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Table of contents

INTRODUCTION……………………………………………………………………….…………………….…………..……..p 3

I- History of the Chinese economy……………………………………………..……………………………….….…p 4

A- The Mao era (1945-1976)………………………………………………..……………………………….….…p 4 B- Post Mao era (Deng era 1976-1994)………..…………………………………………………….……….p 5

II- The process of transition……………………………………..………………………………………………………..p 5

III- Success and consequences of China’s economic transition….………………………………………p 6

IV- Challenges…………………………………………………………………………….……………..………...……………p 8

CONCLUSION…………………………………..………………………………………………………………………………..p 9

BIBLIOGRAPHY…………………………………..……………………………………………………………………….……p 11

APPENDICES…………………………………..…………………………………………………………..……………….…..p 12

INTRODUCTION |

China is now becoming the world’s most prominent up and coming super power. It is a country steeped with a long and chequered past and the history books will show that it deserves its place amongst world leaders. In the last century China has experienced some of its most turbulent years and only in the very latter part of the century has it come to overthrow the oppressive shackles that have haunted the nation from the Mao era. However the case could be argued that the Mao era may have been the catalyst for much of the good that can be found in the Chinese approach to growing a stable economy. Rather than introducing radical reforms and provoking social unrest, the Deng era of Chinese rule introduced a two-track transition process that has allowed the country to gradually move from a centrally planned economy to a wiser free market one.
China’s “two track transition” resonates from the countries understandably negative outlook on radical reforms given the countries recent history which has been marred by wars, famine and political unrest to say the least. They have wisely adopted a slowly, slowly approach in developing their economy. The system was first introduced as a price reform, but the Chinese adapted this two track transition for many others including, urban reform, foreign trade reform, labour reform, housing reform, social security reform and most importantly ownership reform. By adopting some aspects of a market economy while simultaneously operating under the old planned economy regimen the Chinese have successfully grown their economy by an average 9% per annum since the mid 70’s.
Last year, China’s GDP growth was almost 10.5%, a whopping 5,745.13 billion US dollars, forecasts predict an increase of 11.8% in 2011 to 6,422.28 billion US dollars. Forecasts for 2015 predict China’s GDP will expand to 9,982.08 billion US dollars, its economy is expected to grow a further 10-12% per annum until at least 2015.
This is an overwhelming success story of an economy that is only still coming to grips with modern globalization, but at whose expense? Can the negative growth experienced by American and European markets be directly linked to the Chinese phenomenon? I think the simple answer here is yes, and therefore the success of the Chinese transitional economy is ultimately our failure.

HISTORY OF THE CHINESE ECONOMY |
Although this is not a historical essay we simply cannot understand the Chinese evolution without first taking a brief look at their history. Beginning with the fall of the Qing dynasty which lasted from 1644 to 1912, the country soon became embroiled in a civil war headed by warlords that emanated from the Qing dynasty and blighted most of the newly established Republic of China. These civil wars officially lasted until 1928 but some minor warlords still operated trying to gain power of regions well into the 40’s. This may explain why China has suffered in the past with democratically electing leaders. It may have been their culture of having civil wars in establishing dominance in the respective territories. There was also hugely damaging war with Japan (1937-1945). This war ravaged the Chinese economy and reduced its industries operational capacities to about 25%. It also flooded the Chinese economy with cheap American goods (an ironic reversal in modern times) and led to a hyperinflation in the economy. Although the scope of this essay does not allow it to delve into much further detail, it can be understood that these conflicts would have a detrimental effects into harmonising the 4 factors of production that drive any economy, land, labour, capital and enterprise, in the future of the Chinese economy . a) The Mao era (1945-1976)
In what could arguably be called the darkest era of the modern Chinese economy, the Mao leadership lead the Chinese economy to brink of collapse. By introducing a soviet style governance of the land, Mao brought radical reforms such as collectivization. “The great leap forward” is well documented in the history books and will be what Mao is most remembered for. This entailed of agricultural and industrial reforms that brought all economic outputs under control of the state. The respective industries had to meet certain quotas and were not monitored to meet a normal supply and demand that is accustomed to balanced economies. This also wiped out the incentives for peasants to work hard and thus productivity slackened and soon after a food and financial crisis ensued for the Chinese economy. Mao did however set out a part of the platform for which China has built its economy on today. This was the establishment of many industries (which were closely linked to military operations) and he also set in place good infrastructure including roads, rail and an education system. He did have a lot of supporters and some of his ideas though flawed held some substance for many of his followers. And thus brings us to our next stage. b) Post Mao era (Deng era 1976-1994)
It was clear that the Chinese way of governance was hampering the economic progress of the country. Deng Xiaoping understood the fundamentals of how to run an economy, and more importantly the Chinese economy. Only by striking the right balance between reform, development and social stability could the economy prevail in its transition to a better functioning open economy.
Deng started his reform by implementing a dual track transitional process. By learning from the mistakes of the Mao era and by understanding the political, social and economic landscape in which he operated, Deng gradually married a system whereby he developed a new system of implementation, alongside the old “great leap forward” system introduced by Mao. This incremental approach allowed Deng to test the waters in one of his first reforms. One year after coming into power in 1979, Deng went about reforming the agricultural sector. He piloted a household, contract, responsibility system and based farmer’s salaries on their actual output rather than giving them all equal wages. This system was gradually accepted and by 1984 it had been implemented by 98% of farmers. This paved the way and Deng gained huge experience for the many reforms that followed, this allowed him set about the task of key of decentralising of state control leaving local leaders to experiment with ways of increasing economic growth and privatising state sectors. Foolish policies were eventually faded out and the good ones were kept and introduced around the other areas. THE PROCESS OF TRANSITION |
China began its reform process in a relatively advantageous position. Indeed, even if the economy does not work effectively because of the distortions generated by the planning system, the fact remains that it showed a positive growth, a low inflation and low deficits, high savings and a low external debt. That's why the Chinese economy did not need to start the transition with a macroeconomic stabilization program. In addition, China has maintained the political control centralized in the hands of the Communist Party, unlike the other transition economies in Europe that saw the end of their communist states. For China, the political reform was not on the agenda. Thus, the starting point of the economic reform in China lived in relative economic and political stability.
In addition, the reform was initially focused on one sector of the economy that offered the greatest chance of success. In the case of China, it was the agricultural sector. This is a key sector in terms of employment, which was sacrificed during the period of central planning. Given the significant potential and the probability of success of its reform, it was a good springboard for the implementation of further reforms.

Its rapid growth during the first period of reform has significantly improved productivity through the reallocation of resources, the production growth and the increasing farmers' income. This has generated a considerable rural savings and therefore funds for investment in businesses of municipalities and villages, which would be the most dynamic component of non-state sector. Following this initial success, the target of reform had become the industrial sector, in the mid-1980s, where the focus was set on a greater autonomy for enterprises.
In this sector, China has a unique and dynamic ingredient: The enterprises of municipalities and villages. Indeed, these companies make a major contribution to exports, development of the market economy; they have created about 100 million new jobs since the beginning of the reform process and promoted the industrialization of rural areas.
In addition, since the beginning of the economic reform, China has gradually opened up and integrated into the global economy, which resulted in an increase in its foreign trade and foreign direct investment flows. It should be emphasized that the choice by the Chinese government of the openness and the economic integration was largely inspired by the experiences of its dynamic regional neighbors.
This choice paid off, as less than two decades, China's share in world exports has nearly tripled. The open-door policy has enabled China to gain access to technology and Western ideas through foreign direct investment (FDI), which played a key role in its economic development process. Finally, with labor relatively cheap, skilled and flexible, China remains an attractive destination for FDI, including those on intensive industries in labour. SUCCESS AND CONSEQUENCES OF CHINA’S ECONOMIC TRANSITION |

China opted to carry out economic transition in a step-by-step way, rather than by radical reforms or even shock therapy as used in some other economies. This route proved to be the key to the success of transition, because it limited the negative impact of reforms to an acceptable extent and avoided social unrest.
Since 1978, China has combined successfully its transition to a market economy and a policy of rapid economic growth which places it currently among the leading world economic powers. Indeed, it already ranks third in the world in 2007 according to the World Bank, tied with Germany, and could be ranked first in 2050, beating the United States.
With economic growth (appendice 1) that is about 9% per year for 25 years, average income was multiplied by 6. The standard of living of the population has improved significantly, household equipment, housing conditions improved vastly; the extreme poverty has declined, the Chinese coastal regions and cities know in particular an explosive growth. Indeed, its neighbor, India, which also more than a billion inhabitants, preceded by far, in 1949, in terms of human development. Today, the situation has reversed. China has 7% of malnourished children against India which has 44%. In China, 98% of children under 12 attend school against 58% in India.

Meanwhile China has pursued a strategy of economic opening to the outside world which allowed them to take advantage of globalization. It has become a major receiving country for foreign direct investment, and in 2009, it was the largest exporter and the second largest importer in the world.(appendice 2) China makes 9.9% of world merchandise exports (second comes Germany with exports of 9,2%) and 8.1% of world imports (against 13% for U.S.)

These economic successes, which assert themselves both internally and internationally, are the basis of consensus that now exists within the Chinese political power on economic strategy, whose main lines are: continuation of reforms and economic opening, privatization, strengthening of institutions that govern the market. Indeed, China has learnt from its experience of the past two decades that it is only by striking a balance between reform, development and stability that economic transition can succeed.

However, Chinese economic model is often called unsustainable. The savings rate is very high, and slows local consumption too low to allow the takeoff of an internal development.
The social and economic inequalities are widening, a small portion of the population is enriched while the vast majority of the population does not benefit the development of production.
The investment, too high, shows the risk of overproduction. Pollution peaked. The most optimistic supporters of free trade will always claim that these problems will be resolved, provided that China is playing the game of free trade, open its domestic markets and revalue its currency. In the best case these changes may be made only in the long term, while the rapid growth of imbalances places the problems in the medium term. If the Chinese economic model is unsustainable, it appears increasingly that it is not only for China itself, but also for the entire world economy and in the first place to that of most developed countries.
This shows that China is still an economy in transition in which the economic institutions and the regulatory instruments have not reached their maturity.

CHALLENGES |

If China has overcome many challenges during this rapid economic development, many others are still waiting.

First, to achieve a balanced economic growth, which could benefit the entire population, China must strengthen its economic foundations inside the country. The economic reform in China began with the development of coastal areas; they are now much more developed than the rest of the country and its people earn in average three times more than their compatriots who live inside the country. The standard of living of the population in these areas could be high due to the improvement of infrastructure, housing, education and health care. This could also help to create social conditions more stable.
Secondly, the government must strike a balance between economic growth and the environment. Being an important player in the global economy, it is the responsibility of China to protect the environment. Finding out how to protect the environment will not harm its economic development but will certainly be a delicate process for China.
Thirdly, to establish harmonious trade relations with other countries, China should take measures for the long term. The country has a credit of trade balance with most countries of the world, including United States. This credit is the source of most trade frictions between the countries. China is under external pressures increasingly strong for a revaluation of its currency, and the alarm bells are ringing of a trade war with America if action is not forthcoming.

CONCLUSION |

One cannot underestimate the success of the Chinese transition. It has now well and truly established itself as a super power with formidable strength on the global economy. The country has all the ingredients that are required to run an almost perfect economy. They have lots of access to capital, a highly skilled and motivated workforce, working fiscal policies, good banking sectors, increasing enterprise and stable government control. They are now on the brink of becoming the world’s largest super power and leaving the rest in their path.
So what are the implications for the rest of the world? It is clear to see that the United States of America are indeed worried about this evolution of the Chinese economy. Their their rapid ascent to the top of the ladder was never foreseen by Bill Clinton when he made is pleas for China to be re-introduced to the WTO back in 2000. Perhaps the multinationals that may have been persuading him made that cardinal error of short sightedness in business. Indeed the draw of the Chinese economy may have been too good to resist. However this cheap labour and lower corporate tax incentive of the Chinese economy has come at a cost. The Chinese have gained a lot of intellectual property from these huge multi-nationals and are now arguably using it to against them. By favouring their own state owned or private enterprise, the Chinese are giving massive subsidies and making their ever growing domestic and international market very competitive. They are now also flooding American markets with cheaper goods and holding stock piles of American dollars in reserves. By keeping their yuan dollar at low value, this makes them far more competitive in the market, not just for America but indeed the rest of the world.
What lessons can be learned from China? A lot you could say. In Europe we are experiencing the worst financial crisis in living memory and a lot longer before that I’m sure. It could be argued that Germany have looked at this Chinese development and have said they want in on the action. By holding the European countries to ransom and not effectively printing off more money to liquidate the markets, they are exerting pressure on the various economies to gain a tighter fiscal control of their affairs. This release of “national sovereignty” into the hands of the Germans may be seen as an act of treason in some parts of Ireland, but one has to say they know how to run an economy. Are Germany trying to increase a socialist style of governance? This may send the shivers down the spine of many people, and when one thinks about it, it just shows how far the German economy has come also. In these uncertain times Ireland as a nation has to decide which economic route we wish to follow. Do we relinquish our control and perhaps join a better streamlined European economy, or do we jump ship and swim in murky waters of no man’s land. Are the socialist democratic methods of our Chinese counterparts too hot to handle for us here in Europe or could they work?
Only time will tell these answers, until then some advice, don’t make too many investments in American or European bonds, the smart money is way over there in the east.

BIBLIOGRAPHY | * Websites: (1) http://www.contretemps.eu/interventions/chine-peut-elle-sauver-capitalisme-mondial (2) http://infochina.be/fr/content/les-soixante-ans-de-la-r%C3%A9publique-populaire-chinoise-la-qu%C3%AAte-d%E2%80%99un-mod%C3%A8le-de-d%C3%A9veloppement (3) http://english.peopledaily.com.cn/200211/13/eng20021113_106760.shtml (4) http://www.m-lasserre.com/educpop/dossierdelocs/LaChinedansl'economiemondiale.htm (5) http://www.chinadaily.com.cn/fr/editorial/2010-03/17/content_9604604.htm (6) http://www.imf.org/external/index.htm (7) http://www.international.gc.ca/economist-economiste/performance/state-point/state_2010_point/2010_2.aspx?lang=eng&view=d (8) http://www.institut-gouvernance.org/fr/analyse/fiche-analyse-230.html (9) http://1990institute.org/files/public/1990/ipaper/MarketTransition_ip9.pdf
(10)http://www.economist.com/node/21532288
(11)http://www.ceibs.edu/ase/Documents/EuroChinaForum/liuji.htm
(12)http://rss.economist.com/node/21541461

* Book: (1) Wladimir Andreff (2007). Economie de la transition: la transformation des économies planifiées en économies de marché. Paris: Edition Breal.

APPENDICES

1- CHINA’S RAPID GROWTH |

2- LEADING EXPORTERS AND IMPORTERS IN WORLD MERCHANDISE TRADE 2008 |

2009 | 2008 | | 2009US$B | 2009% | 2009 | 2008 | | 2009US$B | 2009% | Rank | Rank | Exporters | Value | Share | Rank | Rank | Importers | Value | Share | 1 | 2 | China | 1,202 | 9,9 | 1 | 1 | U.S. | 1,604 | 13,0 | 2 | 1 | Germany | 1,121 | 9,2 | 2 | 3 | China | 1,006 | 8,1 | 3 | 3 | U.S. | 1,057 | 8,7 | 3 | 2 | Germany | 931 | 7,5 | 4 | 4 | Japan | 581 | 4,8 | 4 | 5 | France | 551 | 4,4 | 5 | 5 | Netherlands | 499 | 4,1 | 4 | 4 | Japan | 551 | 4,4 | 6 | 6 | France | 475 | 3,9 | 6 | 6 | U.K. | 480 | 3,9 | 7 | 7 | Italy | 405 | 3,3 | 7 | 7 | Netherlands | 446 | 3,6 | 8 | 8 | Belgium | 370 | 3,0 | 8 | 8 | Italy | 410 | 3,3 | 9 | 12 | Korea | 364 | 3,0 | 9 | 12 | Hong Kong | 353 | 2,8 | 10 | 9 | U.K. | 351 | 2,9 | 10 | 9 | Belgium | 351 | 2,8 | 12 | 11 | Canada | 316 | 2,5 | 11 | 11 | Canada | 330 | 2,7 |