Ideology, mistakes and Tiananmen

This is the last post in a series on the Chinese transition. You can find Part 1 here, Part 2 here and Part 3 is here.


As far as interesting lives go, Deng Xiaoping was on the top of the list. He was among the only Chinese of his era to study abroad, he survived a civil war, multiple political purges and then rose to become the Paramount Leader of China. 

But when he became Paramount Leader, he had to act quick. He didn’t have years to prepare a new constitution like the American Founding Fathers or the Indian Constituent Assembly did. But he did have an advantage: when he was purged for the first time he spent time thinking on how to change China for the better. From 1969 to 1973, Deng Xiaoping was exiled to work in a tractor factory in Jiangxi. He spent the years thinking about China’s structural flaws, and how he could maintain the power of the party while changing the direction of policy. 

The first thing he realized was that any sharp break from Mao would be disastrous for China. From 1930, Mao was the head of the Communist Party, and from 1949 he was the leader of China. For all practical purposes Mao was the Chinese government. If Mao was to be downgraded, it would mean that the Party’s appeal among the Chinese people would reduce, and they might lose power. Hundreds of people had worked with Mao, and they were at the top ranks of the CCP. They had an immense emotional attachment to Mao, and would be deeply hurt if Deng had demonized Mao.

But on the other hand, Mao’s Great Leap Forward and the Cultural Revolution had been disastrous for China. Modern estimates of the deaths from these range from 20 million to 45 million for the Great Leap Forward and up to 20 million for the Cultural Revolution. Deng’s own son Deng Pufang was beaten up by the Red Guards and denied medical care. Because of this, he was paralyzed below the chest and with no control on his urination and bowel functions. When Deng and his wife Zhuo Lin heard of what happened to their son, she cried for three days and nights and Deng sat in silence smoking cigarettes one after the other. The worst part of this was that Deng wasn’t allowed to see his son till 3 years after the incident had happened. 

How was Deng then to reconcile these views? The basic premise of China’s ideological transformation was that Chinese leaders would still praise Mao and keep him on a pedestal. But they should not interpret Mao’s teachings as fixed, but rather as an adaptation to the conditions of Mao’s time. And so, his teachings could be reinterpreted.

Right after Deng got back into power his first foray into changing the Maoist ideology came when an article called “Practice Is the Sole Criterion for Judging Truth,” appeared in the journal Theoretical Trends. The article argued that the only way to judge if a policy worked was to see if it worked in practice. As soon as it came out, it attracted sharp criticism from the Party’s propaganda team. They correctly realized that if this standard was used, the Mao Zedong thought should have been abandoned a long time ago. When Deng heard of the article after the controversy, he did not publicly say anything. But when liberal officials like Hu Yaobang were being attacked by conservatives he privately assured them of his support. 

This became the model in several of the policy experiments that made China special. Typically someone would initiate the experiment from the bottom. This would be opposed by conservatives in Beijing, and it would be politically difficult to do it. But Deng would privately assure them of support, and say that he’d back them up. As and when the reform led to good results, he would point it out to his colleagues at the top and push for reform. Here again his job was to be a dealmaker keeping both the reformers and the conservatives happy till a majority of the people agreed with the reforms. If he moved too fast, he’d face opposition from conservatives and lose support in the CCP. But if he moved too slow, he would lose out on growth that could have happened. 

Many times this worked. Private farming and town and village enterprises were initiated in stealth by local officials with strong opposition from the Party. In the first 4 years of their existence they had doubled peasant incomes. And they even got the Chinese government to overturn Mao’s signature policy. Slowly, but surely the same happened for private businesses and Township and Village Enterprises, but with a lot more opposition and friction. 

But there were times where the results were not as clear, and there were serious differences between groups in the Chinese government. 

Builders vs Planners

In 1978 the Chairman of the CCP Hua Guofeng announced a set of 120 projects financed by foreign borrowing that would cost US $12.4 billion which was more than Chinese exports at the time. Chen Yun - a senior conservative official warned against it, and said that China would suffer if they took loans they could not pay. He told in a speech to the Politburo in 1979

We lack electricity, we lack transport facilities. Supplies of coal and oil are inadequate to meet needs. Some people make fun of cautious people, making it seem as if cautious people believe that the less steel we produce the better. Ridiculous. Yes, we should borrow funds and technology from abroad. But how much can we be sure that we can repay from our People’s Bank? We need to ensure that we will be able to make the repayments. Officials have not done the calculations. Local industries are competing with our big national projects for materials. Five people want to eat when there is only food for three.

The struggle between the reformers and the planners didn’t end so fast. From 1978 to 1980, the Chinese government embarked on a series of reforms. One consequence of these was that lesser tax revenues were with the central government, and more went to the local governments. This along with lower agricultural taxes led to ballooning fiscal deficits. By late 1980, even Deng Xiaoping had been convinced of the risks of unbalanced growth, and he allowed Chen Yun to take control over the Five Year Plan. Even as macroeconomic fiscal policy was getting more conservative, Hu Yaobang - a liberal senior official - still went around China convincing provincial officials that they should be bold with reforms. During his travels he realized that China had the capacity to grow, and started to publicly advocate for higher growth targets. This dispute started to spill over, and some Hong Kong newspapers caught onto it. 

Deng pushed on and wanted to avoid a public conflict. He avoided a sharp split in the party where the reformist Hu and the conservative Chen both reached a compromise. But Hu Yaobang was not done yet. He had a freewheeling style which critics alleged was detrimental to stability. For example when there was a coal shortage, he travelled to the affected areas and encouraged miners to work harder. But he did not count for the environmental damage done when mines turned to strip mining or that private mines did not have safety precautions leading to worker deaths. In the eyes of conservatives he was an “an undisciplined populist who did not adequately consider the broader consequences of his actions and did not take seriously the national economic plans that they had so carefully crafted”.

To add to this, Hu was far more liberal on political freedoms than most Party leaders were. He encouraged dissent to the extent that the rest of the Party found uncomfortable. From Deng’s perspective, Hu was giving too much space to the intellectuals at the cost of party discipline. Hu was slowly losing support in the Party. 

In 1986, the famous physicist Fang Lizhi started speaking against the Party, and for democracy. He inspired student protests across China in universities. Had he been any normal intellectual, they would have cracked down on him. But he was a genius - one who entered Peking University at age 16, and became China’s youngest full professor. And his message spread like wildfire. Protests popped up in universities all over China. When Hu Yaobang was sent to rectify the situation, he started by conceding to the protestors that universities needed improvement and refused to expel Fang Lizhi and others from the Party - something that was the last straw.  By 1987, Hu Yaobang was removed as CCP General Secretary. He was so dejected that he was crying on the steps of the meeting hall. 

A little bit of reform is a bad thing

At the same time that the shoots of democracy were being crushed in China, there were also important economic changes going on. From 1984, the Chinese government decided to stop directing the specific industries to which state owned banks should make loans to. They decided instead to stipulate the loan amount and let banks decide the industries. In the last quarter of 1984, the People’s Bank of China leaked that the quota for 1985’s loans would be based on the loans in 1984. Banks rushed out to make loans because they wanted their future quota to be higher. If they made more loans in 1984, they’d be allowed to make more loans in 1985, 1986 and so on.. Loans in December 1984 were 50% higher than loans in December 1983. The money supply in Q4 of 1984 increased by 160% and for the whole year the money supply exceeded the economic plan’s target by 45%.

Then, the same year the Chinese government also decided to reform wages. The wages for 1984 would be the base year for future wage increases. This meant that higher wages in 1984 would mean higher wages in 1985, 1986 and so on. So, State Owned Enterprises (SOEs) borrowed from the plentily available bank credit to fund their wage increases. Wages in 1984 increased by 38 percent and bonuses increased by 100%. 

This led to an increase in inflation. In 1985 it was 9.3%, up from 2.3% the previous year and remained high in 1986 and 1987 (6.5 percent and 7.3 percent respectively). In 1988, it hit double digits. Right when inflation was hitting double digits, the government removed price controls. The timing of this could not have been more unfortunate. The removal of price controls and the massive lending and investment binge of the last few years led to rapid inflation and panic buying. The CPI hit 38% in August 1988, and this alarmed citizens. A man in Wuhan reportedly bought 200 kilograms of salt and another in Nanjing bought 500 boxes of matchsticks. This forced the Chinese government to take a rare step back, and reimpose price controls.

Individually all of these moves would have improved the Chinese economy. But together, their timing was unfortunate. However, the damage was done and the Chinese public had lost its patience with the reforms.

Tiananmen Square

On April 8, 1989 Hu Yaobang died. The shock was universal. The Chinese people had long admired him for his integrity and personal warmth as the leader of the Communist Youth League. Even conservatives who had pushed for his removal as General Secretary praised him after he died. 

But as Hu Yaobang died, he became the focal point for all the grievances they had. Students were still angry that their sources of discontent about not being allowed to choose their jobs were not discussed by the government. Intellectuals realized that had they pushed harder in 1986, they may have got reform. And the general public was angry about inflation. There was general discontent that state and Party employees on fixed salaries were falling back, while private entrepreneurs, many of whom had got their money via bribing government officials, were growing richer.  Profiteering officials had no shortage of ways to make money but honest ones got the short end of the stick. And above all there was the fear that with the economic reforms they would fall back and their future would not be guaranteed.

No city had a higher concentration of public officials or university students as Beijing. And so, when student protestors hit the streets mourning the death of Hu Yaobang, it became the gathering point for everyone’s concerns to be expressed. What started off as a display of respect for Hu ended up as a place for all concerns to be expressed. It became the point to express every single frustration they had - inflation, economic insecurity or freedom.

 The Beijing municipal government expected the protests to die out but one issue started to be replaced by the other.  The Chinese government was unable to clear the protestors by persuasion. They posted editorials in People’s Daily, and blared it from the state radio stations.  Almost a month later, on May 15 when Gorbachev was visiting Beijing they camped in the Square. The students didn't back down even when Chinese officials told them the country's reputation was at stake. For many officials in the CCP, this was the turning point where they treated the protestors as enemies of the state. They began to discuss martial law. 

When the Chinese government discussed martial law, only the General Secretary Zhao Ziyang said he wouldn’t support it. He tendered his resignation to Deng immediately. Zhao was put under house arrest until his death in 2005. With Zhao out of the way, the Politburo started to prepare for martial law. They got soldiers in stealth to enter Beijing, and then announced martial law in the city. 

But initially, they faced great resistance from the protestors. When soldiers tried to enter via the subway, they found the subways blocked by groups of people. When they went on the streets they were mobbed and their locations were broadcast by organized motorcycle troops. Beijing residents actively supported the protestors and opposed martial law. Humiliated due to this, the conservatives in Beijing tried again - this time with arms. For the next 2 weeks from May 20 to June 3, the propaganda department blasted radio and editorials trying to convince the protestors to leave. There were signs that it was working. Railway officials reported that there were more tickets being sold to go out of Beijing than in. More crucially, student leaders who had welcomed the foreign media were now trying to control its flow in Tiananmen Square to continue the projection that their movement was growing. 

But Deng still moved on even when there were signs of the movement ending and told Chi Haotian, a general in the PLA to “do whatever was necessary” to restore order. Over the night of June 3rd and 4th, troops moved into Tiananmen Square with no warning and fired at protestors. By the morning of 4th June, less than 200 people were left in the Square. The rest of them had fled or had been shot. The most reliable estimates by foreign observers say that between 300 and 2600 were killed and several thousand were wounded. 

The famous tank man. Source

Epilogue

The Chinese growth story reads like a Shakespearean tragedy if the story were to stop in 1989. Economic growth stalled to 4.2% in 1989 from 11% a year before. Conservative officials saw this as an indictment of economic reform as it led to political instability. And for those who hoped to see a more liberal society in China, it was clear that political reform was almost impossible in their lifetimes. 

Economic reform slowed down for sometime, but it picked up later with Deng’s tour to China’s southern provinces in 1992 where he emphasized the importance of reform and urged the Chinese leadership to speed up the process. After some hiccups, the Chinese economy was back on track with price controls being removed in 1992 and state enterprises being privatized by the late 90s and early 2000s


The last question here is what lessons can be drawn from this.

  1. Decentralization is important. Deng had the combination of centralized policymaking and local implementation. This allowed him to test different policies in a controlled manner

  2. An effective state is necessary for the transition to capitalism. Unlike Russia where state power had died out, China was able to provide some form of property rights, law enforcement and welfare programs to smoothen the transition.

  3. Bad macroeconomic policy can kill even the best microeconomic policy. The pre-Tiananmen environment had amazing microeconomic policy with the liberalization of the economy, but poor macroeconomic policy with high inflation killed it.