Deng Xiaoping
Export focus

In the move toward market allocation, local municipalities and provinces were allowed to invest in industries that they considered most profitable, which encouraged investment in light manufacturing. Thus, Deng's reforms shifted China's development strategy to an emphasis on light industry and export-led growth. Light industrial output was vital for a developing country coming from a low capital base. With the short gestation period, low capital requirements, and high foreign-exchange export earnings, revenues generated by light manufacturing were able to be reinvested in technologically more advanced production and further capital expenditures and investments.

However, in sharp contrast to the similar, but much less successful reforms in the Socialist Federal Republic of Yugoslavia and the People's Republic of Hungary, these investments were not government mandated. The capital invested in heavy industry largely came from the banking system, and most of that capital came from consumer deposits. One of the first items of the Deng reforms was to prevent reallocation of profits except through taxation or through the banking system; hence, the reallocation in state-owned industries was somewhat indirect, thus making them more or less independent from government interference. In short, Deng's reforms sparked an industrial revolution in China.

These reforms were a reversal of the Maoist policy of economic self-reliance. China decided to accelerate the modernization process by stepping up the volume of foreign trade, especially the purchase of machinery from Japan and the West. In October 1978, to exchange the instruments of ratification for the "Treaty of Peace and Friendship between Japan and the People's Republic of China", Deng Xiaoping visited Japan for the first time and was warmly received by Prime Minister Takeo Fukuda and others. Deng Xiaoping was only Vice Premier during the time of his meetings with Japanese officials, but the Japanese government received Deng as the effective paramount leader of China due to his long history with the CCP, nonetheless. Deng was deemed the first Chinese leader to receive an audience in addition to Japanese Emperor Showa. A news article from NHK Japan in 1978 reported that Deng diplomatically stated "we talked about our past, but His Majesty's focus on building a better future is something I noticed." Deng’s statement suggests the new era of China’s political reform through foreign economic diplomacy.

Treaty of Peace and Friendship between Japan and the People's Republic of China is an ongoing pact between the two nations to this day. Article 1 of the treaty describes mutual respect for sovereignty and territorial integrity, mutual non-aggression, and mutual non-interference in internal affairs. Article 2 proclaims anti-hegemony. Article 3 discusses the further development of economic and cultural relations between the two countries, and Article 4 addresses the relationship of this treaty with third countries. Although it took six years from the restoration of diplomatic relations for the peace treaty negotiations to be concluded as the "anti-hegemony" clause and the "third country" clause were considered the most contentious, the agreement still informs much of contemporary Sino-Japanese relations. By participating in such export-led growth, China was able to step up the Four Modernizations by attaining certain foreign funds, market, advanced technologies and management experiences, thus accelerating its economic development. From 1980, Deng attracted foreign companies to a series of Special Economic Zones, where foreign investment and market liberalization were encouraged.

The reforms sought to improve labor productivity. New material incentives and bonus systems were introduced. Rural markets selling peasants' homegrown products and the surplus products of communes were revived. Not only did rural markets increase agricultural output, they stimulated industrial development as well. With peasants able to sell surplus agricultural yields on the open market, domestic consumption stimulated industrialization as well and also created political support for more difficult economic reforms.

There are some parallels between Deng's market socialism especially in the early stages, and Vladimir Lenin 's NEP as well as those of Nikolai Bukharin 's economic policies, in that both foresaw a role for private entrepreneurs and markets based on trade and pricing rather than central planning. As academics Christopher Marquis and Kunyuan Qiao observe, Deng had been present in the Soviet Union when Lenin implemented the NEP, and it is reasonable to infer that it may have impacted Deng's view that markets could exist within socialism. In first meeting between Deng and Armand Hammer, Deng pressed the industrialist and former investor in Lenin's Soviet Union for as much information on the new economic policy as possible.
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