Thematic Report

1987: A Peep across the Border

by CLSA / Aug 18, 2016

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CLSA first analysed the political and economic situation in the PRC some thirty years ago, in the lead up to the 13th Party National Congress in Beijing. In the 1987 report, A Peep Across the Border we highlighted China’s up-and-coming political leaders in two opposing camps: conservatives and reformists, underlining the importance of personal alliances in shaping Chinese politics. The analyst made some bold predictions on the leadership, economic reforms, the balance of power and cross-border integration. Read on to see if CLSA’s 1987 forecasts for China came to fruition.

In the 1987 report, CLSA wrote that China would undergo large-scale economic reforms. Chinese leader Deng Xiaoping’s policy to ‘reform the economic system and open up to the outside world (gaige kaifang)’ led the country into a new era of economic development. China has seen dramatic improvements in living standards and has transformed into a “major industrialised power” as CLSA had forecast.

The analyst (and many others at the time) predicted that Deng’s Deputy, Zhao Ziyang, would succeed him as Chairman of the Central Military Commission. However Zhao Ziyang ‘resigned’ as China politics took a dramatic turn after the suppression of the Tiananmen Square protests in June 1989. It was Jiang Zemin and not Zhao, who came to power and rose to become the top leader of China.

China’s economic reforms were temporarily stalled, but under the influence of Deng Xiaoping, reforms were re-instated a few years later. As our analyst predicted, in the 1990s and 2000s, China saw stellar foreign investment, which contributed to rapid employment creation. In the three decades leading to 2000, China lifted 600 million people out of poverty. China’s GDP per capita at purchasing power parity also increased eight-fold over this period.

However, the ‘rescheduling of political reform’ that the analyst predicted did not really come to fore. While market forces now play a much larger role in China’s economy, power is still concentrated at the top and China remains a centrally planned economy.

CLSA’s 1987 report correctly forecast that Hong Kong would ‘spin off’ its manufacturing sector to China and that “Hong Kong industrialists would open plants in the special economic zone and further afield in the Pearl River Delta”. In fact, as production moved to China in the 1990s, Hong Kong saw a rapid decline in manufacturing (in 1997 HK manufacturing was 20% of GDP compared to just 2% in 2007). Hong Kong has since become a predominantly service-based economy (today over 90% of GDP is produced by the services sector).

CLSA also predicted that Hong Kong would be a “financial … laboratory … as part of China’s future”. This point is very accurate, as we well know. Examples of HK-China financial integration over the past 30-years include offshore RMB and Shanghai-HK Stock Connect. Today Hong Kong is positioned as one of the top financial markets in the world (“…unprecedented boom in profits generated from … financial services”) as it continues to play a unique role as China’s ‘testing ground’ for financial market liberalisation.

While economic reforms continue in China today, they are of a different nature than they were 30 years ago. The concerns of the Chinese leadership have shifted from the single-minded pursuit of GDP growth rates to ‘raising the quality’ of economic growth.

Please click here to view the original 1987 report.