1979 and the birth of an economic miracle.
- By Christian CarylChristian Caryl is the author of Strange Rebels: 1979 and the Birth of the 21st Century. A former reporter at Newsweek, he is a senior fellow at the Legatum Institute (which co-publishes Democracy Lab with Foreign Policy) and a contributing editor at the National Interest. He is also a Senior Fellow at the Center for International Studies at the Massachusetts Institute of Technology and a regular contributor to the New York Review of Books.
It is inevitable, perhaps, that we tend to focus on leaders when we examine grand political and economic transitions. But they are not the only actors in these dramas. Deng Xiaoping and his colleagues triumphed precisely because they unleashed the creativity and the entrepreneurial urges of millions of Chinese. Many of them — shocking though it might be to think — were not even members of the Chinese Communist Party.
In January 1979, around the time that Deng was preparing for his trip to the United States, a young man named Rong Zhiren returned to his hometown of Guangzhou, historically known as Canton, the largest city in Guangdong province, up the river from Hong Kong. Rong had just turned 30, but he had relatively little in the way of concrete achievements to show for someone of his age. The reason was the Great Proletarian Cultural Revolution. A central part of the Cultural Revolution was Mao Zedong’s campaign against intellectualism, book learning, and the "Four Olds" (old habits, old ideas, old customs, and old culture). In 1966, he had ordered the closure of China’s institutions of higher education. Over the ensuing years, 17 million students were dispatched to the countryside to learn the virtues of the simple life from the peasantry. University entrance examinations did not resume in China until autumn 1977. By early 1979, only 7 million students had made it back to the cities.
As the Cultural Revolution played out, the overwhelming majority of students stayed where they were assigned, which usually meant wasting their best years tilling the land in remote agricultural communes. Rong did not. Sent out to the countryside in 1969, he snuck away as soon as he had the chance. He spent the next decade dodging the police and living from odd jobs, such as drawing and tutoring. He lived with friends, moving from place to place. In December 1978, back in Guangzhou but still on the run, he heard a radio broadcast publicizing the results of the historic Third Plenum in Beijing, the meeting that sealed the triumph of Deng’s pragmatic course of economic reform. Like millions of other Chinese, Rong understood that something fundamentally transformative was under way — and that included an opening for entrepreneurship. "I knew this policy would last because Chinese people would want to get rich," as he later put it. In January 1979, he decided that he would be one of the first to take a chance. He applied for a business license. The bureaucratic obstacles sounded daunting: One of the requirements was a complete physical checkup to ensure that he had no infectious diseases. But it turned out to be a cinch. Rong sailed through the procedure in just a few days. (Nowadays it takes nearly three weeks.) The Guangdong government, eager to get things going, was already trying to encourage business creation.
Rong started his business on March 18 — an auspicious date because the number "18" sounds like the phrase "you’ll definitely get rich" in Mandarin. Following the advice of people in the neighborhood where he had been working, he decided to open a small restaurant specializing in breakfast. His signature dish was classic Guangdong comfort food: congee (rice porridge) with peanuts and spareribs. He set up his restaurant — really a glorified tent on a wood frame he put together himself — at an intersection close to two high schools, assuming that he could market his cheap breakfasts to hungry students. His startup capital was 100 yuan (roughly $65 at the official, highly inflated exchange rate), 60 of which he had borrowed from his girlfriend. The furniture and a big cooking pot were loans from friends. He was nervous at first. The idea of running one’s own business was frowned upon by many educated people, who regarded such things as beneath their dignity. But those worries began to fade away as he immersed himself in the daily routine of his business, and the money started rolling in. Almost immediately, the restaurant was an enormous success.
In May 1979, Tom Gorman, a Hong Kong-based American businessman, set off on another one of his trips to the Canton Trade Fair. As part of his job with a Hong Kong publisher of trade magazines, he had already made the trip to the fair several times, so he knew the routine. In the 1970s, foreigners who wanted to do business with the world’s most populous country had to follow a peculiar procedure. They could enter the People’s Republic only at one point, from Hong Kong. There they boarded a train at Tsim Sha Tsui station in Kowloon, across the harbor from Hong Kong Island, marked by its splendid colonial clock tower, and headed north through lush green semitropical countryside to the border crossing at Lo Wu. There they disembarked and walked across the ironically named Friendship Bridge, a rudimentary wooden structure that spanned the slow-flowing Shumchun River, carrying their baggage with them. On the other side the visitors were greeted by scowling border guards wearing uniforms adorned with the insignia of the Chinese Communist Party, who examined the proffered visas and granted the privilege of entry.
And so it went in that spring of 1979. Just as every time before, the guards directed Gorman to a customs waiting room, where he filled out an enormous number of forms documenting every item in his possession. Officials checked his vaccination records. (If you didn’t have all the shots required, they would administer the missing ones on the spot, so it was good to be prepared.) By now it was midday, and the next stop for Gorman and his fellow travelers was the special border-crossing restaurant, which offered a remarkably sumptuous lunch, supplemented with Qingdao beer. Lunch was followed by an obligatory nap period, in a waiting room equipped with spittoons and armchairs adorned with antimacassars. There was little alternative. Southern China is sweltering in the summer, and there was no air conditioning in the People’s Republic. And the train from Shumchun Station to Guangzhou departed only at infrequent intervals. Looking back years later, Gorman would compare the move from frenetic Hong Kong to the sleepy post-Mao mainland "like the transition from snorkeling to wearing a diving bell." You were no longer your own master. The powers-that-be would let you know when you were needed.
Gorman arrived at his hotel in Guangzhou to find the familiar routine in place. At that time the only way to do business in China was to establish contacts with one of the 14 ministries that controlled each of the country’s industrial sectors (chemicals, steel, light industry, etc.). This was easier said than done. Chinese officials were still strikingly stingy with information, another legacy of the Cultural Revolution, when association with foreigners could cost you a stint in a labor camp or worse. You could always go to the trade-fair building and seek out the people you wanted to meet (assuming that you already knew who they were), but that was no guarantee of success. Still, there was little choice. You certainly couldn’t expect them to come to you.
All this is why Gorman and the handful of other Americans at the fair sat up and took notice when a group of Chinese functionaries at the fair approached them with an offer: Would the Americans be interested in taking a look at an investment opportunity? It was not too far away from Guangzhou; it would require an overnight trip. The Americans said yes.
On the appointed day, they set off from Guangzhou in a van that jolted down hideous dirt roads for hours. At one point it broke down, and everyone had to get out and walk to a spot where the Chinese hosts were able to arrange for another
ride. The walk was not a total loss; the little group passed by a rural private market where local farmers were hawking all manner of produce, a vignette none of the Americans in the group could ever remember having seen before.
Finally, after a full day’s journey in the intense heat, they arrived at their destination. It turned out to be just across the border from Hong Kong — not far from the Lo Wu crossing where all foreigners made their entry into mainland China. (In these days you couldn’t fly directly to Beijing from the outside world.) The bewildered Americans followed their hosts to the top of a dike, where the Chinese guides gestured at the vista spread before them. It was not clear what they were meant to look at. All that the Americans could see was the usual South China landscape: There were rice paddies, worked by peasants and their water buffalos in the time-honored manner, and duck ponds. There were a few trees, and here and there a modest peasant dwelling. What the Chinese were describing seemed to bear no relationship to the observable reality. This, they told the Americans, was the location of something called the Baoan Foreign Trade Base. The party had designated it as a special location for foreign investment. According to the plans under consideration, it would soon be the site of chemical factories and textile mills and manufacturing plants. And, oh yes, there would also be plenty of hotels for the foreign businessmen. It was going to be a wonderful chance to make money.
The Americans thought the Chinese were crazy. "It stretched everybody’s imagination," Gorman said. "I don’t think there was one of us who listened to the briefing and thought, ‘Yeah, that sounds feasible.’ It was, emphatically, ‘Come on, what are you smoking?’"
The next day, after an uncomfortable night spent in the only existing local hotel (which had no electricity or running water), the Americans attended a briefing where the Chinese unrolled blueprints that depicted acres of factories, warehouses, and other facilities. The plans betrayed a startling ambition. "It was really hard to believe," Gorman recalled. "Nothing in China at that point happened quickly — except politics. Business and construction didn’t happen on those kinds of timelines."
The Baoan Foreign Trade Base was located in a village that was named, like the nearby river, Shumchun. It later became known under a different version of the name: Shenzhen. It was a place that had attracted Deng’s attention at least as early as the 1978 Work Conference (just before the Third Plenum), when he had floated the idea that the party should "enable some regions to perform better and become more prosperous." Deng had calculated that if only 5 percent of the counties and 5 percent of the citizenry became "relatively prosperous," this would translate into 100 counties and 40 million residents — the equivalent of a medium-sized country and presumably a powerful catalyst for change. Shenzhen was the first on his list of 19 places targeted for early prosperity. "Obviously, he had taken notice of this place at a very early date," writes former aide Yu Guangyuan. "In his view, a major factor in Shenzhen’s quest to become prosperous sooner than others was its capacity to conduct foreign trade." During the Work Conference, in fact, Yu himself had told party officials from Guangdong of his own idea — inspired by an ad a friend had brought from Hong Kong — to construct office buildings in Shenzhen under the auspices of the Chinese Academy of Sciences (Yu’s home institution) and rent them to people from Kowloon, just over the border, where soaring land prices were already driving rents into the stratosphere. Yu even envisioned simplifying border-control procedures for visitors from Hong Kong.
Gorman and his compatriots, all of whom had experienced firsthand the xenophobic legacy of the Cultural Revolution years during their visits to China, could hardly be blamed for feeling skeptical. What they were not yet able to appreciate was the fact the Chinese were deadly serious about their plans to invite overseas investors into new "special districts" that were already well into the planning stages.
Lower-level officials — especially in Guangdong — were undoubtedly keen on the idea. But this was one case where Deng could claim full credit for driving the initiative forward. He had spent his years in exile brooding over how to stimulate the Chinese economy, and he had concluded, after his return to power in the early 1970s, that his country had to tap into the global marketplace for technology, know-how, and management expertise. His 1974 trip to United Nations headquarters in New York City had been the first to jolt him into an understanding of just how far behind China had fallen.
After his third return from political oblivion in 1977, Deng took a series of trips around the region that reinforced this view. His itinerary included a visit to Japan, where he saw the evidence of that country’s extraordinary postwar rise to the pinnacle of the global economy, as well as one to Singapore, which though far smaller in absolute terms was also demonstrating just how powerful the East Asian formula of single-party rule and market economics could be. Deng’s private comments to his speechwriting team in 1978, when he gushed about the Japanese and Singaporean workers who could use their bonuses to buy houses and cars, make it clear just how influential these experiences were.
Nor was that all. Deng and his colleagues — at least those who wanted to pay attention to the outside world — were also acutely aware of the extraordinary rise in living standards already engineered by Hong Kong and Taiwan, which — like Japan, Singapore, and South Korea — had also made strategic decisions to reject "self-sufficiency" and to actively participate in global trade. Taiwan, in particular, had reaped a variety of benefits from its "export-processing zones," areas with special commercial, legal, and tax regimes designed to entice foreign investors to take advantage of a well-trained but low-wage labor force. The Taiwanese were gambling that the shortfalls in tax and customs revenues would be balanced out by the know-how they would acquire in management and production techniques (not to mention the extra employment). By the late 1970s, their gamble that was paying off to spectacular effect, and the example was not lost on their compatriots on the mainland.
But the impetus for a creative approach to foreign investment did not come only from the top. There was also some intense lobbying going on at the regional level — particularly in one of the areas that stood to gain the most from trade with the outside world. That was Guangdong province, directly adjacent to Hong Kong. Its capital, Guangzhou, was the home of the traditional trade fair because it had a long history, dating back to imperial times, as one of the few places where foreigners were allowed to do business with Chinese. The direct proximity of Hong Kong, whose population included many Cantonese-speaking migrants from Guangdong, meant that the province still had access to an extensive web of contacts with the outside world, including the huge network of overseas Chinese. All this meant that a certain amount of illegal trade had continued even during the darkest days of Maoism. (Indeed, considering the huge and intricate possibilities for smuggling offered by the Pearl River Delta, the gateway to Guangdong, it could have hardly been otherwise.) Many Guangdong residents received remittances from their relatives in Hong Kong or places more distant, and these funds were major source of revenue for a region that had otherwise been severed from its natural trading hinterland
Guangdong party officials knew all of this very well, and they were eager to seize upon the new talk in Beijing of opening up the country to investment. They had prevailed upon the party bureaucracy to let them open a few modest channels for trade with Hong Kong, but they were already thinking big. Their plans received a major boost in 1978, when a set of high-ranking party officials, including several from Guangdong, set off on a fact-finding trip to Western Europe that affected them in much the same way that Deng’s journeys had unsettled him. They were impressed not only by the modern air-traffic control systems at Charles de Gaulle Airport in Paris and the automated milking sheds on a Dutch farm, but also by the willingness of their hosts to expose them to new insights and by the eagerness of European businesspeople to marshal funds for investment in production facilities in China.
In January 1979, just two weeks after the end of the Third Plenum, the new party boss in Guangdong, Xi Zhongxun, got approval from Beijing to start drawing up plans for "special zones" that would be opened up to foreign investment. The first zone opened shortly after that in Shekou, a corner of Shenzhen. The Chinese Merchant Steamship Company, a Hong Kong firm set up and owned by the government in Beijing, had been lobbying for a place where old ships could be taken apart for scrap, which could be sold at high profits to the resource-hungry capitalists in Hong Kong. The fact that the company in question was technically "foreign" but actually controlled by the People’s Republic made the experiment that much easier to implement. "Shekou thus became the first place in China to allow foreign direct investment and the first area where decisions about a company inside China could be made by people located outside the country," noted Yu Guangyuan. (Xi Zhongxun, the official responsible for the creation of the Shekou zone, was the father of Xi Jinping, the current Chinese president.)
Economic trends in the outside world gave the officials in Guangdong an additional incentive to open up their province to the outside world. Neighboring Hong Kong was experiencing one of the characteristic disadvantages of a surge in economic growth: a sharp rise in wages. This was rapidly eroding the colony’s international competitiveness, and Hong Kong businesspeople were casting desperately around for new sources of labor. The most obvious place was just over the border.
C. K. Feng was a junior executive with Eltrinic, a small Hong Kong firm that made small electrical devices: a bug zapper, an electric can opener, snow-melting equipment for the U.S. market. Eltrinic’s production was fairly labor-intensive, and the rising wages were hitting it hard. So when one of the company’s bosses heard from a contact on the mainland that the Communist Party was soon going to start inviting in foreign manufacturers, Feng took notice. "I volunteered to go the mainland to open up and find workers there," he said later. "I was so concerned about the workers’ shortage in Hong Kong." He first traveled to Baoan — the same spot that Gorman visited a few months later — in late 1978, and soon began plans to construct a small factory building and to transport machinery there from Hong Kong. The mainland authorities gave Feng a special Hong Kong travel permit, actually a thick book used to record a variety of data. This presumably privileged access did not seem to reduce the number of papers that had to be filled out at each crossing, however. Each time he entered China, Feng said, "it was like crossing into a different world."
In spring 1979, after jumping through countless bureaucratic hoops, Feng opened the first Eltrinic factory in Shenzhen. It employed 20 local workers. (The company’s total work force at the time was around 700, almost all the rest of them in Hong Kong.) The first year was spent training them. The factory’s intended production — heating elements for blow dryers — required a certain amount of skill, and the mainland workers were starting from scratch. None of them had ever seen a blow dryer. But they weren’t fussy. "The workers produced whatever you wanted them to produce," Feng recalls. "They didn’t care." Maintaining communications between the factory and headquarters in Hong Kong was no easy task. The only local telephone was located in the village administration office, and placing calls was hair-raisingly frustrating business. The villagers, however, were extremely happy. When the production line was inaugurated, they killed a dog — a much-valued local delicacy — for a banquet to celebrate the occasion. The somewhat more fastidious Hong Kongers were bemused.
The founding of Feng’s factory preceded the formal establishment of the "special zones" on 26 August 1979 — and that, in itself, says quite a lot about how development in China was progressing at this time. Even as Guangdong was pressing Beijing for formal latitude to manage its own affairs and attract foreign investors, the first contacts between the province and foreign investors were already being made.
These areas were granted exceptional conditions to attract foreign investment, but they could also be easily quarantined from society as a whole. The latter point conveniently placated party conservatives, who worried that the populace might succumb to the corrosive effects of capitalism. Ironically, potential foreign investors shared their appreciation; to them, Deng’s enclave strategy offered a vital degree of protection against political backlash from the Maoists. To be sure, the SEZs needed time to show results, but that was not a problem. Reform in China was supposed to be slow; the country had experienced tumult enough. The main thing was that the cornerstones of a new economy — one driven by efficiency rather than ideological correctness — had been laid. The new revolution could begin, albeit in its own, cautious way.
No one embodied that revolution better than Rong Zhiren. The restaurant that he opened in that spring of 1979 proved a big success. Three years later, by now an affluent Guangzhou entrepreneur, he received the privilege of meeting Deng Xiaoping at a social event for Guangdong Province luminaries. The fact that a local businessman was deemed worthy of such a gathering said a great deal in itself; a few years earlier Rong would have been imprisoned for the same activities that now gave him prestige. Deng, he says, always remained an example. "I took heart from his three-time rise and fall," Rong says. "Deng’s return [in 1977] sent me an important message." If you persevered, you had a chance to do more than just survive. You might even prosper.