China Boom CMS

<p>Personally, after 1989, I really didn't imagine that China would still have the kind of the development that it had later on. I think that one of the most important events of the period was what was then called Deng Xiaoping's &quot;Southern Tour&quot; and the famous speech he made. He renewed the reform in 1992. I think that it was an extremely important historical event because he directed the ship of reform back onto its original track, and reform continued even faster than before. At the time, Deng Xiaoping raised an important perspective: &quot;It doesn't matter whether you follow socialism or capitalism.&quot; He restated the black cat/white cat philosophy. The standard by which he would evaluate [an ideology] was whether or not the economy could develop. He thought that economic development would really solve the problem of legitimacy. After that, China was on the reform track again, and I feel that reform happened faster than before. Because reform is an accelerating process, as soon as it starts, it will move faster and faster. So, I think the restarting of reform in 1992 was very important. After the revival of the reform in 1992, China made a few things explicit. What were these things? In the 1980s, it was Reform and Opening. In 1992, after the revival of the reform, China several things explicit. First of all, the reform would come in the form of market economy. This was important because this economic model was used by Western nations, and it came with the comprehensive experience accumulated over hundreds of years. It was unlike the reform of the 80s, which was mainly about opening, contracting, and experimenting with various models. But, all along, it was &quot;open, open, decentralize.&quot; They thought about that part the most. However, with regard to creating a new system, if you want to give up the past and you are ready to propose something with an unclear vision, the prospects will be unclear. They only explicitly proposed a vision in October of 1992, and that vision was to have a market economy. So, the West attentively said, &quot;Don't you mean a socialist market economy? You need to add 'socialist' at the beginning.&quot; But, don't forget, the word socialism was already in use, but it was the first time that the concept of market economy was proposed and employed by the central government. The market economy, in itself, has its own definitions and explanations; this is really mainstream economics, it has a complete set of definitions and rules. What is a market economy actually? What sort of laws of operation does it have? It has a complete experience and summary. But we continue to see it develop. But, they adopted this, so it's entirely different. Secondly, they decided to build a framework for the market economy. At the end of 1993, the Communist Party held the Third Plenary Session of the 14th Central Committee and this meeting was held to set up the framework for market economy. What does this framework include? Let us recount. In the 80s, much of the reform was expressed in bottom-up efforts. For example, all industries had contracts and privately-run enterprises started to appear, this was bottom-up. Also, state owned enterprises, through contracting, or through the policy of separating politics from enterprise management, and various other methods, reformed. Also, there was what we then called &quot;untying the enterprises,&quot; rural township and village enterprises, the establishment of joint enterprises, and so forth. After '92, these bottom-up reform efforts continued, but, at the same time, they established a framework for market economy -- this signifies the public financial system, taxation system, and the financial and banking system. The financial system reform was major, it included the separation of the commercial banks and the policy banks and, at the same time, there was a clear-cut goal to, step by step, make the central bank independent in the future. Although, even now, the central bank isn't independent, its effectiveness has definitely become increasingly striking. These reforms were top-down, they were only possible with government action. Otherwise, they could not have been done and there would not have been a framework change. This happened at the end of 1993. After [framework reform] was realized, it propelled the reform process forwards, but this was more obvious in '92, or the end of '93.</p>

<p>I was stunned to see the poverty in the countryside of China, and such a low standard of living. And the agricultural technology was not so different from what I saw in the museum. The tools they used were so backward...the economy, and the farmers barely made enough to keep their family going. It's just so poor. Their families and their village, and the area, so under-developed, it's really an education. And Mao Zedong sent us to the countryside to receive reeducation from the farmers, and I think that is a very valuable education for me, but at a very heavy cost. So, ten years, I didn't study high school. I didn't get a chance to study high school. I just graduated from elementary school and was sent to the countryside, away from my parents, from my sisters, on my own. So, that was an extraordinary experience for me, but I learned a lot about what the real China looked like and how people lived in the small villages. And after that, I went back from time to time to visit my family, friends and their children and grand-children. And just a few months ago, I went back again. Of course, after thirty years of economic reform, the living standard now is much higher than thirty years ago when I lived there. They made tremendous progress. In Yenan, when I was there, no running water, no electricity and people in that village never saw trains or airplanes. They had no idea whatsoever about the modern world. And today there is running water, electricity, school, hospital. Economic reform brought them from a primitive economy into the modern economy. And the rural economy integrated so much with towns and cities. So farmers' income is ten times as high as what they received thirty years ago. And the farmers all use televisions and mobile phones now. But when I was there, there was no phone, no video. So, it's very hard to imagine and the shock[ing] contrast between now and then.</p>

<p>First, Japan was seen as a model of modernization. Deng Xiaoping visited Japan first in 1978 and many, many public leaders followed. And they were greatly interested in the way that Japanese businesses were run, the Japanese industrial policies. For sometime after that, Japan became the model of China. So that was one way. And the second way is, from the late 1970s, the Japanese government decided to provide ODA to China, and China accepted it. As far as the Japanese government was concerned, they did not want China to go back to the Cultural Revolution days and they thought that by supporting the Reform and Opening policies, by supporting China's economic growth, they were actually supporting the Chinese leaders who were trying to push China forward into further reforms and opening. Thirdly, the Japanese businesses also played a large role, because many of the Japanese business leaders at that time had personal experiences with China before and during the war. And a lot of the Japanese leaders felt remorse about Japanese deeds during and before the war and they wanted to compensate for that. And we cannot deny that that that has also played a big role in Japan's cooperation with China.</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>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>From an economic perspective, as important as what happened in those 30 years, is what happened in the 30 years before. So, the period from '48 to '78 laid the groundwork for the type of dynamism that we saw after. And the analogy that I like to use is a slingshot. So, since 1978, we&rsquo;ve averaged 9% economic growth in China and the reason, in part, that that growth was so fast, was because the growth before it was so distorted. So, it&rsquo;s like you take a slingshot and if you pull it in the wrong direction for 30 years and then you let it go, the speed with which the stone you have in your slingshot travels is going to be light speed. And that&rsquo;s what happened in China. So, in 1949, when the CCP comes to power, Mao Zedong takes the country, the People&rsquo;s Republic of China, in an economic direction that is not conducive to its resource endowment. China has a lot of labor, doesn&rsquo;t have a lot of resources, and doesn&rsquo;t have a lot of capital. Other countries in East Asia with that type of endowment, like Japan and Korea and Southeast Asia, were doing the types of economic activities that having a lot of labor makes you very good at. So, we&rsquo;re talking about light manufacturing, like toys and textiles and apparel. China, on the contrary, decided to follow a Soviet model of industrialization. So, instead of doing things that required a lot of labor, it decided to do things that took a lot of resources and a lot of capital. So, steel and aluminum and cement, a lot of capital-intensive heavy industry. Over 30 years, that economic strategy brought the country to the point of famine, a number of times...</p>