Session 7
Carl Riskin, China’s Political Economy, 1987, Chapter 13
Summary of Key Points
Chapter 13 – The Open Door: International Economic Policy
This 13th chapter of Carl Riskin’s China’s Political Economy follows a discussion of the decollectivization
of agriculture in 1979 (Chapter 12), and deals specifically with the simultaneous reopening of China to the
world market.
1. Introduction
Prior to post-Mao changes in foreign economic policy, foreign trade was considered simply as a means of
balancing surpluses and shortages in domestic supply. Following the melting of US-led embargo and
general improvement in China’s international position, however, Premier Zhao Ziyang called on the
Chinese to abandon the idea of self-sufficiency and Chinese economists began to study the law of
comparative advantage and urge participation in the international division of labor. As a result trade
soared . Riskin attributes this increase in trade to solicitation of foreign capital, promotion of tourism and
institutional changes which attracted foreign investors.
In 1979, the Chinese government agreed to accept government to government loans and private direct
foreign investment - considered final steps in opening to the international market.
2. Trends in Foreign Trade
Table 13.1 shows trade statistics including merchandise trade per capita. Table highlights rapid
expansion in the late 70s and early 1980s. In fact, two-way trade quadrupled between 1976 and 1984.A
second table shows trade as a percentage of aggregate products and compares China to several other
countries. Riskin makes the point that much of China’s trade growth can be interpreted as a return to a
normal trade ratio for a country of China’s size and level of national income.
As China’s trade was highly concentrated, i.e. China was a significant purchaser of grain, fertilizers,
metals, machinery and equipment…China’s weight increased in the international market in these
markets.
China’s imports – GNP ratio in 1977-8 was 4.7 – strikingly low - contributed to foreign exchange reserves.
Decentralization contributed to a reduction in this level of conservatism. Stemming from an attempt to
bring domestic customers and suppliers into direct contact with their foreign counterparts, dozens of
corporations, enterprises and factories were authorized to conclude business with foreigners. This
resulted in much waste as imports were improperly selected or lacked necessary support facilities.
Losses gave rise to a rethinking of the Ten Year Plan projects. Imports were cut and exports stimulated
resulting in foreign exchange reserves of 14 billion in 1984.
At this point, a new set of monetary and foreign trade reforms set off another crisis. Reforms empowered
local units to use foreign exchange – resulted to an “orgy’ of importing by local authorities – which in turn
resulted in foreign exchange reserves falling by over 5 billion between September of 84 to March of 1985.
Various central “controls” were subsequently imposed.
Tables 13.3 & 13.4 show shifts in the composition of imports and exports between 1970 and 1984.
Significant shifts seen in both imports and exports. Striking change is increase in oil exports from nil in
1961 to 13.4 million tons in 1979. Time gap in well and off-shore production caused production to cease
overall however and although production and exports resumed in 1984, it is expected (when this book
was published), that high rates of growth not sustainable.
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Trend also noted in actual trading partners. Largest trading partners between 1981 & 1984 were Japan,
Hong Kong and USA in that order. Increasing trade with (then) Soviet Union and Hong Kong was
highlighted.
3. Foreign Investment
3.1 General Trends
China’s decision to encourage foreign private capital investment, in joint ventures and even wholly foreign
owned enterprises, constituted its sharpest break with the past.
- Special Economic Zones (SEZs) were created with favorable tax, profit repatriation, and other provisions
for foreign investors.
- China encouraged formation of joint equity ventures with foreign partners.
- China started to participate in various international economic bodies.
- Thousands of students and delegations were sent overseas
- China welcomed over 12 million tourists in 1984 – mostly overseas Chinese.
- China extended favorable terms to potential foreign investors – esp. in regard to income tax and import
tariffs.
- China also began to engage in undertakings abroad – earning foreign exchange from the export of labor
and services and learning relevant technologies by investing in foreign enterprises,
3.2 Labor
Given China’s “socialist self-image”, difficulties arose between foreign corporations and Chinese hosts,
and between foreign and between foreign and Chinese partners in joint ventures, in the areas of wages
and the right to recruit and dismiss labor. (Chinese were very reluctant to permit dismissals except in
extreme circumstances).
In addition, joint venture workers were expected to be paid (in 1983) approx. 3 & ½ times the average
monthly wages of a state industrial worker. In charging this amount, the Chinese government wanted to
make foreign firms and joint ventures pay at least the full social cost of a state employee.
*Note that additional costs incurred by the state were for a variety of social subsidies which ranged from
pension & daycare to foodgrain and vegetable oil subsidies. Also note that the same benefits were not
available to agricultural workers. However, the government was trying to implement new policies which
would narrow the gap.
3.3 Administrative Planning and the open door
Large stumbling block has been the inevitable links between new foreign business structures and the
domestic market. For example, many foreign exporters relied for inputs on enterprises whose plans were
set months in advance.
On the other hand, domestic business feared that priority access promised joint ventures would worsen
shortages in the domestic economy.
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Riskin lays out two strategies for dealing with this problem
1/ Isolate the foreign-oriented sectors from the domestic economy, permitting them to develop in their
own way, outside the planning framework and oriented to the world market.
2/ Reform the domestic economy to activate market forces, relax administrative controls, and make
enterprises responsive to demand and sensitive to cost.
Pros and cons of both approaches are discussed.
Riskin highlights fact that incentive to make changes limited by complexity of the problem and by fact that
foreign investment, though substantial, had not allowed China – as that time - to recoup investments
made to attract foreign investment – such as those made in roads, harbors, housing…
He includes in his elaboration of the complexity of administrative reform:
- decentralization of the administrative apparatus governing foreign economic reform (which in turn led to
a change in the exchange rate mechanism)
- isolation of producers and consumers in China from international prices (this lack of price flexibility
means that producers of exports have no incentive to make improvements to products to enhance
marketability because they cannot recover costs)
- problem of corruption – kickbacks, smuggling as a result of officials having contact with “outsiders”.
Riskin concludes the chapter by stating that leaders who want to expand foreign economic relations must
identify core socialist values and institutions they hope to protect – this, under the assumption that foreign
presence can be used to learn modern techniques without changing China’s socialist essence.
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