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China’s Four Decades of Reforms and Development

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The Financial Implications of China’s Belt and Road Initiative

Abstract

This chapter gives an overview of the major socio-economic transformations that occurred in China for more than four decades. They include transitions from a centrally planned to market economy, from a closed to an open economy, and from a manufacturing and export-driven to a more consumption- and innovation-led growth path. It also describes the main features of the socialist market economy with ‘Chinese characteristics’ including the gradual ‘step-by-step’ approach in the economic reforms in the different production sectors of the economy. In particular, the financial reforms that were given a major boost in the early 1990s and still require the necessary deepening of the current transition to a more sustainable economy are discussed. This chapter also elaborates on the adverse consequences of the rapid growth model and China’s incomplete transition to a market economy. The traditional development model caused a huge depletion of natural resources, serious environmental pollution, which hindered the sustained economic development. Special emphasis is given to some current problem areas in the housing and stock market; the huge local government and increasing corporate debt; and the capital flight and excess capacity described in their relation with the current inevitable economic slowdown which could be seen as a breeding ground for new initiatives where the BRI can be seen as an important example and is central to this pivot.

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Notes

  1. 1.

    The Renminbi (RMB) or sometimes called ‘redback’ is the name of the currency meaning ‘the people’s currency,’ whereas the Chinese Yuan (CNY) is the basic unit of account issued and administered by the PBC. While the banking sector uses the RMB for its settlements and the authorities for its internationalization objective, the values are denominated in CNYs. For many years, the RMB was pegged to the USD, but the RMB has now switched to a managed floating exchange rate with reference to a basket of foreign currencies. Depending on the macroeconomic circumstances, the authorities sometimes allow the value of the currency to float a little more and at other times to remain somewhat more stable.

  2. 2.

    This is the official term used to refer to the economic system of the People’s Republic of China (PRC) after the reforms of Deng Xiaoping. According to Deng, socialism and capitalism need to be mutually exclusive. His pragmatic approach states that ‘it doesn’t matter if a cat is black or white; as long as it catches mice, it’s a good cat.’ In essence, the ‘black and white cat’ stands for ‘planned and market economy’ and ‘the one who is able to do a job properly will be hired for the job’ (Fan 2016).

  3. 3.

    Already in 1975, Deng and Prime Minister Zhou Enlai introduced the so-called Four Modernizations of agriculture, industry, defense, science and technology. From 1979 onwards, these modernizations were further introduced by Deng without satisfying the call for a fifth modernization of more political reforms or democratization.

  4. 4.

    A proverb of the conservatives is ‘crossing the river step by step, while groping for the stones,’ while the radicals state ‘you cannot jump a chasm in two steps.’

  5. 5.

    Since the mid-1980s, a ‘dual track’ system of plan and market was set up with the aim to strengthen the SOEs with market forces.

  6. 6.

    As part of the SOE reforms, China’s ‘corporatisation without privatisation’ measures are designed and implemented around a central target of establishing a competitive market, leaving the ownership structure basically unchanged.

  7. 7.

    In a way, the ‘Made in China 2025’ plan to use state direction to dominate high-tech industries has alarmed the rest of the world, USA in particular, and ignored the advice of Deng Xiaoping to ‘hide your capabilities and bide your time.’ Although the ‘Made in China 2025’ plan has not produced any results yet, with Xi Jinping’s slogan’ ‘socialism with Chinese characteristics’ a parallel is often drawn with the Maoist era in China (Shazada 2019).

  8. 8.

    An AMC is an investment company that buys outstanding debts and then manages and resells these debts in order to recover (some of) the funds. For each of the major state-owned commercial banks, there is one AMC which are funded by the MoF and a loan by the PBC. AMCs exchange bonds with the respective banks for NPLs.

  9. 9.

    China’s total social financing (TSF) is a broad official measure of credit and liquidity in the economy that consists mainly of bank loans and bond issuance, but it also includes off-balance sheet forms of financing such as initial public offerings, shadow banking credit such as trust loans, and bankers’ acceptance bills.

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Łasak, P., van der Linden, R.W.H. (2019). China’s Four Decades of Reforms and Development. In: The Financial Implications of China’s Belt and Road Initiative. Palgrave Pivot, Cham. https://doi.org/10.1007/978-3-030-30118-7_2

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  • DOI: https://doi.org/10.1007/978-3-030-30118-7_2

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