Fred Hu (Fred Hu) will never forget the horror that stood in front of his science teachers, when he was taken away in a Chinese prison. This was the period of the Cultural revolution of Mao Zedong. Then Hu was 12 years old, and his dream about how to get out of rural poverty and become a journalist or a teacher, it seemed impossible.

However, two years later he began to hope for the realization of this dream: at the end of 1977, the new leader Deng Xiaoping returned to the entrance exams to universities, giving all young people the opportunity to fight for a place at University.

“The first time we have opened a clear way, said Hu, who received a master’s degree at Tsinghua University and at Harvard, worked at the International monetary Fund, headed the Chinese Department of Goldman Sachs Group and founded the Primavera Capital Group, a private equity Fund in Beijing. — The confusion left behind. A new era has begun”.

In subsequent years, Hu and hundreds of millions of Chinese left the villages and set up their own companies in large cities or went to work in those factories, which enabled China to become the second largest economy in the world. The reforms of Deng officially began exactly 40 years ago on December 18, became the basis of one of the greatest enrichments in the history of mankind, allowing the 700 million people out of poverty.

However, these changes sowed the seeds of many of the problems that China faces today. Two decades of “growth at any cost” when stamina Jiang and Hu Jintao, which began in 1993, led to the fact that the Chinese were left with the contaminated rivers, cloudy smog sky and huge debts. While China is already firmly entrenched in the world economy, and this trend accelerated after 2001, it joined the world trade organization.

When XI Jinping came to power in 2013, many had hoped that he, like Dan, is a reformer. But if Dan wanted his market reforms have made China rich, si regained control of the state in an attempt to transform his country into a political and technological superpower.

“One of the main goals of si in the economic sense was actually put an end to the reform era of Deng Xiaoping,” said Arthur Kroeber (Arthur Kroeber), founding partner and Executive Director of research firm Gavekal Dragonomics. If Deng and subsequent leaders have sought to strengthen the role of the private sector in the economy and reduce the role of the state, si, apparently, believes that now is established the right balance.

Ignoring the advice of Deng that China should lie low and bide his time, si entered into an open dispute with the President of the United States Donald trump and other world leaders, who were unhappy that Beijing many years prevented foreign companies to operate in the Chinese market. According to critics of China, the Chinese company that now claim to world domination in technology and trade have risen due to government subsidies and cheap loans, while Beijing has shielded them from foreign competitors.

This confrontation caused several political failures si and the sudden surge of criticism from the Chinese public. Even son Dan made a veiled reproach in her speech, which said in October in which he called the Chinese government “keep a sober mind” and “know their place”.

This confrontation takes place at a critical time for China’s moment when he is struggling not to fall into the so-called “middle income trap” (then a country which attains a certain income gets stuck at that level). This usually occurs because rising wages and costs undermined the profitability of those factories that produce these basic goods, such as clothing and furniture, causing economies to leapfrog to more profitable sectors and services.

According to the world Bank, since 1960, only five industrialized economies of East Asia have managed to avoid this trap. This is Japan, Hong Kong, Singapore, South Korea and Taiwan.

To enter the number, si will have to rebuild the Chinese markets, increasing competition in the financial services industry, improving technology and tightening corporate governance. It needs to be done now, when the sea is waging a trade war with the US administration, seeking to restrain the growth of this Asian country. The situation is exacerbated by an ageing workforce, a huge debt of corporations and local governments, as well as the need to repair the damage done to the environment, which will require several decades.

“No major economy that is not a democracy, has not managed to avoid the middle-income trap, and in this sense, China has little chance of success — even if it was not a trade war, said Steve Tsang (Steve Tsang), the Director of the China Institute at the London school of Oriental and African studies (SOAS). — The rejection of the approach of Deng caused alarm in the West, especially in the United States. This greatly complicates the task.”

Whether China can achieve this will depend on the legacy of those migrants and entrepreneurs that have benefited from the reforms of Deng, have formed their own company and began conquering one industry after another. Today, the private sector accounted for 60% of manufactured products in China, 70% of technological innovation and 90% of new jobs. This was announced by Liu he (Liu He), chief economic Advisor, si.

The shadow banking system

Many of these private firms felt the brunt of campaigns of si in reducing the share of borrowed funds and the fight against environmental pollution. The attack on the shadow banking system has blocked the access to a powerful source of financing in the period of rapid economic growth, and hundreds of thousands of small companies were closed due to the fact that they pollute the environment.

Their plight has pushed politicians to an unprecedented step: in this year the government tried to convince banks to issue more loans to non-state companies. Si supported the campaign, declaring their “unwavering” support to the private sector.

On Sunday, in an interview with Bloomberg Television, Hu said that these actions of the authorities is not effective enough and that there is a risk of further weakening confidence of business and investors, creating a vicious circle. According to him, the policy towards private sector “inconsistent”, because the words, the authorities support it, and in fact, introduce more stringent regulatory standards.

“The government needs to remove that straitjacket that is strangling entrepreneurs, he said. Rules, stupid rules too much. Every day becomes harder. Hopefully, this is partly to help deal with bureaucratic negligence.”

Best of all successes and challenges of Chinese entrepreneurs are visible in Shenzhen, which in just 40 years has turned from a fishing village into a small town that grew around a single plant and then to the center of export and technology center, which is now.

Andy Yu (by Andy Yu), born in Wuhan in Central China, is a typical representative of that generation of people who made the city’s successful immigrants. He came to Shenzhen in 2003 to work in a technology company, and several years later founded his own company for the production of mobile phones Shenzhen Garlant Technology Development.

“Some say China can only make cheap garbage, but this is not so, — told Yu. China can produce really good products, and this is why companies such as Apple, have opened their factory. In China, the best ratio of price and quality”.

According to Yu, the combination of high quality and low prices will allow the company to circumvent the tariffs of trump. About a fifth of annual sales Shenzhen Garlant — in the amount of $ 150 million — comes from the United States, and now the products his company is subject to U.S. tax at 10%, which in the following year could jump to 25%. According to Yu, he is willing to accept such price increase for its products because of its Western competitors sell their products at much higher prices, and its competitors in South-East Asia and Latin America are far behind in terms of technology.

The trajectory of the development of Shenzhen Garlant shows how those who have benefited from the reforms of Deng, have had to adapt to changing conditions to survive. The company continues to develop and sell products from Shenzhen, but the plant, which employs 300 people, is now in Hubei province in Central China, where wages are lower. Yu is considering to increase the degree of automation and to build a new factory in the West of the country, on the border with Myanmar, there are work migrants-Burmese, who can pay less than half of Chinese workers.

To achieve dominance in key technologies — the goal that si has made in his programme “Made in China 2025”, China will not only produce smartphones and laptops with high specifications, but also something much more. However, si promoted the model of tightening state control and restrictions on loans may discourage innovation.

“This year the Golden age of startups is over, said van Haonan (Wang Gaonan), representative of a new generation of entrepreneurs advocating for changes in the Chinese economy. — To find investors is almost impossible. No. If I graduated from University in 2015 and not in 2012, I would have already been too late to start”.

Wang, who received a master’s degree in the field of production technology at the University of California at Berkeley, heads the Capstone Games, which develops games. This company was founded in 2013 in Beijing, and since then her annual income doubled every year. Now it is about 150 million yuan (21.8 million dollars).

Tighter controls for new games in China, whose government is concerned about the consequences, depending on the gadgets, emerging in children as well as the slowdown in the economy forced the van to look for growth opportunities abroad. Capstone plans to launch its app in the United Kingdom in March.

Tighter control

Si also tighten the screws in relation to various kinds of activities, from online posts to independent private businesses that arose as a result of the policy of the Dan. Si regained control of the party over the business, as well as over the state companies and government-owned banks. The economic effect of such measures is manifested after some time, so it is quite difficult to assess their impact, said the Nobel laureate in Economics Michael Spence (Michael Spence), Professor at the stern business School at new York University. “In the future, it can create obstacles to innovation,” he said.

But, according to Spence, even in the presence of political and commercial obstacles in the new digital economy, services and manufacturers high-end products can help China to be among the richest countries. “Trade war spread to technology and foreign investment, slowing the growth of China — not only China — but is unlikely to negate his progress,” he said.

In the third quarter Chinese economy grew by 6.5% — the lowest figure in China after the global financial crisis of 2008-2009. If China manages to keep growth at over 5% in 2020-ies, in terms of income per capita it is equal to the developed countries, said Kroeber, who wrote the book “China’s Economy: what you need to know everything” (China’s Economy: What Everyone Needs to Know).

However, the average income is only part of the picture. In a small provincial town Sintan in Hunan province, where more than half a century ago, arrested teacher Fred Hu, inequality, provoked by the rapid development of China’s economy, it is striking.

The paint on the walls of high school, where he studied Hu was peeling. Heating is almost there, and that’s why in December, the children sit at their desks in winter jackets. Standards of education are far behind standards in major cities, said 60-year-old school Director huajun the pan (Pan Yuezhong). Approximately 80% of children is “left behind children” whose parents have gone to cities for work, and both of which tend to look after their relatives or friends.

“China failed to invest in its most important asset — people, — said economist Scott Roselle (Scott Rozelle) from Stanford. — In China, one of the lowest levels of education.”

According to a study carried out in 2015, only 30% of the workers graduated from secondary school. In this sense, China lags far behind other countries “middle-income”, including Mexico, South Africa, Thailand and Turkey. Although this did not prevent China become a powerful industrial nation, but certainly will stop him from evolving in more advanced innovation-based economy.

In major Chinese cities this year, 8 million students graduated from universities. However, according to Rosella, the problem lies in the fact that the Chinese authorities do not pay enough attention to the province. Workers in the province were four times less likely to have completed high school education than workers in the cities. However, in the Chinese province lives 64% of the total population of China, and more than two thirds of them children.

There is another serious problem. Every fifth resident of Nice, a major city near the town of Sinton, more than 60 years, and this demographic trend typical of much of China. Soon it will be a serious burden on the economy.

Nevertheless, even in Centane the situation today is much better than in the dark days of the era of the Cultural revolution, when people lit oil lamps at home, wrapped the feet with scraps of cloth, and the rice was so valuable that it is often cherished for the elderly, children and the sick, said a local resident Hu Fuxin (Fuxin Hu). This 78-year-old former teacher who walks in his modest house in a thick jacket and wraps foot with quilt, still remembers that Fred Hu was a model student.

Owned by Hu Primavera Capital company invests in a new company, such as the online platform of financial services to Ant Financial Services Group and cloud services provider Xunlei. According to him, by creativity, innovation and vision of the Chinese entrepreneurs are not inferior to the entrepreneurs of Silicon valley. He believes that China is able to achieve developed country status. However, it is increasingly concerned about the direction of Chinese policy at sea.

“China has embarked on the right path, but all want to know, will accelerate the process of reforms that Deng initiated 40 years ago to slow down if he or we go in the opposite direction, he said. — The lack of reforms may hinder China to fully realize its economic potential.”

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