was in charge of relations with Taiwan and arranged for me to meet with him to help me understand the Chinese
perspective. He explained that China would do anything, including going to war, to prevent a referendum in
Taiwan from passing and leading to independence, and he reiterated what I conveyed to you before about what
reunification with Taiwan meant to the Chinese leaders. He also explained that if a referendum and move toward
independence happened and the new leader let it happen, it would be intolerable for the Chinese people because
that leader would be shown to be too weak to lead. So it simply could not happen. He also explained that they were
watching the weekly poll numbers indicating how widely supported independence was and they observed that
Russia’s brutal crushing of rebels in its Chechen republic led to reduced support for independence, and he
explained that the Chinese needed to make clear their position via a series of missile tests in the Taiwan Strait. In
March 1996, President Clinton, who was approaching a presidential election, sent two aircraft carrier groups into
the Taiwan Strait to sail through it, displaying American support. Lots of military movements and threats on both
sides happened. The Taiwanese never had the referendum so my Chinese friends thought their moves were
successful, and the Chinese never moved beyond the threats, which led the Americans to believe they humiliated
the Chinese (which I only recently found out from an American friend who was involved in sending the American
carriers to the Taiwan Strait). That put an end to the “Third Taiwan Strait Crisis.” As a result of this crisis, the
Chinese never wanted to be in an inferior military position again, so they significantly built their military
capabilities for operating in that region. I point this out to convey a) how important Taiwan’s reunification with
China is and b) how risky the situation was 25 years ago when China was not nearly as strong militarily as it is
now, so this is why I would worry a lot if we were to see a “Fourth Taiwan Strait Crisis.”
Deng died on February 19, 1997.
Deng’s results, and the Chinese people’s results, speak for themselves. When Deng came to power about 90%25 of
the population lived in extreme poverty; at his death that number was around 40% and fell to less than 2% by
2013.26 From the start of Deng’s reforms in 1978 until his death in 1997, the Chinese economy grew at an average
rate of 10% for nearly 20 years, so the economy grew over six times in size with an average inflation rate of about
8%. Its reserves grew from $4 billion to nearly $150 billion (inflation-adjusted to today’s dollars, reserves grew by
over $250 billion). Reserves went from covering 60% of annual imports in 1978 to over 125% of imports by 1998
(and by that point reserves covered nearly 800% of foreign debt service).
Deng’s successors, Jiang Zemin and Hu Jintao, and their teams continued the reforms and the advances
through many ups and downs (though more ups than downs) like the 1992 recession. During this period, the
“triangular debt” problem (in which state-owned banks lent money to state-owned enterprises due to implicit
guarantees by the central government) had to be dealt with, and in 1997 the Asian financial crisis came along.
China, with Zhu Rongji assigned to run the effort, did a very successful debt and corporate restructuring to resolve
the problem, which included the government selling off bureaucratically run and unprofitable state-owned
enterprises, the building of exports and foreign exchange reserves, cracking down on corruption, and developing
and improving markets and market functioning. These and more market and economic changes were all important
evolutionary steps along the way. I felt lucky to be intimately involved at the grassroots level with some of them—
e.g., the debt restructuring and asset sales—that gave me an intimacy of contact and the perspectives I now have.
Though these events seemed bigger at the time than they appear in retrospect, they were all significant
achievements of smart Chinese people who were committed to Chinese progress. Along the way I also ran into
cases of corruption and bad behavior, and the ongoing struggle between the good and the bad that led to the
reforms and results we have seen.
This phase in the cycle was a time of great progress in China. As is typically true in postwar periods of peace and
prosperity, when the leading power isn’t threatened and the emerging countries aren’t yet threatening, the
leading emerging countries (in this case most importantly China) can learn a lot from the leading powers (in
this case most importantly the United States) as they work in a symbiotic way until the emerging powers become
powerful enough to threaten the leading powers. In addition to benefiting from the learning, they benefit from
trading with each other until that becomes disadvantageous, and they benefit from using the capital markets in
a symbiotic way until that becomes disadvantageous.
More specifically, the 1978 to 2008 period of fast growth in China came about because 1) the world was still
in the peace-and-prosperity phase of the Big Cycle in which globalization and capitalism—i.e., the beliefs
that goods and services should be produced wherever they can most cost-effectively be produced, there