendour, magnificence and China amongst other things
Guo: means country or state
Feng: means a sharp blade
The successor who was hand-picked by Mao but quickly sidelined by Deng.


Deng: A surname
Xiao: Little
Ping: Flat/level/balanced

[Art]

I think as China becomes more and more successful in its economic and social growth, there will be greater interest around the world on "how'd they do it?".

Err Polly this may come as a surprise to you but we already know how they did it. They adopted capitalism. Dog eat dog, survival of the fittest, greed is good etc...

[The Smoking Man]

They just do it better than the USA which ... like many western countries ... are primarily socialist.

You'll see China begin to lose it's steam when it gets more laws and becomes socially conscious and begins to care for the poor in this country ... like miners, farmers, etc.

[Polly]

  "Sternly oppose impure elements such as Art and Smokie!"

 

[The Smoking Man]

Why???

It's true!!!

That is why HK did so well for so many years.

Now, you have social programs just like the west and have developed a social conscience (But not as great as in the USA or UK etc)

The people of China have undercut even you morally and socially and have taken the business away from you.

[Polly]

From 1 to 2, there are infinite numbers, as many as you can devise.  Read on, this is getting interesting

2.   Government Handled Import & Export: From “10 Da Qings” to USD 800 Billion Foreign Reserve

After 1976, Hua came to power and handled the economy.  At the time Da Qing oilfield had a steady output of 50 million tones and the surplus of the whole country was exported to countries such as Japan to earn foreign exchange which was quite considerable. Hua was very pleased and launched an economical plan to “build 10 Da Qings, 10 Kai Liangs [coal fields] and 30 power stations and import from abroad 22 projects”, the core of the plan being 10 Da Qings.  With 10 Da Qings, foreign earning would be guaranteed.  And as luck would have it, as the western developed countries wanted to pull China over in their combat with the USSR, opportunities of technological import abound.  Nowadays some of us have turned around and asked “Where did China get her foreign reserve for such import?”  Have no illusion, the money came from raw material export.

History proved that the economic policy of what was later termed “foreign leap-forward” very dangerous.  The import of technology was of course a correct decision, all different sects in the party agreed to it.  But as import was costly, from 1978 to 1980 the foreign reserve went into the red.  The deficits were respectively 1.1 billion, 2 billion and 1.3 billion. In 1980, [the total] foreign reserve became a negative number.  (At the time USD 1 billion was an astronomical sum of money)  The projected 10 Da Qings went into thin air as geological survey did not support this kind of wishful thinking. And the oil price was not high either (This is the conspiracy of America to destroy the USSR as she relied on oil export for foreign reserve as well).  From 1981 to 1983, the government was ginger with its money and managed to record 3 years of surplus.

The issues of the oil export strategy have lingered till today.  As a result of the long term agreements there is still a small amount of oil being exported to Japan. To think, Japan had for a while seen China as an important source of oil, it had no idea that China would be competing with it for oil so soon.  The oil price had been more bullish since of course, unfortunately China had also become no. 2 biggest oil importing country.  Actually the price should have shot up a long time ago, but in the 1990’s to the turn of the century, Comrade Saddam, being an altruistic role model, kicked off the “oil for food” program and exported a huge amount of cheap oil in an effort to save some pin money, thereby suppressing the oil price.

Earning foreign reserve by exporting raw material is a dead-end road and everybody knows it, yet the import of technology takes money.  Comrade Xiaoping thought it through, gritted his teeth and started to import foreign capital, raise foreign loans and embark on export processing “on a large scale” from 1984 onwards.  And “on a large scale” meant no more than USD 1 or 2 billion per year.  Yet this was nonetheless a kind of subversion to [the deep rooted belief/distrust in] “say no to foreign loans” and [the perennial debate of] “is our surname capitalism or socialism?”  Can foreign capital ever be applied to serve the purpose of socialism?  Knowing what we know today, and leaving aside the debate of “is our surname capitalism or socialism”, we can safely say a lot of developing countries’ disasters have sprung from this very same starting point.

It is therefore quite apparent that the economy of China was indeed in a dire state.  The old planned economy came to knotty problems after the initial easy stage of industrialization, yet a new developmental model was nowhere to be found.  That is why China had to step on the “feel-your-way-through route”.  Yet various wonders began to surface thereon and the real power of China’s “government economy” also started to take effect.

(Next to come: organization, Art would love it )

[The Smoking Man]

Great ... this sounds like the idiot who wrote the Coming Fall of China about 10 years ago which predicted the collapse in 5 years ... Like I said ... 10 - 5 = idiot with no brains.

These people seem to think that countries get to a certain point and do no adjustments from that point on.

While this may be true of George Bush who seems to stumble around with blind faith in his redeemer, the rest of the world especially China, seems to be able to weather all these predicted 'storm' with few problems that they assume will happen.

China is a big experiment ... There has been nothing like it. They are using standard mdels and prdicting demise for ages.

I'll believe it when I see it.

[Art]

Earning foreign reserve by exporting raw material is a dead-end road and everybody knows it, yet the import of technology takes money.  Comrade Xiaoping thought it through, gritted his teeth and started to import foreign capital, raise foreign loans and embark on export processing “on a large scale” from 1984 onwards.  And “on a large scale” meant no more than USD 1 or 2 billion per year.  Yet this was nonetheless a kind of subversion to [the deep rooted belief/distrust in] “say no to foreign loans” and [the perennial debate of] “is our surname capitalism or socialism?”  Can foreign capital ever be applied to serve the purpose of socialism?  Knowing what we know today, and leaving aside the debate of “is our surname capitalism or socialism”, we can safely say a lot of developing countries’ disasters have sprung from this very same starting point.

Wow, so China discovered the benefits of capital investment and lateral diversification. There's a shocker 

China's big problem in the future will be the social problems which will eminate from the unequal distribution of all this new wealth. http://en.wikipedia.org/wiki/Image:World_Map_Gini_coefficient.png

[Art]

And here's an example of the social unrest I mentioned;

'Thousands riot' in China protest
A protest staged by thousands of rural workers in central China ended in violent clashes last week, reports say.
Several people were injured as up to 20,000 people clashed with 1,000 police in Hunan province on Friday, a local official told Reuters news agency.

The Boxun Chinese news website said the clash was sparked by rising public transport costs. A witness told the BBC sporadic incidents continued on Monday.

Rural regions of China have seen mounting unrest in recent years.

Thousands of protests were held last year amid growing discontent over the widening gap between rich and poor and corruption among officials at local level and above.

The latest reported unrest came as the Chinese legislature, the National People's Congress, held its annual session in Beijing.

Discontent

At least nine police cars were burnt during the clashes, the Boxun report said.

Zhan Zilin, an eyewitness and a local activist, told the BBC Chinese Service that "the authorities sent over about 1,000 armed police, special police and local police and attempted to cordon off the roads in front of the local police station and government buildings".

He said the police were confronted by protesters and "large-scale conflicts broke out".

The Reuters news agency reported that police were armed with guns and electric cattle prods.

A number of police and protesters were injured - with some taken to hospital - but none were thought to be in a serious condition.

The official, from the Hunan city of Yongzhou, told Reuters that the protesters "were not satisfied with some government behaviour".

"They were also unhappy about official corruption," the official added.

The overseas-based Boxun, which is blocked inside China by the Beijing government, reported that protesters had been dissatisfied with the rising cost of bus prices.

Mr Zhan said that sporadic incidents were still going on on Monday.

"This afternoon, several dozens of people were injured, including some passers-by; four police vehicles were burned," he said.

The Chinese government has introduced a series of measures to try to address the sources of discontent in rural communities.

They include pumping billions of dollars into the rural economy in the form of farm subsidies, as well as reining in the seizures of farmland for development and tackling government corruption.

Story from BBC NEWS:
http://news.bbc.co.uk/go/pr/fr/-/2/hi/asia-pacific/6441295.stm

Published: 2007/03/12 15:49:10 GMT

© BBC MMVII

[The Smoking Man]

Yeah ... this is what we were saying earlier ...

China is a great place to invest because it has few rules other than those that cater to capitalism.

This is appealing if you have money.

HK started this way.

But then HK started to develop a social conscience and made concessions to paying things like pensions and arranging for social programs like housing for the poor etc.

This made you less appealing to the businessmen who bailed when HK went back to China because they got more benefits from doing business IN China than outside of it.

Why ... taxes are collected to pay for social programs ... of which HK has a few.

China on the other hand has practically none although the social unrest is causing them to start thinking of programs now.

It's ironic ... capitalism breeds the revolt that leads to socialism and thus waters down the Capitalism and makes the country less appealing to capitalists.

[The Smoking Man]

PS ... If you want to see a revolution ... all that has to happen is some idiot in the ruling party has to say the Chinese equivalent of 'let them eat cake' and the place turns into a bar fight.

Oh, and this author is no great shakes ...

This has happened repeatedly throughout history:

Taxation without representation ... USA

Let them eat Cake ... France.

Hitler during the beer hall pusch ... Germany.

And tons of other examples.

This guy is just unable to draw the parallels to study history and draw the lessons.

George Santayana ... 'He who does not study history is doomed to repeat it.'

Something also tells me that the Chinese government has worked out exactly how far they can push the people before the revolution would happen and they are making the adjustments now.

Just take a look at the results of the current Government Convention.

[Polly]

3.   A Preliminary Analysis of the Power of Government Economy

From a macro perspective, there was little novelty in Comrade Xiaoping’s ploys.  So there was a little opening up, a little import of technology, a small heap of export processing and a little foreign loans and FDI [foreign direct investment].  What’s new in all these?  All developing countries did the same thing and many of them got their ass bitten off.

Yet, just as there is always a huge difference in the results of a group of students who attend the same class and are given the same exam paper, the developing countries sitting in the same class (in the sense that they are all trying to make a livelihood in the international arena) show remarkable discrepancy in their achievement.

On the basis of the economic data in recent years, we can conclude quite positively that, in terms of development, China manages to throw off all the other developing countries by many lengths.  Basically all the industries that were up for grabs have been grabbed by China.  Leaving aside the question of whether opening-up, introduction and export processing are a suitable path to take, China is ahead of all the rest on this path.  If we were to understand how China managed to beat these countries, we have to describe the specific powers of the government economy.

Comrade Ol’ Mao is a super “oxman”(note 1) and had transformed China in a way that has ever been done before. As a result, the Chinese society, headed by the PRC government, has become an organization unique in the history of mankind.  Ol’ Mao, after kicking the ass of the American soldiers in N Korea, managed to push the social structure reform smoothly throughout the country.  From then on, the Chinese people have been very tightly organized, such that what Ol’ Mao said about “it will be a disaster to get on the wrong side of the Chinese, once they are organized”, is true.

There are those who doubt if the organizational intensity has been somewhat eroded after more than 20 years of economic development and came along SARS, proving that stern orders from the central government are still firmly executed by the local government.  The mechanism is still working. Actually the organization use to be far better still.  Take for instance the Anti-Right movement, the Great Leap Forward and the Cultural Revolution, many of those in the government could not accept it from their hearts, but these movements were nonetheless firmly executed in the whole society.  Currently we have an organizational intensity that is like this: if the government itself buys an idea, it becomes a certainty that it can be executed, there is not a hope in hell that the populace could resist it.  If there are some in the government who don’t buy an idea though, it is unlikely to be implemented easily.

Therefore Ol’ Mao was really something.  Transforming the population from that sort of state [a plate of loose sand] to this kind of organizational intensity.  I can’t think of anyone other than Mao himself who was so mighty.  This is an organization never before so tightly knitted in any of the dynasties in our history.  Therefore the achievement of Ol’ Mao lies not only in overthrowing the Jiang dynasty, but in organizing the Chinese to an unprecedented level.  Even in Tang and Han dynasties when times were good, the society was far from organized and that was why we were more often than not beaten by the nomadic tribes even at the high water mark of our civilization and prosperity.  Once what was left of the organizational ability collapsed, the country was on the verge of coming to an end.  What Ol’ Mao had done was to solve the fundamental problem of development. As long as there is organization, everything else is secondary, and this is true for both development and advances in technology and humanities.

Unfortunately Comrade Mao had very little understanding of economics and abused this organizational intensity.  As a result, even with the remarkable quality of the Chinese as a society, after more than 20 years of abuse and by the end of the Cultural Revolution, many of her data were almost as deplorable as the prime negative example of India.

Note 1 “Ox Man”, a very popular colloquial expression in China, probably means someone who can do the unthinkable.

[The Smoking Man]

even with the remarkable quality of the Chinese as a society, after more than 20 years of abuse and by the end of the Cultural Revolution, many of her data were almost as deplorable as the prime negative example of India.

We talking about the same people???

We're talking this society of sheep???

With the manners of a barnyard???

[Polly]

 

The next few sections are going to be Bone Dry history stuff ( ), and you are advised to skip them altogether and save some energy for the more relevant parts to come.  I will translate them anyway in the interest of completeness and painting a full historic background.



http://news.china.com/zh_cn/history/photos/11025921/20050613/12395106.html

Chen Yun (middle)
Chen, a surname, also means aged where wine and materials are concerned.
Yun means cloud.

4.   Government Economy – Comrade Ol’ Mao who did not understand specific economic operation

This chapter will be a repeat of “Mao Zedong’s own admission that he did not understand specific economic operation”, written previously. 

I am of the view that all these facts demonstrated undisputably that Ol’ Mao was a layman who had no understanding of specific economic operations.  Many people are unable to accept this view, they say how can you say he did not understand economics when he had all these achievements?  Well, this is a mentality issue, and turns on whether one is willing to accept the most logical fact.  His achievement lied in the transformation of China as a society.  There was bound to be achievement, and great achievement no less, given the vastness of the country.  But zero in on the economic operations and his errors became transparent and undisputable.  If one is willing to accept that Comrade Mao had his own share of ignorance and was just as prone to make foolish mistakes, there is nothing really to debate.

From the perspective of reasonable expectation, the first 30 years was far from satisfactory. Should we have some conceptual understanding of economic growth, we will see that as long as the political front was stable, economic growth could not be low even if a country were to start from scratch, work on the extraction of raw material and embark on the most primitive kind of industrialization.  Yet we ended up with industrial indexes comparable to that of India and just slightly better social indexes.

And India, with its unfavorable conditions and bad social indexes, was on the same par with China in terms of development.  We can only say China had undergone too many disturbance and malfeasance during those years.

The economic errors in the first 30 years could be categorized into two main areas.  Firstly, there are indeed inherent flaws in the theory of planned economy, which are universal to all socialist countries, and China was not immune to them.  Secondly, Comrade Ol’ Mao had to bear the responsibility.  Because of him, the plan was not executed as designed and there were all sorts of derailments.  This is to say the result of our own planned economy lagged far behind that of the USSR.  Comrade Stalin was much better than Ol’ Mao in terms of economic construction.  But his successors were not quite as worthy and in turn lost out to the successors of Ol’ Mao.  And as the USSR had gone too far ahead on the path of planned economy, their achievements were as great as their flops and greater than those suffered by China.  We will be exploring this area later.

Judging from the experience of Chen Yun, Mao Zedong’s own admission that he did not understand economic operation and the archived data available nowadays, Chen Yuen was the controller of the economy from 1949 to 1956.  Being the supervisor of the [Economic and Finance Committee], he controlled all economic affairs. At this stage, it can be said that Chen Yun had created an economic miracle. Faced with all kinds of difficulties, the country was revived from a messy havoc and all economic activities returned to normal within 3 short years.  In addition, there was a new plan, the First 5-Year Plan, and socialist reforms were all implemented smoothly.  As a result of the achievement, Chen Yun’s fame soared.  People such as Wang Guiwu (verification specialist and member of the structural reform committee) went so far as to openly praised him as “the greatest economist in the 20th century”.

Mao Zedong’s contribution at this stage was spiritual and formal leadership, basically detached from the operation itself.  The problem in his own words in the [Augmentation of the Political Bureau Conference]on 18th February, 1958, was this: “Can members of the Political Bureau be entitled to participate in the design[?] [We are] effectively not entitled to participate in the design of this 5 Year Plan (the First 5 Year Plan). Being the Chairman, I did not take part in the design. [I am] asked of course to sign in every annual plan, this is forced endorsement. I have my way out of course – I am not looking at it.  You are forcing me, I had no prior notification of it, no prior contact.  [The Plan] is always being discussed in the State Council, always unavailable for preview.  Always behind the stage despite all kinds of pleading and urging.  Why is it not out yet?  Because it is not done yet.  Then the plan is freshened up in a hurry and pushed out to the stage.  But we say no, it’s too late! This is effectively a shut-out.” This indicates that Chen Yun was rather independent in terms of economic powers and the planning and operation were free from Mao Zedong’s hands, to the extent that there was only formal recognition of his leadership.  Mao was the overall leader at this stage, and meddled little on the economic front.  I suspect both Chen Yun and Zhou Enlai knew privately that Mao was completely lay and must well be sidelined.

Mao was very frustrated about his lack of involvement in the economic construction, and starting from the “anti-anti-premature advance movement” in 1957, he took the initiative to intervene and mould specific policy.

[Polly]

The People’s Daily ran an editorial on “anti-premature advancement” titled “We oppose conservatism, we also oppose the flurry of over-haste” on 20th June, 1956.  I believe the perspective was correct.  It did not sit well with Mao, his displeasure sipped through his comment of “I am not reading it”.  He openly criticized the “anti-premature advancement” for the first time in the third session of the 8th CPPCC held from 20th Sept to 9th Oct 1957.  A disaster appeared after several years of brewing.

On 17th January 1958, Mao called upon Li Fu Chuen (Li wealth spring), Li Xian Nian (Li prior pining) and Bo Yi Bo (Bo one wave) who were “in charge of the economy” to talk.  Bo recalled that Mao called a spade a spade and said “this is mainly to criticize Comrade Chen Yun”.

As a result, Zhou En Lai and Chen Yun had no choice but to look into “anti-premature advancement” in the previously mentioned [Augmentation of the Political Bureau Conference] held on 18th February, 1958,.  Mao used heavy words and it was apparent that he wanted his hands in economic policy.  Because of his power, the others could only make way and coordinate accordingly.

Because of his ignorance, his first order of “30 million tonnes of steel to be produced in 1962” was nothing but ridiculous.  Achievement of the target was both unrealistic and out of the question as the total output was a meager 5.35 million tonnes in 1957. As the target for 1962 was 30 million tonnes, the target for 1958 had to increase and was eventually fixed at 10.7 million tonnes, doubling that of the previous year.  To reach this target, those in charge of implementation went to outlandish lengths (note 1) but still only managed an output of 8 million tonnes. And then they scrambled and produced another 2 million tonnes of useless scrap steel.  And the People Daily bluffed and claimed that it was mission accomplished.

Seeing that the target for the year had been accomplished in 1958,, Mao further showed his true colour as an out and out layman.  He instructed that the target of 30 million tonnes be met in 1959! This was the last straw for those who were involved in the economic construction.  Zhao Er Lu, Minister of the First Machine Tools and Industry Ministry and Chen Yun both stated plainly that this could not be done.  Mao realized that it was probably too demanding and the target was lowered to 18 million tonnes after some haggling. Realistically, this was a target beyond reach as well, as the output of 11 million tonnes in 1958 was far from solid.  The announcement of the CPPCC went as follows, fraught with all kinds of impossible “great leap forward” targets:

“The output of steel will increase from this year’s estimate of 11 million tonnes to 18 million tonnes.  The output of coal will increase from this year’s estimate of 270 million tonnes to 380 million tonnes.  Grain and cereals will increase from this year’s estimate of 750 billion catty to 1050 billion catty.  Cotton will increase from 67 million dans [1 dan = 50 kg] to around 100 million dans.  After the persuasion of Chen Yun, Mao finally cooled down for a while.  On 23rd May, 1959, Chen Yun in the Central Economics and Finance Committee announced the latest adjusted target was to be 13 million tonnes.  After much adulteration, it was finally announced that the total output for 1959 was 13.87 tonnes, target just about achieved.

All these served to show that Mao did not understand economics.  People had worked their guts out to hit 13 million tonnes, and yet he demanded 30 million tonnes!  Chen Yun was remarkably accurate with his estimate though, as it was subsequently proved that 13 million tonnes was the max.

Note 1.  I remember reading that even iron woks and hoes were smelten to make steel.