A vibrant and chaotic integration
Deng Xiaoping's challenge as an architect of China's reform in the early 1980s was to find a way making the one party political system and state owned economy compatible with the functioning of the free market. Deng's creative solution was to massively deregulate the central control of state-owned enterprises and to make local governments, in effect, economic entities by instituting economic decentralization and at the same time keeping their political functions intact.
Under these guidelines Chinese local governments at several different levels have been given great autonomy. In particular, they can, in exchange for only limited compensation, acquire massive amounts of land from rural and urban residents. They on-sell this land to developers at significantly inflated prices. Wu Jinglian, an influential Chinese economist, in a 2013 speech estimated that Chinese local governments had reaped a huge profit from land sales: 30 trillion yuan (~7 yuan = U.S. $1).
During the period between the 1990s and early 21st century, the capital gains from "land finance" allowed Chinese local governments to create a "low-cost basin" for international and domestic businesses by offering tax exemptions, favourable loans and cheap industrial land. In addition, by selling land occupied by state-owned enterprises in the inner cities, local governments were able to offer redundancy packages to laid-off workers in their millions. These lay-offs had been caused by large-scale closedowns of state-owned enterprises.
Basically, the Chinese approach, characterised by the integration of the one-party political system and the free market, has offered stability and predictability. By managing the introduction to China of the market economy – a process of rapid and continuous economic growth – it has cushioned dramatic social change.
However, the Chinese approach has its downside. China's economic reform is actually a process of reshuffling the control of assets that were once state-owned. An excessive dependence upon government during this process provided the more privileged (powerful people or those close to power) an unfair advantage during the redistribution of wealth.
For instance, it is common for businessmen to bribe government officials in order to win a bid for land for their commercial projects. Many insiders, either from the government or the original management, have bought mines and factories that once were publicly owned at extremely low prices. Many children from the families of high ranking government officials have positions in lucrative industries such as banking, international trade and real estate.
The sheer number of those privileged people who have become wealthy is astonishing. Wang Xiaolu, an influential Chinese economist, estimated in a report published in 2011 that " grey income" which was then about 3-6% of China's GDP, was mainly shared by the 20% of Chinese families of privileged background using illegal, immoral and improper methods. The income differential between the top and the bottom rungs was huge. The top 10% of families had incomes 26 times those of the lowest 10%. This climbed to 65 times when rural residents were included.
At that time, the government's response to the income disparity was mainly to "make the cake larger", in the hope that improved living standards would dilute the problem.
However, the government-propelled economic expansion, locally orientated and focused on housing- and construction-related industries, has intensified the problems of overcapacity and pollution. In addition, the strategy of "making the cake larger" has become unsustainable because China's labour supply peaked around 2012. Since 2011, the minimum wage has risen over 60%, as the government has lifted wages in order to deal with social tensions.
The contraction of the export and manufacturing sectors has now brought the Chinese financial sector into the spotlight. China's total debt is at 260% of its GDP. China's money supply has increased from 47.5 trillion yuan in 2008 to 170 trillion by 2017.
A new era
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