In January 1992, Deng Xiaoping, the then “paramount leader” of the People’s Republic of China (PRC) made a tour of the Shenzhen Special Economic Zone in China’s southern Guangdong province, situated immediately north of Hong Kong. During his tour, Deng praised Guangdong as a model to be emulated by the rest of China. According to the Communist Party’s People’s Daily, during his tour Deng also declared that the “Singaporean social order is good, because the country put it under strict control, we should learn from its experiences and should exercise better management of society”.
At the time, only 35% of industrial production in Guangdong came from state-owned enterprises (SOEs), while 38% came from privately owned firms and 27% came from semi-private “collectively owned” enterprises. In Shenzhen, Hong Kong capitalists accounted for 64% of the US$449 million in accumulated direct foreign investment and employed 3 million workers, compared to only 680,000 workers in Hong Kong itself.
Guangdong’s economy was described in October 1988 by the US Forbes business magazine as a “marriage made in heaven combining the business acumen, technology and capital of Hong Kong industry with the bottomless pool of cheap Chinese labor”. It reported that in the Shenzhen factories owned by Kader Enterprises, Hong Kong’s largest toy maker, Chinese workers, many of them women as young as 12, worked 14-hour days, seven days a week, for the equivalent of US$21 per month, and slept six to a room in company dormitories. The Forbes article quoted a Kader executive as saying: “We can work these girls all day and night, while in Hong Kong it would be impossible. We couldn’t get this kind of labor, even if we were willing to meet Hong Kong wage levels.”
In praising Guangdong province’s economy as a model for the rest of China, Deng was giving his approval for the country’s party and state officials to emulate the “entrepreneurial” practices of the province’s party and state officials. An example of these practices was provided by a September 1991 Associated Press report of how Yuan Lisong, a 48-year-old member of the Communist Party and the deputy mayor of Guangdong’s Dongguan city, had used his government position to become the managing director of the Fook Man Development Company, a Hong Kong-based investment firm. Yuan also sat on the boards of three other Hong Kong companies and was part owner of a 500-room hotel in Los Angeles.
‘Socialist market economy’?
In September 1992, the CPC’s 14th congress approved the creation of a “socialist market economy with Chinese characteristics”. In doing this, the bureaucratic elite that commanded the organs of state power in China decided to abandon its previous policy of having state-owned, centrally planned enterprises as the dominant element in China’s economy in favour of the privatisation of the bulk of state-owned enterprises. Some 2500 large and medium-sized SOEs were selected for privatisation, which was largely completed by 1998, relatives of Communist Party officials becoming the joint-stock owners of these privatised enterprises. At the end of the 1990s, SOEs employed 83 million people, but this represented only 12% of total employment.
A 2005 document, “China’s ownership transformation”, produced jointly by the Australian National University, Beijing University’s Centre for Economic Research and the World Bank’s International Finance Corporation, assisted by the Chinese government’s Economic and Trade Commission, observed: “Over the past decade or so, the [Chinese] economy has made the transition from complete reliance on state-owned and collective enterprises to a mixed economy where private enterprise plays a leading role. This remarkable transformation has been accomplished through the dynamic growth of the de novo private sector and more recently through privatisation …
“Gaizhi, a Chinese term meaning ‘transforming the system’, has become a major phenomenon in most parts of China … In many cases gaizhi has involved full privatisation. Gaizhi programs in China have been gradual and low profile, but in many ways as far reaching as, and generally economically more productive than, privatization measures in Eastern Europe and the former Soviet Union.
“Reforms have been most dramatic in the industrial sector where the number of state-owned enterprises has declined from 114,000 in 1996 to 34,000 in 2003. According to our estimates, about half of the decline is due to privatisations. Privatisation in China has not been limited to small enterprises only: the average size of privatised SOEs is about 600 employees. The process has been socially painful: around 30 million SOE workers have been laid off since 1998 …
“We estimate that the private sector, narrowly defined [i.e., capitalist-owned companies], has become the largest sector of the Chinese economy, accounting for about 37% of gross domestic product in 2003. Overall, the non-state sector accounted for two-thirds of China’s GDP in 2003.
China plays a critical role as the final assembly point for East Asia’s export-driven growth. The Asian Development Bank explains in its Asian Development Outlook 2010 report: “[T]here is the cluster of highly interdependent, open, and vibrant economies in East Asia and Southeast Asia … With the PRC at the center of the assembly process and with exports going mainly to the US and Europe, production in and trade among these economies have been increasingly organised through vertical specialisation in networks, with intense trade in parts and components, particularly in the Information, Communication and Technology (ICT) and electrical machinery industries.”
Martin Hart-Landsberg notes in his article “Globalisation and its consequences”: “China’s unique position is highlighted by the fact that it is the only country in the region that runs a deficit in components trade, and whose exports are overwhelmingly final products. It is this unique position that has enabled China to increase its share of world exports of ICT products (such as computers and telecom equipment) from 3% in 1992 to 24% in 2006, and its share of electrical goods (such as semiconductors and semiconductor devices) from 4% to 21% over the same period. Of course, these are not truly Chinese exports, but rather exports assembled/produced in China. Foreign corporations are responsible for approximately 60% of all Chinese exports; their share is 88% for high-tech goods.”
An example of who gains the most from this situation is provided by New York State University’s Dr Cong Cao in the July-August 2004 China Perspectives journal. He writes: “Being labour rather than technology intensive, those so-called ‘high-tech’ gadgets have a profit margin of sometimes as low as 2-3%. For example, Wanda, a wireless mouse manufactured by Logitech International SA, a Swiss-American company, sells in the United States for around US$40, of which China takes a meagre US$3 for wages, power, transport, and other overhead costs.”
Cao went on to note: “[L]ocated at the lower end of the international division of labour, [China] has yet to achieve much in added-value and raise its competitive advantage significantly. This may also explain the discrepancy of trade statistics between the Chinese and American sources: products considered ‘high-tech’ in China may not be elsewhere … China has become an important assembly line for products made using key high-tech parts from abroad with the addition of low-tech domestic components. The majority of Chinese exports are lower-end products involving basic processing and manufacturing techniques, while imports in general are much more sophisticated.”
According to Cao, the main “competitive advantage” that China has in this process is low labour costs. This was confirmed by a recent study by the US Bureau of Labor Statistics published in its March Monthly Labor Review, which found that in 2008 Chinese manufacturing workers earned an average of only US$1.36 per hour in both wages and social benefits, roughly 4% of what US manufacturing workers earned.