China: Building “Capitalism with Socialist Characteristics”

Topics: People's Republic of China, Currency, International economics Pages: 5 (1784 words) Published: May 2, 2011

In the beginning the core of the society was the extended family and an agricultural society. In 1949 Mao Zedong proclaimed the establishment of the “People´s Republic of China”. (PRC)

The new government nationalized the country´s banking system and brought all currency credit under centralized control. It boosted government revenues by collecting agricultural taxes. Industry and commerce was under control of the state. Wages were calculated under the principle of “ to each according to his needs”. By 1969 the power passed to the CCP, led by Deng Xiaoping, a pragmatic man who determined pragmatic policies to work and determined to bring china back from the devastation. • Reform in the countryside:

Deng allowed farmers to produce on their own and sanctioned the sale of surplus production.. Also, due to the shortage of food, he encouraged the one child policy. As a result, China´s rate population growth slowly began to subside. China created four “special economic zones” (SEZ) and by this welcomed investment, attracted potential investment with tax incentives, foreign exchange provisions and a decided lack of regulation. China also opened some coastal cities to foreign trade. All these reforms began to open China up to the outside world. • Rural industrialization and enterprise reform:

At that time the state determined prices, input & output and retained any profits form enterprises. But in 1983, the government introduced a variant of responsibility system making the enterprises free to run their business (managers could set wages, make investment decisions and retain profits). This was clearly making China a more market-oriented country. By the establishment of township and village enterprises (TVE´s), villages raised money to fund everything. TVE´s grew competitive with each other and became very successful, reinvesting their profits to fund growth. The state started using the “dual-price system” in industrial products. So the enterprises were still required to sell their quota of production to the state at state-fixed prices, but they could also sell any excess production into the open market. This brought corruption since the easiest route to profits lay in using fixed-price inputs to manufacture goods sold at market prices. The economy did grow but so it did the inflation (prices in some cities increased more than 30%). To fund the expansion TVEs and SOEs were borrowing a lot form local financial institutions. At the end, central authorities froze credit issued by the state banks. Government agencies tightened administrative controls on imports and credit, cut state investment expenditures, raised interest rates and devalued the currency by 21%. The economy cooled down and the inflation fell to 2%.

The 1990s consolidated China´s reform efforts and firmly set the course for a capitalist market economy, still with socialist characteristics. One main objective of the government was to establish a new system for national taxation to allow the centre both to increase its revenues and enhance its control over provincial authorities ⎝“divided tax system” which redesigned all categories of taxes as central, local or shared. This classification eliminated the category of extra budgetary revenues and quickly increased the centre’s taxes. The government also begun to adjust its dual exchange rates to exchange their foreign exchange receipts at a “market “rate. China also accelerated the process of privatization. China´s restructuring in 1990´s was gradual (not like in Russia and parts of Eastern Europe). Only a small part of firms were privatized and the state remained a major shareholder in the largest and most important firms.

In 2003 political leadership had been passed to Hu Jintao.
Internationally, China was playing an important role; it was the third largest...
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