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Several years ago, the Dallas Fed’s annual report featured an essay entitled
“The Churn.” The churn is our term for what economist Joseph Schumpeter
called “creative destruction.” A dynamic economy like ours can grow and make
room for the new only if we allow parts of the economy to shrink. Unprofitable
firms and industries must be allowed to fail and go out of business so their
workers and other resources can move into firms and industries whose products
are more favored or needed by consumers. This is, as the essay’s subtitle says,
the paradox of progress.
As the most populous country on the planet, China has been experiencing
the mother of all churns. Although still a communist country, its market reforms
over the past two decades have produced tremendous growth and change. Using
conventional measures, at present growth rates China will soon replace Japan as
the world’s second largest economy. China’s churn — already huge — will only grow
as the country becomes part of the world trading system. The pain will be great,
but so will the rewards.
The Dallas Fed is proud to make available this publication, written by our
economist Meredith Walker. It is an up-close-and-personal account based on
her recent tour of China. Alas, shortly after her trip, the churn got Meredith.
She may now be reached at the New York Fed. We miss her.

Bob McTeer
President
Federal Reserve Bank of Dallas

China’s progress
toward prosperity
and accession into
the WTO will create
new opportunities for
American businesses
and farmers.
— Alan Greenspan

China’s Churn
China is changing.
Beijing’s billboards no longer
spout ideology. They advertise
consumer products like Internet
service, cell phones and credit
cards. On the outskirts of Nanjing,
prosperous farmers are remodeling old dwellings into suburbanstyle two-story homes, complete
with satellite dishes. Skyscrapers
rise from what a decade ago was
farmland in Shanghai, providing
office space for financial and technology companies.

Fashionable girls toddle along
the streets of Wenzhou on 6-inchtall shoes, just like the teens in
Tokyo.
Once drab, regimented and
inward-looking, China now ranks
as one of the world’s most dynamic
countries. The symbols of the past
still prevail—state-owned enterprises still dominate the economy
and the Communist Party still
rules the roost in politics. But
there’s little doubt a new China is
emerging, one that offers both

challenges and opportunities for
the United States.
In November 1999, after 14
years of negotiation, China and
the United States reached a bilateral agreement that paves the way
for China to join the World Trade
Organization, the 136-nation
group that sets the standards for
international commerce. The Chinese regard joining the WTO as
their most important economic reform in 20 years. China is expected
to officially join the WTO in late

Federal Reserve Bank of Dallas | CHINA’S CHURN

1

In their linguistic and economic
diversity, mainland China’s provinces resemble the nations of
Europe more than the American
states. Two-thirds of Chinese reside in the prosperous eastern
fifth of the country. Only one quarter of China’s population live in the
impoverished western half.
The map highlights five cities that
illustrate some of the churn’s many
faces in China today.

2000 and begin fulfilling its commitments to open markets, some
immediately and some gradually
over the following six years.
Whether it’s a matter of national
security or economic interests, the
United States benefits by encouraging the nation of 1.2 billion
people toward a market economy,
one that abides by the accepted
rules of international trade and
investment. Despite its status as the
world’s seventh largest economy
and America’s fourth largest trading partner, China is still a poor
country that needs foreign technology, markets, investment and
2

competition to hasten its economic
development (Exhibit 1).
Faced with economic stagnation two decades ago, China sidestepped communist orthodoxy,
loosening state control of the
economy through market opening
and reform.
It started on the farms in 1978,
when the government allowed
farmers to sell on the open market
some of what they produced.
The experiment yielded quick
results. Food output rose sharply
because profit motivates people
to work harder and smarter, in
China as much as anywhere else.

CHINA’S CHURN | Federal Reserve Bank of Dallas

Over the years, China’s leaders
let the market penetrate other
parts of the economy. Now,
enterprising Chinese can open
their own businesses and look
for better jobs. The country
welcomes foreign investment.
The reforms have paid off, and
living standards throughout
China have improved dramatically (Exhibit 2).
As market forces emerge in
China, the country cannot avoid
the turbulence of economic
progress —what economists call
“the churn.” The shorthand term
refers to the creative destruction

China, with a population
of 1.2 billion people, has
an economy that, when
measured taking into
account the purchasing
power of alternative
currencies, is larger than
that of Japan and may be
approaching half the size
of the U.S. economy.
—Alan Greenspan

Exhibit 1

Looking at China and the United States
It’s no secret China has many mouths to feed, but is that good or bad? Mao Zedong encouraged Chinese families to have as many children as possible. Deng Xiaoping believed that
China would never be rich if its growing GNP had to be divided among more and more people. He implemented the one-child policy in 1978, and annual population growth declined
from 2.3 percent in the 1980s to 1.2 percent in the 1990s. But having many mouths also
means having many minds. Says American futurist George Gilder: “Forget oil, gold, land,
the ocean floor or the reaches of outer space. The single greatest untapped resource in
the world economy is the Chinese people.”

China

United States

Surface area

9.597 million sq. km

9.364 million sq. km

Population

1.239 billion

270 million

Population density

133 per sq. km

30 per sq. km

Labor force

743 million

138 million

Urban population

31% of total

77% of total

Rural population density

685 per sq. km

35 per sq. km

Arable land (% of land area)

13.3%

19.3%

GNP

$923.6 billion

$7,903 billion

GNP rank

7

1

GNP growth rate

7.4%

3.7%

GNP per capita

$3,051

$29,240

GNP per capita rank

132

4

NOTES: Data are for 1998, except 1997 for rural population density and arable land. Rural density is people
per square kilometer of arable land. GNP per capita and rank adjusted for consumer purchasing power.
SOURCE: World Bank, World Development Indicators 2000, World Development Report 1999/2000.

Federal Reserve Bank of Dallas | CHINA’S CHURN

3

that occurs as a market economy
continuously reallocates labor
and capital to their most profitable uses. Day in and day out, the
churn revitalizes an economy as
technological innovations spawn
new goods and services, as companies streamline production, as
new jobs replace old ones and as
companies’ fortunes wax and wane.
The churn, an essential part of
a free market economy, accelerates
with liberalization of trade and
finance and faster introduction of
technology. It slows when governments or special interests try to
protect existing industries and jobs.
The churn creates hardships,
including job losses and business
failures, but it pays off handsomely
with higher standards of living.
For proof, Americans need only
look around. The United States
has endured more than two centuries of the churn. Companies
and entire industries have come
and gone. Millions of jobs have
been created, destroyed and recreated. All the turmoil was
worth it: an agrarian country
transformed itself into one of the
world’s most advanced and prosperous nations.
The marketplace’s churn has
already begun to remake China
and will accelerate as China
makes good on its WTO commitments. Its impact can be seen
throughout the country—from
the capital of Beijing in the north
and the remote southwestern
enclave of Guiyang to the prosperous eastern cities of Shanghai,
Wenzhou and Nanjing.
4

China’s capital,
Beijing, is the
center of the
country’s
emerging digital
economy.

Beijing:
Getting Down
to Business
In China’s capital city, Mao
Zedong’s giant portrait still casts
an imposing gaze over Tiananmen
Square. Mao now looks over
China’s transition to a market
economy. Elsewhere in Beijing —
and throughout China— market
forces are crowding out collectivism and attracting people and
capital to private enterprise.
Just a few minutes from Tiananmen Square, China’s churn shows
up in a thriving, 30-table restaurant owned by women who lost
their jobs in a state-owned factory.
The motto of Laid Off Sisters’
Dumplings, translated from Chinese, tells their entrepreneurial
story: Fate has brought you here; our
service will keep you, so we’ll never
be laid off again.
Bloated and inefficient, China’s

CHINA’S CHURN | Federal Reserve Bank of Dallas

huge state sector still employs
60 percent of the country’s urban
workers. China’s future lies in
putting its labor resources to more
productive uses. In recent years
employees have been rapidly
moving out of government enterprises, going to work for private
Chinese or foreign companies.
And some, like the laid-off sisters,
are able to start their own businesses and make a living without
government help.
China is getting down to business. In 1994, Mark Baldwin, a
British citizen, was in Beijing to
study Chinese but became an
accidental entrepreneur. Because
of earlier experience working for
an executive search firm, Baldwin
saw a niche helping foreign companies find Chinese managers in
Beijing.
He started his own corporate
recruiting business with just a few
phones and Chinese employees.

Waterways remain a
major mode of
transportation in China.

Exhibit 2

Bounty of Market Reform:
Household Ownership of Products in Urban and Rural China
Many Chinese would agree life is more comfortable today, especially for city dwellers.
Families everywhere now enjoy electric fans and televisions, although in the countryside
black and white TVs are more common than color ones and refrigerators are scarce.
Building on their success with consumers at home, Chinese manufacturers are expanding
overseas. Haier Group Co. is building a plant in South Carolina to make refrigerators, and
Konka Group Co. Ltd. plans to sell its televisions at Wal-Mart.
Ownership per 100 households

100
90

Urban
Electric fan

80

Color TV

70

Washing machine
Refrigerator

60

Soft bed

50

Rural

40

Electric fan
Color TV

30

Washing machine
Refrigerator

20

Black & white TV

10

Sofa

0

’81

’83

’85

’87

’89

’91

’93

’95

’97

Federal Reserve Bank of Dallas | CHINA’S CHURN

5

Upstairs rooms in
this Zhongguancun
district hotel are
home to Information
Age entrepreneurs.

His client base expanded rapidly,
and in 1997 he joined forces with
Robert Zhang, a Chinese national,
and Steve Chiu, a Canadian, to
create China’s first Internet recruiting service. Zhaopin.com, loosely
translated as “help wanted,” posts
over 5,500 job listings for 350
companies in 70 cities and has a
database of 200,000 resumes.
For China, companies like
Zhaopin.com carry considerable
symbolic weight. They reflect not
only the rise of private enterprise
and foreign joint ventures but also
the emergence of a labor market
in a nation where the government
once assigned all jobs.
The quick emergence of competition for Zhaopin.com is yet
another sign of changing times in
China. At least 300 Chinese Internet sites are vying for the business
of matching people with jobs.
In just a few years, Beijing has
become the center of China’s
6

emerging digital economy. The
city’s Zhongguancun district, near
Qinghua and Beijing universities
and the National Academy of
Sciences, is called China’s Silicon
Valley because of the Internet
start-ups founded by students
and faculty members.
Beijing is even attracting the
best beacon of market activity—
the venture capitalist. Born in
Taiwan and educated in Michigan,
Ray Lee moved to China in 1997
to work for Millennium Capital
Services Co. Ltd. He helps entrepreneurs develop business plans
and advises collectives on privatization strategies.
“There’s a lot of capital in
China, both domestic and foreign,
and many entrepreneurs,” Lee
says. “But there’s still a gap. It’s
difficult to find a ready project.”
After completing his M.B.A.
in the United States, Jie Liang
returned to Beijing to open an

CHINA’S CHURN | Federal Reserve Bank of Dallas

office for Global Emerging Markets Group, a private equity fund
that targets Internet companies.
“In the United States, life is easy,”
Jie says. “I could have had a good
job that supported my family.
Coming back is exciting but risky.
There are more opportunities here
for people like us, and there’s a
feeling of being on top. We know
how much better things are now
in China. We see the progress.”

Wenzhou:
Everyone’s an
Entrepreneur
Isolated from the rest of China
by mountains, the coastal city of
Wenzhou lies closer to Taiwan than
to Beijing. Its 7.2 million residents
speak their own dialect. Geography
and language proved barriers to
state domination of the economy,
allowing Wenzhou to develop a
self-reliant, entrepreneurial spirit.

The modern
factory and
equipment at
Great Wall
Shoes have
helped make
Wenzhou a
center for the
production
of leather
goods.

So when China’s economic
reform began, many in Wenzhou
were ready to capitalize on the
opportunity. “Because Wenzhou
wasn’t a planned economy, we
saw the potential of the market,”
says Zheng Xiangbo, who founded
Taili Industrial Co. with just three
employees in 1984.
Zheng’s company grew slowly
in its early years, but Deng Xiaoping’s celebrated 1992 Southern
tour boosted the acceptability of
private enterprise. The company
now employs 500 workers to
manufacture more than 1,000
types of electrical devices, including switches, sockets and fans.
Zheng supports China’s entry
into the World Trade Organization, even though it will mean less
protection for domestic industry.
“We’ll have competition,” he says.
“This will be good for us long
term. We’ll learn from other companies.”

Another early entrepreneur
was Zheng Xiukang, who left his
job at a state-owned enterprise in
1980 and spent 45 days learning
shoemaking from a local cobbler.
He then started a family business
making shoes. To expand his
Wenzhou Great Wall Shoes Co.
Ltd., Zheng imported Taiwanese
and Italian equipment and used
computers to produce designs for
men’s and women’s shoes. The
factory now employs 2,000 workers. It manufactures over 3 million
pairs of shoes a year, making it
one of China’s 10 largest shoe companies. Great Wall sells through
its 1,000 stores in all parts of
China, and its Kangnai brand is
registered in 46 countries.
Shenou Communication Equipment Co., founded in 1990 by
self-educated engineer Cai Chun
Chao, employs more than 200
workers to manufacture high-tech
communications equipment, in-

cluding telecom switches. The
company depends on microprocessors from Texas Instruments Inc.,
Motorola Inc. and other U.S.
companies.
“WTO membership will benefit
us because many of our materials
are imported; it would lower our
costs,” says Cai, Shenou’s general
manager.
Wenzhou epitomizes China’s
economic potential as it moves
toward a free enterprise system.
Since reforms began two decades
ago, its economy has grown at an
average 16 percent annually. Nine
of 10 Wenzhou businesses are privately owned, and its citizens are
among China’s wealthiest.

Guiyang:
How the West
Will Be Won
A thousand miles southwest of
Wenzhou, Guiyang nestles among
green mountains carved by gorges
and waterfalls. The picture-postcard landscape belies the region’s
economic hardship. Although
Guiyang, the capital of Guizhou
province, looks as modern as
other Chinese cities, Guizhou is
among the poorest provinces of a
poor country. Just beyond the city
limits, rural women wash their
hair in buckets outside humble
homes along the highway. Water
buffalo work the fields. Cars are
rare, and bicycles are a luxury.
Even here, though, it’s possible
to see the churn at work. Eakan
Pharmaceutical Co., a privately
owned enterprise, processes the

Federal Reserve Bank of Dallas | CHINA’S CHURN

7

region’s wild plants, producing
traditional Chinese medicines for
the domestic market and export.
Eakan employs 80 people, chauffeuring them to and from work in
company-operated buses. In 1998,
three partners founded Yuanye
Wild Food Development Co.,
which employs 90 people and
harvests wild vegetables for
shipment to cities in China and
elsewhere in Asia.
Not far from Guiyang’s crowded
streets, the life of dairy farmers
has improved. They now own their
cows and barns. They’ve invested
in modern pasteurizing equipment
that allows one village to supply
80 percent of the capital city’s milk.
As Beijing liberalized the economy, stronger areas revived first
and regional disparities widened.
Coastal cities boomed as foreign
investors arrived and exports
skyrocketed, while the hinterlands, isolated and backward,
lagged behind. Urban areas raced
ahead, leaving rural areas mired
in poverty.
China’s challenge lies in creating new industries and jobs where
growth has been slow. In Guiyang,
local officials hope tourism can
thrive in an area blessed with
natural beauty.
A new airport opened in May
1997, linking Guiyang to the rest
of China. In early 2000, Prime
Minister Zhu Rongji visited
Guiyang to encourage its citizens,
and the government announced
policies to develop western China
and encourage foreign investment there.
8

Wenzhou has
been quick to
capitalize on
China’s move
to free markets.

Shanghai: Back
to the Future
Shanghai’s Bund, a broad avenue of European financial buildings along the Huangpu River, was
once a source of shame. The stately
old buildings recalled the foreign
gunboat diplomacy that dominated
China in the late 19th and early
20th centuries. Now the city is trying to persuade foreign banks to
return to the once-thriving Bund.
One of the most telling changes
in China involves its integration
with the world economy.
Although its economy isn’t
open by Western standards, China
depends heavily on international
trade, with exports and imports
accounting for nearly 40 percent
of GDP in 1998, compared with
25 percent in the United States.
The country ranks as one of the
developing world’s top recipients
of foreign investment, pulling in

CHINA’S CHURN | Federal Reserve Bank of Dallas

$43 billion in 1998 alone.
By the end of 1998, Shanghai
had 19,000 foreign-funded ventures in operation, 62 of them
financial institutions from more
than 20 nations. Foreign jointventure companies produce about
40 percent of the nation’s exports.
Across the river from downtown Shanghai lies Pudong, a
symbol of China’s headlong rush
into the global economy. The area
was home to 1 million farmers
before the government designated
it the future technology and financial capital of all China. Skyscrapers designed by noted architects
from around the world have replaced the farms. Shanghai’s stock
exchange relocated in Pudong,
and the city’s new airport is there,
too. Nineteen foreign banks, including Citibank, have opened
offices in the district.
Pudong’s Zhangjiang (Z.J.)
Hi-Tech Park, created to provide

Skyscrapers
have replaced
crops in Pudong.

modern office space and infrastructure for foreign companies,
is now home to 10,000 workers in
dozens of enterprises. Shanghai
Motorola Paging Products Co.
manufactures pagers there, and
SmithKline Beecham Biologicals
(Shanghai) Ltd., a joint venture,
makes hepatitis vaccines.
Like most developing nations,
China largely produces low-cost
manufactured goods, both for the
domestic market and export. But
Z.J. Hi-Tech Park shows that China
isn’t content to trade on its comparative advantage of cheap labor.
The country wants to forge more
advanced industries. Z.J. officials
have visited Austin, Texas, and
other U.S. technology centers. At
first the idea was to recruit companies. But although Z.J. still welcomes transplants, it has broadened
its approach and incubates homegrown Chinese firms. The goal is
to create the kind of technological

explosion that took place a quarter
century ago in Silicon Valley.

Nanjing:
Reconcilable
Differences
Political differences between
China and the United States tend
to overshadow the emerging economic similarities. Although President Nixon’s 1972 trip to Beijing
established diplomatic relations
after 20 years of isolation, several
incidents have challenged the
U.S.–Chinese relationship. These
include Tiananmen Square in 1989
and, in 1999, the United States’
accidental bombing of China’s
embassy in Belgrade and the Cox
Report on Chinese theft of U.S.
atomic secrets.
Getting past the low points
requires understanding that two
large, powerful nations have to
learn to live together.

One good example of communication between Americans and
Chinese can be found in Nanjing,
a city of 5 million that served as
the original capital of the Ming
Dynasty and the Nationalist government and is now the capital
of Jiangsu province.
The Hopkins-Nanjing Center,
established in 1986 with high-level
support from both the American
and Chinese governments, seeks
to foster understanding between
the two countries. Each year, 50
English-speaking Chinese students
recruited by Nanjing University
join 50 Chinese-speaking American
students recruited by Johns Hopkins University for the center’s
one-year residential graduate program. Students take courses in
economics, international relations,
political science, and the history
and culture of China and the
United States. The center has more
than 1,000 alumni.

Federal Reserve Bank of Dallas | CHINA’S CHURN

9

East meets West
at the HopkinsNanjing Center.

Even when Americans and
Chinese try their best to understand each other, tensions aren’t
always easy to avoid. The day
U.S. bombs killed several Chinese
in Belgrade, protestors marched
in Nanjing. American students at
the center were alarmed and hurt
by their Chinese classmates’ support of the demonstrations.
Elizabeth Knup, the center’s
American director, says a studentorganized open forum helped cut
through an atmosphere tainted by
suspicion and misunderstanding.
“Through many tears, students
acknowledged each other’s strongly
held beliefs, deep emotions and
disagreement over the facts and
moved toward a mutual understanding,” she says.
What happened at the center
shows the value of Americans and
Chinese learning more about each
other. For many Americans,
though, China remains a far-off,
10

mysterious place. It’s easy to cling
to a view of China that may have
been accurate 20 or even 50 years
ago and ignore the changes that
are opening up Chinese society.
Americans debate whether political
or economic liberalization should
come first in China. Meanwhile,
the expanding domestic and foreign private sectors are giving
the Chinese more choices. And
enabling personal economic decisions immediately reduces the
power of the state over people’s
lives.

China’s Churn:
Unfinished
Business
China began moving away
from collectivism and central
planning just about a generation
ago, and the economy looks very
different than it did in the 1970s.
Private domestic and foreign

CHINA’S CHURN | Federal Reserve Bank of Dallas

employers account for a quarter
of the jobs in urban China, with
the state-owned sector shrinking
to two-thirds of jobs. When it
comes to output, the shift has
been even more dramatic.
The government-run part of
the economy accounted for only a
third of nationwide industrial
production in 1998, down from
about three-quarters two decades
ago (Exhibits 3 and 4 ).
Despite its growing private
sector, China is still far from enjoying bona fide free enterprise.
Chinese people themselves have
initiated many changes, not waiting for an official stamp of approval. The government has taken
important policy steps, but China
still has to wean itself from the
state sector, a process that will
mean huge social adjustments.
China’s churn has only just begun and still faces formidable
practical and ideological barriers.

Exhibit 3

The Exodus of Urban Workers
from State-Owned Enterprises
Not all workers are being forced out of their state-sector jobs. Some are
voluntarily leaving for more challenging, better paid positions in private
enterprise. In 1998 the average monthly wage of these workers was 17
percent higher than that of workers in state-owned enterprises and an
astonishing 68 percent greater than that of collective employees.
Percentage of employed people

100
90
80
70
60
50
40
30
20
10
0
’78

’80

’82

State-owned

’84

’86

Collective

’88

’90

’92

Private domestic

’94

’96

’98

Private foreign

Fearing a political backlash
from idle workers, the Chinese
government put off cutting jobs in
unprofitable state-owned enterprises (SOEs) until the late 1990s.
To maintain full employment in
urban areas, companies were once
required to employ redundant
workers. Although rural-sector
reforms began in 1978, SOE managers couldn’t even legally hire
and fire workers until 1988. By
1998, SOEs still employed 91 million urban Chinese.
China once guaranteed lifetime
employment to workers in stateowned enterprises. Under the
“iron rice bowl” system, a job
wasn’t just a paycheck. SOEs provided housing, education, pensions, medical care and even
funeral benefits. As a result, layoffs are deeply painful for workers. To wean urban workers off
SOEs, in 1998 the government announced ambitious plans to stop
subsidizing housing and enable
urban residents to buy or rent
their own homes. But housing privatization remains slow while the
government scrambles to create a
mortgage industry.
Many laid-off workers have
trouble finding jobs in the emerging private sector. The castoffs
from SOEs are typically low
skilled with limited education.
Of laid-off workers in 1998,
55 percent had only completed
junior secondary school and just a
third had finished senior secondary school.
Low-skilled urban workers
compete with rural migrants for

Federal Reserve Bank of Dallas | CHINA’S CHURN

11

even menial jobs. Not that long
ago, impoverished rural Chinese
couldn’t legally leave their villages
in search of work. In 1984 the
government eased its system of
residency permits, allowing workers
to travel for temporary jobs. In
1999 an estimated 100 million
Chinese left their official places
of residence to work temporarily
in larger cities as waitresses, construction workers, even garbage
collectors.
The churn can’t operate effectively as long as the legal barriers
to labor mobility remain. Migrant
workers still can’t obtain permanent urban residency permits,
which excludes them from many
jobs. They are also largely barred
from the health care and education commonly available to city
residents.
Despite these hardships,
Chinese are flocking to urban
areas in search of the opportunities they can’t find at home. Once
the communes were disbanded
in the late 1970s and early 1980s,
many rural residents found jobs
outside agriculture at community-owned small factories known
as township and village enterprises (TVE). TVEs employed
7 percent of rural Chinese in 1978,
11 percent in 1984 and, at their
peak, 28 percent in 1996. But the
TVEs have not been the panacea
many had hoped. Although the
TVEs initially provided better
paying work and were very
productive, now they are cutting
jobs, too, just like the urban
SOEs (Exhibit 5 ).
12

Exhibit 4

The State Loses Its Grip on Industry
When China began its economic reforms in 1978, state-owned enterprises
accounted for 78 percent of industrial workers and output. Although they
still employ 57 percent of workers, they account for only 28 percent
of output. China’s more efficient private enterprises generate almost
40 percent of industrial output with just 26 percent of industrial workers.
Percentage of total output value

100
90
80
70
60
50
40
30
20
10
0
’78

CHINA’S CHURN | Federal Reserve Bank of Dallas

’80

’82

State-owned

’84

’86

Collective

’88

’90

’92

Private individual

’94

’96

’98

Other private

Exhibit 5

The Changing Face of Rural Employment
When communes began disbanding in 1978, private companies were not
yet legal. The government fostered industry outside the state sector by
deregulating local enterprises. Operating in the gray area between public
and private ownership, township and village enterprises grew rapidly
throughout the 1980s and 1990s. But the same management problems
the state sector faced eventually plagued the TVEs, and many have been
privatized or are downsizing.
Millions of rural workers

140
Township and village enterprises (TVE)
120
100
80
60
Private domestic
40
20
0

’78

’80

’82

’84

’86

’88

’90

’92

’94

’96

’98

Even today, two out of three
Chinese living in the countryside
work in agriculture, and nationwide, 50 percent of Chinese are
employed in agriculture. In this
sense, China looks like the United
States 120 years ago.
Yet agriculture only accounts
for 18 percent of China’s gross
domestic product, and most of
these workers probably aren’t
needed on the farms. To complicate matters, China is undergoing
two major “churns” at the same
time—moving people from farms
to factories, and from factories to
services (Exhibit 6).
Beyond the labor market, China’s
churn must also redirect capital
from the inefficient state sector to
the private sector. Although the
government is working feverishly
to restructure its financial system,
the country’s capital markets still
favor state companies, making it
hard for enterprising Chinese to
start new businesses. State-owned
banks have been required to loan
heavily to state-owned enterprises
and may never recoup all their
investment.
Even though they are allowed
to make loans to the private sector,
most bank officials have no experience evaluating business plans
and lending to entrepreneurs, and
few choose to take the risk. And
two pillars of the U.S. financial
system —the central bank and the
stock market—are still new and
developing in China.
Although Deng Xiaoping
changed China’s economic course
in the 1970s, market reform and

Federal Reserve Bank of Dallas | CHINA’S CHURN

13

liberalization have always been
controversial.
It’s difficult to overstate the
challenges facing China. Though
beneficial in the long run, the
churn is painful in the short run.
There is conflict in China between
those who want to move toward
more open markets and those who
wish to preserve state domination
of the economy. Even though the
nation is now moving toward
freer markets, some forces in the
government still resist.

China’s Churn,
America’s Choice
Market forces have unleashed
tidal waves of change in China,
creating economic progress for the
Chinese and new business opportunities for the United States and
the rest of the world. As China
implements the policies WTO
membership requires, the churn
will accelerate as the country
accepts more competition, more
foreign influence and more privatization. Resources will increasingly be allocated by the consumerdriven market, rather than by
the arbitrary power of state
bureaucrats.
As the world’s leading capitalist
nation, the United States can do a
lot to promote China’s churn. But
America’s persistent uneasiness
about trade with China reflects
our attitudes about the churn at
home. Looking back, it’s easy to
see that decade after decade, the
churn made the U.S. economy
stronger and raised living stan14

Exhibit 6

Still Far from a Service Economy
The government knows that for this stage of economic development, China
has too many farmers. But it’s still a miracle that since 1978, the churn
has redirected 20 percent of the country’s agricultural workers toward
industry or services.
Percentage of employed people

100
90
80
70
60
50
40
30
20
10
0

’78

CHINA’S CHURN | Federal Reserve Bank of Dallas

’80

’82

’84

Agriculture

’86

’88

’90

Industry

’92

’94
Services

’96

’98

More than 500
companies are
listed on the
Shanghai Stock
Exchange, whose
1990 reopening
signaled a new
era for China.

dards. In the here and now, however, we—like some in China —
face the temptation to resist the
churn and protect existing industries and jobs.
Freer trade with China and
other developing nations will
mean greater churn in the United
States, speeding the shift of resources toward technology and
services. Some workers will lose
jobs and some companies will lose
markets, but the churn will replace
them with other, better jobs in
new, higher-value-added industries. In fact, the capital-intensive

manufacturing job losses blamed
on trade are more likely the result
of better technology that enables
companies to produce more with
fewer workers.
The churn ignites economic
progress. Nations that allow it to
work grow rich faster. Countries
that stifle the churn, in a misguided attempt to protect its citizens from economic change, reap
slower growth or even end up
poorer. The churn is the secret of
America’s success. And it’s the
key to China’s economic future.
Market forces are changing the

country rapidly. Over the years
and decades to come, China will
experience even faster progress —
if it allows the inexorable forces
of creative destruction to play
themselves out. ★
Ñ

Meredith M. Walker
Richard Alm

The addition of the
Chinese economy to
the global marketplace
will result in a more
efficient worldwide
allocation of resources
and will raise standards
of living in China and
its trading partners.
— Alan Greenspan

Notes
ChinaÕ s Churn was written by
Meredith M. Walker and Richard
Alm. It is based on research and
interviews that Walker, a Dallas Fed
economist, conducted in March
2000. She wishes to express
appreciation to those who shared
their insights and are actively
engaged in China’s churn. Alm is a
Dallas-based freelance writer.
Quotes from Federal Reserve
Chairman Alan Greenspan are from
his remarks on permanent normal
trade relations with China, at the
White House, May 18, 2000.
All data except in Exhibit 1 are from
the China Statistical Yearbook, published by China Statistics Press,
various years. In Exhibit 3, “private
domestic” is the sum of what the
yearbook terms share holding units,

joint-owned units, limited liability
corporations, share holding corporations, private enterprises and selfemployed individuals. “Private foreign”
is the sum of what it terms foreignfunded economic units and economic
units funded by entrepreneurs from
Hong Kong, Macao and Taiwan.
It should be noted that state-owned
and collective enterprises sometimes
offer nonsalary benefits that the
private sector does not. In Exhibit 4,
“other private” refers to what the
yearbook terms other types of
private ownership.
Credits

Hopkins-Nanjing Center, Washington
Program Office (pp. 3, 10)
John O’Donnell, Cultural Bridge
Productions (p. 2, lower center)
McDonald’s Corporation (p. 1, lower
left)
Pepsi-Cola Company (p. 11)
Shanghai Municipal Information
Office (p. 9)
Shanghai Stock Exchange (p. 15)
Wenzhou Lucheng Foreign Trade
& Economic Cooperation Bureau
(pp. 7, 8)

Photos courtesy of:

www.virtualchina.com (p. 2, lower
left and right; p. 6)

China News Digest, www.cnd.org
(p. 1, lower right)

Photo research by Charlene Howell.

Citibank N.A. Shanghai Branch
(p. 15, lower left and right)

The views expressed are those of the
authors and do not necessarily reflect the
positions of the Federal Reserve Bank of
Dallas or the Federal Reserve System.
This publication is available on the Internet
at www.dallasfed.org.
Kay Champagne, Publications Director
Monica Reeves, Editor
Paul Smith, Art Director
Laura J. Bell, Graphic Designer

Federal Reserve Bank of Dallas
2200 North Pearl Street
Dallas, Texas 75201
(214) 922-6000
www.dallasfed.org
September 2000