The Limits of Chinese Economic Reform

Publication: China Brief Volume: 5 Issue: 17

The conventional view on China is that the PRC has entered the realm of global politics and is currently vying with the United States for superpower status. China has enjoyed dramatic economic growth in recent decades, ever since Deng Xiaoping initiated his reform program more than 26 years ago. The current leadership remains committed to economic reform, recognizing that it is necessary for long-term growth and prosperity. Like Deng, they have embraced the view that an inward-looking China, cut off from the outside world, with an inefficient and unresponsive command economy, cannot progress.

China’s rapid economic growth has generated widespread belief that it will be the economic superpower of the new millennium. The assumptions underlying this belief are multiple and appear reasonable: China’s economy is already one of the largest in the world and is growing very rapidly; this growth rate can be sustained virtually indefinitely; any serious challenges to growth will be overcome; the state will be able to exert sufficient coordinative control over this process leading to China’s emergence as a superpower. But often overlooked in this analysis is the fact that China’s economic reform process seeks to develop an internationally integrated market economy without substantially restructuring its political system.

The prime objective of the reform process has been rapid economic growth in such sectors as foreign investment, urban and rural industrialisation, service industries, and private sector enterprises, while increasing managerial autonomy for the state and collectively-owned sectors of industry and expanding foreign trade. Though for the most part these goals have been achieved, one must understand that China’s economy in is not a national economy, and bears little resemblance to Western economies structurally.

There have always been two Chinas: a maritime China, caught up in the economic growth of modern times and looking beyond her frontiers; and a continental China, agrarian, bureaucratic, conservative, and unaware of the economic advantages of international capitalism. It is this second China that consistently controls the political power within Beijing. Economic growth has mainly been concentrated in maritime cities, while the vast hinterland remains very unevenly integrated into a national economy. Given its size and rate of growth, this inequity between reformed and unreformed areas may greatly distort free-market trading systems.

In an October 2003 address to the Australian Parliament, Chinese President Hu Jintao declare: “In the past twenty years and more, since China embarked on the road of reform and opening up, we have moved steadfastly to promote political restructuring and vigorously build democratic politics under socialism”. [1] The first part of this claim is relatively uncontroversial. There has been some political restructuring since 1978-79, without question. This restructuring allowed President Hu, Prime Minsiter Wen Jiabao and other fourth-generation leaders to succeed Jiang Zemin without a violent struggle. Far more controversial is the claim that China has been vigorously building democratic politics under socialism.

Deng Xiaoping regarded the democratic movements of the 1980s with deep ambivalence, as have succeeding generations within the Chinese Communist Party (CCP). In fact, the CCP has steadfastly suppressed the emergence of democratic politics in China: from the brutal Tiananmen Square crackdown in 1989 to the bloody suppression of Tibetan dissent, the Falun Gong religious movement, the China Democratic Party and the arbitrary detention of scholars and journalists for “revealing state secrets”.

The significant point in this is the connection between democratization and the potential from economic growth. Economic development, free-market reforms and political democratization are intimately connected – which is something the CCP would rather not confront. While China enjoys a vast market and an abundant labor force, it also needs to maintain social and political stability in order to capitalize on its current momentum toward development. The CCP’s answer has been the retention of authoritarian control, even as the private sector replaces state-owned enterprises, ensuring that new entrepreneurs count party representatives as among their close colleagues.

But Beijing continues to struggle in finding the balance between adopting policies which promote economic growth, while concomitantly ensuring the hegemony of the CCP; in short, trying to achieve political centralism with economic decentralism. And there are other challenges as well: the growing economic disparity between rural and coastal provinces and its implications for internal cohesion; unemployment; an ageing population; corruption; the rise of sub-state and non-state forces such as ethnic identities and religious fundamentalism; capital inflows, pollution, the tensions within an emerging entrepreneurial economy; the vast parts of China still under state control and the future of the CCP. There is a deep-seated fear that sooner or later one or more of these issues is going to result in political unrest. Therefore, in closing the 10th National People’s Congress (NPC) in March 2003, Hu called for greater democracy in China, while indicating that the CCP’s priority “will be to bridge the growing economic disparities in Chinese society caused by reforms.” [2]

The ageing population structure is an important concern for China. One study estimates the ratio of the elderly population dependent on working adults or the government will rise from 10 percent in 1990 to 22 percent in 2025. [3] Already nearly 10 percent of the 1.24 billion Chinese are aged 60 or over. By mid-century, birth and death rates are expected to equalize, with the population stabilizing at 1.6 billion, of whom no fewer than a quarter will be over 40. This ageing phenomenon is occurring in many countries, but most have a stronger economic base than China and a better-developed welfare system.

Meanwhile, the plight of the more than 300,000 state-owned enterprises (SOEs) is another concern and is also a serious burden on China’s economy. These SOEs, which employ more than 100 million workers, are operating at a loss of about 1 percent of GDP each year. Many industrial workers receive only partial payment. The problem of underemployment and bankruptcy in state-owned enterprises is critical, and needs reform. But SOE reform is only one aspect of China’s escalating unemployment problem. The one million-plus soldiers and officers in the Chinese military’s reserve forces are primarily in SOEs. The closure of these SOEs in a drive for national economic efficiency would create more unemployment and social unrest.

In rural areas, farm technologies have reduced many to unemployment, with official estimates suggesting that the army of jobless will soon reach 120-140 million. Questions are also arising about the future of the 23 million town and village enterprises which employ around 135 million people, and have been driving local economies in some parts of the country since the mid-1980s. Now, however, they are being squeezed because of rising costs and greater competition from foreign-invested firms.

Unemployment in urban China is also rising, with some estimates suggesting that the real rate of unemployment there has already reached around 10 to 12 percent. Another potentially disruptive group is China’s “floating population” of underemployed or unemployed rural labour. Mainly male, and numbering about 100-120 million, they migrate into cities and work on construction projects. They return to the countryside from time to time, or else send funds back to their families. The potential for labor unrest in China is high, and may be one of the most volatile problems to confront the Chinese leadership and the People’s Liberation Army.

Furthermore, pollution problems are mounting. Raw sewage is being dumped untreated into rivers, much of the rain falling in some areas – such as Guangdong Province – is acidic, and vehicle emissions are rising in cities like Beijing, Shanghai and Guangzhou. Many foreign enterprises are heavy polluters as are village enterprises, which use rivers as drains for untreated toxic wastes. The last couple of years have seen a crack-down on polluting enterprises, but every closure means fewer jobs.

The central government is becoming increasingly concerned about the likely disruption to political and social stability if the inland areas continue to believe that they are not getting a fair share of the benefits of rapid economic growth. The current Five Year Plan gives priority to inland development, and the top leadership constantly reiterates the importance of rectifying the imbalance by stepping up resource development and infrastructure projects, improving the investment climate and directing more funds there and creating employment opportunities.

As observed earlier, economic growth in China, though impressive overall, has been uneven; great advances on the east coast regions have not been matched by economic progress within the Chinese interior. One result of this has been wide disparities in income between the regions. Aside from being divisive regional hostility, there has been a massive influx of workers into the coastal regions from the poor interior. The result has been a wide variety of social problems in the cities, including rising crime, drug trafficking and prostitution and huge pressure on an already stretched infrastructure.

Rapid economic growth has also contributed to weakening central government control over the regions. Guangdong, for example, is the fastest-growing provincial economy in China. The wealth generated by this growth has bred a new regional elite anxious to escape the fetters of central government policy control. While the Party has attempted to control this new elite, the trend toward greater regional autonomy has continued, fuelled by economic developments. Guangdong province is perhaps the best example of this phenomenon. It is now largely self-financing, receiving little cash from central government and, in return, paying little in taxes.

Rapid economic reform has brought many dangerous side effects including rampant inflation, corruption and growing economic differentials. It has also failed to bring the government solvency. The reform has also generated a process of class formation, which threatens the largely unchanged political system. A new working class is being formed whose interests are far less closely aligned with management, state and Party than in the past. Pressure is now building for increased political reform. Achieving democratic politics, however, will be a task requiring fundamental restructuring of the state and an end of the Party’s monopoly on political and judicial power.

The CCP shows no sign of giving up this monopoly. It is inevitable that the values of the rich and industrialised countries of the West will gather influence in China. Controls on this influence are inevitably going to create resentments among the educated young, the skilled people who are going to make up the very personnel who implement modernization. The government wants them on side, not resenting everything it does. Indoctrination of the youth has worked in the past, but the fact that the student movement and the Tiananmen massacre occurred proves that it has not been entirely successful since the mid-1980s.

Today, power is still in the hands of the government, but we can anticipate China will be transformed within the next few decades. The basis for this judgement is that Chinese society itself is swiftly changing, no matter what the government does. No political authority can halt this process. According to U.S. Defence Secretary Donald Rumsfeld, “Ultimately, China will need to embrace some form of open, representative government if it is to fully achieve the benefits to which its people aspire.” It remains to be seen whether Beijing would adopt that approach.


1. The Australian Financial Review, October 31, 2003.

2. Frontline, Chennai (India), April 11, 2003.

3. Far Eastern Economic Review, March 26, 1998.