A Brief Economic History of China


Starting an economic adventure in China as an investor without at the very least having a firm grasp on the very basics of its economic history would be a foolish mistakes. To that effect, I always encourage potential investors to start by analyzing the Angus Maddison database, which tracks the percentage of the world’s GDP of various countries and goes back not just hundreds but downright thousands of years (to be fair, do keep in mind that prior to events such as the First Industrial Revolution which made it possible for certain nations to have a far higher per capita productivity level, the slice of the global pie each country had was mostly a function of its population).

As you will notice, for the overwhelming majority of the past 2,000 years (no, this is not a typo), China and India accounted for quite a bit over 50% of the global economy. In China’s case, they navigated the sometimes tricky geopolitical landscape through a remarkable combination between an effective bureaucracy and diplomacy that was smart enough to keep “barbarians” (the term Chinese leaders liked to use when referring to foreigners).

While China did have military shortcomings and was the victim of various invasions over the years, its culture proved too strong and whatever dominance it has to deal with was temporary at best. It is also worth noting that China achieved all of this without an emphasis on global trade, contrary to what you would have thought if you expected there to be a parallel between China and let’s say European colonial powers. There isn’t.

Simply put, for the better part of two millennia, China considered itself the center of the world’s economic and cultural universe and was never eager to learn from or transact with other cultures. After all, they were employing the previously mentioned combination between administration and diplomacy which had proven to work for thousands of years… so why change anything?

Unfortunately for them, as of the First Industrial Revolution, this excessive rigidity proved to be quite costly. By the year 1820, China was still the world’s #1 economy but they were lagging behind technologically-speaking, with entities such as the British Empire being far superior in that respect. The British were eager to out-maneuver the other colonial powers by being the first to trade heavily with China and, indeed, their first efforts to do so were diplomatic in nature.

However, other than some minor concessions, it was for the most part a diplomatic failure on their end. The British Empire was not interested in limiting itself to very basic coastline commerce and, as such, the Opium Wars started in 1839 and China was forced to change its mind at gunpoint. Within the next decade after the Second Opium War came to an end, China’s percentage of the global economy suffered a 50% blow and, worse yet, it was only a matter of time until significant concessions had to be made not just to other European nations but also to the Russians and Japanese. Needless to say, what followed was a very humiliating period for China.

The end result was that a lot of bottled-up resentment ultimately manifested itself as of 1949, when Mao Zedong defeated the nationalists (who withdrew to Taiwan for strategic reasons, a situation which to this day has not been settled) and on October 1, 1949, the People’s Republic of China was born.

Unlike what happened in the USSR after Nikita Khrushchev followed Stalin to power and adopted a more moderate political tone, the previously-mentioned resentment manifested itself in China to a very significant degree, resulting in economic and political programs which proved to be excessively ambitious.

The two most well-known examples are:

  1. The Great Leap Forward of 1957, with China setting the goal of surpassing the UK for itself. Eager to achieve this goal, those at the administrative level declared production results which were considerably more optimistic than reality, which led to China exporting too much… including food. The result of these excessive exports has been a famine with tens of millions of deaths, with the most casualties in recorded history
  2. The Cultural Revolution of 1966, an “out with the old, in with the new” ideology-driven approach which led to the intellectual capacity of China being under-utilized, with intellectuals sent to rural regions to learn from farmers, cultural symbols such as ones related to Confucius being destroyed and the list could go on and on

Closer to Mao’s death, however, things changed and China’s policies became more flexible, with the culmination of this being represented by Richard Nixon’s visit to Beijing in 1972. Still, things were very tricky both politically and economically (with China engaging in roughly as much commerce with the United States ad the nation of Honduras and ten times less than Taiwan despite Taiwan not even having 2% of China’s population) after Mao Zedong’s death, with two factions fighting for power. One driven heavily by ideology and led by the Gang of Four and one that was far more pragmatic, led by Deng Xiaoping.

The pragmatic faction ultimately won and after a brief experience as a leader for Hua Guofeng, Deng Xiaoping took over and ended up representing an emblematic figure, the symbol of China’s recovery. Contrary to the ideology-driven approach of his opponents, Deng Xiaoping is famous for his “it doesn’t matter if a cat is black or white, as long as it catches mice” statement, which accurately illustrated his willingness to be flexible if the end result is economic growth.

To achieve just that, Deng Xiaoping promoted his four modernizations. When it comes to agriculture, they revolved around helping farmers by providing electricity to rural regions and allowing private initiative to take place. As far as the industrial sector was concerned, state-owned enterprises were allowed the flexibility of directing excess profits toward incentives such as bonuses and wage increases. As far as the technological dimension (the third) was concerned, China dramatically changed its previous position of rigidity and became a lot more willing to learn from its more developed trading partners. Finally, defense was of course not neglected either.

This approach remained unchanged, with future leaders (Hu Jintao and Xi Jinping) mostly maintaining this level of flexibility and the results which followed were nothing short of impressive. Poverty declined dramatically (as per World Bank statistics), from roughly 90% at the beginning of Deng Xiaoping’s reform programs to low single digits at this point. Compared to the same period, China’s GDP per capita is currently 25 times higher and needless to say, the economy of China has been modernized, with agriculture sector representing less than 10% of its economy nowadays (compared to 50% before the reforms started), the industrial sector doubling, the service sector increasing by mid double digits and the list could go on and on.

As can be seen, we’ve managed to cover over 2,000 years of history through one article and by internalizing the aspects which have been brought to your attention, your perspective when it comes to China’s present will be a lot more context-based and complex.

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