China Not Yet Free Market

November 12, 1997 • Commentary
This article appeared in Copley News Service.

SHANGHAI - President Jiang Zemin was recently in Washington, and protesters were dogging his footsteps. Although politics dominates the U.S.-China relationship, the two nations’ most important ties are economic. Bilateral trade and investment have been growing dramatically, but future increases ultimately depend on developments within China.

At its recent party congress, Beijing’s Communist leadership reaffirmed its commitment to a capitalist course. Although Hong Kong, newly returned to Chinese authority, is the country’s economic crown jewel, Shanghai, China’s traditional economic star, may be a more accurate bellwether for the success of China’s economic reforms.

The city’s recent history symbolizes the fate of the nation. Shanghai was a small fishing town until 1842, when Britain, under the Treaty of Nanking, which ended the Opium Wars, established a foreign concession. France entered five years later, soon to be followed by American and Japanese settlements. By 1900 Shanghai was a major trading center, though the impoverished Chinese masses remained hemmed into their own quarter.

The Communist Party was formed in Shanghai in 1921. The city was seized by the Japanese and held through the end of World War II; the Communists entered in 1949, finally extinguishing foreign control. Shanghai is where Mao Zedong launched the Cultural Revolution in 1966. It served as the last stronghold of the so‐​called Gang of Four after Mao’s death, and is home base for President Jiang.

Even during the worst Communist excesses, Shanghai retained some Western influence. The buildings of the Bund, along the Huangpu waterfront, presented an incongruous 19th century European facade. Residents were wealthier, enjoyed a more abundant night life and adopted some occidental fashions. Business remained a factor in Shanghai life.

Thus, when Deng Xiaoping moved China onto its reform course in 1978, Shanghai was ready to regain its position of economic leadership. However, even a decade ago, the airport was pre‐​modern, new construction was nonexistent and automobiles were rare. It was a city where prosperity remained merely a possibility.

Economic freedom may not be sufficient to free China politically. But it is probably a necessary condition, which is why Washington should not attempt to isolate Beijing economically.

But in 1992 Deng decided to target Shanghai. A mixture of capital investment and tax incentives transformed the city. Its GDP has since grown 13 percent a year.

Today Shanghai has arrived. The airport would make any American city proud, the business district is dominated by modern office buildings, thousands of construction cranes dot the city, and cars fill the streets. Luxury department stores line Beijing and Huaihai streets. Pedestrians sport cellular phones. The city literally bustles, like a somewhat lower‐​tech and less‐​glitzy New York City.

While demonstrating China’s enormous economic potential, Shanghai also shows how far the country has to go. Stores may be filled with Western goods, but local shoppers are sparse. A few blocks away from the Bund lie squalid alleyways in the old walled city, where the Chinese were once confined by their foreign overlords. Close outside of Shanghai lie rice fields worked by hand.

Even the process of economic reform has been inconsistent. Not all of the $16.9 billion in foreign investment has been well‐​spent. The Beijing government is committed to turning the Pudong area, which lies across the river from the Bund, into a special economic zone. Thus, leading companies reportedly treat investment in Pudong as the price of doing business in China.

Tall, new buildings sporting corporate logos rise skyward amid empty streets. All that distinguishes Pudong from old West ghost towns is the lack of tumbleweed blowing down the streets. Build it and they will come, seems to be the government’s motto. China may be committed to markets, but not entirely free markets.

Still, Shanghai is a dramatically different place today than even a few years ago. And its experience suggests the possibility of a broader transformation of China.

Obviously the move toward freer markets alone is not enough to bring democracy. Chinese participants in a recent Cato Institute conference were far less willing to freely discuss political issues than they were at a similar event a decade before in a much poorer Shanghai. In that sense, Tiananamen Square’s influence is still felt.

On the other hand, residents of Shanghai exhibit greater freedom in their personal lives than they did before. Over the long term, access to autos and cellular phones, the presence of Western advertising and goods, and cooperation with foreign visitors will make the population ever harder to control. Economic freedom may not be sufficient to free China politically. But it is probably a necessary condition, which is why Washington should not attempt to isolate Beijing economically.

Shanghai is full of magnificent reminders of an ancient culture stretching back thousands of years. Just a few blocks away from the Shanghai Museum, however, sits a Pizza Hut. It is the modern world, and the modern Western world at that, which now dominates life in the city.

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