China Enters a New Era

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China Enters a New Era

For three decades, the model that Deng Xiaoping instituted to guide China’s emergence from Mao’s Cultural Revolution has had developed countries looking over their shoulders.  For years, as the Chinese economy grew, it appeared to outsiders that two opposing systems had magically been brought together.  A single, centrally-controlling political party was seemingly directing the “invisible hand” of an emerging capitalist market, complete with international trade.1 This was, in fact, the goal of Deng’s model, which rested on three pillars:

  • Pillar one was economic pragmatism, which allowed for the rise of capitalist-style incentives and openness to international trade.  The vision was to maintain a high trade surplus, which would keep dollars flowing into the country and Chinese workers employed in factories.  One implication of economic pragmatism was a shift of the basis of the Communist Party’s legitimacy from ideological zeal and class warfare to enabling the country’s economic success.
  • Pillar two called for a foreign policy of cooperation, which became possible once there was a lack of emphasis on political ideology.  Economic cooperation became the focus as China became open to befriending and trading with almost any country.
  • The third pillar can be defined as the primacy of the Communist Party system.  Although reform might be envisioned, it would never be allowed to evolve in such a way as to undermine party supremacy.  This pillar became most clearly visible in the reaction of the Chinese government to the 1989 student uprising, culminating in the famous “Tiananmen Square incident.”

Over the years, Deng’s successors have followed this same model.  The result has been Chinese-style capitalism driving a favorable trade balance with the U.S. and EU.  Most experts would say that, on balance, it has worked extraordinarily well for China, as well as for the global economy.

But, the big question has always been whether or not this model is sustainable.

Taking a closer look, we can see that it relies on several elements that are seemingly impossible to maintain:

  • One of these is artificial growth, based on forcing state-controlled banks to lend money to state-owned companies that are forced to borrow.  This model has led to enormous unneeded manufacturing capacity, a sign that the economy is not healthy or robust and is being propped up artificially from within.
  • Secondly, the Deng economic model produces very little wealth and it is very slow to raise standards of living for the great mass of Chinese...

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