From Mao to the GFC: The Comrades’ Macro

When Comrade Mao Zedong and his communist forces arrived to power on 1 October 1949, a new country emerged – in a year which would certainly leave a hallmark in China's history (Naughton, 2007). Almost thirty years later, in December 1978, the Communist Party of China (CPC) decided to take the initial steps of a new long march, now towards a more balanced and successful economic model that entailed breaking with some traditional communist practices, including a closer association with the global economy in the form of international trade and foreign investment. Economic transformation, however, would not erode the central role played by the public sector in the economy nor CPC influence. Nevertheless, sooner rather than later the country adopted an open policy towards foreign investors, although under a gradualist approach, transforming the country into one of the principal recipients of FDI (UNCTAD, 2008b). Foreign investment, in turn, became massively involved in transforming the (mostly backward and agrarian) country into the world's leading export platform. Both FDI attraction and export promotion become the drivers of China's exceptional growth, a path characterized by the simultaneous presence of commercial and capital account surplus.

Whereas FDI inflows were highly incentivized, other flows became certainly much less. Portfolio and foreign debt flows would definitely remain unimportant during the whole transformation process. During the initial years authorities always prevented convertibility in the local currency, including important limitations on the purchase of FX by domestic importers. The central government somewhat liberalized the FX regime in 1994, giving room to RMB convertibility, although on a partial basis and fiercely maintaining foreclosed capital account movements. When some timid proposals (from within the government) advanced towards the opening of the capital account, the Asian crisis persuaded authorities on the menaces posed by financial liberalization. Consequently, Chinese authorities followed a ‘selective opening’ strategy for the capital account (Prasad and Wei, 2004; Yu, 2010), keeping China away from market volatility.