Chinese Economic Reform (Essay Sample)

Chinese Economic Reform
Name
Institution
Chinese Economic Reform
Introduction
China, since its founding in 1949, maintained a centrally planned economy and until the end of 1978. The implication is that the government managed a large proportion of economic resources, set production objectives, and controlled prices. According to Chow (2015), almost three-quarters of the nation's industrial manufacturing were made by centrally organized state-owned enterprises (SOEs) in accordance with centrally intended production targets by 1978. Private institutions and foreign investments almost never existed in the country. Notably, the estimated real GDP from 1960 to 1978 grew by an average of 5.3% (Curtis, 2016). The reasons behind the slow rate include the fact that the government and the economic systems put little importance on productivity, competition, and profitability thereby making the economy moderately stagnant and ineffective. Consequently, the living standards of the Chinese declined substantially compared to other developing nations. The Chinese government instituted changes to enhance economic progression and advanced life in the late 1970s.
The formulated reforms in China came into existence after the Third Plenum by the Communist Party, and that has been hailed as ambitious (Chow, 2015). China has transformed from centrally planned economy to an emerging one since 1978. Notably, the GDP has increased by roughly seven stretches as well as notable significant improvement in living standards Curtis, 2016). As such, this discussion aims at discussing the reasons behind the reforms in China, major initiatives, and impacts on the Chinese economy.
Reasons for the Reforms
According to Sudarsan and Sankaranarayan (2016), several reasons instigated the witnessed reforms in China. First, the Cultural Revolution experienced between 1966 and 1976 was unpopular. The government and the Communist Party needed to adjust trend to get backing from the Chinese populace. The party leader, Mao Zedong, planned the Cultural Revolution and passed on in 1976 (Chow, 2015). The subsequent Gang of Four that grasped supremacy and reinforced that callous governmental movement was also eliminated. Later, Deng Xiaoping became the spearhead of China since the highest Party headship supported him. This chance presented him with an opportunity to make changes.
Second, experience taught various economic architects an arrangement system was challenging to control and economically unproductive. This perspective was observed in the economic administrators’ writings seen in the late 1970s (Morrison, 2014). However, the comprehension of the flaws of the framework differed among the officials.
Third, prompt economic evolution and witnessed in the neighboring more market-oriented economies acted as illustrations that a marketplace economy could achieve better outcomes. These neighbors encompassed South Korea, Hong Kong, Taiwan, and Singapore. The differences in the economic performance between North and South Korea, East and West Germany strengthened this fact (Wang, 2015). Therefore, the mentioned reasons forced the Chinese to desire to adopt market-oriented reforms.
Major Reforms
Agriculture
Major institutional reforms were undertaken at the beginning of 1978 regarding agriculture. The foremost included the implementation of the Household Responsibility System (HRS). The Commune system launched by Mao in 1958 was modified whereby land was distributed to separate households farming exclusively. Additionally, each would get an extra incentive for added effort after providing a fixed amount of produce delivered to the administration procurement agencies. Deng acknowledged its valuable impacts in 1978, approved it as a state policy, and named it the “household responsibility system’ (Curtis, 2016). As a result, output in Agriculture output improved speedily in China and farmers became wealthier. The achievement of the transformation in farming obliged the basis of reforms in other segments by increasing food supply as well shifting the philosophical thinking of Communist Party followers in backing a market economy.
State-Owned Enterprises
Sudarsan and Sankaranarayan (2016) points out that the reform in this area is seen in four phases. Each stage is characterized by a reduction in the government intervention as SOEs extended their autonomy.
The initial stage (1979-1983) underscored numerous significant tentative initiatives anticipated to expand enterprise independence and enlarge the function of monetary inducements within the conventional economic arrangement.
The second phase (1984-1986) shifted emphasis to enacting financial commitments of the SOEs to the administration and expose enterprises to marketplace impacts. The state government inaugurated the “two-track system” whereby SOEs were expected to meet their production ration and sell at the prices set by the government. Notably, price controls have been progressively relaxed and rarely exist apart from areas such as grain price supports.
The third stage (1987-1992) saw the formalization of the contract responsibility system. This framework endeavored to explain the responsibilities and authority of enterprise managers. The last phase (1993-present) tried to familiarize the contemporary SOEs corporate system. Notable reforms regarding privatization have been implemented from the time the administration ought to “let go of the small and hold on to the large” (Curtis, 2016) in 1997.
The Open-Door Policy
This policy instituted by Deng Xiaoping stimulated the opening of China to external importations and the elevation of exports (Curtis, 2016). The state permitted provinces the autonomy to endorse exports. Trading companies were created in collaboration with manufacturing enterprises producing goods for export to enable devolution of transaction undertakings. The trading corporations and firms received special treatment to boost their export duties. For instance, the government permitted them to keep a proportion of the foreign exchange earned and to acquire exceptional credits in RMB or foreign exchange (Chow, 2015). Since 1978, China has commenced limited break-ups of the monopoly mechanism of overseas trade by regionalization of trading privileges to distant business bodies at provincial and lower level as well as to several companies. Besides, the country has further devaluated the currency numerously to reasonable levels. Liberalization of trade is also noted by the reduction of tariffs from 56% in 1982 to 23 % in 1996, 15% by 2001, and to 9.9% by 2005 (Chow, 2015). Moreover, China steadily dropped its nontariff barriers and gradually eliminated restrictions on trading rights.
Financial Reform
Reforms in the financial sector were noted by the institution of an actual central banking system in 1983 by the reinstitution of the PBoC into a modern form (Yao, 2015). Additionally, four newly detached specified banks founded in the 1980s initiated direct provision of loans in their specific domains of influence. The institutions included the China Construction Bank, the Industrial and Commercial Bank of China, as well as the Agricultural Bank of China (Yao, 2015). The three banks handled domestic dealings while the Bank of China specified in intercontinental transactions.
The formation of three additional policy banks in 1994 fostered the commercialization of the former banks. The later include the Import-Export Bank of China, the State Development Bank of China, and the Agricultural Development Bank of China (Yao, 2015). The new institutions assumed policy loans while the others became accountable for their profits and losses. The Budget Law enhanced the independence of the Central Bank in the same year by barring the government from borrowing from the PBoC.
Moving Towards a Market Economy
The decision on matters regarding the formation of a socialist market economic arrangement, approved by the Third Plenum, marked the turning point concerning road to markets (Wang, 2015). The “Decision” highlighted the significance of synchronization between many features of the reforms. Additionally, particularistic contracting played a central function in the initial stages of the reforms. Such contracts included the fiscal, managerial, and household recruiting (Chow, 2015). The “Decision” rallied for a market system based on rules for the first time to form a level playing ground. The “Decision” concentrated on the constructing market-supporting bodies, including a consolidated financial system, official fiscal federalism, and a societal welfare net. The “Decision” also addressed the enterprise transformation subject concerning property ownership and rights.
Impacts of the Reforms in the Economy
The reforms instituted in China have contributed to various implications in the economy. Foremost, there is a significant slowdown in economic growth. According to a review by Curtis (2016), China’s GDP grew by an average of 9% per year during 1980-1990 an average of over 10% during between 1991 and 2011. The annual growth was 7.7% from 2012 to 2013 and grew to the lowest level of 7.4% in 2014. The apparent trend indicates that the periods of double-digit economic growth are over and it is likely to slow further.
The slowdown is attributed to several factors that include a bigger economy after years of rapid growth. Moreover, there are rising wages and associated costs as well as the appreciation of the Chinese renminbi that contribute to a reduction in the growth of exports. Other policies such as anti-co...