Can China Conduct Its 4th Wave of Economic Liberalization Smoothly?

China’ first three waves of economic liberalization succeeded due to students’ protests and serious crises of unemployment. Can it conduct its fourth wave of economic liberalization smoothly now without mass protests or serious unemployment?

Mao’s mismanagement of economy made the State unable to provide jobs to secondary school graduates. Before the Cultural Revolution, there had already been millions of unemployed secondary school graduates. Being a college dropout due to sickness, I was one of the unemployed. I saw lots of them, 100,000 of them according to statistics, sent fromShanghaito military farms in Xinjiang, but did not feel that the number of us unemployed youth was reduced.

The problem worsened when Mao’s Cultural Revolution disrupted production. Mao had to play the trick of sending graduates to rural areas to be “reeducated by peasants”. However,China’s rural areas were very poor and could not afford having their income shared by the students. The students, however, were unable to endure the hardship in rural areas as they had been used to live much better life in urban areas.

They could not return home as their hukou (residence registration) had been moved to rural areas. Without hukou, they had no food rations in their hometowns and were not allowed to find any job. Otherwise most of their family could support them even if they remained unemployed. Seeing the misery of the rusticated youth, more and more graduates refused to be rusticated on excuse of sickness. The number of unemployed grew year by year.

The rusticated students demanded returning home with their hukou moved back. Their struggle culminated in the large-scale hunger strike in Yunnan in late 1978 and early 1979. For the first time in the history of the PRC, the Party entirely yielded to mass protests. All rusticated students were allowed to go home and bring back their hukou. No participants of the protests were ever punished for that.

The problem of unemployment exploded when 20 million returned rusticated students joined the huge number of unemployed in the urban areas. Obviously, it might give rise to serious troubles. In order to provide employment, Deng Xiaoping began to open up to draw in foreign investment and conduct the reform to allow people to be self-employed and employ a few people if successful. It led to a boom of individual farming in agriculture and private enterprises in industry.

Quite a few private enterprises soon employed hundreds of people but as they were allowed to employ only a few people, they all deceptively adopted the form of collective enterprise. However, the central authority knew well that they were private and realized the vigor of private economy. (Note: All those collective enterprises were later transformed into private ones.)

In order to make private economy lawful and prosperous to provide employment and tax revenue for the State, Zhao Ziyang invented the concept of the primary stage of socialism to allow the development of private sector. It was accepted by the 13th Party Congress. Those who upheld communist values fiercely protested, but the serious unemployment forced them to accept reluctantly that first wave of economic liberalization.

While private economy prospered, losses suffered by state-owned enterprises (SOEs) became a critical issue. They have to be privatized to improve efficiency. Some of them had to be sold and others, the large ones, had to be turned into joint stock companies with autonomy of management. The reduction of planning and the privatization of SOEs encountered fierce resistance from conservatives. Luckily for Jiang Zemin, the pervasive fear created by Tiananmen Protests throughout the Party enabled Jiang to carry out a silent peaceful coup to substitute intellectuals’ dominance for workers’ and peasants’ dominance of the Party and State. The first of Jiang’s Three Represents justified the Party’s pursue of capitalism. It created conditions for the success of Zhu Rongji’s reform of SOEs to turn them profitable.

The second wave of liberalization, the reform of SOEs, succeeded because Chinese leaders wisely exploited the pervasive fear created by Tiananmen Protests throughout the Party.

However, conservatives remained so strong that though the Three Represents have been written into the Party’s constitution since 2002, the 2004 amended Chinese constitution still provides that the public sector is the “dominant” sector (Article 6) and the “leading force” (Article 7) in China’s economic system and that the State “exercises supervision and control over the non-public sectors of the economy” (Article 11).

There were various barriers and restrictions to private enterprises’ entry into quite a few industries. As a result, most of them were engaged in export-oriented industries with low added value. In 2008, the sharp reduction of demand in export market due to the financial tsunami brought lots of those enterprises to the verge of bankruptcy and caused them to lay off over 100 million migrant workers.

Chinese leaders exploited the crisis of serious unemployment to overcome conservatives’ opposition to further economic liberalization. They encouraged private capital to enter various other industries where there were open and hidden barriers for private capital to enter in the past. Private capital displayed its great vigor and potential in making surprisingly great achievements in those industries and soon employed back all the workers they had laid off.

In order to further develop China’s private sector, the State Council issued its opinions on encouraging and guiding development of private investment on May 7, 2010 (the “Opinions”).

For implementation of the Opinions, the General Office of the State Council issued on July 22, 2010a notice to assign the responsibilities for helping private investment in various industries to various central departments and local governments (the “Notice”). It tells them to encourage private capital to participate in transformation of SOEs and take part in international competition. They should help private enterprises conduct research and development and encourage private capital to play its role in hi-tech sector, utilize high technologies to reform and develop traditional industries, vigorously develop recycle economy and eco-friendly economy, and invest in the development of the emerging industries with development potentials.

This third wave of liberalization was possible only when there was a crisis. So were the other two waves. It proved the strength of conservatism as well as the leaders’ wisdom in exploiting the crises. However, can there be a fourth wave of liberalization without mass protest or serious unemployment?

It does not seem so. In spite of the Opinions and Notice, SOEs’ monopoly remains and private enterprises, especially small and medium-sized one still are discriminated in obtaining bank loans and government approval.

The State Council invited the World Bank to issue a joint report with itsDevelopmentResearchCenterto point out the need for further economic liberalization. However, Du Jianguo, an independent economist, openly protested against the report and lots of bloggers supported him. In Premier Wen’s Government Work Report, only one paragraph consisting of 186 characters touches the issue of economic reform but gives no details about the targets and measures.

The removal of Bo Xilai from his post as Chongqing Party head dealt a heavy blow at conservatives and seemed to have removed some obstacles. The recent National Work Conference on Economic Structural Reform decided to carry out 13 projects of reform including financial reform for the establishment of small and medium-sized financial institutions and the reform of SOEs and industries with monopoly such as the railway system and telecommunication and power industries. Detailed implementation rules will be promulgated later this year to encourage non-governmental capital to enter railway, municipal works, energy and social work sectors. However due to lack of information, we still have to wait and see.

What puzzles me is the rumor that Bo’s close assistant Wang Lijun was demoted as he discussed a case related to the death of an expatriate involving Bo Xilai’s wife. However serious the dispute between Bo and Wang, there was no need for Wang to give up everything to seek asylum in America. Wang must have felt very serious threat to his life. What was really the threat may perhaps remain an eternal mystery.

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