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The Chinese Marketplace
Why markets are needed for a nation to thrive
Sushil Tailor, Contributor
After the reforms endowed onto China by Deng Xiaoping in the 80s, the nation became an economic force to be reckoned with in the decade after. With foreign direct investment on the rise, China’s GDP grew at a rate of 9.5% a year. In 1999, it became one of the largest economies in the world, second only to the United States.
This served as quite a shock for the Western World. Once again, liberal democracies were no longer situated as sole world powers. The Soviet Union was toppled but a largely socialist China was now on the rise.
Aside from military strength, power and influence over world affairs is gained via a powerful economy. Veto power is given to UN nations with strong economies. The chairman of the board for the World Bank is appointed by the United States, its biggest shareholder. Agricultural subsidies in the USA are enough to crush local farms in Third World and developing nations. A strong economy provides leverage on matters of international diplomacy.
Nevertheless, how is this economic strength gained? The answer lies within a thriving financial sector.
A thriving financial sector can only be attained if the corresponding rules are put into place, rules that allow for a market economy.
First, debt collection needs to be enforced and so regulatory mechanisms must be set in place in order to allow for said debt to be collected.
Another important institution are the courts that deal with common law. These courts deal with affairs pertaining to contracts, which are a required in order for creditors to dole out money to debtors with a greater sense of ease. Laws allow corporations to be limited liability institutions, entities that are regarded as legal persons (not to mention, laws allow corporations to exist in the first place).
Meanwhile, regulations unsure general accounting guidelines are adhered to in order to en sure investors have the correct financial information needed to make an investment decision. These laws and regulations may not be perfect, but once instated and enforced, greater stability ensues that allow businesses and entrepreneurs to take risks, while knowing roughly what the general outcomes will be.
These rules provide for a stable foundation from which the financial sector can grow, as seen in action throughout history.
Hong Kong serves as a prime example as seen by its proximity to mainland China and the contrast it serves between the two.
After the First Opium War, Hong Kong was ceded to the British under the Treaty of Nanking. The Convention of Peking after The Second Opium war resulted in more land gained by the British. Situated as a trading outpost, English Common Law was introduced into Hong Kong.
Now a special administrative zone of China, Hong Kong still adheres to English Common Law. The rules set forth by precedent within it on how to deal with matters of contract, tort and business allowed for a market economy to thrive while mainland China’s financial system suffered after Mao Zedong instated a command economy.
The English Common Law rules and regulations mentioned previously, along with a liberal political environment, resulted in a growing free market economy. As a result, Hong Kong shines today as an international financial hub, giving birth to powerful banking institutions such as HSBC and hosting a welcoming business climate for international banking institutions originally from places such as America, Canada, Europe and Singapore.
China’s reforms in the 80s by Deng Xiaoping were the result of emulating Hong Kong for the purposes of attracting foreign business, as its tiny neighbour had succeeded in doing for so long. For this reason, special economic zones were set up with rules that would garner foreign investment. Amongst these zones were Shenzhen, Shantou and Xiamen.
From then on, central planning took a different route and instead of directing goods and services on a microeconomic scale, more attention was given to market-oriented macroeconomic planning. Hong Kong’s liberal market economy served as an inspiration for the planners in the Communist Party.
Ultimately, while Maoism and variants of communism and socialism are the official ideologies of the Communist Party of China, ideas regarding the economy proposed by capitalist liberal democracies are often implemented.
For a strong economy they needed foreign direct investment and a thriving financial sector. In order to accomplish this, they realized that they had to follow suite with what Western nations have been doing for so long: have laws and regulations that allow for a market economy.
Arbitrage Magazine
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