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CHINESE ECONOMIC REFORM:
AN ANALYSIS IN THREE SECTORS
Pamela Ban
C
hina has been the focus of much attention in the
past few years; hardly a day goes by without a newspaper article
explaining the impact China has on the world. This impact has
come as a result of significant economic reforms that China has
implemented within the past few decades. This reform process
is of particular interest. Market-oriented reforms have created a
new economy that differs immensely from the pre-reform strict,
doctrinaire socialist economy. Some reform measures were forced
by popular pressure while others were established through trial
and error; some were based on conventional thought, while others broke prevalent norms. Nevertheless, China’s reform path has
introduced market mechanisms, increased efficiency, and pushed
the Chinese economy into international importance. Economic
reform has resulted in an improved, market-oriented Chinese
economy.
This can be clearly seen through three specific areas.
Reform of the agricultural system has forged the link between
work and income with the introduction of contracting systems,
creating a new economic environment for Chinese peasants. In
Pamela Ban is a Senior at Thomas Worthington High School in
Worthington, Ohio, where she wrote this paper as an independent study
for Mr. Mark McCart in the 2006/2007 academic year.
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Pamela Ban
the enterprise sector, trial and error developed a unique gradualist
strategy, which has improved state-owned enterprises, developed
private sectors, and progressively diminished the state’s influence
in enterprise. In the area of foreign trade, evolving attitudes have
caused China to open its trade, encourage foreign direct investment, and integrate its reformed economy in the world market.
How has economic reform been implemented and how
has it resulted in an improved economy? To answer this question,
this paper will concentrate on the reform paths that China has
taken in agriculture, enterprise, and foreign trade. Focus will begin
on reforms starting in 1978, and follow the Chinese economy as
economic reform measures are introduced and implemented in
each of the three sectors.
I. Agricultural Reform
Before 1978, China’s agricultural system was characterized
by strict control and slow agricultural growth. Within a mere decade
however, this all changed, and China increased its agricultural
output by almost 50 percent. The reason behind this remarkable
shift is China’s market-oriented reform of its institutional system
beginning in 1978. Agricultural reform centered on the link
between work and income and created a new economic environment for Chinese peasants, which increased agricultural output
and growth.
The agricultural system in place under China’s traditional
economic system revolved around government leaders’ goal of
implementing heavy industry. The state needed to control the
production of grain and other raw materials in order to create a
favorable economy for heavy industry to thrive in. Thus, in 1955,
the Cooperative Transformation Campaign organized peasants into
collective economic units to facilitate control, and state-operated
advanced cooperatives were established. Three years later in 1958,
the government further tightened control and began to combine
the advanced cooperatives into people’s communes during the
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People’s Communes Campaign. The government mandated what
the collective farming units produced, how much they produced,
and from where they received the means of production.
Opposition to this strictly-planned agricultural system found
leadership under Deng Zihui, the director of rural affairs in the
Central Committee of the Communist Party of China (CCCPC).
This faction believed that peasants engaged in farming should
have freedom in management, and advocated a form of private
ownership. To them, peasants should have the power to buy, sell,
or lease land, and to manage and employ labor. Zihui saw collectivization as a dangerous and detrimental practice to the Chinese
economy. The production-team system that was practiced under
collective farming did not maximize agricultural output. Production teams were comprised of around 20 to 30 households in the
neighborhood, and net income was based on the performance
of the production team as a whole. Individual peasants did not
see direct returns for their efforts, and therefore the incentive
to work hard did not exist under the production-team system.
Consequently, agricultural outputs and farmers’ per capita net
income were significantly low; in 1957, each farmer received an
average net income of 73.37 yuan.2
Peasants began to support Deng Zihui’s stance against
the collective farming policy and demanded a household responsibility system, under which income would be linked to work.
Specifically, peasants desired household contracting, a form of
the household responsibility system which operated using “task
rates.” Under this system, a number of work points were set for
each job, and peasants received those work points based on the
number of jobs they did. These work points would determine
the peasants’ annual net income. Demand for this household
contracting system was directly proportional to the political and
economic environment, as shown in three specific time periods
when agriculture production and the living standard of farmers
suffered greatly. The first major push occurred in 1956, after the
Cooperative Transformation Campaign established advanced cooperatives. Wenzhou Prefecture in Zhejiang Province, Chengdu
Prefecture in Sichuan Province, and Wuhu Prefecture in Anhui
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Province began practicing household contracting. However, the
Communist Party, especially its chairman Mao Zedong, steadfastly
opposed household contracting, viewing it as private in nature and
completely against the principles of Communism. On August 8,
1957, the government took direct action to suppress the practice
and commenced a campaign of “mass debates between socialist
and capitalist roads,” and household contracting was branded as
part of the road leading to capitalism.3
The second major press for household contracting took
place in 1959, after a Communism revival and the establishment
of the commune system under the People’s Commune Campaign. As Jinglian Wu described in his book Understanding and
Interpreting Chinese Economic Reform, “rural China was dominated by the go-Communism craze, the tendency to exaggerate,
the tendency to be authoritarian, the tendency to give arbitrary
orders, and the tendency for cadres to behave as the privileged...
all these did great harm to farmers.”4 Farmers were victimized
to the point where their minimum living standards could not be
sustained. For themselves, villages began to practice household
contracting. However, unfortunately for the peasants, the timing
of this coincided with the government’s Anti-Right Opportunism campaign, and household contracting was condemned as
“right opportunism,” or “liberalist practices.” This can be clearly
seen through the government-controlled press. The newspaper
People’s Daily published an article on November 2, 1959 labeling
household contracting as “a practice of extreme backwardness,
retrogression, and reaction” and that “this poisonous weed...must
be uprooted and burned up completely, not even a mite of it is
to be retained!”5 Guangming Daily, reinforcing the government’s
view that household contracting was a malicious effort to restore
capitalism, released an article on December 4, 1959 reporting that
household contracting was a “program of right opportunists for
capitalist restoration in the countryside.”6
The third key push for household contracting occurred
in 1962, when the catastrophic and disastrous effects of the failed
Great Leap Forward and People’s Communes Campaign became
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increasingly evident. The collectives could not support the lives of
commune members, and more and more farmers were dying from
starvation. Anhui Province, in desperation, once again returned
to household contracting. Output quota was fixed for each plot,
each worker was designated certain responsibilities, and eventually
agricultural production was restored. Anhui Province’s actions
were, however, publicly disparaged by Mao at a CCCPC conference in January 1962. According to David Zweig, to Mao, a link
between work and income represented “the ultimate in material
incentives.”7 In response to Mao’s criticism, the Anhui Provincial
Committee issued a Resolution on Rectifying the Practice of “Responsibility Plots.”
In spite of this, household contracting had by this time
rooted itself as a potential solution to agriculture’s problems of
low outputs. As long as the practice could increase outputs, as
it did in Anhui, some leaders were willing to entertain the idea.
This was evident in June 1962, when the Secretariat of the CCCPC
received a work report from rural areas of East China. Half the
Secretariat backed the practice of household contracting, while
half opposed it. Mao, seeing that more and more leaders were
accepting the idea of household contracting, turned the issue
into a topic of class struggle to garner support. In the summer
of 1962 at another conference of the CCCPC, Mao proclaimed
that if any type of household contracting was implemented, the
struggle and strife between social classes would be disastrous.8 In
September of that same year, Mao gave a speech which intertwined
the problem of class struggle with household contracting, stating
that household contracting would “paint everything black.”9
Nevertheless, household contracting was tolerated. In
1978, the CCCPC allowed household contracting in remote and
poor areas. This alone led to a huge increase in production teams
practicing household contracting. In the beginning of 1980, 1.1
percent of all production teams in China participated in household
contracting. By the middle of 1980, this figure had increased to 20
percent.10 By 1981, the government, seeing the success resulting
from linking work to income, eliminated any other restrictions
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on practicing the household responsibility system, and gave it its
full acceptance. By 1984, nearly all agricultural production teams
were under the household responsibility system.11
Around the same time of its official acceptance, the
household responsibility system underwent a few changes as well.
Production teams began to disband into smaller work groups to
better recognize individual accountability. The practice of work
points was gradually replaced by quota and above-quota prices
as the household responsibility system evolved. Peasants were
obligated to sell to the state a certain amount of produce at the
quota price, but also received an above-quota price for any excess
produce. Furthermore, price reform was implemented in 1979,
and quota and above-quota prices were increased. The government
raised the quota prices of grain, cotton, sugar crops, oil crops,
and pork by 17.1 percent, and above-quota prices of grain and
oil crops were raised from 30 percent to half their corresponding
quota prices.12
Another stage of reform occurred in 1984 when these fixed
quotas were abolished and replaced by procurement contracts.
Procurement contracts were compulsory sales to the government,
and the contract price was a weighted average of the basic quota
price and the above-quota price. Peasants were only responsible
for paying the State Agricultural Tax and upholding the procurement contracts, and were allowed to dispose of excess produce
after this in any way they pleased.
What was the reason behind the government’s shift to
procurement contracts in 1984? The motivation came from the
government’s financial burden. The increases made in quota and
above-quota prices resulted in a growth in output starting around
1982.13 According to 1988 figures in the China Statistical yearbook,
the government’s financial burden in this area increased from 8.4
percent of the budget in 1982 to approximately 24.6 percent of
the budget in 1984.14 Procurement contracts were introduced in
part to alleviate the government’s financial burden.
Peasants were allowed to continue to dispose of excess
produce in any way they wished. Most sold the excess in market
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fairs, or, in the specific case of grain, to private grain traders who
traveled across the countryside. The number of rural market fairs in
operation increased from 50,356 in 1984 to 66,569 within a decade.15
According to Justin Yifu Lin’s figures in his study on rural reform
in China, the market prices of these market fairs were generally
higher than the procurement prices paid by the government.16
Furthermore, another study conducted by Jean C. Oi concluded
that the government went as far as to encourage its grain stations
to “pay market prices to compete with the private grain traders
for peasant grain.”17 However, this practice was abruptly stopped
by the government in 1998, when the government declared that
all grain was to be sold to the state. Private grain operators were
allowed to continue operating, but they were restricted to purchasing grain from state grain stores and were forbidden to continue
purchasing grain directly from peasants. Why did China come so
close to market freedom and then reverse its policies?
To answer this question, one must first consider why China
did not permit a complete market to develop or privatize the
ownership of land. By this time, China’s land policy was extremely
outdated; each peasant household was registered as a farm and
was obligated to pay the State Agricultural Tax and meet the compulsory sales stipulated in the procurement contracts, whether or
not the household wanted to engage in farming. As reforms were
implemented in all economic sectors, the Chinese economy had
greatly diversified and allowed peasants the opportunity to engage
in labor other than farming. Millions of peasants left farming to
go into various types of industry, rural and urban. Farming was not
the priority, and land was not worked to produce maximum yields.
The state could have easily subsidized the peasants who chose to
farm the land, and farm technology advancements would be able
to further increase produce yields. This strategy was not implausible, and could have been a possible solution. For example, even
in the early 1980s, some highly technologically advanced peasant
villages delegated the task of farming to a few households and
were still able to meet the terms of the procurement contracts.
However, in light of this, the government did not privatize
land nor let a complete market to develop due to two main objec-
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tives. First, the government did not want to become dependent on
food imports. The Chinese government was extremely concerned
with food security and supply. Although the state encouraged
development of rural industries, it did not want grain production
to become a minor or secondary task for peasants. Second, as the
government began to reform state-owned enterprises, a significant
number of these workers were laid off. The state found it easier to
make former peasants leave industry and keep the original workers if the peasants were able to go back to farming. By keeping all
households registered as farms, the government was maintaining
a job cushion.18
Look at the state of grain outputs during 1984-1987, and
the government’s anxiety over maintaining food security and
supply can be seen a little easier. In 1985 the government went
as far as to even set aside procurement contracts. Peasants were
enjoying great economic freedom. They began to increase the
proportion of cash crops in their farming to increase their profit
margin. Naturally, the percentage of field area dedicated to grain
production decreased while the percentage of the field area devoted to producing cash crops increased.19 With grain outputs
stalled and even dropping, state interference began to increase
in order to ensure food security and supply, and state procurement contracts were once again initiated. Data shows that after
this occurred, grain production reversed its decline and started
increasing again.20 1985 remains the year in which peasants had
the most economic freedom.
Going back to 1998 with this information, the reason behind
the government’s action of reversing its policies and eliminating
market forces is more obvious. State interference increased and
culminated in 1998, all due to grain production. Although market
fairs still continued to operate at a reasonable rate, from 1998 to
1999, the number in existence dropped from 65,050 to 63,593;
within another year this figure dropped even lower to 62,416.21
The state’s anxiety over food security and supply, especially in
the area of grain production, has jeopardized and threatened
the future status of market freedom. The agricultural market
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65
continues to be regulated by a combination of market forces and
state intervention.
Nevertheless, the agricultural reforms that China took were
extremely significant. The institution of the household responsibility system increased agricultural output. Since households were
allowed, in most cases, to control any excess produce after state
quotas or compulsory sales were met, the incentive to increase
output existed. The formation of the link between work and income created an incentive and successfully increased agricultural
output and growth; from 1978-1984 alone, total agricultural growth
increased 48.64 percent.22 46.89 percent of this growth is directly
related to the institutional shift to linking work to income.23 This
increase in growth was extraordinary. Figures such as these had
not existed since 1949, when the People’s Republic of China was
founded.24
China was able to change its agricultural system in such a
short time period because farmers were not only supportive but
they also pressed for change. Disastrous effects on agricultural
production from events such as the Great Leap Forward and the
Great Cultural Revolution nearly wiped out all rural economics,
making local leaders more inclined to “break the law” and implement a new system. The rest of the population did not object to
the reform since it did not have any negative effects on other social
groups.25 National leaders saw the positive effect of linking work to
income on agricultural outputs, and gradually accepted the new
system. Although the government’s anxiety over food security and
supply has curtailed and prevented market freedom from reaching
its full extent, China’s agricultural system has nevertheless established the link between work and income, incorporated market
forces, and increased agricultural production and growth.
II. Enterprise Reform
The reform of the enterprise sector is integral in transforming a centrally planned economy to a more market-oriented one
as it establishes the microeconomic foundation that is required
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for a modern market economy. China’s reform path in this area
broke prevalent norms. Instead of the mass privatization, “big
bang” strategies that were applied in Central and Eastern Europe,
China’s enterprise reform took on a more gradualist transition.
This gradualist strategy has proven to be extremely successful.
State-owned enterprises (SOEs) were reformed through several
central ideologies and private sectors were established steadily and
flourished quickly, overall progressively diminishing the state’s
influence in enterprise.
The traditional SOEs, as they existed before reform, were
seen by the government as a way to fulfill political and economic
objectives in line with their goal of promoting heavy industry. The
government completely controlled the allocation of the factors
of production. Just as in the traditional agricultural system, the
government determined what, how many, and how to produce, in
addition to mandating where raw material came from and who the
consumers would be. Output was sold to the state at governmentregulated prices. Market forces were eliminated. There was neither
a product market nor a production factors market, and supply
and demand was, in most part, ignored. The process of meeting
demand was replaced by the role of meeting government goals.
Furthermore, SOEs operated in extremely broad and wide-ranging
fields, sometimes in fields ill-suited for government interference.26
In addition, important economic factors such as input and output
prices, investments, and taxes, were all determined and regulated
by the state. SOEs’ close relationship with the government gave
them the power to greatly influence the modification of these barriers to their favor, instead of being forced to optimize business
plans.
Naturally, this system was characterized by various problems. Those who allocated resources did not have the essential
information required to do so efficiently; decision-making power
concentrated in the central government was detrimental because
the central government was too separated from the environments,
interests, and problems facing enterprises. Enterprises did not
have sufficient funds to spend on technological advancements
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and research; managers did not have the opportunity to develop,
innovate, or plan.27 Even authority over seemingly routine issues
such as wage determination, employment levels, production
scheduling and forecasts, and raw material acquisitions was not
given to managers.28 In addition, there was no effective way for administrators to monitor enterprises and check whether enterprises
were putting resources to optimal use. Since input and output
prices were fixed, enterprise accounting profits or losses could
not reflect whether resources were being used efficiently.29 There
was no incentive for workers or managers to increase productivity.
Furthermore, during the decades before reform, the total factor
productivity (TFP), which measures the efficiency of capital and
labor use of SOEs, remained the same or even dropped.30 During
the period 1957-1978, SOEs experienced an annual TFP growth
rate that fluctuated closely around zero, conditional on the capital
and labor weights chosen.31 Capital and labor were directed into
industries, but the enterprise system was not efficient in using
them.
The first mainstream program reforming SOEs concentrated on the idea of expanding enterprise autonomy. During the
Third Plenum of the 11th CCCPC in December 1978, government
leaders admitted that enterprises lacked autonomy. In 1979, the
economist Hong Ma advocated that “the economic management
system reform should begin with expanding enterprise autonomy
to expand the enterprise decision-making power concerning
human, financial, and material resources, as well as planning.”32
The idea of “expanding enterprise autonomy” was the process of
transferring more decision-making power and control from the
government to enterprise management; this was a type of “powerdelegating” reform.
This idea spread successfully, and in July 1979, the State
Council released documents which encouraged reform by expanding enterprise autonomy nationwide. By June 1980, enterprises
running under this system accounted for over 94 percent of total
enterprise profit. In Shanghai and Tianjin, the figure was 80 percent.33 At the end of 1980, the Chinese government also adopted
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the idea of profit retention. SOEs no longer had to relinquish all
profit to the state; rather, they were permitted to keep a negotiated,
preset percentage of the profit. In essence, this practice of profit
retention, a type of “profit-sharing” reform, echoed the system of
linking work to income that was incorporated in Chinese agricultural reform. Variations of power-delegating and profit-sharing
comprised the first major enterprise reform program.
However, although this reform increased production and
income initially, the newly found enthusiasm for efficiency was
not long lasting. Shortly, fiscal deficits returned and increased,
inflation materialized, and economic order, in general, was lost.
The increased fiscal deficits that were generated by the profit
retention program were, according to Robert Hsu, inconsistent
with the “fiscal balance” of the state macroeconomic plan, and
was accordingly replaced with profit taxes around 1983-1984.34
This tax system, which levied a 55 percent35 profit tax for large
and medium sized SOEs, was designed to make enterprises more
liable for business profits and losses.36
Around the approximate time period, in 1983, the contracting system was introduced to the enterprise sector. This was
the same contracting system used in agriculture, but adapted for
SOEs. The enterprise contracting system was essentially a specific
form of power-delegating and profit-sharing. A contract is established between the contracting party, which was one of many state
organizations, and the contracted party, which was the business.
The terms of how decision-making power and profit are divided
are stipulated in each contract. In most cases, any superfluous
profit would be retained by the contracted party or be divided
and shared between the two parties by a pre-negotiated proportion. In addition, any commodities produced beyond the plans
could be sold on a newly developed “dual-price” system, which
operated with market forces. In early 1983, the Secretariat leader
of the CCCPC strongly encouraged the implementation of the
enterprise contracting system “in all urban industries and commercial enterprises,” and within two to three months, the practice
was allowed nationwide.37 By the end of 1987, 78 percent of SOEs
were operating under the enterprise contracting system.38
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However, the effectiveness of the system was yet to be
revealed. The enterprise contracting system did not alleviate the
problems plaguing the Chinese economy; it upset the economic
balance once again and led to rising inflation. The decentralization of fiscal power granted local governments the ability to
influence local economies; consequently, local leaders earnestly
pursued quick growth, causing inflation to rise rapidly. The central
government, in turn, reestablished central control and implemented price ceilings and credit quotas in an effort to “rein” the
economy back in.39 In addition, even with the implementation of
the enterprise contracting system, the heart of the problem still
existed. Enterprise property rights remained undefined, which
caused discord between the contracting and contracted parties
and led to mutual contract breaches. Furthermore, enterprises
still had no complete accountability for profits or losses.
Why was full accountability not granted to enterprises?
Enterprise leaders shared residual control with the state, as
decision-making power was divided between the two. Residual
claim on income was also shared between enterprise leaders and
the state, as profit was divided between the two. However, the
state is the only one with an equity investment, as the state is the
sole owner of the enterprise. Therefore, enterprise leaders share
residual claim and control, but do not share risk. They never
assume responsibility for the losses, but always have a claim on
profit. This problem was present in any reform that consisted
of any type of power-delegating and profit-sharing, leading to a
circle of problems with reform.40 Government intervention was
the only way to check insider control, but government intervention was the direct opposite of reform intentions. Furthermore,
full accountability could not be given to enterprises without the
transfer of ownership. This would remain a crucial problem in
SOE reform.
By the early 1990s, a new avenue of enterprise reform
took shape. The Third Plenary Session of the 14th CCCPC in
November 1993 marked the ending of power-delegating and
profit-sharing reform and began the period of corporatization.
The Decision on Issues Regarding the Establishment of a Social-
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ist Market Economy was released, proclaiming that future SOE
reform should concentrate on “the institutional innovation of
enterprises” and “establish a modern enterprise system [modern
corporations].”41 According to the Decision, the corporate system
should be characterized by clearly defined property rights, power,
and responsibilities, scientific management, and the distinct
separation between enterprise and government.42 The Decision
also had many ramifications on the Chinese economy as a whole;
it established the “socialist market economy,” and finally allowed
market forces to play a larger role in the allocation of resources.
However, sweeping privatization fell short of acceptance and public
ownership was still emphasized as a core idea.43 Nevertheless, the
Decision was a step toward a more market-oriented economy.
The Decision was closely followed by the Company Law of
the People’s Republic of China in December 1993, which more
clearly stipulated how corporatization was to work. Going into
effect midyear in 1994, 100 SOEs were chosen to be the first to
be corporatized. Within two years, these SOEs were to become
limited liability companies (LLCs) or shareholding enterprises
(SHEs). Article 3 of the Company Law stipulated the difference
between the two: in LLCs, a shareholder is liable to the extent
of his capital input, in SHEs, the company’s capital is equally
divided into shares and a shareholder is liable to the extent of
his shareholdings.44 However, in a LLC, the state is the only one
with equity investment. LLCs can either be a “wholly state-owned”
LLC, when there is only one state entity investing, or an “ordinary
state-owned” LLC, when there are multiple state entities investing.
In either case, a LLC remains a state-owned enterprise; the only
difference between a LLC and a traditional SOE is that the state
may divide its investments by investing in the company through
various entities. On the other hand, SHEs must, according to the
Company Law, be incorporated through share offer. With SHEs
the state must hold, at minimum, 35 percent of the total shares,
with the rest offered to the general public. The state does not
have to invest in 51 percent of the shares and be the majority
owner; the shares held by the general public often are so spread
out that the 35 percent requirement often ensures that the state
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is the largest shareholder.45 Therefore, the state could reduce its
expenditures in this area without relinquishing control.
While this shareholding system was introduced in the
enterprise sector, it was not filtered through the enterprise sector as much to make an effect. The corporatization plan was not
a radical change in enterprise ownership, as it included mostly
LLCs and only a handful of SHEs. With the state still as the owner,
the former problem of enterprise leaders sharing residual claim
but not risk still existed. Accordingly, financial performance of
enterprises did not improve, as managers still did not strive to
minimize costs and losses. From 1994-1997, losses increased 64
percent, jumping from 48 billion to 78 billion yuan.46
In 1997, the corporatization program was discontinued.
The government, seeing the success that the SHEs had during
the corporatization reform, decided to transform loss-making
enterprises into publicly listed companies, thereby beginning the
period of shareholding system reform. The government mandated
that SOEs be reformed by restructuring corporate governance, by
breaking up monopolies, and by converting SOEs into shareholding
enterprises by initial public offering (IPO). In 1998, administrative
function was separated from enterprise function, and monopolies
were broken up and reorganized into competitive enterprises.
In the case of natural monopolies, the government limited those
monopolies’ functions down to a narrow and most-needed extent
and strictly monitored their actions.47 Lastly, IPOs were listed in
domestic and foreign securities market.
No analysis of Chinese enterprise reform is complete
without a look at the development of the private sector. In 1987,
the 13th National Congress of the Communist Party encouraged
the development of the private sector, and in April 1988, at the
First Session of the National People’s Congress, the Constitution
of the People’s Republic of China was successfully amended to
include a reference to developing private sectors. Article 11 of
the Constitution mandates that “the State permits the private
sector to exist and develop within the limits prescribed by law.
The private sector is a supplement to socialist private sectors. The
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State protects the lawful rights and interests of the private sector,
and exercises guidance, supervision, and control over the private
sector.”48 In 1993, the Third Plenary Session of the 14th CCCPC
reorganized and accepted the increasing number of non-state
enterprises, while once again emphasizing that the focus of the
economy would still be public ownership.
SOEs could not meet every need of the market, and private businesses met the missing needs. They also helped with the
problem of unemployment, which gave them the support of local
governments.49 In 1998, the government faced a critical problem
when SOE reform forced more than 10 million people into unemployment. The development of the non-state sector became
a high priority. In the late 1980s and early 1990s, the annual real
growth rate of private firms was 140.6 percent, and state firms’
output share was 48.4 percent.50 As non-state enterprises became
more critical, the federal government began to modify its policies and regulations to allow the gradual development of larger
private enterprises. This gradual development is a key characteristic of China’s reform. Non-state sectors developed gradually
while state sectors maintained the prominent position. When this
was attempted in the Soviet Union and other Eastern European
countries, it failed. China was able to do this, according to Jeffrey
Sachs and Wing T. Woo, because there was a surplus labor force,
which was absent in the Soviet Union, and because Chinese SOEs
were still in the dynamic process of reform.51
Overall, enterprise reform has influenced the autonomy,
incentives, and competitiveness of SOEs. Decision-making power
was decentralized and transferred to enterprise management, giving managers authority over amounts and types of inputs, methods
of production, and output prices. Incentives were created with
the advent of various profit retention practices, corporatization
was introduced, and the shareholding system was evolved. With
the development of the non-state sector and the reform of SOEs,
state influence in enterprise and industry has gradually declined.
Back in 1978, the state sector was responsible for 77.63 percent of
gross output value, and the non-state sector accounted for 22.37
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percent of gross output value.52 As enterprise reform continued,
the state sector’s share declined while the non-state sector’s share
increased. By 1994, the state sector only accounted for 34.06 percent
of gross output value, with the non-state sector being responsible
for 65.94 percent.53
Competition is now common within the non-state sector,
between the non-state and state sectors, and within the state sector.
Furthermore, as competition affects the state sector, state enterprises press for additional release from state regulation. Enterprise
profits have soared, averaging 36 percent annual increases since
1999 among both non-state and state sectors.54 Returns on equity
have also increased. From 1998 to 2005, state-owned enterprises’
returns went from 2 percent to 13 percent, and private enterprises’
rose from 7 percent to 16 percent.55 In addition, China’s TFP is no
longer the stagnate rate of the 1960s and 1970s. In the past decade,
China’s TFP growth rate has been the fastest in the world.56 These
results reflect the success from expanding the private sector and
restructuring SOEs.
Economic reform in China’s enterprise sector is a dynamic
process. As reform creates new environments, new problems will
arise. However, what is significant is the extent of reform that
China was able to undergo within the period of approximately two
decades. Trial and error has yielded an improved state sector, and
the acceptance of non-state sectors has created a new economy
that differs immensely from the pre-reform doctrinaire socialist
economy. The success from enterprise reform forecasts more years
of robust growth.
III. Reform of Foreign Trade Attitudes
Ten years ago, a Chinese assistant foreign minister stated,
“China is not any kind of power. It is not at present. And it will not
be one in the future.”57 How perspectives have changed. Today,
not a single person doubts China’s rising economic power. It is
hard to believe that merely three decades ago, China was nearly
completely isolated from the rest of the world. Since then, China
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has opened up its economy, entered the international scene, and
risen to prominence, integrating itself in the world economy.
In the 1960s, the Chinese government held a monopoly
over foreign trade, and completely controlled imports and exports. China ended its political and economic relationships with
the USSR, withdrew from the world, and focused on becoming
self-sufficient. World trade figures illustrate China’s isolation
from the rest of the world. In 1962, the world trade volume was
$2.66 billion, and China’s trade activity accounted for a mere 1.5
percent of this. Even as the world trade volume grew, reaching
$14.80 billion in 1977, China retreated further and further away
from international trade, accounting for only 0.6 percent of world
trade.58
Despite this, China could not remain in complete isolation. By the mid 1970s, the government realized that it could not
match the industrialization of the Western world independently;
China was unable to close the gap in industry, technology, or
management by itself. Therefore, the government partially restored economic relations with the United States, other Western
countries, and Japan. In 1978, China signed a $7.8 billion trade
contract with the U.S. for chemical fertilizers and metallurgy, and
in this one year, China’s trade activity increased 39 percent.59 On
the other hand, China was still not willing to open its economy to
foreign countries; the trade opened up in the 1970s was intended
to build independence and self-reliance.
However, the Chinese government slowly realized that
trade was integral to economic development. In September 1978,
at the Third Plenary Session of the Central Advisory Commission
of the Communist Party of China, Deng Xiaoping declared that
the last 30 years of closed-door policy hindered China’s economic
development, and pressed for reform and “opening up” to take
advantage of foreign capital and foreign advanced technology.
In his speech, he stated that “if we isolate ourselves and close our
doors again, it will be absolutely impossible for us to approach
the level of the developed countries in 50 years.”60 Government
leaders looked at Japan and Hong Kong’s economic development
THE CONCORD REVIEW
75
success with export-oriented systems, and decided to pursue the
policy of export-orientation.
China’s economy, with Deng Xiaoping’s leadership, has
been opened in stages on a regional basis. In the 1980s, opening
began in select coastal cities that were close to other East Asian
countries. In May 1980, Guandong and Fujian were granted open
economic policies to develop export-oriented industries and
attract foreign investment. In August 1980, Shenzhen, Shuhai,
Shantou, and Xiamen became the first four Special Economic
Zones (SEZs). SEZs were given special flexible policies and treatment. “Imported goods for self-use” were free from tariffs and
industrial or commercial taxes, and imports primarily for resale
were given a 50 percent discount off standard taxes. In May 1984,
14 coastal cities (Dalian, Qinhuangdao, Tianjin, Yantai, Qingdao,
Lianyungang, Nantong, Shanghai, Ningbo, Wenzhou, Fuzhou,
Guangshou, Zhanjiang, Beihai) were given similar open economic
privileges, but were not designated SEZs. In February 1985, the
Yangtze River Delta, and the Pearl River Delta, among other areas,
were also declared to be open economic regions. By 1988, the last
SEZ was established in Hainan.
Opening up these areas allowed for rapid development in
their respective regions and, in addition, encouraged the opening up of the entire nation. The open regions made successful
use of international resources and were involved in international
competition. The first four SEZs alone experienced an increase
of 44.4 billion yuan of industrial output within the first five years,
with an annual growth rate of about 50 percent.61 China’s exportoriented industries developed rapidly: in 1990 alone, the total
export volume of the coastal provinces amounted to $40 billion.
This number was approximately two-thirds of China’s total export
volume.62 The open regions greatly strengthened themselves
with the assistance of foreign capital investment, technology, and
management, and experimented with new economic systems
and operating mechanisms. They tested new reform models and
provided a foundation for reform for the entire nation.
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Pamela Ban
The success, advancement, and experience gained by China
in the 1980s, through opening up, set an extremely solid basis for
further pursuits in the next decade. In the 1990s, China followed
a “four-along” strategy of opening up. The four specific regions
focused on were “along the coast,” from the Bohai Sea to the Gulf
of Tonkin, “along the border,” with both northern and southern
borders, “along the river,” in particular the Yangtze River Valley
and the Pudong area in Shanghai, and “along the railway,” with
regions located along railroads across the entire nation.63 Pudong,
a district of Shanghai, used to be mainly farmland and countryside until the government concentrated economic development
reform in 1990, when the “Pudong New Area” was created. Pudong
was to be the “head of the dragon” for the opening up of regions
along the banks of the Yangtze River. Pudong has successfully
emerged as a crucial financial and commercial center of China.
It is the home to the Shanghai Stock Exchange, the major stock
exchange in China (with the other being the smaller Shenzhen
Stock Exchange), and the Lujiazui finance and trade zone.
Foreign direct investment is crucial to China’s economic
development. Ever since China has begun the process of opening
up, special policies have been implemented to encourage foreign
countries to invest in China. In July 1979, The Law on Joint-Ventures
using Chinese and Foreign Investment was adopted, legalizing
foreign investment in China. In 1986, the government formally
permitted the existence of entirely foreign-owned enterprises.
Furthermore, the State Council backed the Provisions of the State
Council of the Encouragement of Foreign Investment. The 22
articles in the Provision outlined preferential tax treatment for
foreign joint-ventures, and granted them the freedom to import
inputs, an increased promise of autonomy from bureaucratic intervention, and quicker licensing procedures, among others. In
addition, foreign ventures were given privileged access to basic
resources such as water, electricity, and transportation, and were
provided with interest-free loans.64
These preferential policies and incentives were critical in
making China the largest recipient of foreign direct investment
(FDI) among developing countries. It has become a norm to invest
THE CONCORD REVIEW
77
in China. Out of the world’s top 500 non-financial corporations,
over 400 have projects in China. Over 400 research and development bases have been created by multinationals.65 In particular,
the Yangtze River Delta and the Pearl River Delta have become
important areas of the information technology industry. However,
most of the FDI is used towards labor-intensive production. Over
half of the total foreign investment went towards the manufacturing
industry; around 70 percent of foreign enterprises in China are
dedicated to manufacturing.66 By 2002, China exceeded the U.S.
to become the country with the most foreign direct investment
in the world.67
East Asia is an important source of China’s foreign direct
investment. The numbers are staggering. Hong Kong itself is
responsible for around $204.9 billion of investment as of 2002.
Japan’s accumulated investment amounts to $36.34 billion, and
Taiwan’s is $33.11 billion.68 These East Asian countries originally
held a trade surplus with the United States, a trade surplus which
has since diminished due to their trade relations with China. East
Asian countries take advantage of China’s cheap production factors. A triangular trade is formed, China processes imports from
East Asian countries and then exports the product to the United
States, Europe, and other developed markets. This effect is most
pronounced in Japan’s case. According to a report by the Centre
d’Etudes Prospectives et d’Informations Internationales in Paris,
Japan has shifted its export market from exporting goods to
Western countries to exporting product parts and components
to China.69 Japan’s import market has changed from importing
finished goods from Western countries to importing finished goods
from China.70 China is now East Asia’s major trading partner. The
trade surplus has shifted from between East Asia and the U.S. to
between China and the U.S. and between East Asian countries
and the U.S. By 2001, China became the primary source of U.S.
trade deficits. In January 2004, China experienced a trade surplus
of $11.5 billion with the U.S. alone.71
China’s trade surplus mainly comes from its manufacturing industry. China is unsurpassed in its ability to provide low-cost
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manufacturing. China is responsible for manufacturing 70 percent of the world’s toys, 60 percent of the world’s bicycles, and 50
percent of the world’s shoes.72 Former manufacturing intensive
countries such as Mexico and South Korea will have to contend
with China’s manufacturing powerhouse. China can already assemble, manufacture, and ship its products over to the U.S. more
cheaply than Mexico can produce them. Even though Mexico is
right below the U.S. and has the privileges of NAFTA on its side,
in 2003, China has surpassed Mexico in exporting to the U.S.73
Worldwide, in 2004, China took its place behind America and
Germany as the world’s third-largest exporter.74
China’s opening up to foreign investment and its welcoming
of international trade has greatly altered the economic makeup
of the Asiatic region. World Trade Organization membership has
allowed China to increase its appeal to foreign investors. East Asia
is not the only region actively linked to China; China has increasingly drawn in immense quantities of parts for final assembly from
countries all around Asia. Thailand, Malaysia, Singapore, the
Philippines, and Indonesia are major players in the “triangular
trade,” along with the other East Asian countries such as Taiwan
and South Korea. China’s accession to the WTO and the opening
of its trade has benefited numerous countries. In 2003, China’s
demand for capital goods and components pulled Japan out of its
15-year recession.75 Chinese demand for raw materials has been
satisfied by Southern Asia’s rubber, crude oil, and natural gas, to
the benefit of those countries.76 In 1978, China’s dependence rate
on foreign trade was 9.8 percent; by 2000, this figure increased to
43.9 percent.77 China is being linked closer and closer with Asian
production networks all over the continent, and the Chinese
economy has become increasingly reliant on foreign trade.
China, however, is not content with merely manufacturing toys. It has entered the high-tech product market, exporting
the likes of computers, DVD players, and cell phones. In 1998,
America imported $5.0 million of Chinese made notebook computers. By 2004, this figure jumped to $7.7 billion.78 In the year
after that, 43 percent of China’s exports were in electronics,
computers, and telecoms equipment.79 Nevertheless, contrary to
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79
the fear that China’s ascent in the high-tech industry threatens
U. S. national security, China’s position in the high-tech industry
is not what it seems. Its high-tech exports are very much like its
toy exports—it assembles a computer as it assembles a toy. Most
of China’s high-tech “exports” are, in reality, exports assembled
from imported components. However, that does not say that
China is not developing its own place in the high-tech industry.
Already, the Chinese firm Huawei is a mobile handset supplier to
Vodafone, and China’s own car industry has secured around 25
percent of its domestic market.80
The isolated China is no more. Evolving attitudes have
opened up China’s economy to foreign trade, benefiting both
China and foreign countries. China has been able to exploit its
comparative advantage in areas such as manufacturing, establishing itself as a force to be reckoned with in the global market. And
by integrating itself in international markets, China now affects
numerous countries around the world and has aroused worldwide
interest. When Deng Xiaoping made his speech pushing to open
China up 30 years ago, he might not have predicted that China
would achieve its current prominence. Yet, it was this push that
started China’s ascent as an international economic power.
Within the last few decades, China has undergone a period
of significant reforms that has left it with an improved, marketoriented economy. Linking work to income in agricultural production has increased agricultural output and growth, reduced the
threat of chronic shortages, and established a solid foundation for
economic prosperity and political stability. The development of
the non-state enterprise sector is a clear indication that the market
mechanism has been brought into play. In addition, the growth
of the private sector and the restructuring of SOEs have resulted
in productivity gains, improvement in profits, and increases in
returns on equity. Furthermore, open foreign trade attitudes have
allowed China to benefit from international markets and achieve
a principal role in world trade.
China did not easily accept market-oriented reforms.
They were not implemented effortlessly, nor were they welcomed
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Pamela Ban
without resistance. They were not developed overnight, nor were
they always in line with standard models. Perhaps no one in the
beginning predicted that these reforms would thrust China into
its economic prominence of today. However, it is these economic
reforms that have driven China along the road of success.
An ambitious, reformed Chinese economy will affect the
entire world. China’s economic reform is by no means finished.
As it continues to be carried out, continued attention is needed,
as knowledge of China’s reforms is vital in understanding the
challenges that China faces.
THE CONCORD REVIEW
Endnotes
Jinglian Wu, Understanding and Interpreting Chinese
Economic Reform (Mason: Thomson Higher Education, 2005)
p. 96
2
Ibid., p. 104
3
Ibid., p. 106
4
Ibid., p. 106
5
Ibid., p. 107
6
Ibid., p. 107
7
David Zweig, “Opposition to Change in Rural China:
The System of Responsibility and People’s Communes,” Asian
Survey 23, no. 7 (1983) p. 881
8
Wu, p. 108
9
Ibid., p. 108
10
Justin Yifu Lin, Fang Cai, and Zhou Li, The China
Miracle: Development Strategy and Economic Reform (Hong
Kong: The Chinese University Press, 2003) p. 144
11
Justin Yifu Lin, “Rural Reforms and Agricultural Growth
in China,” The American Economic Review 82, no. 1 (1992)
p. 38
12
Ibid., p. 38
13
Ibid., p. 40
14
Ibid., p. 36
15
Him Chung, China’s Rural Market Development in the
Reform Era (Aldershot, England: Ashgate, 2004) p. 46
16
Lin, p. 37
17
Jean C. Oi, “Two Decades of Rural Reform in China: An
Overview and Assessment,” The China Quarterly 159, Special
Issue (1999) p. 623
18
Ibid., pp. 622-623
19
Lin, p. 38 (Table 3)
20
Ibid., p. 38
21
Chung, p. 46
22
Lin et al., p. 145
23
Ibid., p. 145
24
Ibid., p. 145
25
Wu, p. 114
26
Ibid., p. 190
27
Ibid., p. 142
28
Gary H. Jefferson and Thomas G. Rawski, “Enterprise
Reform in Chinese Industry,” The Journal of Economic
Perspectives 8, no. 2 (1994) p. 50
1
81
82
Pamela Ban
David Dollar, “Economic Reform and Allocative
Efficiency in China’s State-Owned Industry,” Economic
Development and Cultural Change 39, no. 1 (1990) p. 92
30
Ibid., p. 89
31
Ibid., p. 104 (endnote)
32
Wu, p. 58
33
Ibid., p. 145
34
Robert Hsu, “Changing Conceptions of the Socialist
Enterprise in China, 1979-1988,” Modern China 15, no. 4
(1989) p. 512
35
Wu Zengxian, “How Successful Has State-Owned
Enterprise Reform Been in China?” Europe-Asia Studies 49,
no. 7 (1997) p. 1239
36
Hsu, p. 512
37
Wu, p. 146
38
Ibid., p. 147
39
Zengxian, p. 1239
40
Wu, p. 152
41
Ibid., p. 154
42
Ibid., p. 154
43
Zengxian, p. 1240
44
Shu Y. Ma, “The Chinese Route to Privatization: The
Evolution of the Shareholding System Option,” Asian Survey
38, no. 4 (1998) p. 381
45
Ibid., p. 382
46
Ibid., p. 382
47
Wu, p. 157
48
Ibid., p. 158
49
Ibid., p. 158
50
Thomas G. Rawski, “Chinese Industrial Reform:
Accomplishments, Prospects, and Implications,” The American
Economic Review 84, no. 2 (1994) p. 272
51
Wu, p. 185
52
Zengxian, p. 1242
53
Ibid., p. 1242
54
“Profits and Prophecies,” The Economist (21 October
2006) p. 88
55
Ibid., p. 88
56
Ibid., p. 88
57
Reaching for a Renaissance,” A Special Report on China
and its Region, The Economist (31 March 2007) p. 4
58
Wu, p. 292
59
Ibid., p. 293
29
THE CONCORD REVIEW
Ibid., p. 294
Ibid., p. 297
62
Ibid., p. 296
63
Ibid., p. 297
64
K.C. Fung, Hitomi Iizaka, & Sarah Tong, “Foreign
Direct Investment in China: Policy, Trend and Impact,” in
International Conference on China’s Economy in the 21st
Century held in Hong Kong, June 24-25, 2002 http://www.
hiebs.hku.hk/working_paper_updates/pdf/wp1049.pdf
65
Wu, p. 300
66
Ibid., p. 304
67
Ibid., p. 300
68
Ibid., p. 302
69
“The Export Juggernaut,” A Special Report on China and
its Region, The Economist (31 March 2007) p. 11
70
Ibid., p. 11
71
Oded Shenkar, The Chinese Century (Saddle River:
Wharton School Publishing, 2005) p. 9
72
Ibid., p. 3
73
Thomas Friedman, The World is Flat (New York: Farrar,
Straus, and Giroux, 2005) p. 10
74
“The Export Juggernaut,” p. 10
75
Ibid., p. 10
76
Ibid., p. 10
77
Lin et al., p. 194
78
“The Export Juggernaut,” p. 11
79
Ibid., p. 11
80
Ibid., p. 11
60
61
Bibliography
Chung, Him, China’s Rural Market Development in the
Reform Era Aldershot: Ashgate, 2004
Dollar, David, “Economic Reform and Allocative Efficiency
in China’s State-Owned Industry,” Economic Development and
Cultural Change 9, no. 1 (1990) pp. 89-105
“The Export Juggernaut,” A Special Report on China and its
Region, The Economist 31 March 2007, pp. 10-12
83
84
Pamela Ban
Friedman, Thomas, The World is Flat New York: Farrar,
Straus, and Giroux, 2005
Fung, K.C., Hitomi Iizaka, and Sarah Tong, “Foreign
Direct Investment in China: Policy, Trend and Impact,” in
International Conference on China’s Economy in the 21st
Century held in Hong Kong, June 24-25, 2002 <http://www.
hiebs.hku.hk/working_paper_updates/pdf/wp1049.pdf>
Hsu, Robert, “Changing Conceptions of the Socialist
Enterprise in China, 1979-1988,” Modern China 15, no. 4
(1989) pp. 499-524
Jefferson, Gary H., and Thomas G. Rawski, “Enterprise
Reform in Chinese Industry,” The Journal of Economic
Perspectives 8, no. 2 (1994) pp. 47-70
Lin, Justin Yifu, “Rural Reforms and Agricultural Growth in
China,” The American Economic Review 82, no. 1 (1992) pp.
34-51
Lin, Justin Yifu, Fang Cai, and Zhou Li, The China Miracle:
Development Strategy and Economic Reform Hong Kong: The
Chinese University Press, 2003
Ma, Shu Y., “The Chinese Route to Privatization: The
Evolution of the Shareholding System Option,” Asian Survey
38, no. 4 (1998) pp. 379-397
Oi, Jean C., “Two Decades of Rural Reform in China: An
Overview and Assessment,” The China Quarterly 159, Special
Issue (1999) pp. 616-628
“Profits and Prophecies,” The Economist 21 October 2006
p. 88
“Pudong Official Site,” Pudong Area New Government, 30
March 2007 <http://english.pudong.gov.cn/index.jsp>
Rawski, Thomas G., “Chinese Industrial Reform:
Accomplishments, Prospects, and Implications,” The American
Economic Review 84, no. 2 (1994) pp. 271-275
THE CONCORD REVIEW
“Reaching for a Renaissance,” A Special Report on China
and its Region, The Economist 31 March 2007, pp. 3-6
Shenkar, Oded, The Chinese Century Saddle River:
Wharton School Publishing, 2005
Wu, Jinglian, Understanding and Interpreting Chinese
Economic Reform Mason: Thomson Higher Education, 2005
Zengxian, Wu, “How Successful Has State-Owned Enterprise
Reform Been in China?” Europe-Asia Studies 49, no. 7 (1997)
pp. 1237-1262
Zweig, David, “Opposition to Change in Rural China: The
System of Responsibility and People’s Communes,” Asian
Survey 23, no. 7 (1983) pp. 879-900
85
86
Pamela Ban
email
22 May 2007
Dear Mr. Fitzhugh,
First I would like to thank you for deciding to
publish my essay on the Florida Ship Canal in this Summer’s issue
of The Concord Review. When I received the letter of notification
I was just ecstatic! It has been quite a few years since anyone
at my school has achieved this recognition and the faculty and
administration are already encouraging more students to submit
their history papers to The Concord Review.
I also want to update you on my plans for
next year; I will be attending Washington and Lee University in
Lexington, Virginia beginning in the Fall of 2007.
Thank you again for publishing my essay and
for creating The Concord Review and allowing students with a
passion for history to share their knowledge around the globe.
Sincerely,
Caroline Bovay
Oak Hall School
Gainesville, Florida