For someone living in China, their hukou designation can make all the difference. Ostensibly a family-registration system with the government, functionally it is like a domestic passport. Not only that, it conveys certain rights and privileges exacerbating already deep economic and political divides. From its earliest Communist days, urbanization has been a Chinese priority almost always at the expense of the nation’s rural farm dwellers.
From the government’s perspective, hukou has been an effective means to effect control over people as a resource; and in this sense, “effective” doesn’t mean efficient, as in economically speaking, rather it speaks to how useful the system has been for the Communists to wield supreme power.
This was formalized in 1958 after the “successful” completion of China’s first 5-year plan. After having seized political control, Mao Zedong’s Communists moved to reorder what was then little more than a feudal system dominated by subsistence agrarianism.
Literally importing Marxist “engineers” from their northern Soviet neighbors, in 1952 China’s aspiring socialists simply copied the first 5-year plan the Russians had adopted in 1928. The main goals were the same for each instance; the victorious Communists in both cases believed that the only way a Socialist society could develop given their starting point (against Marx’s expressed warning) was to build up first heavy industry so as to be freed from the “imperialist” powers.
If you can’t build something big yourself, you’ll always be under the boot of Western colonialists begging them for their scraps. As Stalin once said, “Because China did not
have its own heavy industry and its own war industry, it was being trampled upon by all the reckless and unruly elements.”
To begin rectifying such a fundamental weakness, China’s first 5-year plan (1953-57) like Russia’s had assigned huge growth, therefore committing immense resources, to those heavy industries. Coal output, for example, was targeted to increase from 63 million tons in 1952 to 113 million by 1957. The production of steel was meant to leap from 1.3 million tons to 4.1 million tons. And so on.
Of these industrial goals, the vast majority were actually exceeded: reported coal output in 1957 had been 124 million tons exceeding 113, while 5.2 million tons of steel were fabricated far in advance of the 4.1 written down. Achieving such “miraculous” economic growth had meant China’s government collectivizing – one way or another – all of those industries, to the government “proving” the wisdom of the economic model.
About two-thirds of private companies were outright nationalized, while the remaining third were “given” a new and decidedly not-silent partner: Mao.
Mao believed that to make China a shining Socialist example, he needed to remake China into an industrial powerhouse because that’s what an advanced economy looked like back then. To do it, the government would necessarily prioritize the cities and regions where such industries were situated to meet whatever specific plan mandate.
Authorities would, by definition, throw resources at those cities meaning for those with certain urban hukou there were tremendous benefits in more modern social services in addition to vastly improved job - therefore quality of life - prospects. By 1956, an estimated 88% of all Chinese people lived on these farms with rural hukou listings, while 88% of government investment flowed into market towns and burgeoning industrial cities.
Outside of heavy industry, though, output lagged in other areas even though in agriculture family farms had begun to be collectivized, too, as the Soviet example had demanded. It hadn’t immediately led to the widespread destruction of farm capacities as it had in Russia (succumbing to severe famine in places like the Ukraine; the holodomor).
For those rural farmers, the incentives were as clear as they were intentional. Above all, the Communists financed much of their industrialization and its urbanization by underpricing agricultural products at the same time overpricing industrial goods produced locally. The hukou system greatly aided authorities in at least controlling migration patterns according to their strict central planning edicts.
Back in 1949, originally Mao had advocated rural farming be transformed into early stage collectivist “mutual aid teams” consisting of between five and fifteen households “sharing” the work on government-confiscated land. These were then expanded to “higher cooperatives” between 100 and 300 families around 1956. Estimates indicate between 93 and 95% of all farmers had been so collectivized by the end of China’s first 5-year plan.
Unlike the Soviet Union, China never really faced a shortage of manpower. One of the primary contributing factors to the food shortages of the twenties and thirties in Russia was that many communes were stripped of labor which had been “reallocated” to rushing Russia’s initial industrial catch-up phase.
Labor just wasn’t a problem when in China’s first real census it showed ~800 million people, an absolute ocean of untapped labor potential. This economy, Mao thought, lacked only the will and the plan. Thus, upon completion of the first five-year plan in 1957, by 1958 the Chinese economic planners had worked out how they were going to tap into this ocean of cheap strength.
They began calling for a “leap forward” whereby, as in the first 5-year plan, heavy industry would be given priority, including resources devoted to industrializing cities. While that couldn’t be sped up anymore, while the rest of China’s “idle” farm labor waited around for their hukou ticket to an urban, modern situation, they’d be put to work in industry right where they already were.
Farm collectives were “reformed” into rural People’s Communes, each with an average of around 5,000 people within. All private farm plots were abolished – even meals were collectivized into People’s kitchens. Akin to prisons, anyone caught violating their hukou registration was subjected to public humiliation in addition to official abuse, sometimes torture.
Mao believed that such large-unit People’s Communes would be easier and more efficient to manage. Many of the approximately 25,000 or so would be re-tasked from solely farming as they had known for generations to suddenly begin producing especially steel beside. This supposedly more efficient – and supposedly more manageable - structure had planners thinking China could keep up food production even at the same time marshalling so much of its “surplus” labor into small-scale industrial operations.
Rather than inefficiently using human manual labor in agriculture, the Chinese regime thought they may as well deploy the same manual human labor just as inefficiently but now in backyard steel furnaces.
Having seen the fruits of its first radical five-year plan, the Communists weren’t the only group in the world who were enthusiastic about the prospects for this second one. The CIA in a June 1959 confidential memo (comparing and contrasting Russia’s and China’s first 5-year plans) wrote:
“The ‘leap forward’ movement, operating through the new commune system or organization, is aimed at mobilizing the vast rural Chinese labor force for an impressive program of investment in agriculture and small-scale, local industry. Because these innovations are well calculated to take advantage of China’s abundant manpower and because natural resources for both industrial agricultural development are adequate, China’s rate of economic growth during the Second Five Year Plan may very well equal or exceed the growth of the USSR during its Second Five Year Plan.”
The most important question, the memo writes, “appears to be social and political rather than economic” and that “Communist China will present a strong contrast to the long-term experience of the USSR, where industry was developed at the expense of, and in spite of failures in, Soviet agriculture.”
Yeah, man, the CIA. They really nailed another one here.
Even in its earliest months, the “Great Leap Forward” was demonstrating itself as one of humanity’s worst ever disasters. By its end, at the very least 15 and maybe as many as 60 million Chinese, mostly peasants, were thought to have died from starvation and starvation-related disease.
While the People’s Communes were busy with their small-scale industries of backyard smelting, the farming parts of them were, by necessity, being neglected. Worse, since such communes weren’t really set up to be steel producers, there was no infrastructure and upstream logistics (the central planners had neglected to work out just exactly how these furnaces were going keep being refueled and from what raw material the steel would be forged).
Having to meet 5-year plan targets no matter what, they cranked out steel by volume regardless of its quality. When coal supplies ran out (quickly), even-more-inefficient wood was substituted which required so much labor put to work mindlessly chopping down trees for no other purpose than steel-making. Iron ore hardly ever available, the unmovable government output demands demanded the People’s Communes use every alternative; they began melting down anything made out of iron, including cooking and farming implements.
Worst of all, with the Maoist government believing in the predetermined success of this method, agricultural output was commanded to be increasing, too. Targets were made accordingly from which the government allowed no leeway. As a consequence, the communes produced very high volumes of worthless pig iron (rather than expected steel) as well as even higher volumes of phantom agriculture.
Most of the real produce was shipped off to China’s cities and much was even exported, China needing the cash, the Chinese government all the while deluded by central planning into thinking it had more than enough food for the rural oppressed. Instead, it was the fictional grains and foodstuffs that remained behind for those beleaguered imprisoned under their rural hukou.
In typical Communist style, Mao blamed someone else…the Russians, in this case. In 1964, while enthusiastically talking about China’s very different third 5-year plan, he whined:
“In the past, the method of planning was essentially learned from the Soviet Union and comparatively easy to do. First you determine how much steel is needed, then on this basis estimate how much coal, electricity, transport force, and so on are needed; and then based on these assumptions estimate the expected increase in urban population and the livelihood benefits. This is the method of using the calculator. Once the output of steel is reduced, all other items are correspondingly reduced. This kind of method is impractical and unworkable…It is necessary to change the method of planning. This is a revolution. After we learned the Soviet method, it has become a force of habit with us and it seems hard to change.”
And in order to complete his comeback, Mao having been sidelined after the disastrous Great Leap Forward, the dictator would re-cultivate his cult-of-personality and use it plus this new-found blame for Russia to reestablish himself with China’s nearly-as-awful Cultural Revolution beginning in 1966.
It wasn’t until Mao died and Deng Xiaoping usurped the Gang of Four, which included Mao’s third wife, Jiang Qing, that China could actually move in any other direction away from the stranglehold of backwards collectivization. The country’s fifth 5-year plan (1976-80) was the first which directed the economy back toward market reforms (although it also introduced the one-child policy at the same time).
Thus began a lengthy movement toward quasi-private ownership in industry and the de-collectivization of the communes (along with moving toward setting up the first Special Economic Zones, essentially free market islands, by 1980). These were followed up in widescale fashion in 1992 when Deng made his famous Southern Tour, committing China to the nearly opposite course with Deng Xiaoping Theory which combined a nominally communist political structure with a nearly capitalist market economy.
The world was already decades into being (euro)dollarized, after watching what it had done for places like Japan, China needed only some willingness for it, too, to finally take advantage.
It has been this regime, fueled in no small part by the global eurodollar’s expansive expansion, which transformed China in the manner Mao Zedong had envisioned and had expected. This dollar-based framework has been the system from which Chinese economic plans, as well as its economic reality, had been derived for decades.
Until Xi Jinping.
The pendulum always swings back and forth, from one extreme to the other. Where Mao had gone so far toward collectivism and top-down, leaving China to sit out much of the post-war prosperity being built up and witnessed in the free(r) West, Deng had set up China for it to swing the pendulum back near completely (but intentionally not fully complete) in the opposite direction (under successors Jiang Zemin and Hu Jintao).
That had given China the ability to hitch a ride on the second, later wave of globalization and prosperity, an even bigger and more complete one – especially for Emerging Market economies across Asia.
All that being derailed starting in August 2007, it took several years for China’s leadership to realize the permanence of this new involuntarily de-dollarizing setting.
For China’s thirteenth 5-year plan planned and written up around 2014 and 2015, crucial years, indeed, the challenges facing China during its mandate (2016-20) were suddenly enormous. No longer dependable global growth had left Communist leaders wondering how they were going to move forward with rural hukou still expecting at least their children’s advance to the glittering modern city lifestyle.
Urbanization would continue, according to it, as would other key initiatives to bring about an increasingly “updated” version of Deng’s vision for a “moderately prosperous society.” The 80-chapter, 60,000-character document decried the prior economic model as one of “unbalanced, uncoordinated, and unsustainable growth.” Pollution, corruption, inequality suddenly in focus.
But to move toward a more sustainable economic model, one that’s now called Xi Jinping Thought on Socialism with Chinese Characteristics, this would demand serious, serious cash. By one estimate, continued urbanization alone would have required $6.3 trillion (RMB 42 trillion). Another $1.5 trillion for environmental promises, nearly as much for healthcare, etc.
In other words, there was no way the government could conceivably make such investments on its own.
For several years, beginning in October 2014, China’s State Council promoted PPP’s – public-private partnerships designed to solicit investment in social projects according to the thirteenth 5-year plan. By July 2016, 600 of them had been written up – by the government. Just 24% had signed contracts, though, as only 39% had actually found private partners.
Private business won’t cooperate.
You begin to see Xi’s problem. To continue with the promises made under Deng Xiaoping Theory it would require resources the Chinese economy, even after its two-decadelong “miracle” (meaning dollar) transformation, just doesn’t have. Without the same level of dollar flows, especially with Euro$ #4 hitting in late 2017, about the only answer left to him is to change the rules – in one sense like Mao did.
This is why what we’ve seen so far of the Chinese fourteenth 5-year plan alludes to the pendulum swinging even farther back in that direction; politically as well as economically. Politically speaking, that already happened in October 2017 with the admittance of Xi’s name into China’s constitution alongside only Mao’s (as living leaders).
Economically, “quality” growth has more and more supplanted Deng’s idea for “quantity” growth. While the thirteenth plan began to rely more on the domestic system making big future advancements, this fourteenth puts China on course to almost completely depend upon them. Just yesterday, Xi Jinping reiterated that he expects the Chinese system to make “major breakthroughs” in “key technologies.”
He didn’t specify how. Like Mao, it's just planned that way.
Whereas an advanced economy looked like an industrial steel producer to Mao Zedong in 1952, an advanced economy looks like a technology, consumer-led system to Xi Jinping in 2020. The latter may be nothing like the former, but how Xi may intend to arrive at it might not be so dissimilar; nor might be the results, an isolated China economy an island unto itself.
Caught up in the (euro)dollar’s decay gravity, China’s pendulum has been made to swing. If they can’t depend on the rest of the world, they’ll do it themselves maybe through the most extreme means regardless. After all, Xi has a plan to follow, as well as to (somehow) deal with hundreds of millions on de facto second-class rural hukou registrations who might soon figure out they’re going nowhere.
As I wrote elsewhere last week:
“Sure, if the world ever gets its act together, fine, the Chinese will welcome that external boost. They are explicitly not counting on it. Instead, China’s going to develop new innovations and technologies all its own to leap ahead of everyone else. Some might say preparing China for a huge leap forward (uh oh).”
One of the key features embedded in these last two five-year plans is increasingly deglobalization. While most in the West can’t figure out why, or why Xi’s Communists would want to move in this direction, that’s only because Economists and central bankers neither understand their jobs nor well enough the history, especially the monetary history, of the last half century.
Quasi-socialism could work only so long as the socialists aligned with the dollar. Misaligned, the dollar first before the socialists, now what? Some commune back in communism, it would seem.
