Hang-Sheng Cheng

English

Research Papers in Economics

FRBSF WEEKLY LETTER
November 1, 1985
In a Chinese Village
This is a story ofa Chinese village; it is also a story
of China's current modernization program. A Bud-
dhist saying goes: "See the universe through a
grain of sand." From this simple story of a small,
rather insignificant village, one may be able to
obtain a glimpse .of some important aspects of the
vast modernization movement that is sweeping
through China today and fundamentally changing
the livelihood of one-fourth of mankind.
Hungshan: pre-industrialization
Hungshan is a collective farm of 845 families. It is
located on the east coast ofChina, about100 miles
south of Shanghai, on the south shore of the
Chientang River near where the river pours into the
sea. Throughout history, the area has been known
for a spectacular natural phenomenon: Twice a
day, the tide rushes into the mouth of the river in a
wall of water dozens of feet tall, foaming and thun-
dering like ten thousand white horses galloping in a
line across a battlefield. This sight has made the
area a favorite tourist spot, but not Hungshan itself.
Sixteen years ago, Hungshan was a mere salt
marsh, with a few households eking out a living by
drying seawater for salt. In 1969, a dramatic
change took place. During the heightof the
Cultural Revolution (1966-1976), a decree was
issued to turn the marsh into arable land for grow-
ing food grains. In the spirit of those daring times,
the decree was carried out withno consideration
of the costs involved. Hordes of laborers were
mobilized to build dikes, dig drainage trenches,
plant legumes that thrive on salt (thus removing
salt from the soil), and construct irrigation canals.
Three years' hard work achieved the decree's
objective: the salt marsh was turned into high-
yielding rice fields. It was supposed to be another
triumph of the Cultural Revolution.
Yet, despite the gigantic and successful fight
against nature, it is doubtful that the effort paid off
in an economic sense. Out of the huge investment
in labor and capital arose thenewly established
Hungshan Collective Farm ofa few hundred des-
perately poor households eking out a living by
growing rice. One reason for their poverty was that
the government set farm product prices so low
relative to industrial prices that farm income barely
reached a subsistence level. The price system in
effect taxed farmers to keep down the cost of
urban living. Another reason was that farm produc-
tion was carried out by work brigades. Workers
were paid by the hours put in,with no regard to
productivity or individual initiative. The net result
was that the rural standard of living remained far
below that of the urban,and a nationwide house-
hold registration system kept rural populations
from migrating into the cities.
Industrial take-off
In 1978, the new national leadership launched the
Modernization drive designed to breathe new life
into the national economy by dismantling the rigid
Soviet-type economic structure that was erected
twenty-five years earlier. Under the new policy,
market incentives were to replace ideological fer-
vor as the motive force for economic activities.
Bureaucratic controls over the economy were to
be loosened to give private enterprises more
latitude in making decisions. Individuals were to be
rewarded for their productivity and initiative. A
market mechanism was to be activated to help
allocate resources in a fundamentally socialist eco-
nomic system. Furthermore, transformation was to
be gradual, experimental, and to start from rural
areas where eighty percent of the population
resided.
The new wind reached Hungshan in 1980. A new
team of village leaders decided that the time had
come for the village to pull itself out of poverty
through industrialization. Seeing the Widespread
shortage of building materials, they hit upon the
idea of building acement factory. A group was
sent to procure technical advice from cement
plants elsewhere. The collective's meager surplus
fund was used as initial capital, plus a small capital
loan from agovernment bank at zero interest. In
addition, advance payments were asked of
customers, who were eager to comply in order to
ensure future delivery of much needed cement.
The factory started operation in 1980, and was a
spectacular financial success by the very next year.FRBSF
Emboldened, the farm plowed profits into starting
aceramic tile factory, a slate-polishing factory, a
cloth-dyeing factory, a clothes-making factory, a
plastic-molding factory, a television shell factory,
and a farm-machinery parts factory in the succeed-
ing years. By late 1984, a total of18 enterprises had
been established.
In the short span of four years, the structure of the
village's economic activities changed drastically.
The collective farm was replaced by the Hungshan
Agricultural-Industrial-Commercial Development
Corporation, which serves as the holding company
for the 18 separate enterprises. As the corpora-
tion's name implies, its businesses encompass
three areas of economic activity. Whereas in 1978
the collective farm depended mostly on farming,
five years later the corporation generated 84 per-
cent of its 1983 revenue from industry, 6 percent
from commerce, and only 10percent from
agriculture. Duringthe same period, agricultural
employment fell from 80 percent of total employ-
ment to 37 percent, and industrial employment
rose from 16 percent to 58 percent, while com-
merce and education's combined share rose from 4
to 5 percent.
With a more diversified industrial structure came
the problem of securing future supplies of energy
and raw materials. Given the inadequate distribu-
tion system and the distorted price structure in
China, ensuring a steady supply ofenergy was the
first requirement forsustained industrial growth.
The village corporation's managers contracted to
make a substantial capital investment in a small
coal mine in a distant province to ensure an ade-
quate supply of coal forthe village in future years.
But at times, capital alone was not enough. In one
case, the corporation had to agree to help train
plastic-molding technicians in another province to get
the provincial authorities to supply coal to the village.
The corporation has further diversified its portfolio
by, for example, investing in a large beer brewery
nearby. In 1984, plans were afoot to build an
eighteen-story commercial building and an air-
conditioned movie theater in the county city.
Industrialization raised the Village's income at a
dizzying rate. From 1978to1983, its total net
income increased 470 percent from 1.6 million
yuan to 8.9 million yuan. After deducting for tax
payments and the corporation's surplus funds, per
capita distribution in 1983 was 860 yuan in 1983
- triple the amount of 285 yuan in 1978.
Welfare
With the higher income came improved living con-
ditions. I was taken to see one of the eight housing
developments in the extended village. These were
handsome two-story pre-fabricated concrete
houses, decorated extensively with locally pro-
duced ceramic tiles and polished slate, containing
spacious and airy rooms and traditional farm-
kitchen facilities (that used dried rice stalksfor
fuel), They were called "third generation" houses.
The corporation manager proudly contrasted them
with the "first generation" and "second genera-
tion" houses in the distance to show the progress
that had been made in the last five years.
Inside, the houses were remarkably clean and well-
furnished - suspiciously looking like model homes
in U.s. new housing developments. The hosts
proudly showed the visitors the new television
sets, refrigerators and bicycles. Across the back-
yard from one main house was a low structure
used for raising dozens of chickens, with light bulbs
to keep them warm. The visitors were told that
there were fish ponds as well as fruit orchards
nearby to supply the villagers' needs.
In addition, the village has also built a four-story
school building. Education from kindergarten
through junior high school was free. The village did
not have a high school. It provided scholarships of
300 yuan per year for students who were accepted
into high schools elsewhere, and 1,500yuan per
year for those who entered universities. The village
also paid for 70 percent of medical expenses up to
30 yuan per illness, and 100 percent above that
amount. For families of a single child, it paid 30
yuan per year up to 14 years. The village claimed
not to have had a new family with more than one
child in the past six years.
Incentive vs. equity
A great deal ofcredit for the village's spectacular
economic success was given to entrepreneurship,
and entrepreneurship was richly rewarded. In
1983, the cement factory was contracted out to a
five-man management team with a target profit of
1.6 million yuan - twice the amount that was
realized in 1982. Under the contract, each worker
was paid a flat wage rate of 34.5 yuan per month
plus a floating bonus depending on the amount by
which the factory's target profit was exceeded.
That year, the factory netted 2.13 million yuan in
profit. As a result, the workers averaged 3,000 yuan
income per person, and the five-man management
team each received more than 10,000 yuan.The clothing factory suffered losses in 1982. In
1983, the factory switched to the new incentive
system. It was contracted out to a young man from
a neighboring village who had had six years of
clothing-sales experience. Through innovative
management methods and introduction of new
products (new-style shirts and ski jackets), the fac-
tory realized a 250,000 yuan profit in 1983. The
manager received a total of 29,000 yuan that year,
including bonus, and became the highest paid per-
son in the village. In a country where per capita
income was about 400 yuan a year, these
remunerations were indeed astronomical.
Newspapers have reported these income dis-
parities with approval and relish. These cases were
cited as successes of the new incentive system. It is
the government's proclaimed policy to permit a
few people to get rich first in order to help every-
body else get rich later.
Assessment
This story of Hungshan Village is based on data col-
lected during a half-day visit to the village, supple-
mented by information contained in newspaper re-
ports. The two sets ofdata are so similar that they
clearly came from the same source. The depend-
ability of that source cannot be verified. Moreover,
the village was apparently displayed to visitors as a
"showcase" for the new government policy's suc-
cess. A cautious visitor must be wary of the infor-
mation's usefulness and significance in the vast and
complex country that is China.
However, there is other evidence to suggest that
Hungshan's story is notan officially fabricated fan-
tasy. Western journalists have reported similar
explosions in rural industrial growth in other parts
of the country. In particular, one in-depth analysis
of China's economic growth by region (conducted
in 1984) points to the "important role played by
collective enterprises, and rural industry in particu-
lar" as a striking feature of the fastest growing
provinces: Jiangsu and Zhejiang on China's east
coast. Jiangsu is reported to have 68,000 rural
enterprises, employing 4.35 million workers in
1984. Since 1978, the average annual output
growth of these rural enterprises was nearly 25
percent, compared to 9 percent for state
enterprises in that province. In Zhejiang, which
contains Hungshan Village, some 40,000 new
township-run enterprises were established in 1984
alone. The Beijing Municipality, which includes
Beijing (the nation's capital) and 10 surrounding
counties, had 16,500 rural enterprises in 1984, up
from 8,900 in 1983. On the basis of this evidence,
it appears that Hungshan's story not only is not a
myth, it also is notan isolated phenomenon.
More significantly, Hungshan is aconcrete
manifestation of what the Modernization policy
intends to achieve. Perhaps, the earlier reference to
a "model home" is, after all, rather appropriate in
the present context. Hungshan Village and its story
symbolize the ideals the nation's new leaders are
striving to attain. In a fundamental sense, these
ideals are perhaps not that different from those
that had prevailed for thirty years before the new
leaders came into power. However, in terms of the
means for achieving the goals, the departures from
the old path have been significant.
From this viewpoint, the story is noteworthy
because it helps highlight a few interesting points
about China's Modernization drive. First, it demon-
strates that by giving free rein to industrial
development outside the rigidly controlled state-
enterprise sector, a vast reservoir ofentrepreneur-
ship and creative energy can be released to propel
the country's economic growth. Second, the
deliberate allowance of income disparity has pro-
vided a large incentive for individual initiative that
was absent in the old regime.
Third, rural industrial development has continued
to be distinctly socialistic: the enterprises were col-
lectively owned by village or township corpora-
tions and not by private individuals. Fourth, by
encouraging rural industrial development - and
thereby providing jobs where the majority of the
population resides - China may be able to miti-
gate the ills of urban concentration that have
plagued many developing nations.
Hang-Sheng Cheng
Opinionsexpressed in this newsletterdo not necessarily reflect theviews of the managementof the Federal Reserve Bank ofSan
Francisco, orofthe Board ofGovernorsofthe Federal Reserve System.
Editorial commentsmaybe addressedtotheeditor(GregoryTong) ortotheauthor....FreecopiesofFederal Reserve publications
can beobtained from the Public Information Department, Federal Reserve Bank ofSan Francisco, P.O. Box 7702, San Francisco
94120. Phone (415) 974-2246.uo~6U!4S0m 4o~n U060JO 0POI\0U
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BANKING DATA-TWElFTH FEDERAL RESERVE DISTRICT
(Dollar amounts in millions)
Selected Assets and Liabilities
Large Commercial Banks
Amount
Outstanding
10/9/85
Change
from
10/2/85
Change from 10/10/84
Dollar Percent?
Loans, Leases and Investments1 2 195,142 - 970 11,496 6.2
Loans and Leases1 6 176,079 - 809 10,996 6.6
Commercial and Industrial 51,033 - 454 557 1.1
Real estate 65,164 104 3,847 6.2
Loans to Individuals 35,923 - 13 5,654 18.6
Leases 5,405 0 370 7.3
U.S. Treasury and Agency Securities2 11,823 - 160 182 1.5
OtherSecurities2 7,239 - 2 318 4.5
Total Deposits 199,640 - 2,822 6,629 3.4
Demand Deposits 47,206 - 3,044 461 0.9
Demand Deposits Adjusted3 32,792 - 53 2,439 8.0
OtherTransaction Balances4 14,220 116 1,665 13.2
Total Non-Transaction Balances6 138,214 106 4,502 3.3
MoneyMarket Deposit
Accounts-Total 45,302 94 7,340 19.3
Time Deposits in Amounts of
$100,000 or more 38,570 13 - 2,907 - 7.0
Other Liabilities for Borrowed MoneyS 22,546 894 2,713 13.6
Two WeekAverages
of Daily Figures
Reserve Position, All Reporting Banks
Excess Reserves (+l/Deficiency(-)
Borrowings
Netfree reserves (+l/Netborrowed(-)
Period ended
10/7/85
62
82
- 144
Period ended
9123/85
61
39
23
1 Includes loss reserves, unearned income, excludes interbank loans
2 Excludes trading account securities
3 Excludes U.S. governmentand depository institution deposits and cash items
4 ATS, NOW, Super NOWand savings accounts with telephone transfers
5 Includes borrowingvia FRB, TI&L notes, Fed Funds, RPs and other sources
6 Includes items not shown separately
7 Annualized percent change

In a Chinese village

http://www.frbsf.org/publications/economics/letter/1985/el85-44.pdf

In a Chinese village

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Research Papers in Economics