Deng's Southern Tour and China's Economic Miracle

Book: Financial Cold War by James A. Fok | ISBN 9781119862765

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Mao died in September 1976. China was broke, isolated, and traumatized. The question was whether anyone could pull it out of the hole. James A. Fok spends the second half of Chapter 4 on the answer: a messy, contested, sometimes brutal path from Deng Xiaoping to Zhu Rongji, ending with the 2008 Beijing Olympics as a statement to the world.

Herding cats

Hua Guofeng arrested the Gang of Four within a month of Mao’s death. That was a break. But real power shifted to Deng Xiaoping, already 72 and purged twice by Mao.

Deng faced four huge problems. Talent was gone after the Cultural Revolution. Technology lagged far behind Japan and South Korea. The country was desperately poor. And the Soviet Union and Vietnam still threatened the borders.

His famous line captured the approach: it does not matter if the cat is black or white, as long as it catches mice. He sent officials abroad to see how far behind China had fallen. Zhao Ziyang visited France and Greece and realized farmers there got rich by trading what they were good at, not by forcing every region into the same crop plan.

Japan gave China massive aid and technology. Normalization with the US in 1979 eased the Soviet threat. Deng’s 1979 strike on Vietnam was costly in lives but, as Lee Kuan Yew later argued, it checked Vietnamese expansion and freed resources for development.

Reform was never smooth. Chen Yun, the veteran planner, wanted the market to stay in a cage. Deng balanced him with Hu Yaobang and Zhao Ziyang. Guangdong became the laboratory. Xi Zhongxun, father of the current president, pushed for more autonomy. Four special economic zones opened. Two-thirds of foreign investment through 1995 came via Hong Kong.

A Hong Kong factory owner named Cheng Ho-ming crossed into Shenzhen in 1978 and found a dirt-road backwater. Workers earned 26 yuan a month with no incentive to work hard. When he introduced piece-rate pay, the manager worried it was illegal capitalism. Cheng said he would go to jail with him if needed. Productivity jumped.

Crackdown

The 1980s boom created new problems. Corruption spread. SOE workers feared losing their iron rice bowls. In 1988, Deng rolled back price controls. Inflation spiked over 30 percent in Beijing. People rushed to banks to buy goods before prices rose again.

Student protests after Hu Yaobang’s death in April 1989 were not only about economics. Graduates still had jobs assigned by political guides on campus. Zhao Ziyang had pushed for political reform and an independent judiciary. Deng rejected multi-party politics.

A harsh People’s Daily editorial on April 26 made things worse. Martial law followed. Zhao visited Tiananmen Square on May 18, pleaded with students, then vanished into house arrest. Troops cleared the square on June 4.

Fok does not excuse the violence. But he notes the leadership feared chaos like the Cultural Revolution. The Soviet collapse two years later looked like a warning. Reformers lost power. Economic reform itself nearly stalled.

Journeys to the south

Jiang Zemin emerged as a compromise leader after 1989. Growth slowed to 4.2 percent in 1989. Conservatives wanted more control. Deng, now retired, disagreed.

In 1992 he took a family holiday by train to the south. Nobody in Beijing was told in advance. In Wuhan he said officials should do more and talk less. In Shenzhen and Zhuhai he praised local results and attacked leftist rigidity. Hong Kong journalists crossed the border. The story could not be suppressed.

Jiang got the message. Chen Yun even backed Shanghai’s Pudong development. Zhu Rongji came to Beijing as vice premier. At the 14th Party Congress, China committed to a socialist market economy.

A new path

Zhu Rongji was blunt, competent, and feared. He fixed triangular debts among SOEs by injecting 80 billion yuan that cleared 380 billion in chained obligations. Then he made himself PBOC governor while serving as vice premier. His Sixteen Measures recentralized monetary and tax policy. Inflation that hit 22 percent in 1994 fell to 2.8 percent by 1997.

When the Asian Financial Crisis hit, China did not devalue. That earned regional goodwill. Zhu accelerated SOE and bank reform and fought to get China into the WTO.

The accession talks were brutal. China opened tariffs, allowed foreign banks in stages, and accepted safeguards. FDI surged before formal entry in 2001. Exports jumped to 10 percent of GDP by 2007, helped by a cheap currency. China also learned to use WTO rules cleverly, like capping foreign banks’ interbank borrowing at 40 percent of deposits, a rule that looked neutral but favored domestic lenders.

Zhu told critics to prepare 100 coffins, 99 for corrupt officials and one for himself. He left office in 2003 with growth in double digits and plenty of unfinished business.

The Bird’s Nest

On August 8, 2008, at 8:08 PM, 2,008 drummers opened the Beijing Olympics in a stadium shaped like a bird’s nest. Over 100 heads of state watched. The price tag was $43 billion. As Western markets cracked in the GFC, China announced its return to the world stage.

The numbers since Deng are hard to argue with. Hundreds of millions lifted out of poverty. China became the second largest economy by 2010 and largest by purchasing power parity by 2014. Pollution costs were enormous. Centralized power still depends on picking strong leaders. Corruption keeps coming back.

Fok closes Chapter 4 with an open question. Can this model handle slower growth, aging, inequality, and deeper global integration? Chapter 5 digs into the financial side of that puzzle.

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