Bits of History #5

A socialist market economy

– The hardline factions within the Communist Party of China (CPC) that had gained influence after the Tiananmen crackdown were overturned in January 1992, following Deng Xiaoping’s famous Southern Tour of China’s Special Economic Zones. This trip paved the way for the adoption of market-oriented economic principles, which were later debated and approved at the CPC’s 14th National Congress in October of the same year.

However, this shift in Chinese policy was not enough to prevent newly elected U.S. President Bill Clinton, in early 1993, from attaching seven conditions (Executive Order 12859) to China’s bid for Most Favored Nation (MFN) trade status, which was lost after the military intervention at Tiananmen. These seven conditions were:

1. Free emigration; 2. Cessation of exports manufactured by prison labour; 3. Observance of the UN Declaration of Human Rights; 4. Preservation of Tibetan indigenous religion and culture; 5. Access to prisons by international human rights organizations; 6. Permission for international radio and TV broadcasts; 7. The release of prisoners held on political and religious grounds.

President Clinton appointed Winston Lord, one of the key architects of the U.S. opening to China and a close associate of Henry Kissinger (see Bits of History #1), to head the Senior Steering Group, the body responsible for advising him on China’s eligibility for MFN status.

That same year, China enshrined the principle of a socialist market economy in its constitution, and the following year it introduced partial convertibility for its currency, the renminbi. In the technical terms of the International Monetary Fund, the renminbi adopted a hard peg to the U.S. dollar. This marked the first step toward the slow but steady liberalization of China’s exchange rate.

China also established the China Foreign Exchange Trading System and unified its two exchange rates, political and commercial, the latter reserved for businesses operating in the Special Economic Zones (see Bits of History #4), which were visited by Deng during his Southern Tour. The renminbi was fixed at 8.70 per U.S. dollar, representing a devaluation of over 30%.

This manoeuvre created favourable conditions for attracting foreign direct investment, namely the establishment of Western manufacturing plants along China’s coastal regions, and for boosting exports of both Chinese-made and foreign products produced in China. President Clinton, who had criticized Bush during the campaign for being too soft on China, dropped the seven MFN conditions and, in 1994, formally restored China’s MFN status.

A few years later, in 1997, the Asian financial crisis erupted. While trade balances across the Western Pacific countries shifted significantly, the trade relationship between China and the United States remained largely stable, despite China’s government implementing a renminbi appreciation to mitigate the regional impact of the crisis.

That same year, Chinese President Jiang Zemin met with Bill Clinton in the United States during a visit to Hughes Electronics’ facilities near Los Angeles. A few months later, in February 1998, Clinton approved the sale of satellite technology and a Loral Space and Communications satellite to China. Clinton had approved earlier, in 1996, to transfer oversight of satellite sales from the State Department to the Department of Commerce. This regulatory shift facilitated commercial transactions involving advanced communication technologies, since such technologies were reclassified as dual-use rather than strictly military products.

However, both Loral and Hughes were fined for illegally transferring technology to China in early 1990s and Clinton was forced to move back commercial satellite technology transfer under the supervision of the State Department. The Loral-Hughes case became the focus of an investigation that culminated in the publication of the Cox Report in 1999. The report, issued by the Committee on U.S. National Security and Military/Commercial Concerns with the People’s Republic of China, was chaired by Chris Cox, a Republican congressman from California.

The report noted that these transfers occurred in an environment favourable to strengthening China’s position, shaped by U.S.-China relations established in the 1970s to limit Soviet influence in Asia. It also recounted the case of Wen Ho Lee, a scientist at the Los Alamos nuclear research laboratory, who was accused of illegally leaking classified information. The charges were later dropped. The contents of the report have been widely debated due to inaccuracies that overstated China’s technological capabilities in the nuclear and ballistic fields.

These trade exchanges that, according to many American observers, were illegal or at the very edge of legality, served not only China’s domestic economic development but also supported American industries that had established their business in China. American entrepreneurs now needed to raise the technological level of the Chinese industrial system on which they had come to depend.

The following year, a presidential decree by Bill Clinton granted China the status of permanent normal trade relations (PNTR), paving the way for its entry into the World Trade Organization. In less than a decade, China had achieved two major milestones: first, it deepened its integration into the international trading system; and second, it raised the technological level of its economic activities. The U.S., for its part, restructured its industrial base by relying on China’s labour force, thus enhancing the competitiveness of its corporations and transferring abroad some of its social, environmental, and energy burdens. Despite mutual and domestic frictions, the U.S. and China had jointly laid the basis for an integrated global trading system.

A few references:

Qiao L., and Wang X. (1999). Unrestricted Warfare, PLA Literature and Arts Publishing House. https://www.c4i.org/unrestricted.pdf

The Cox Report, https://web.archive.org/web/20060529040921/http://www.access.gpo.gov/congress/house/hr105851/