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What Changes China  
Feb. 14, 2014
Author:  Zhang Weiying
Category:  Non-fiction: Business/Investing/Finance
Description:  With the misty global economic prospect and the Chinese domestic reform in stagnation, we are eager to find a way out and find a more secured future.
Professor Weiying Zhang, widely known as Mr. Market, graduated from Oxford University, is a prominent economist in China. In this book, he retrospects the Chinese way of getting to success in the past decades, and focuses on the topic of how to implement economic reform in the future would turn out to be effective, and his economic forecast and judgments on the direction of Chinese reform. He is known for his advocacy of free markets and his ideas have been influenced by the Austrian School.
Rights available:  World
Rights already sold:  Complex Chinese - Hong Kong
Other information:  The effect of China's economy opening up to the world in 1978 has been momentous. Over the past 30 years, increasing economic freedom and growth have brought vast improvements to the lives of the Chinese people. The Chinese now have more choices and more freedom than at any time in China's recent history. Chinese economy has moved from being the world's 13th largest before Deng Xiaoping's reforms to the world's #2 economy today, just behind the US. China's voice in the international community has grown increasingly relevant. The concept of a G2 comprised of the US and China has become popular, and some even say that global leadership is shifting to The East.

Yet at the same time China's economy gallops ahead (the present period notwithstanding), Chinese society is facing increasingly sharp contradictions. Income and regional inequalities are expanding, official corruption is rampant, access to medical care and education are uneven, and environmental degradation is worsening. As a result, discontent amongst the Chinese people has increased even as their living standards have improved.

As we come to grips with these problems and look to the future of China, there have emerged two opposing viewpoints in China's intellectual community, both of which I oppose: the "China Model" theory and the "Failure of Reform" theory.

"China Model" theorists believe that China's economic miracle stems from its unique governance system, which at its foundation is comprised of heavy government intervention in the economy and the state-ownership dominance of strategic industries. This is vastly different from the development road taken by Western economies, including the so-called "Washington Consensus" which advocates free competition and private ownership. The idea of a "China Model" was first proposed by non-Chinese scholars specializing in developing countries, but gained currency in China after the 2008 global economic crisis, especially amongst Chinese government officials.

The advocates of the "Failure of Reform" theory posit that the problems confronting today's Chinese society are a result of the increasing reliance on the market economy. They believe that the policy of marketization over the past 30 years has been an error. The "Failure of Reform" theory arose out of China's political left, but also has its fans amongst average Chinese citizens and some in government.

While these two ways of thinking appear different on the surface, it is my belief that they are in fact largely the same: at base they hold a superstitious belief in the government's ability to manage the economy and hostility to the logic of the market. They hold an irrational faith in the power of politicians and a contempt for entrepreneurs. They both celebrate authority and belittle freedom. They deny universal values, and oppose market reforms.

The only difference between the two is that the "Failure of Reform" theory finds fault with the market reforms since their promulgation in 1978 and advocate for a return to the planned economy, even that which we saw during the Cultural Revolution. Those who support the theory want the government to allocate resources and income, as well as to destroy the private economy. The supporters of the "China Model", however, stand in opposition to further market and democratic reforms. They want to consolidate and strengthen the state-owned sectors of the economy, as well as rely on industrial policy for further economic development.

On the surface, both theories appear to have a veneer of factual basis. But their explanatory power is limited. If we compare China with developed economies in the West, the greatest difference is that China's has had a greater reliance on government intervention, state-owned enterprises, and the fact that we've yet been unable to create true democracy and the rule of law. Yet it would be ahistorical to say that the past 30 years of economic growth in China was the result of government intervention and the state-owned sector.

The economic reforms began at a time when China's government was omnipresent, and this growth has been sustainable only because the State receded further into the background. Similarly, State-owned enterprises have seen their role in society and the economy diminish with time. While the government relaxed its controls, market prices, village enterprises, private firms, private entrepreneurship, and foreign investors insured that the Chinese economy didn't collapse, but in fact thrived.

It can thus be said that China's extraordinary economic growth is the result of the past several hundred years of knowledge and experience accumulated in the West. Such practices cannot incubate in a country, like China, that had such a profound level of State intervention and government-led economic planning.

Thus, the Chinese economic miracle cannot be explained by government intervention and State ownership. In fact, they are the causes of China's inequality and profound contradictions. The government's control of vast amounts of resources and the excessive interference in the economy are the direct cause of official corruption and the collusion between the government and business. This has eroded the culture of business and destroyed the proper functioning of the market economy. The monopoly profits and above-market wages in State-owned sector are an important cause of the unequal distribution of income in China.

Yet we can imagine a better way. If we open up the health care market and allow the freedom of private capital, we would find that difficulty and expense of purchasing health care services would diminish. If we allow private capital to invest in our schools and to found new universities, the level of education in China would certainly rise. If we create a constitutional government and establish the absolute authority of the law, then the power of the government would be put under the rule of law. We would thus see fewer cases of the theft and demolition of private property by local governments. If farmers and peasants were to truly own their land, the plunder of their livelihoods would diminish. If the freedom to become an entrepreneur was held by all, and was not subject to the approval of the government, collusion between the government and big business would decrease. If Chinese citizens have the right to choose their leaders and the freedom of speech and the press, official corruption would be restrained.

The reform in China has been stagnant and even setback in the past decade. In the first two decades of China's transition, the ideas dominated the vested interests. The reform was pushed forward even although it was strongly opposed by the interest groups. However, in the past decade, it is the vested interests that have dominated the ideas. Various anti-reform policies have been implemented for protecting and strengthening interest groups. China's future will depend upon whether ideas of markets will re-dominate the vested interests, as well as missionary and visionary leadership.

As a result, whether it's for the future sustainable growth of China or to solve problems confronting today's society and to create a truly harmonious society, we must continue to support market reforms. We must oppose government intervention in the economy and its control over resources. And we must build a democratic system governed by the rule of law.

In the past few years, I have been interviewed by various media. The contents of this book are based on these interviews. The background is the reality of reform stagnation and setback in the past decade, and two theories described above mentioned. I was willing to publish these interviews, because I think it helps to clarify the confusion of understanding, helps people to have a rational thinking of Chinese reform course of the past and of how the future reform direction should be chosen.

Generally speaking, with the global financial crisis as the boundary, the contents of the book can be divided into two periods. The pre-financial crisis interviews deal mainly with the "failure of reform" theory; and the interviews after the financial crisis is mainly directed against the "China model" theory and practical policy.

Since the reform beginning in 1978, the reform has been controversial, but before 2004, the strongest opposition mainly came from government officials and politicians; academics, the media and the general public's voice were largely pro-reform. However, in the spring of 2004, wind direction changed. Some individual scholars took "the loss of state assets" during the SOEs reform as an excuse to deny the past privatization of state-owned enterprise and to demonize private entrepreneurs. Their arguments attracted the eyes of a large number of public, and gradually was echoed by the mass media. It began a scholars and the mass media-led tide of negation of reform. Given accumulated social problems during the reform as I described at the beginning, it is understandable that this kind of negative voice of reform had a market, of course. Academic dress is very confusing and misleading for public. I felt it was my duty to express my own point of view. In August 24, 2004, I accepted a joint interviewed by Economic Observer and Securities Market Weekly. In this interview, I reviewed and analyzed the historical process of privatization of the state-owned enterprises, and put forward an argument that Chinese society should treat fairly those who had make contributions to the reform. When the interview was published, the comments from netizens were basically negative. However, I believe that my view is correct. Later, I also expressed my views on official corruption, income distribution and other issues. I argue that corruption and unfair gap of income distribution result from that the government are too powerful, and not from market-oriented reform itself. Comments on my view from netizens were still negative. In 2006 March, I wrote the article "Rational thinking on China's reform", and hoped to direct the debate toward rational analysis of reform, rather than stay in emotional vent. This article can be said to have pushed the debate to a climax, and indeed it influenced views of some people. Later, I was also interviewed by the "trade-off" magazine, and put forward the viewpoint of that "entrepreneurs change China". In 2007, I accepted the an interview by "well-off" magazine. This interview focuses on the relationship between the distribution of power and the distribution of income, and further analysis of rational thinking of reform. In 2008, during the 30 anniversary commemoration of economic reform, in addition to my academic writings, I gave comprehensive analysis of the process of Chinese economic reform in the depth interview by the Economic Observer, and and a presentation in Phoenix TV Forum.

It should be said, published articles of mine and several other pro-market reform scholars (such as Zhou Qiren, Zhang Wenkui and so on) during this period did play an important role in balancing the public opinion, and guiding people toward rational thinking of reform. But before the financial crisis, in general, negative views of reform prevailed not only in public media, but also had the reality in the block of the reform process. Beginning in 2005, the SASAC's focus shifted to making the state-owned enterprises "bigger and stronger ", instead of reforming the state-owned enterprises; the majority of local government officials stopped the reform of state-owned enterprises to avoid being charged with "the loss of state-owned assets". Anti-market restrictions on employment terms were written into the new labor contract law. China's economic reform were basically stagnant, private enterprises became the target of macro adjustment and control, and private entrepreneurs were publicly demonized. Some even were jailed without justifiable reasons.

In 2008, the global financial crisis started with the United States subprime crisis. Because the United States has been considered to be the most market-oriented countries in the world, the financial crisis was naturally regarded by many (both in China and outside of China) as a failure of the market, and an adverse consequence of financial liberalization. In contrast to the United States and other developed countries, China itself not only had no financial crisis, and but still had high-speed growth even during the financial crisis, while China's economy is not yet a real market economy, and China has not implemented financial liberalization. For a time, as a country with the largest foreign exchange reserve, China was said to has become the great savior of the world, and China's international status suddenly increases. China reversed its attitude to the American system and Chinese government officials began to teach Americans, instead of learning from America as earlier for long. As a result, public opinion of denying reform achievement began to disappear, and the "China model" became popular. When the United States Congress was still debating on a 700 billion dollar bailout, China's stimulus of 4000 billion yuan had started even with no need to be discussed by the National People's congress. The revitalization plan of top ten industries followed close on succession; all levels of government began a large-scale investment hitherto unknown; trillions of new bank loans were injected into state-owned enterprises. All these seem to have proved that China's state-dominated system is superior. Thus, after 30 years of the reform, Keynesian economics has become the guiding theory of not only China's macroeconomic policies, but also the China's twelfth five-year development plan. China began in fact a process of state-in and private-out, and reform policy was reversed!

In this context, from the beginning of 2009, through series of forum speeches, articles, and interviews by mass media, I analyzed the causes of the financial crisis, and criticized the stimulus policy and structural regression. In my opinion, the financial crisis was mainly a consequence of USA Fed's overly loosing monetary policy combined with the "home ownership" housing policy induced by government of the United States; and it is the failure of government, rather than market failure. I warned, Keynesian stimulus policy not only could not solve the fundamental problem, but would lead to a new round of the bubble and inflation, and then a new round of crisis. Unfortunately, a lot of things I predicted have been proved true. In 2009 only after less than half year of the promoting policy of real estate markets, the house market prices were rising dramatically. The Chinese central government reversed the policy and took tough measures to suppress the real estate market. Just for one year of macroeconomic stimulus, inflation control became the main policy goals. I also think, the setback of system reform will damage China's long-term growth, and only by returning to the path of marketization reform, stimulating entrepreneurship and innovation, can the Chinese economy really go to the track of sustainable development.

Contact:  Yinghong Li
China CITIC Press
dingchuan@citicpub.com
Beijing
Item number:  9318
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