Between 1911 and 1978, China experienced significant political and economic changes: 1) After the fall of the Qing dynasty in 1911, China established a republic but experienced political instability, civil war, and invasion by Japan until 1949. 2) In 1949, Mao Zedong established the People's Republic of China and instituted communist policies like collectivization that caused famine and over 65 million deaths. 3) In 1978, Deng Xiaoping implemented economic reforms like opening special economic zones, decentralizing agriculture, and embracing market mechanisms, setting China on a path of rapid economic growth and integration into the global economy.

1. China in the 20th Century (1911-2008)
The Emergence of China in the 21st Century — Session three
Luis Torras (@TorrasLuis)
November 2015

2. China in the XX century: Chinese economic
history can be divided in three main periods
WTO$
entry$
Asian$
Crisis$Shenzen$SEZ$
Deng$Xiaoping$
$$$Cultural$Revolu=on$
$$$End$of$
Qing$
dynasty$
$$$Communist$
Party$of$China$
founda=on$
$$$People’s$republic$of$
China;$Mao$first$
Chairman$
$$$Great$Leap$
Forward$
1900$ 1910$ 1920$ 1930$ 1940$ 1950$ 1960$ 1970$ 1980$ 1990$ 2000$
ECONOMIC
REFORM
MAOIST ERA
Farm$
priva=za=on$
GDP
Source: Maddison; IMF.
! Between&1949&and&1978&China&
suffered&the&consequences&of&a&
socialist&planned&regime&that&
caused&famine&and&starva>on&
! In&1978,&Deng&Xiaoping&became&
China’s&new&leader&and&the&
economic&reform&began&
! 1978&it&is&the&essen>al&milestone&
to&understand&Chinese&recent&
history&
2
Chinese GDP though 20th century
REPUBLIC OF CHINA

3. 1912-1949: Republic of China, Dr. Sun Yat-sen
Sun Yat-sen (1866-1925), chairman of the Republic of China and premier of the
Kuomintang.
3

4. 1912-1949: Republic of China, Chiang Kai-shek
Portrait of Chiang Kai-shek hangs on the Tiananmen. 4

5. 1937-1945: Second sino-Japanese war
December, 1937, bodies of victims along Qinhuai River out of Nanjing's
west gate during Nanjing Massacre.
5

6. 1937-1945: Japanese occupation, situation at the
end of World War II
Japanese occupation (red) and Communist bases (striped). 6

7. 1946-50: Chinese civil war: Chiang Kai-shek
(nationalists) vs. Mao Zedong (communist)
Chiang Kai-shek on the cover of
a 1933 edition of Time magazine
Mao Zedong in 1938, writing On
Protracted War.
7

8. 1946-50: Chinese civil war: Chiang Kai-shek
(nationalists) vs. Mao Zedong (communist)
1934-1935: movement of Communist forces during the long march. 8

9. October 1, 1949: Mao Zedong proclaims the
People’s Republic of China (China last unification)
Mao Zedong proclaiming the establishment of the People's Republic in 1949.
9

10. Between 1949 and 1978, Mao and the CCP set
up a socialist planned-economy regime based on
Marxist theory
Source: Mises; Huerta de Soto; Margolin.
Socialism aims a social system
based on public ownership of the
means of production
Socialism in China was implemented
thought three main things: Agricultural
collectivization, central planned economy
and repression
French scholar J.L. Margolin estimates
the number of deaths due to the
Communist policies in 65 million people
! government is the only employer
! government decides what has to be
produced (planned economy)
! anyone can consume more that what the
government allows him to do
! there is no room left for freedom
! Agricultural collectivization
WHAT IS COMUNISM? HOW WAS IMPLEMENTED IN CHINA? WHAT WERE THE RESULTS?
Therefore in a socialist commonwealth…
“the theory of communism (socialism) may
be summed up in the single sentence:
Abolition of private property”
Communist Manifesto (1848)
• Mao started an agricultural revolution in order to
collectivized the land and set up a commune
system
• Peasants were force to join the communes and
small business and private property was abolished
! Great Leap Forward (1958-62)
• Once all resources were centralized in the power of
the State, the communists design a plan in order to
transform China into an industrialized country
! Cultural revolution (1966-78)
• In order to re-establish faith in the revolution, Mao
intensified the purges and violence against those
who question their policies
! Violence (many people were forced to move to
the countryside, people were forced to join the
communes, private business forbidden,…)
! Between 30-65 million people died, 35 million
during the period of the Great Leap Forward
alone (worse famine in absolute terms in human
history)
! Starvation
! Internal purges
! Social repression
! Environment collapse
! Dictatorial state under the CCP
! China did not develop growth and industry
10

11. Mao’s Cultural revolution 1966-76
Completely smash the capitalist class and the reactionary line of Liu and Deng!
11

12. Mao’s Cultural revolution 1966-76
Mao’s Little Red Book (1966).
12

13. China's Communist Party (CCP) focused on
Soviet-like socialist policies to rebuild the
economy after wars and invasions
During'Mao'Zedong's'rule,'the'CCP'focused'on:'
! Rural'collec:viza:on'
! Central'planning'
! State'control'and'ownership'of'industry'
! Chinese'selfAsufficiency'
1949
1950s
1958
The Chinese Communist
Party (CCP) establishes the
People's Republic of China (PRC)
1953
First Five Year Plan announced
• Industry nationalized
• Profits diverted to "key" industries
(iron, steel, textiles)
Second Five Year Plan
announced
Mao's "Great Leap
Forward"
Nationalization of industries: focus on industrialization
Land reform: collective model in the agrarian sector
(Soviet model )
Cultural Revolution
1966
13

14. – Deng Xiaoping
“To get rich is glorious.”
14

15. 1978: Deng Xiaoping, the road to (state/Chinese)
capitalism to promote growth
Deng Xiaoping (1904-1997).
15

16. In 1978 “the wall falls,” and China begins his
particular process of global integration
Deng Xiaoping on an official visit to the United States with President Carter in January 1979.
16

17. Since 1978, China has experienced the “great
convergence”, the great story of our generation
Source: IMF.
0%
5%
10%
15%
20%
25%
1980 1985 1990 1995 2000 2005 2010 2014e 2018e
China's per capita GDP compared to the GDP per capita of US!
In#1980#the#average#
American#was#20#6mes#
richer#than#the#average#
Chinese#richest#,#today#this#
ra6o#has#been#reduced#to#
only#5#6mes
17

18. China is been growing two decades above 7%
Source: Oficial stats.
18
6%
8%
10%
12%
14%
2002 2004 2006 2008 2010 2012 2014 2015
XVI$$NPC$ XVII$NPC$ XVIII$NPC$
Chinese Real GDP growth

19. China: the great story of our generation.
The “great convergence”
08$ World$GDP$percentage$on$total$principal$economies$(198082018)$
Source: Maddison; IMF. PPP data. Adapted form Prof. Niall Ferguson.
Share of Chinese GDP on total
19
Catch-up in GDP per capita with the US
Ratio of GDP per capita in China to GDP in US (%)

20. The reform is a story of a great success that has
allow China to catch-up with the rest of the world
after years of stagnation
Source: IMF.
0%
5%
10%
15%
20%
25%
1980 1985 1990 1995 2000 2005 2010 2014e 2018e
China's per capita GDP compared to the GDP per capita of US!
In#1980#the#average#
American#was#20#6mes#
richer#than#the#average#
Chinese#richest#,#today#this#
ra6o#has#been#reduced#to#
only#5#6mes
20
Chinese/US per capita GDP ratio

21. Deng had a clear vision for China: Open Door
Policy and reversed policies that had closed
China's market
21
! Economic growth main priority,
could best be achieved through
liberalization policies (Special
Economic Zones)
! Descollectivization (household
responsibility system) and swift
towards private initiative
! Responsibility in agriculture and
industry was decentralized,
small-scale enterprises and
services were permitted
Posi%ve:)
! China's)GDP)quadrupled)from)1978)to)2002)
! Manufacturing)exploded;)in)Shenzhen)(the)
first)SEZ),)the)number)of)manufacturing)
enterprises)increased)from)26)in)1980)to)
500)in)1984,)and)personal)income)was)five)
%mes)the)na%onal)average)
! Trade)and)investment)flourished,)China's)
economy)grew)faster)than)any)other)in)the)
world)in)the)1980's))
! Liberaliza%on)policies)set)the)stage)for)
China's)accession)to)the)WTO)
)
Open)door)policy) First)results)
Nega%ve:)
! Serious)
environmental)
problems)caused)by)
industrial)pollu%on)
and)rapid)economic)
development)
! Inequali%es)and)
migra%on)pressures)

22. The reform (in short) refers to the process of
transformation of the Chinese economy: from
planned economy to market economy
22
COMMUNIST
DICTATORSHIP
As#of###20151)#
1978
Abolition of
private property
and private
business
Central planned
closed economy
(“Soviet type”)
Political and
social
dictatorship
FREE OPEN
SOCIETY
Private property
Free
entrepreneurship
Free-market
economy
Democracy
(rule of law)
Commune system
descollectivization
Household
Responsibility
System
Increase
procurement prices
Agricultural
decentralization
SOEs allowed to retain
their profits
Creation of a Profit
Tax
Bank system
“Growing out of the
plan”
Openness (SEZ)
Join WTO
in 2001
Private
property in
China
Reduction of SOEs
Market
liberalizations
30%
55%
70%
0%
Reduction
of tariffs
PLANNED#ECONOMY#
MARKET#ECONOMY#
Increase efficiency
Market mechanisms
1984 1988 1990 2000 2007
Fiscal
decentralization
Source: Author. Illustrative. (1) Based on the 2015 Index of Economic Freedom.
The process of openness and reform

23. Agricultural descollectivization provide the right
incentives to generate the surplus needed for
Chinese industrialisation
23
Maoist'era'lack'of'incen/ves'
! In'1979,'procurement'prices'rised'by'22%,'and'40%'
accumula/ve'during'the'next'decade'
! Descollec/viza/on'of'the'commune'system'was'done'
with'the'Household'Responsability'System'that'
allowed'subcontrac/ng'small'plots'to'individual'
households'
! In'1983,'almost'98%'of'the'agrarian'sector'had'
switched'to'the'HRS'
! Results'(1978L1988):'
! Fixed'quota'(State'plan)'from'47.8'million'tons'to'
50.5'million'
! Domes/c'produc/on'jumped'from'304.8'million'
tons'to'394.1'million'
Key'facts'

24. The Dual-track strategy was used in several issues of the
reform as part of “the growing out of the plan” system…
24
The idea was that market economy began to drive Chinese economy gradually
0
10
20
30
40
50
60
70
80
90
100
1991 1995 1999 20031978 1985
Market prices State guided State fixes
Share&of&regulated&price&for&industrial&transac3ons&[%]& Key&facts&
! Dual:track&strategy&represent&the&coexistance&of&both&
systems&(socialism&and&capitalim)&during&some&3me&
! This&way,&the&number&of&loosers&due&to&the&reform&
was&minimize,&while&the&old&ins3tu3ons&serve&as&
second&best&op3on&beFer&than&abolish&them&all&at&
once&&
Coal market
(in million tones)
Labour market
(in million people)
Planed
1981 1989
329 427
Market 293 628
Planed 74.5 112.1
Market 48.9 204.9
Examples:*
Source: OECD.

25. China has become the “world’s manufacturing
plant”, having an economic model based on
export
Source: Oficial stats.
25
Foreign Direct
Investment
Imports
Raw materials
and components
Industrial activity
Exports
Components and semi
finished goods
Chinese economic growth export model

26. This strong growth has been very uneven ...
Source: Oficial stats.
26
Chinese GDP distribution
High Medium Low Very Low
Beijing
Tianjin
Shanghai
Dalian
Nanjing
Xiamen
Fuzhou
Hong Kong
Shenzen
Guangzhou
Chongqing
Xi’an
Chengdu
Wuhan
Tsingtao

27. …and the same has happen in terms of Foreign
Direct Investment
Source: Oficial stats.
27
Foreign direct investment distribution
High Medium Low Very Low Very Low

28. China is among the countries that has benefit the
most form globalisation developing region-states
Source: BBT Research Institut via Kenichi Ohmae.
28
Chinese main economic clusters
Beijing
Tianjin Dalian
Tsingtao
Shanghai
Suzhou
Fuzhou
Xiamen
Hong Kong
ShenzhenGuangzhou
Dongguang
Beijing / Tianjin Area
• R&D
• IT, bio, space and defense
• Government services
Liaoning Area
• Heavy industry, aircraft
• Software
• Japanese BPO
Shandong Area
• Heavy industry, aircraft
• Software
• Japanese BPO
Zhu Jiang Delta
• IT
• Electronics components
• Chemicals
• Automobiles
Chang Jiang Delta
• Textiles
• Automobiles
• Laptops, mobile phones
• Financial institutions
• LCD panels
Xiamen / Fuzhou Area
• Agricultural products
• Textiles
• Taiwanese companies
• Tea

29. Capital factor and total productivity factor had
been the major drivers of Chinese GDP in the
past
Source: Bloomberg.
29
Real vs. potential GDP growth
Real%GDP%
Poten,al%GDP%
Capital%factor%
TFP%
Labor%factor%

30. Poverty has decreased world wide in the last
three decades, specially in China
Source: Human Progress.
30
Poverty rate world wide and in East Asia

31. Poverty has decreased world wide in the last
three decades, specially in China
Source: Human Progress.
31
Poverty in absolute terms

32. China has experienced the shortest Industrial
Revolution
Number'of'years'required'to'double'the'real'GDP'per'capita'
RPC
(1990-1998)
Japan
(1885-1919)
US
(1839-1886)
RPC
(1981-1990)
Corea
(1966-1977)
United Kingdom
(1780-1835)
8'
9'
11'
34'
47'
55'
Source: IMF.
32

33. In 3 years, China used more cement than the US
did it a century
33
Source: USGD; International Cement Review.
Cement usage in the US and China

34. The reform process is still today the main issue in
order to understand Chinese economy
34
Summary chart: economic policies in China 1949-2006
Chinese Socialism
1958
! Chinese'economic'
policy'based'on'
the'Soviet'model'
! Agricultural'
collec8viza8on''
! The'Great'Leap'Forward'(1958D60)'
broke'with'Soviet'model.'Mass'
mobiliza8on'of'resources'to'promote'
Chinese'selfDsufficiency'
! The'Cultural'Revolu8on'(1966D76)'
focused'on'poli8cal'consolida8on'
! Open'door'policy:'Built'
on'a'principle'of'
moderniza8on'and'
emphasized'econoDmic'
liberaliza8on'to'achieve'
growth'
! This'policy'allowed'
foreign'investment'in'
China'for'the'first'8me'
(SEZ)'
! Liberaliza8on:'A'
liberaliza8on'and'
priva8za8on'package'was'
introduced'in'order'to'realize'
China's'candidacy'in'the'
WTO.''
! The'focus'of'the'CCP'was'to'
enter'the'global'market'
(while's8ll'restric8ng'poli8cal'
freedom)'
Soviet-like system
1949
Open door policy
1978
Liberalization
1994
1960
The Great
Leap Forward
1966 1976
Cultural Revolution
2006
Mao Zedong Mao Zedong Deng Xiaoping Deng Xiaoping, Zhu
Ronji

35. China recognise that the institutions that work in
one economy may not work in other economies
35
Key success factors of Chinese economic reform
• Existence of a real consensus. Chinese economic reform has had a clear objective since the beginning and
had a real consensus of all society
• Gradualism: Chinese economic reform, in contrast of other former Soviet economies that had followed a “big-
bang” strategy, has perform its economic reform step-by-step
• Existence of carefully designed strategy and the existence of mechanism that helped to drive the
transformation of the economy step-by-step (e.g. SEZ, dual-track strategy)
• Decentralization, that together with pragmatism make possible that good policies spread around the rest of the
country and that local governments adapt this policies to its particular region
• Customization of economic institutions. China chose its own institutions recognizing its unique case and its
particularities
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3
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