Gu Mu, China’s champion of export discipline

The concept of “export discipline” is an important one in my understanding of the development of Asian economies, and the functioning of industrial policy more generally. The phrase, which I take from Joe Studwell’s 2013 book How Asia Works, describes a particular type of relationship between the government and business, one in which the government pushes business to make sure that its energy and investment are going into improving national productivity. Exporting does that by forcing companies to compete in global markets and meet global standards. Absent such discipline, businesses can easily turn into lazy monopolists, rent-seekers, or property speculators–activities that generate lots of profits for them but do not do much to raise the nation’s living standards (see my last post on the topic).

Of course, this is easy to say in the abstract, but how is export discipline actually applied in real-life politics and business? Studwell’s book has some good stories about this, for instance the one about how South Korean president Park Chung Hee in 1961 put the nation’s leading businessmen in jail until they agreed to do what he wanted: develop heavy industry and obtain foreign technology.

The official history of China’s economic reforms is rather more sanitized, but the memoirs of Gu Mu (谷牧), who was vice premier in the 1980s and in charge of foreign trade, do help show how export discipline was applied in the Communist bureaucratic system (see this post for some more interesting tidbits from Gu’s memoir).

China initially decided to open up to foreign trade through the famous Special Economic Zones: the coastal cities of Shenzhen, Zhuhai, Shantou, and Xiamen that were given dispensation from many of the stifling rules and procedures of the planned economy. And from the beginning there was some ambiguity about what the function of the SEZs would be, as Gu relates in his account of the March 1980 meeting that decided to create them (these and following quotes are from the official English translation of his memoir):

During the discussions, in light of the practice of starting the special zones, the comrades also considered that we should not only develop industry, but also commerce, tourism, real estate and other sectors. We should not only expand export trade, but also play multiple functions in the economic life of the whole country. So the term “special export zone” could hardly cover all of their functions and roles. Based on these discussions, I came up with the term “special economic zone,” which had a wider connotation and was endorsed by everyone.

In other words, the SEZs were originally general laboratories for economic reform, rather than solely being solely focused on exports (as an aside, it’s interesting that Gu takes credit for coining the term SEZ). And Gu relates how the deregulation in the SEZs allowed them to quickly become centers for smuggling, which attracted lots of criticism from conservative elements in the Party. While he is emphatic that Deng Xiaoping’s strategic justification for the SEZs was mainly to export and attract foreign technology, he also makes it clear that many people in the SEZs were reluctant to sign up to this vision.

From 1979 to the end of 1984, five special documents were issued by the Party Central Committee and the State Council on SEZs or containing content relevant to SEZs. For the orientation of the economy of SEZs, these documents repeatedly pointed out: “Priority should be given to the utilization of foreign capital,” “Priority should be given to conducting industrial productive projects,” “Products should be mainly for export,” “Great efforts should be directed to introducing advanced technology.” The basic intention was clear.

But some comrades who worked in Shenzhen SEZ and several experts and scholars had long held different opinions. They thought that the conditions were bad for Shenzhen to develop industry. Products for export ran against the investment goal of foreign businessmen, which was for their products to enter the Chinese market. Their proposal was to build Shenzhen into a financial, commercial, foreign trade and tourist center, and their cries became louder and louder.

Here is the impulse that export discipline has to counter: local bureaucrats and businesspeople want to make money in ways that are convenient to them, but that don’t build national productivity. Gu worked consistently against these arguments, and tried to stop Shenzhen from focusing so much on property development:

I agreed the SEZs should develop tertiary industry like finance, commerce, foreign trade and tourism. But priority should be given to industry, and related industries should be developed correspondingly to make them comprehensive export-oriented SEZs centered around industry. Without industry on a certain scale and level, their economic foundation was not solid, with no source of goods for export, or vehicles for the introduction and digestion of advanced technology, and other industries would not develop. … So this argument, which went against the policy of the Party Central Committee and the State Council, was inadvisable and unrealistic.

Since I perceived these problems, I wanted to hold a meeting to unify the understanding and action. … I talked about the positive situation of opening up in the country, about the new progress of SEZs, and also pointed out some problems that needed careful attention, including the overextended scale of capital construction, too fast increase of funds for consumption, and the gaining of easy money by taking advantage of the preferential policies. … I emphasized that SEZs should not be content with erecting big buildings; they should not be average industrial cities. They should become export-oriented special economic zones based principally on industry earning foreign exchange through export, so that their products could enter international markets and earn foreign exchange for the state. …

At the meeting I focused on guidance rather than criticism. But this was no easy problem to solve. The meeting was over, but there was no agreement on how to develop an export-oriented economy. Some SEZs still acted according to their own beliefs. In 1985, the scale of construction in Shenzhen was even bigger, with the plan increased by 40 percent over the actual scale of 1984. My opinions were dismissed, and little attention was paid to similar criticisms from others. … I realized that general talk would not solve the problem and we needed systematic work.

The bureaucratic maneuvering that followed is too detailed to quote in full, but basically Gu commissioned some expert reports that would back up his goal of an export-oriented economy, and sent some of his trusted cadres to Guangdong to convince working-level officials of the rightness of his views. The leadership team of the Shenzhen SEZ was also reshuffled, which presumably (though Gu does not say this directly) helped lessen resistance. He then organized a nationwide meeting, running from late December 1985 to early January 1986, of almost all the central and local government officials involved in SEZs, where his speech advocating for export-oriented SEZs achieved the backing of the top leadership. That ensured that the local officials got the message:

This meeting was new starting point for the SEZs to advance in a pioneering spirit. The SEZs unified their understanding and carried it out properly. … they stressed industrial production and a better range and quality of products; they made great efforts to open international markets and increase exports; they cleaned and reorganized companies and overcame disorder in product circulation. These measures were carried out swiftly and resolutely. In that year, Shenzhen cut 51 buildings of more than 18 stories from its capital construction planning. Its scale of capital construction was reduced by 30% from that of the previous year. Hundreds of substandard companies were removed or merged. This was a major shift in focus.

Gu Mu (2nd from right) in Shenzhen in 1980

After reading this account, it hard not to feel that the importance of effective bureaucratic battlers like Gu is probably underrated in recent Chinese history (and probably all history) relative to charismatic leaders like Deng Xiaoping. I also have to wonder who in the current Chinese leadership is serving as the champion of export discipline?

What you can see from the high speed train to Beijing

The last time I was in Hong Kong, I decided to take the train up to Beijing rather than fly. The last time I had taken a train along that route, it was still an epic 24-hour journey. The new high-speed rail does it in nine hours, leaving Hong Kong at 8am and arriving in Beijing at 5pm. I thought it might be a good way to see big chunk of the country in daylight hours.

The HSR route from Hong Kong to Beijing

It’s not a ride I would suggest to regular tourists: nine hours is still a pretty long journey, even in a relatively comfortable train seat. And indeed very few people who got on the train with me in Hong Kong got off in Beijing; most were headed to a stop somewhere in between. There’s also not a lot of scenic views. Probably the nicest part of the trip was the southern bit of Hunan, just over the border from Guangdong, which is lovely, green and hilly.

A nice view of southern Hunan

But the trip would probably be more interesting for another species of traveler: the economics tourist. You might not see a lot of postcard-worthy views, but you will learn something about the structure of the Chinese economy. What you can see from the train is a lot of construction: urban sprawl, Chinese-style:

Outskirts of Changsha, Hunan
Somewhere in Hubei
Somewhere in Henan

This is in fact a rare privilege: to be able to see with the naked eye the structure of a country’s economy. After all, most macroeconomic variables are not available to simple visual inspection. Anecdotal impressions of inflation, for instance, are famously unreliable because of standard cognitive biases (people only notice price changes in items whose prices change a lot or that they buy a lot, and aren’t good at aggregating to a representative basket). And it’s not really possible to discern, just by walking around, changes of a few tenths of a percentage point in the growth rate of multi-trillion-dollar economic aggregates.

But I think it is possible to tell, just by looking, the difference between an economy that spends over 40% of GDP on investment, like China, and one that spends closer to 20%, like the US. To spend a nine hour high-speed train journey looking mostly at construction is to see a lot of construction. This is what spending almost half of national income on investment looks like. And that is not an experience you can have anywhere else.

To be fair, the reason you can see so much construction from the train is not just that China builds a lot in general. A lot of new construction is also concentrated around the high-speed rail lines, so the view from the train is not the view from everywhere. The reasons for this particular pattern of urban sprawl are well explained in this ADB paper by two authors from the Department of Urban Planning of Tongji University:

In the PRC, the “HSR new town” model has dominated the government planning in the site selection for HSR stations. In this model, most new station sites are located in suburbs or exurbs away from the large urban centers. The hope is that HSR stations will trigger the development of new towns. (In Western terms, these would be major metropolitan sub-centers or districts.) The plan is to stimulate local economic development by offering an attractive alternative location to the crowded city centers. Take the example of the 1,318 km Beijing–Shanghai HSR line. Of the 24 cities connected by the line, 18 chose to build HSR stations in suburbs. The reasons for suburban site selection included ensuring lower costs, capturing rising land values, and relieving pressure on the central areas of the cities.

There is no problem with small business lending in China

That is not the message you would get from the Chinese government these days, which is devoting an impressive amount of high-level political attention to this issue. Premier Li Keqiang just chaired a State Council meeting which urged banks to deliver more financing to small- and medium-sized enterprises, and at lower interest rates–the latest of many such meetings in which this topic topped the agenda.

In effect, small-business lending is being treated as an urgent national emergency: apparently China’s financial system is systematically failing to deliver what is needed for a healthy economy. Yet it is impossible to see any evidence of this emergency in the data presented in a white paper on the topic published by the People’s Bank of China this week. Here is a brief section of the appendix:

At the end of 2016, the balance of renminbi loans for small- and medium-sized enterprises in China was 42.2 trillion yuan (about 6.1 trillion U.S. dollars), accounting for 56.8% of GDP in the same period, higher than that of Japan (46.1%), Malaysia (22.9%), France (10.0%), Brazil (9.9%), Russia (5.8%), the United States (3.3%, where commercial loans under 1 million U.S. dollars are counted as small enterprise loans) and other countries.

At the end of 2016, China’s SME loan balance accounted for 65.1% of all enterprise loans, higher than Malaysia (43.7%), Brazil (36.9%), France (20.6%), the United States (18.5%), Russia (15.8%) and other countries, only lower than Japan (65.6%) and South Korea (79%).

In 2016, the average interest rate of loans for small and medium-sized enterprises in China was 4.77%, significantly lower than that of emerging market countries such as Brazil (33.50%), Russia (13.03%), Malaysia (7.22%), but higher than that of developed countries such as South Korea (3.58%), the United States (3.46%), France (1.50%), Japan (< 1%).

That’s right: China lends more than twice as much to small businesses, as a proportion of the economy or the banking system, as most other countries, and at a lower interest rate to boot (the data cited are from the OECD’s very useful cross-country survey on SME financing; you can download their detailed data for China here)

Of course, that doesn’t mean small businesses in China have problems getting bank loans–but small businesses everywhere have problems getting bank loans, because they are small and their credit risk is hard to evaluate. There is little evidence this problem is worse in China, and plenty of reason to think that it is actually better. After all, in an economy with a debt-to-GDP ratio of 250%, it is not particularly plausible to assume there are massive shortages of credit.

Almost five years ago I wrote an op-ed for The Wall Street Journal, my alma mater, entitled “Small Business Won’t Save China,” that made these points, and argued that a government drive to deliver aid to small businesses would not actually be very effective. Unfortunately very little has changed since then. Pushing credit to small business is still a politically attractive way of avoiding the structural issues for the private sector in China, and the political pressure on banks to meet arbitrary targets for lending to small businesses has only gotten more intense.

A European inspiration for Chinese decentralization

A lot happened in China in 1978, the year conventionally used as the starting point for the reform era. One of the many fascinating events of that year was the five-week journey of a group of Chinese officials, led by Vice Premier Gu Mu, to France, Germany, Switzerland, Belgium, and Denmark. Today, when such visits are a regular occurrence, it is hard to comprehend the significance of this trip, and just how much it must have blown the minds of the Chinese officials. Gu and other officials saw first hand, and for the first time, just how advanced Western technology was and how high living standards were in these countries.

Ezra Vogel, in chapter 7 of his Deng Xiaoping and the Transformation of China, compares the overseas trips that Chinese leaders made in 1978 to the Iwakura Mission of 1871-73, which helped inspire Japan’s modernization. Gu Mu’s authorized memoirs also discuss this trip, and in the book he actually reproduces a large section of the subsequent report he wrote for the Party leadership (I picked up a copy of the English translation of his memoirs at the Foreign Languages Bookstore in Beijing).

His report made a big impression, and is usually credited with helping inspire the high-level decisions made soon after to open China up to foreign trade and develop science and technology. But Gu’s report also discusses several other issues, and I was particularly interested in the part where he argues for decentralizing authority on economic matters to local governments. This was inspired by what he saw in Europe: for instance, Gu remarks on his meeting with the governor of the German state of Bavaria, who offered him a handshake agreement for a $5 billion loan over dinner.

Decentralization would become one of the most distinctive features of China’s reform era, and local governments’ freedom to pursue economic growth is usually given a lot of credit for China’s subsequent success. So it’s worth reading Gu’s arguments in full:

On the improvement of the economic management system. The key to this question is how, under the uniform planning of the central authority, to allow local governments to accomplish more. Chairman Mao once said, one of the important reasons why the economy of European countries had developed so fast was that their countries were comparatively small. The central and local governments had division of power and could handle affairs flexibly. What we saw during our visit bears this out.

For example, in West Germany, the local governments at the state level enjoy relatively wide power. Many affairs can be handled once decided by a state government. This is beneficial to economic growth. Rhineland State only has a population of 3.6 million and it has a revenue of 10 billion DM (about 8 billion renminbi) for the state government to handle. Apart from administrative expenditure, this revenue is used in developing agriculture, local transport, education, urban construction, environmental protection and so on. Industrial construction is invested by capitalists and not included.

We have provinces and municipalities that are larger than some European countries, but their authority in managing the economy is very limited and hence they lack initiative. In planning, finance and managing materials, provinces and municipalities have not become real actors. The local governments do not have much power. For many affairs they have to come to Beijing. Often to address a single problem they have to go to several departments and wait several months without a result. This state of superstructure makes our socialist state machine seem inflexible and poorly adapted to the development of economic foundations.

If this problem is not solved and if we do not give full play to the initiative of local governments under the uniform planning of the central authority, our economy will lack vigor and there will be no high-speed economic development worth talking about.

This is a useful reminder that decentralization is not an immutable feature of the Chinese system, or something that happened automatically just because China is a very large country. Clearly Gu saw that in the 1970s the Chinese system was too centralized to be efficient, and that it needed to be more decentralized. (Jae-Ho Chung’s book Centrifugal Empire: Central-Local Relations in China also argues that the Maoist emphasis on local autonomy in the 1970s was largely rhetorical, with most localities compelled to follow the same political campaigns and economic priorities.)

It’s fascinating to learn that one of the most distinctive features of China’s economic model was, at least in part, inspired by the example of Europe. This history seems particularly relevant now, given that China’s current leadership is often focused on the problems decentralization has created, and looking for ways to push the pendulum back the other way (see this post from 2017 on the recent shift away from decentralization and its potential implications).

Three ways of looking at China and its history

A friend recommended I read Rana Mitter’s Modern China: A Very Short Introduction, and being a big fan of the Very Short Introduction series I was happy to do so. I’m glad I did: although the book surveys some fairly familiar material, it also puts forth some interesting historical ideas. What I found most useful is Mitter’s suggestion that our interpretations of modern Chinese history usually fall into one of three categories (the following are my terms not his):

Traditionalist. This is the view that “China has not essentially changed” despite the upheavals of the 20th century: that Mao and Deng were “new emperors” (as one book put it), that China is fundamentally Confucian and still on the same trajectory as in the rest of its supposed 5,000 years of history. This interpretation is quite common in popular discussions of China, and is implicitly invoked every time someone calls it “The Middle Kingdom” or talks about how Chinese foreign policy is still taking tips from Sun Tzu’s Art of War.

Socialist. This is the view that 1949 is the dividing line in Chinese history, and that the Communist victory in the civil war changed everything. Mitter associates this view mostly with romantic leftists of the 1960s, who were sympathetic to the Chinese revolution and willing to give Mao the benefit of the doubt. But there is a more contemporary version that also has a lot of currency, which emphasizes the present-day continuities with state socialism: how China remains politically authoritarian and how state-owned enterprises still play a major role in the economy.

Nationalist. This is Mitter’s own view: that the true dividing line in Chinese history is 1911, when the Qing dynasty was overthrown, not 1949. Since then Chinese politics has a “mass politics where there was a social contract between government and citizen” in which nationalism provides the major source of legitimacy. Both the Nationalists and the Communists sought national sovereignty, a strong state and economic development: Mitter sees both parties as engaged in “one long modernizing project.”

The standard academic thing to do would be to admit the obvious point that all three views have elements of truth and call for a nuanced combination: clearly some elements of Chinese traditional culture are still relevant, clearly it matters that the Communists and not the Nationalists have been in power since 1949, and clearly nationalism is a central issue in Chinese politics. So it’s nice that Mitter does not do this, and plants his flag firmly in the last camp. One of the more interesting passages in the book is his assertion that:

The Communist Party of today has essentially created the state sought by the progressive wing of the Nationalists in the 1930s rather than the dominant, radical Communists of the 1960s. One can imagine Chiang Kai-shek’s ghost wandering round China today nodding in approval, while Mao’s ghost follows behind him , moaning at the destruction of his vision.

There’s definitely something to this, but ultimately I’m not sure that I buy it. As regular readers will recognize, the legacy of Chinese socialism has been one of the major themes of this blog since I started writing it. So it’s probably no surprise that, if forced to choose among those three views of Chinese history, I might have to choose door #2, the socialist one.

These days it seems like it is not China’s similarities to other modern nations and economies that are most salient, but its differences. And if you interrogate the source of those differences, a lot of the time the answer is socialism and not Chinese traditional culture.

What I’ve been listening to lately

  • Eric Dolphy – Musical Prophet: The Expanded 1963 New York Studio Sessions. A reissue with new material of two of Dolphy’s best albums, Conversations and Iron Man, that hopefully will draw more attention to these somewhat neglected recordings (see this appreciation by Richard Williams for more background). The arrangements for larger groups are quite interesting, but for me the real highlights are the more intimate pieces, especially the duets between Richard Davis on bass and Dolphy on bass clarinet.
  • Joe Lovano – Trio Tapestry. An unusual, minimalist outing for Lovano, a trio with just Marilyn Crispell on piano and Carmen Castaldi on drums. I first heard Crispell in the 1990s when she was a terror of aggressive free jazz; her recent ECM recordings, like this one, display a much gentler side.
  • Hearts & Minds – Electroradiance. Another oddball trio, featuring the Chicago-based bass clarinetist Jason Stein along with Paul Giallorenzo on synthesizer and Chad Taylor on drums. The instrumentation is like something Sun Ra would throw together over a weekend, and indeed the combination of avant-garde sounds with a backbeat is a little reminiscent of some of his 1970s experiments. But altogether it’s a completely original sound, and how often do you encounter that?
  • Matthew Shipp – Pastoral Composure. An excellent and almost-but-not-quite traditional quartet led by pianist Shipp and featuring super-bassist William Parker and Roy Campbell on trumpet. Every tune has a different feel and approach–a kind of variety surprisingly uncommon for jazz albums–making for a very satisfying listen.
  • Philip Cohran – Armageddon. Though a legend of the 1960s avant-garde, Cohran did not leave behind many recordings. All of them are worth hearing for their Afro-spiritual vibe and the powerful sound of his invented Frankiphone, sort of an amplified thumb piano. If this short concert recorded in 1968 does not quite rise to the level of his masterpiece On The Beach, it definitively has its moments.

Is state ownership turning into a core interest for China?

Since the breakdown of the US-China trade talks earlier this month, it has often seemed as if Chinese officialdom and state-controlled media have been speaking off of a single script of pure nationalist outrage. But in fact the trade tensions have exposed some interesting differences in views across the system. Consider this part of a Xinhua commentary published on Saturday (you can read the Chinese text or an English summary):

At the negotiating table, the US government made many outrageous demands of China, including restricting the operation and development of state-owned enterprises. Obviously, this goes beyond the scope of trade negotiations and touches on China’s basic economic system. This shows that behind the US trade war with China is an attempt to violate China’s economic sovereignty and force China to harm its own core interests.

Some commentators have noted how the expression “core interests,” previously only attached to territorial issues, has now been applied to state-owned enterprises. But those who track such minutiae will notice that this commentary is signed by two journalists; Xinhua commentaries used to articulate official views are typically written by committee and do not carry a real person’s byline. The more official series of People’s Daily commentaries on the trade war has, as best I can tell, not mentioned state-owned enterprises at all. So my interpretation of this Xinhua piece would be that there are definitely people in the Chinese system who share these views, but the government has probably not (yet) decided to adopt this as its official position.

Now compare this “China has a state-owned economy and we’re proud of it” take with a recent speech from Guo Shuqing, who as Party secretary of the People’s Bank of China and head of the China Banking & Insurance Regulatory Commission is the government’s top-ranking financial official. Guo’s talk on the trade war (Chinese text and English summary) covered a lot of ground, but he also addressed the issue of state ownership:

In recent years, there has been an opinion expressed abroad that China’s rapid economic development is the result of “state monopoly capitalism.” But this kind of talk has no basis. In fact, the composition of China’s economy has become increasingly diversified, and the market share of state-owned enterprises has continuously declined. Including the economic activity of government, the state-owned economy accounts for less than 40% of GDP. Many state-owned enterprises are listed on foreign or domestic stock exchanges, and in fact are joint-stock enterprises; 100% purely state-owned enterprises are rare. Large state-owned enterprises have a large number of subsidiaries whose controlling shareholders are private enterprises. And even the central state-owned enterprises compete with each other. Today, private and foreign investors can enter almost all industries and sectors without any restrictions or barriers.

The tone here is quite different: yes, we have state enterprises, but they are a small and declining part of the economy, and it is more important that there is market competition among all companies. These defensive statements probably are not really completely, objectively true (though I think Guo’s estimate of the state-owned share of GDP is probably not too far off). Guo is what foreigners usually call a “reformer” in the Chinese system, and in a different context I’m sure he would frankly discuss the fact that both foreign and domestic private companies face many barriers. Indeed, at the moment Guo is spearheading a political campaign to increase private-sector firms’ access to bank credit, a campaign whose very existence makes it clear that there is not at all a level playing field.

But I think Guo is here engaging in a strategy that is common for those who want to nudge the Chinese system in a more market-oriented direction: they tend to describe things are being more competitive and market-driven than they actually are, so that marginal change in that direction seems unremarkable and logical. If you pound the table and call China’s state-owned enterprises a core interest of the nation, it becomes quite difficult to change them. If you say, China is mostly a market economy already, then gradually reducing the role of SOEs over time seems pretty unthreatening.

One of the dangers I see in the US-China trade war is that it could become politically more and more difficult for people like Guo to both defend China’s system against foreign attacks, and continue to nudge it in a different direction. “The Americans want us to get rid of state enterprises, and by gosh they’re right” is a much less likely response to US pressure than “How dare those Americans tell us to get rid of our state enterprises?” And that’s true even among people who might not otherwise be disposed to cheer on SOEs.

As is so often the case, Sheng Hong of the Unirule Institute (a libertarian-leaning think tank now mostly banned in China) sees the fundamental political issue quite clearly. Here are a few lines from his recent blog post (I have retranslated the Chinese, since the English version is a bit clunky):

State-owned enterprises account for 10% of exports, so the remaining 90% are made by private and foreign-invested enterprises. Therefore the vast majority of Trump’s tariffs are being imposed on private and foreign enterprises who do not receive government subsidies. This does not correct a market distortion, but actually punishes companies that follow market rules, which makes the market more distorted. …

In order to punish the unfair trade of a small group of companies, Trump has harmed all Chinese companies, and especially private companies. This has caused their feelings to run high and united them in their hatred [of the US], so that in a nationalist fervor they are now supporting their own country’s state-owned enterprises.

In other words, the trade war seems very likely to increase popular support for state-owned enterprises, and push more Chinese people into the view that they do actually represent a core interest of the Chinese nation. And that is probably not in the longer-term interests of the US.

I expect a US trade hawk would likely respond to this by saying that waiting around for China to decide on its own to slim down state-owned enterprises has not worked out for the last decade or so, and the harm this has done justifies putting pressure on China to change more quickly. And they would have a pretty good point. Which is unfortunately why it is now seems hard to be optimistic about the politics on either side.