Download The Yesteryears

The Forbidden Kingdom
1. Introduction
On August 24th, 2015, the global stock market experienced a shock and the
whole world speculated another financial crisis. The epicentre of this turmoil
went back to China, where the Shanghai stock market went down by 40%. A
week before that, China had again surprised the whole world by devaluing the
Yuan. In order to stabilize this new endeavour, the Chinese government
splurged $156 billion at buying shares in order to stabilize them, leading only to
a drastic fall, yet again.
China, ever since, looks so good on paper, with trade surpluses and a stable
government, but then, what caused the above mentioned discrepancy? China has
always been a threat to other developed nations, with economist predicting it to
be the next super-power. China’s labour force, considered to be the cheapest
and the most efficient, is always a setting example to a country like India. With
very high investment rate and a very high savings rate, China looked on the path
of a glorious future and after its trade liberalization, enabled it to be the world’s
biggest exporter.
This paper analyses the reasons for this current turmoil by taking a tour of
China’s past, revisiting its key policies and reforms (this section analyses China
from the years 1950 to 1990); taking us to the present condition (from 1990
onwards) and concludes by foretelling its future.
2. The Yesteryears
In the year 1948, China’s Communist Party came into power. This paper also
analyses the ambiguity, whether China can be deemed to be a true Communist
state or not. China had heavily banned the mobility of the population between
the rural and urban sector in the past, which was a result of low agricultural
output. The rationing needs of the cities were not completely fulfilled causing
the government to take this measure. Post 1960’s, China saw an exceptional rate
of growth, which to the most surprise, was a reason of trade labialization.
During the reign of Deng Xioping, trade reforms in the rural played the most
important role of its growth out of poverty and achieving financial stability. The
impetus to the economy, during that time, was because of its rural reforms,
making the impact from urbanization very negligible. This resulted in doubling
of the rural per capita and poverty reduction.
The credit of these happenings is certainly given to townships and village
enterprises. It was said that, the state controlled TVE’s, proved to be very
successful and its economic contributions were more than foreign investments.
People always argued, the reason for these was because the state owned TVE’s
were more like private owned. Others argued that they were heavily government
protected, had preferential access to capital, unlike other firms in the urban and
took advantage of the weak legal framework. There was one thing for certain,
the state run TVE’s were actually privately run which made the urban
population more competitive to work hard. The dual tracking system by the
government helped the people earn more profits by selling the part of the crops
to the government and then in the market, which helped boost China’s economy
tremendously. Rural China was actually capitalist, which helped in increase of
rural income absorbed the surplus rural labour and reduced the urban – rural
gap.
The Informal sector also plays an important part in development of China at that
point in time. The Informal sector was a result of privatisation of the TVE’s,
which gave people the opportunity to save money, invest their income by
making loans to others. There was free availability of credit, which further
increased the span of the rural market, compared to the urban market which had
severe financial restrictions. This informal sector gave rise to the Rural Cooperative Bank, which proved beneficiary to the further growth in the sector
until the 1990’s, when there was reversal of the policies.
Apart from these reforms, Deng Xioping was a liberal individual who also tried
to liberalize the financial sector in the urban. He de-criminalized the practice of
free trade in the urban and tried to make it as potent as the rural market.
The ambiguity now arises that how can a communist state be so liberal in its
practices. The free flow of funds in the rural sector is another example of it.
Apart from the positive mechanism in China, there was also an increase in
negative externalities. There were stricter controls over the migrant population
in the state which caused regional imbalances. The one birth policy in order to
control the population boom created many imbalances in the future. The rural
population was not benefited by the social security schemes offered to the urban
sector by the government.
3.1990 Onwards
This section understands the reversal of the policies which were mentioned in
the above section. It gives an emphasis on how the government started
intervening with the policies already established and the impacts it generated
because of its interference.
In the 1980’s the rural Co-Cooperative Bank started to have stricter reforms on
its policies. The borrowing of the people drastically reduced because it made it
necessary to give collaterals in order to take a loan. The Central Bank made it
mandatory to have a 30% reserve ration, thus reducing the credit availability to
its people. This was a systematic end to the informal system started in the 70’s
and by the end of 1990’s it was made completely illegal. After this stint, the
country again saw increase in poverty and rural migration. This was when the
outlook of the whole country changed towards the outside world and undertook
new ways to collaborate.
The labour back in the 80’s was very cheap leading to high domestic produce,
but, the Chinese labours were underpaid compared to its other Asian
counterparts. The new and the younger generation now did not work in rural
sector, since its decline, but move more towards the urban areas. The agriculture
now is done by the older generation in china. The indicators first showed that
the growth rate was lower than that of the labour productivity rate- which made
labour cheaper. Later it was realized that its annual growth rate was far behind
its real growth ratemaking the Chinese labour more expensive. Privatization of
the state owned enterprises resulted in rise in urban wages. Those workers who
have a rural hukou started working in a more labour intensive industry which
catered for the foreign exports. The productivity of the labourers increased since
the privatization of the industries. Labourers became more competitive and the
total factor production as a whole was on a rise.
Certain reforms allowed the market to be competitive- before, the government
had a planned labour allocation system, which did not allow them to change
their jobs, this reduced the productivity of the firm. Later, reforms were made to
make the labour more market oriented. People were given various incentives
and bonuses which encouraged them to pursue extra years of schooling, hence,
increasing the education of the labourers as well.
There was a huge change in the demographics of the nation which posed a
severe threat to the labour. The one child policy had a bad effect on the labour
of the country. Since the implication of the policy, there was a big difference in
the age group of the work force. Middle aged men were more in number
compared to the old and young men in the workforce. Thus there was heavy
income concertation amongst men that age.
The above mentioned policy reforms and implications had an impact on the
labour market outcomes of the nation. Over time, China’s labour markets were
transformed to an increasingly market driven system. In 1990’s, more than 40%
of China’s state owned enterprises were making severe losses, but policies were
implemented in which the state kept the best 1000 firms and privatized the
others. After the reforms, the government allowed labour mobility, and rural
migrants started to do labour intensive jobs .Older people and women have seen
reduction in employment since then and the role of housewives in household
savings have increased.
The main reason for the mention of these reforms and its then implications are
its impetus to aggregate savings and external imbalances in China.
In 2001, there were already high investment rates & savings rate which led to
rapid economic growth. After entering the WTO, its business climate improved
and trade barriers fell down, with increase in profitability. The rules focused on
export promotion, favoured firms and government, but not households. Profits
were saved by corporate, taken by government, but not spent on social welfare
accordingly. Aggregate savings were high, with weak domestic consumption
and less demand for imports. Excess savings ended in foreign exchange reserves
and in low yield government bonds. The capital and financial account was
balanced before joining the WTO, after that there were large rise in surplus.
There started a large inflow of FDI post 1990. There were twin surpluses in the
Current and Capital account which resulted in increase of net foreign assets. In
china, the trade surpluses are not consumed or invested, but, saved. The huge
gap in savings and investments resulted on the CA surplus. There was no final
consumption in the corporate sector since everything was saved and not
invested. Pace of the increased government spending failed to catch up with the
pace of the increase in revenues. The collection of income taxes and social
insurance out spaced the spending of the government.
Younger people started earning more, the economy shifted from the regards of
the aged to productive human capital of the younger generation. Young people
who spend more than earning, started burdening the family to save more, adult
children started providing financial care for the old people, which, further
increased the savings, older families saved more, gender imbalances promoted
competition among youngsters to save more to get married in the future.
4. CONCLUSION
The above sections gives a purview to the current situation and most of it is to
be blamed on the ambiguity of the government policy and reforms. If things go
ahead the way they are, then there will increase income disparity and will lead
to income concentration amongst the riches.
In order to avoid a crisis, it is advisable if the Chinese government increases
spending amongst the households to prevent it to go into a slowdown and
affecting other countries.