China Boom CMS

<p>More specifically, getting to the heart of the matter, in terms of the boom years, how it happened, I personally feel it&rsquo;s sort of a very, very large confluence of many different developments and forces that came together. Most important of which was probably the existence of the Chinese Diaspora. But what happened around 1980 is, I started getting phone calls and people saying it&rsquo;s time for me to say goodbye. And, of course, I was very surprised, I thought maybe something happened to their careers or their companies, and they said no, it wasn&rsquo;t anything like that. They had been approached by some of their either friends or relatives in Taiwan, that Taiwan at that time was building &ndash; the name wasn&rsquo;t even created yet &ndash; a technology development effort, and wound up becoming Xinzhu. And that they were going to be engaged in extremely high level development responsibilities and therefore, it was, more or less, an offer they could not refuse. For some of them, it was the usual sort of things that happened with the family and trauma and American born kids who didn&rsquo;t want to go back, and all this other sort of thing, and spouses who didn&rsquo;t agree with it, but that&rsquo;s also another concern. But, more importantly, on a professional basis, hundreds of people went there, which eventually became thousands. And in that, I think, the development of Xinzhu, which many people now know and realize and see 20, 25 years later, what a economic, scientific and technological behemoth it became. And then, of course, I guess by about ten years later, a little bit beyond that, in the early 90s or so, of course, Taiwan&rsquo;s activities subsequent to Xinzhu&rsquo;s development is also legendary, became very active in the development of personal computers and all of the other gadgetry and peripheral equipment that came along with it. And, of course, as economic forces would eventually evolve, it became attractive to outsource into China. And that was also a very, very natural activity because here you had many, I guess you want to call them China expats, who had either lived or grown up in Taiwan and many of whom then subsequently received very, very high-level American educations as part of the repatriation effort from Taiwan to China via some time here in the American educational system. &nbsp;And I think that&rsquo;s extremely significant because, once again, going back to comparisons with Soviet Union and India and other large countries such as maybe a Brazil or even other developed countries such as a Germany or a Canada or an Australia, how is it that China was able to develop into this boom and yet others were not able to do it?</p>

<p>I think one of the reasons why we have seen such an economic miracle happen in China in the last 30 years is the open-mindedness of the Chinese government. The Chinese government, first of all, set up the stock exchange when it discovered that its domestic stock exchange not really work. They allowed all their companies to go international, to learn about the international experience and use international standards to upgrade their standards, to upgrade the management system, the corporate governance, and so on. I think, actually, that helped the reforms and the progress of the state-owned enterprises as well. And the overseas listings not only allowed Chinese companies to get access to international capital, I think the experience also helped the reform of the Chinese sector, the state-owned enterprises and many industries as well. I think that is important. And then, I think another reason why the Chinese economic reforms were successful compared to many, many other emerging markets was the role Hong Kong has played. I think that is very important in two aspects: Capital, human capital as well as monetary capital. Hong Kong helped Chinese companies raise billions and billions of dollars to help the economic reforms in China and bring the money back to China in many sectors. And human capital is very important as well. Like ourselves in the investment banking industry, we provide services to Chinese companies and help them to raise capital and help them improve their management system and teach them about the importance of corporate governance. I think this is very important to the development of the Chinese companies. And also, many Hong Kong entrepreneurs have moved their operations, their companies into China and they employ millions of workers in China. As I told you earlier, the first phase of the China experience, or the China concept, was the movement of Hong Kong companies into China. This Hong Kong money and expertise actually has helped, in particular, the development of the Pearl River Delta. I think overseas Chinese, in particular Hong Kong Chinese, have played a very important role in the modernization and in the reforms of China.</p>

<p>In other countries, when people get rich, they try to transfer their money out of the country as you can see from Russia. But, thousands of years of home-oriented culture is encouraging the overseas Chinese to invest back in China. It&rsquo;s every Chinese's belief. So, when China started to open up in 1980s, not many westerners believed: &quot;Your policies are really open? You are really encouraging investment? You are really protecting foreign investments?&quot; But overseas Chinese people, they believed first. So, if we look at the initial so-called &quot;foreign investments,&quot; they were not really foreign investment. They were overseas Chinese's investments or investment from Hong Kong, or Taiwan. That amount of capital helped China to start. Also, their successful stories proved to other western investors that the Chinese government's opening-up policy was serious and workable. Then, you see the second round of investments, more from multinational companies, true foreign direct investment.</p>

<p>And then, from '78 onwards, something changed. Now, one of the things that's very interesting, you don't want to overstate demographics, but, it's very interesting that from basically the early 50s until the mid-1970s, China had a real demographic problem. And that is that the share of the population that works, that is between the ages, let's say we can use between the ages of 18 and 65 as proxy, was contracting quite rapidly. And in a lot of countries, we've seen that when this dependency ratio deteriorates, there is economic stagnation. And there was something very close, I wouldn't call it stagnation, but there was very weak growth in China during that period. Beginning around the mid 1970s, the dependency ratio began improving very rapidly largely because of the one-child policy. The dependents are the old and the young and, when you eliminate the young, the working population is a much bigger share of the total population. So the dependency ratio in China, and I'm speaking off the top of my head, improved from roughly 50% in the mid-70s to somewhere in the low 70s in the next 3 or 4 years, it peaks out. After that it begins deteriorating very dramatically and one thing about the improvement in the dependency ratio, it means that while the overall population may have been growing by around half a percent a year, the working population was actually growing at something like 2% a year, at a much much faster rate. And I think we shouldn't underestimate the impact of that tremendous improvement in demographics. And if I'm right, then the next 30 to 40 years, we're going to see a great slowdown in growth, because that demographic sweet spot is reversing, and we're now going to see the working population contract much faster than the total population, which, will be stable to slightly down. That was very important, but other things happened there too, and I sort of divide the 30 years of growth into, broadly speaking, three periods, and we're at the end of the third and we're now going to enter into the fourth period, a much more difficult period. And those periods are: In the 1980s when there was the first spurt of growth, much of the growth was really achieved by unwinding economic policies that were, quite frankly, idiotic. A lot of the stagnation that took place, took place because of very poor economic policies and very poor economic planning, so that even simple things, like, after 1978, it no longer marked you as a criminal to sell stuff in the street. Now, decriminalizing market activity has a huge impact on the underlying economy. Other things that happened was that a small portion of the collectivized land was turned over to households, and they were able to keep everything they grew on that land above some quota that they had to give to the government. Before that, of course, everything that you grew was given to the government, and a portion of that was given back to you. So, there were all sorts of problems with that, but among other things, there was no incentive to really increase productivity, because if you did, what you gave to the government would simply increase by exactly that amount. Once peasant households were able to retain a portion of what they grew, not surprisingly, productivity nearly doubled, and nearly doubled for all of it, even though what was given over to the peasants was probably less than 5% of the land. So, things like that had a huge impact on growth. And the healthiest period of Chinese growth was really in the 1980s, where you really did see an elimination of a whole series of rules that constrained economic growth, and productivity shot up.</p>

<p>So, at that time, the Chinese government made a big move, and that was to announce that people who fall behind will be beaten. This slogan was posted everywhere, it was an acknowledgement that China was behind, to awaken the Chinese people to the enormous economic development and technology gap between China and the West, to face a hard reality, that China was still being beaten. Because China was beaten, for 100 years, beaten by the Eight Allied Forces, beaten by Japan, beaten so badly that a lot of people embraced socialism. Because, finally, we could rule our own country, the country was peaceful, there was no foreign troops living inside this country. Whenever we look at Japan, we think its economy is well developed, but there are still American forces stationed there, and the same was true of Taiwan. So, Chinese people were very proud of this point. So, for the government to announce this distance between China's technological and economic development in this manner, using the slogan &quot;people who fall behind will be beaten,&quot; was something that really woke up a lot of ordinary people in China.</p>

<p>So, the puzzle to me was, if they&rsquo;re appointed by the central party, why are they so important? Why did Mao and Deng Xiaoping play to the provinces and try to get their support for these new initiatives? You know, whenever they were trying to do something really ambitious, really different, to change the status quo, why did they play to the provinces? And, so I started trying to open up the black box of power relations within the Communist Party. And what I realized was, that the Central Committee -- in the Communist Party, you&rsquo;ve got the Central Committee, which is about 200 people, then you&rsquo;ve got the Politburo and the Standing Committee of the Politburo -- has the authority to elect the Politburo and the Standing Committee of the Politburo. Now, it&rsquo;s true that the nominations come from the guys at the top, and more or less they just ratify it, but according to the Party constitution, they have the power to select the Standing Committee of the Politburo and the Politburo. So, I started speculating that maybe those guys at the top really do have to anticipate the reactions and the preferences of those people. And if they do it successfully, then you never see them overruling. And it&rsquo;s interesting because, in the Soviet Union, there are a couple of instances in which the Central Committee did overrule the nominations. So, they have the same formal political system, but what&rsquo;s interesting is who&rsquo;s in the Central Committee. The Central Committee consists of three main blocs: The central, government and party officials. So, it&rsquo;s not a full-time job, being a Central Committee member. You&rsquo;re a Minister of the Education Ministry, or the Chemical Ministry, but you&rsquo;re also a Central Committee member. So, central officials, provincial officials, the Party Secretary and the Governor, pretty much of every province, is in the Central Committee, and it&rsquo;s one of the largest blocs. And then the third one is military officers. So, the army, local officials, central officials. And I saw some evidence, although I really wasn&rsquo;t able to pin this down systemically, and people have now been trying to do research on this, that during that period when they were trying to build support and play to the provinces, the proportion of provincial leaders in the Central Committee grew. So, they bolstered it, they played it out. The other thing they did is to make a lot of decisions in national work conferences, which were, in effect, the Central Committee, augmented by even more provincial officials. So, they tried to find decision-making arenas where provincial officials had a strong voice. So I have a model of the Chinese political institutions, which may or may not be right, but at least I&rsquo;ve got a model, whereas most people just don&rsquo;t even try. So, I give myself a little credit for that. So, my model is something called &ldquo;reciprocal accountability.&rdquo; The top party leaders appoint all the officials and the military officers, who are in the Central Committee, so that&rsquo;s top-down, but those guys also have the authority to choose the top leaders. So, the lines of authority run both ways. And what that means is that when the top leaders in the Standing Committee of the Politburo, or Deng Xiaoping, who of course was doing this informally, not in the Standing Committee actually, in order to get the support for their initiatives, try to make sure that those three big groups are satisfied, that they&rsquo;re getting things that they want. And in the case of the economic reform, I think the key group was the provincial officials, and playing to the provinces was the core political strategy of China&rsquo;s economic reforms. The market reforms were introduced, first of all, selectively, as experiments. So, you would give Fuzhen and Guangdong Special Economic Zones. The experiments in allowing firms to retain profits, give them incentive to make more money, instead of delivering everything up, those were also introduced selectively, according to different localities. And then the so-called &quot;experiments&quot; really weren&rsquo;t experiments, because the reformers at the top lavished all sorts of special treatment on them: tax breaks, you name it. So, of course, they succeeded, and then other areas that may have once been very skeptical of the reforms, because it was a little bit of a threat to their vested interests, thought, &ldquo;Wow, we want to do this too. This is really a great deal.&rdquo; And, particularly important, there was the fiscal decentralization that allowed provincial governments to retain a certain share of the revenue produced by the enterprises in their locality. So, I&rsquo;d say they&rsquo;re an engine. They create this kind of bandwagon that spreads from one region to another, and primarily from coastal to inland.</p>

<p>It's utterly and completely different. In the early visits, both in 1975 and in my second visit in 1982, when I spent a month visiting all of the special economic zones with a colleague from the University of Toronto -- I was then at the University of Toronto -- it was very clear that factory managers were not involved in business. And the clearest example of this came in 1982 when I visited a plant in Shanghai that was producing sewing machines and we're talking to the head of the plant. And I asked him what the production cost of one sewing machine was and he said he didn't know. I had been in China three weeks by that time and I lost my temper, which I shouldn't have done, and I said, &quot;Don't give me this rubbish.&quot; I said, &quot;Tell me it's a secret, tell me you're not allowed to share that kind of information with foreign visitors, that's fine, every country has its own secrets and, as a visitor, I have to accept this just as you would if you came to me.&quot; I said, &quot;Don't tell me that you, the head of this factory that produces 60,000 sewing machines a year, don't know what the cost of production is.&quot; In the end, I was convinced he really didn't know. He said, &quot;We just make them here. Some <em>zonggongsi</em> over there, they can tell you what the production cost is. We don't know.&quot; There are many examples of this. In the first trip, in 1975, we went to a factory that was producing what the Chinese call <em>shoulatoulaji</em>, garden tractors. And we arrived there and they had a parking lot with hundreds of tractors sitting out there, rusty, and so on and we could see, Chinese machinery has little tags on it that give the date of production, a serial number and the name of a factory. I became addicted to reading these tags the first day I was in China, so it was clear before we went in the factory that they were just producing these tractors and putting them outside and they were just sitting there. And we asked them, &quot;Why are you producing these things, because there are already hundreds of them just sitting out there?&quot; And they said, &quot;Our job is to fulfill the plan, which means producing the number of tractors that we've been assigned and when we put them out there, they become the property of the Commercial Department and we have nothing to do with them. And it's their problem.&quot;</p>

<p>There are a few reasons why reform occurred in Xiangyang with regard to the bureaucracy system. There were three factors as a commune. First, wealth was equally distributed without giving consideration to how much one had worked. The second factor was blind command. For example, the cadres issued confused orders, taking actions that did not suit local circumstances like planting double cropping rice instead of single-crop rice which suited this area. Finally, the people didn't have an incentive to work hard because the equal-income paying system would not calculate how hard you worked. It is also called &quot;Da Guo Fan&quot; (eating from one rice bowl).</p>