IN THE LATE 1980s the Chinese economy was a system in transition,
moving cautiously away from central planning and gradually adopting some
of the institutions and mechanisms of a market economy. The process of
economic reform began in earnest in 1979, after Chinese leaders
concluded that the Soviet-style system that had been in place since the
1950s was making little progress in improving the standard of living of
the Chinese people and also was failing to close the economic gap
between China and the industrialized nations.
The first major success of the economic reform program was the
introduction of the responsibility system of production in agriculture,
a policy that allowed farm families to work a piece of land under
contract and to keep whatever profits they earned. By 1984 the
responsibility system had dramatically increased food production, and
the government had eliminated the people's communes--the hallmark of
Chinese socialism for over twenty years. In most other sectors of the
economy the role of government was reduced, managers were given more
decision-making power, enterprises were encouraged to produce for
profit, the role of the private sector increased, and experimentation
with new forms of ownership began in the state sector. Constraints on
foreign trade were relaxed, and joint ventures with foreign firms were
officially encouraged as sources of modern technology and scarce foreign
exchange. With rising incomes, greater incentives, and rapid growth in
the service and light industrial sectors, the People's Republic of China
began to exhibit some of the traits of a consumer society.
Movement toward a market system, however, was complex and difficult,
and in 1987 the transition was far from complete. Relaxing restrictions
on economic activity quickly alleviated some of China's most pressing
economic difficulties, but it also gave rise to a new set of problems.
Inflation--the greatest fear of Chinese consumers--became a problem for
the first time since the early 1950s, and along with new opportunities
to seek profit came growing inequality in income distribution and new
temptations for crime, corruption, and Western cultural styles, regarded
by many older Chinese people as decadent and "spiritually
polluting." The state still owned and controlled the largest
nonagricultural enterprises, and the major industries were still
primarily guided by the central plan.
Thus, the Chinese economy in the late 1980s was very much a mixed
system. It could not be accurately described as either a centrally
planned economy or a market economy. The leadership was committed to
further expansion of the reform program as a requisite for satisfactory
economic growth, but at the same time it was compelled to keep a tight
grip on key aspects of the economy- -particularly inflation and grain
production--to prevent the emergence of overwhelming political
discontent. Under these circumstances, forces in the economic system
worked against each other, producing what the Chinese leadership called
internal "contradictions." On the one hand, the economy was no
longer tightly controlled by the state plan because of the large and
growing market sector. On the other hand, the market could not operate
efficiently because many commodities were still under government control
and most prices were still set or restricted by government agencies.
Under the leadership of Deng Xiaoping, the entire nation was
"riding the tiger"--making great progress but not entirely in
control--and therefore unable to stop the process without risk.
Despite the burst of progress in the 1980s, the Chinese economy still
shared many basic characteristics with the economies of other developing
countries. The gross national product per capita in 1986 was -Y849, or about US$228 (at the 1986 exchange rate), reflecting the
low average level of labor productivity. As in many countries that did
not begin sustained industrialization efforts until the middle of the
twentieth century, the majority of the Chinese labor force--over 60
percent--was still employed in agriculture, which produced around 30
percent of the value of national output. Agricultural work still was
performed primarily by hand. Modern equipment was in general use in
industry but was largely typified by outdated designs and low levels of
efficiency.
In other respects China's economy was quite different from those of
most developing nations. The most important difference was that the
Chinese economy--although in the midst of far-reaching changes--was
organized as a socialist system, directed by a central planning
structure. The predominance of state and collective ownership, firm
central control over the financial system, redistribution of resources
among regions, rationing of grain, and subsidized provision of housing
resulted in a pattern of income distribution that was much narrower than
those in almost all other developing countries. There was relatively
little true capitalism in the form of private ownership of productive
assets. Agricultural land was farmed under lease by farm households but
was formally owned by villages, towns, and townships--the collective
units that had replaced the rural commune system.
In the mid-1980s most Chinese were still very poor by American
standards, but several important measures indicated that the quality of
their lives was considerably better than implied by the level of gross
national product (GNP) per capita. According to World Bank data, in 1984
energy consumption per person was 485 kilograms of oil equivalent,
higher than that for any other country ranked as a low-income country
and greater than the average for lower middle-income countries. In 1983
the daily calorie supply per capita was 2,620--11 percent above the
basic requirement and nearly as high as the average for countries
classified as upper middle-income countries. Significantly, infant
mortality in 1985 was 39 per 1,000, well below the average for upper
middle-income countries, and life expectancy at birth was 69 years,
higher than the average for upper middle-income countries.
Despite the major economic gains made by China since 1949 and the
dramatic advances of the 1980s, serious imbalances and deficiencies have
persisted. Contributing to these deficiencies were the political turmoil
that disrupted the economy during the Cultural Revolution decade
(1966-76), insufficient flexibility in the planning process, and serious
inaccuracies in price structures. Power shortages, inadequate
transportation and communication networks, shortages of technicians and
other highly trained personnel, insufficient foreign exchange for
procurement of advanced technology from other countries, and inadequate
legal and administrative provisions for both foreign and domestic trade
further hindered modernization.
An important by-product of the reform program since the late 1970s
has been an enormous increase in the amount of information available on
the economy. The government collected and published basic national
economic data in the 1950s, but the centralized statistics-keeping
system broke down at the end of the 1950s, and very little statistical
information was available during the 1960s and early 1970s. It was not
until 1979 that the State Statistical Bureau ended the statistical
"blackout" with the publication of an economic statistical
communique. In subsequent years the State Statistical Bureau published
larger and more frequent compendia, including annual almanacs of the
economy and annual statistical yearbooks, which became progressively
more sophisticated and informative. In addition, most provincial-level
units and cities, as well as the major industries and economic sectors,
such as coal mining and agriculture, began to produce their own
specialized statistical yearbooks. In the early 1980s, numerous new
periodicals, many of which specialized in economic data and analysis,
started publication. Although Chinese statistical definitions and
practices still differed from those in the West in many respects and the
accuracy of some figures was called into doubt even by Chinese
economists, foreign analysts in 1987 had access to a rich and growing
body of data that would support extensive analysis of the Chinese
economy.
China - GENERAL NATURE OF THE ECONOMY
Throughout most of the nineteenth and twentieth centuries, as during
much of earlier Chinese history, the economy was barely able to meet the
basic needs of the country's huge population--the largest in the world.
In normal years the economy produced just about the amount of food
required to meet the minimum nutritional requirements of the populace.
In times of drought, flood, warfare, or civil disorder, there was not
enough food, and before 1949 such conditions often led to starvation on
a vast scale. Under the government of the People's Republic, food
shortages were countered by redistributing supplies within China and by
importing grain from abroad, which successfully averted famine except in
the catastrophic years of 1959, 1960, and 1961.
Despite formidable constraints and disruptions, the Chinese economy
was never stagnant. Production grew substantially between 1800 and 1949
and increased fairly rapidly after 1949. Before the 1980s, however,
production gains were largely matched by population growth, so that
productive capacity was unable to outdistance essential consumption
needs significantly, particularly in agriculture. Grain output in 1979
was about twice as large as in 1952, but so was the population. As a
result, little surplus was produced even in good years. Further, few
resources could be spared for investment in capital goods, such as
machinery, factories, mines, railroads, and other productive assets. The
relatively small size of the capital stock caused productivity per
worker to remain low, which in turn perpetuated the economy's inability
to generate a substantial surplus).
China's socialist system, with state ownership of most industry and
central control over planning and the financial system, has enabled the
government to mobilize whatever surplus was available and greatly
increase the proportion of the national economic output devoted to
investment. Western analysts estimated that investment accounted for
about 25 percent of GNP in the 30 years after 1949, a rate surpassed by
few other countries. Because of the comparatively low level of GNP,
however, even this high rate of investment secured only a small amount
of resources relative to the size of the country and the population. In
1978, for instance, only 16 percent of the GNP of the United States went
into gross investment, but this amounted to US$345.6 billion, whereas
the approximately 25 percent of China's GNP that was invested came to
about the equivalent of US$111 billion and had to serve a population 4.5
times the size of that in the United States. The limited resources
available for investment prevented China from rapidly producing or
importing advanced equipment. Technological development proceeded
gradually, and outdated equipment continued to be used as long as
possible. Consequently, many different levels of technology were in use
simultaneously. Most industries included some plants that were
comparable to modern Western facilities, often based on imported
equipment and designs. Equipment produced by Chinese factories was
generally some years behind standard Western designs. Agriculture
received a smaller share of state investment than industry and remained
at a much lower average level of technology and productivity. Despite a
significant increase in the availability of tractors, trucks, electric
pumps, and mechanical threshers, most agricultural activities were still
performed by people or animals.
Although the central administration coordinated the economy and
redistributed resources among regions when necessary, in practice most
economic activity was very decentralized, and there was relatively
little flow of goods and services between areas. About 75 percent of the
grain grown in China, for instance, was consumed by the families that
produced it. One of the most important sources of growth in the economy
was the improved ability to exploit the comparative advantages of each
locality by expanding transportation capacity. The communications and
transportation sectors were growing and improving but still could not
carry the volume of traffic required by a modern economy because of the
scarcity of investment funds and advanced technology.
Because of limited interaction among regions, the great variety of
geographic zones in China, and the broad spectrum of technologies in
use, areas differed widely in economic activities, organizational forms,
and prosperity. Within any given city, enterprises ranged from tiny,
collectively owned handicraft units, barely earning subsistencelevel
incomes for their members, to modern state-owned factories, whose
workers received steady wages plus free medical care, bonuses, and an
assortment of other benefits. The agricultural sector was diverse,
accommodating well-equipped, "specialized households" that
supplied scarce products and services to local markets; wealthy suburban
villages specializing in the production of vegetables, pork, poultry,
and eggs to sell in free markets in the nearby cities; fishing villages
on the seacoast; herding groups on the grasslands of Nei Monggol
Autonomous Region (Inner Mongolia); and poor, struggling grain-producing
villages in the arid mountains of Shaanxi and Gansu provinces. The
economy had progressed in major ways since 1949, but after four decades
experts in China and abroad agreed that it had a great distance yet to
go.
China - ECONOMIC POLICIES, 1949-80
Having restored a viable economic base, the leadership under Mao
Zedong, Zhou Enlai, and other revolutionary veterans was prepared to
embark on an intensive program of industrial growth and socialization.
For this purpose the administration adopted the Soviet economic model,
based on state ownership in the modern sector, large collective units in
agriculture, and centralized economic planning. The Soviet approach to
economic development was manifested in the First Five-Year Plan
(1953-57). As in the Soviet economy, the main objective was a high rate
of economic growth, with primary emphasis on industrial development at
the expense of agriculture and particular concentration on heavy
industry and capital-intensive technology. Soviet planners helped their
Chinese counterparts formulate the plan. Large numbers of Soviet
engineers, technicians, and scientists assisted in developing and
installing new heavy industrial facilities, including many entire plants
and pieces of equipment purchased from the Soviet Union. Government
control over industry was increased during this period by applying
financial pressures and inducements to convince owners of private,
modern firms to sell them to the state or convert them into joint
public-private enterprises under state control. By 1956 approximately
67.5 percent of all modern industrial enterprises were state owned, and
32.5 percent were under joint public-private ownership. No privately
owned firms remained. During the same period, the handicraft industries
were organized into cooperatives, which accounted for 91.7 percent of
all handicraft workers by 1956.
Agriculture also underwent extensive organizational changes. To
facilitate the mobilization of agricultural resources, improve the
efficiency of farming, and increase government access to agricultural
products, the authorities encouraged farmers to organize increasingly
large and socialized collective units. From the loosely structured, tiny
mutual aid teams, villages were to advance first to lower-stage,
agricultural producers' cooperatives, in which families still received
some income on the basis of the amount of land they contributed, and
eventually to advanced cooperatives, or collectives. In the advanced
producers' cooperatives, income shares were based only on the amount of
labor contributed. In addition, each family was allowed to retain a
small private plot on which to grow vegetables, fruit, and livestock for
its own use. The collectivization process began slowly but accelerated
in 1955 and 1956. In 1957 about 93.5 percent of all farm households had
joined advanced producers' cooperatives.
In terms of economic growth the First Five-Year Plan was quite
successful, especially in those areas emphasized by the Soviet-style
development strategy. A solid foundation was created in heavy industry.
Key industries, including iron and steel manufacturing, coal mining,
cement production, electricity generation, and machine building were
greatly expanded and were put on a firm, modern technological footing.
Thousands of industrial and mining enterprises were constructed,
including 156 major facilities. Industrial production increased at an
average annual rate of 19 percent between 1952 and 1957, and national
income grew at a rate of 9 percent a year.
Despite the lack of state investment in agriculture, agricultural
output increased substantially, averaging increases of about 4 percent a
year. This growth resulted primarily from gains in efficiency brought
about by the reorganization and cooperation achieved through
collectivization. As the First Five-Year Plan wore on, however, Chinese
leaders became increasingly concerned over the relatively sluggish
performance of agriculture and the inability of state trading companies
to increase significantly the amount of grain procured from rural units
for urban consumption.
China - The Great Leap Forward, 1958-60
Before the end of the First Five-Year Plan, the growing imbalance
between industrial and agricultural growth, dissatisfaction with
inefficiency, and lack of flexibility in the decision-making process
convinced the nation's leaders-- particularly Mao Zedong--that the
highly centralized, industry-biased Soviet model was not appropriate for
China. In 1957 the government adopted measures to shift a great deal of
the authority for economic decision making to the provincial-level,
county, and local administrations. In 1958 the Second Five-Year Plan
(1958-62), which was intended to continue the policies of the first
plan, was abandoned. In its place the leadership adopted an approach
that relied on spontaneous heroic efforts by the entire population to
produce a dramatic "great leap" in production for all sectors
of the economy at once. Further reorganization of agriculture was
regarded as the key to the endeavor to leap suddenly to a higher stage
of productivity. A fundamental problem was the lack of sufficient
capital to invest heavily in both industry and agriculture at the same
time. To overcome this problem, the leadership decided to attempt to
create capital in the agricultural sector by building vast irrigation
and water control works employing huge teams of farmers whose labor was
not being fully utilized. Surplus rural labor also was to be employed to
support the industrial sector by setting up thousands of small-scale,
low-technology, "backyard" industrial projects in farm units,
which would produce machinery required for agricultural development and
components for urban industries. Mobilization of surplus rural labor and
further improvements in agricultural efficiency were to be accomplished
by a "leap" to the final stage of agricultural
collectivization--the formation of people's communes.
People's communes were created by combining some 20 or 30 advanced
producers' cooperatives of 20,000 to 30,000 members on average, although
membership varied from as few as 6,000 to over 40,000 in some cases.
When first instituted, the communes were envisaged as combining in one
body the functions of the lowest level of local government and the
highest level of organization in agricultural production. Communes
consisted of three organizational levels: the central commune
administration; the production brigade (roughly equivalent to the
advanced producers' cooperatives, or a traditional rural village), and
the production team, which generally consisted of around thirty
families. At the inception of the Great Leap Forward, the communes were
intended to acquire all ownership rights over the productive assets of
their subordinate units and to take over most of the planning and
decision making for farm activities. Ideally, communes were to improve
efficiency by moving farm families into dormitories, feeding them in
communal mess halls, and moving whole teams of laborers from task to
task. In practice, this ideal, extremely centralized form of commune was
not instituted in most areas.
Ninety-eight percent of the farm population was organized into
communes between April and September of 1958. Very soon it became
evident that in most cases the communes were too unwieldy to carry out
successfully all the managerial and administrative functions that were
assigned to them. In 1959 and 1960, most production decisions reverted
to the brigade and team levels, and eventually most governmental
responsibilities were returned to county and township administrations.
Nonetheless, the commune system was retained and continued to be the
basic form of organization in the agricultural sector until the early
1980s.
During the Great Leap Forward, the industrial sector also was
expected to discover and use slack labor and productive capacity to
increase output beyond the levels previously considered feasible.
Political zeal was to be the motive force, and to "put politics in
command" enterprising party branches took over the direction of
many factories. In addition, central planning was relegated to a minor
role in favor of spontaneous, politically inspired production decisions
from individual units.
The result of the Great Leap Forward was a severe economic crisis. In
1958 industrial output did in fact "leap" by 55 percent, and
the agricultural sector gathered in a good harvest. In 1959, 1960, and
1961, however, adverse weather conditions, improperly constructed water
control projects, and other misallocations of resources that had
occurred during the overly centralized communization movement resulted
in disastrous declines in agricultural output. In 1959 and 1960, the
gross value of agricultural output fell by 14 percent and 13 percent,
respectively, and in 1961 it dropped a further 2 percent to reach the
lowest point since 1952. Widespread famine occurred, especially in rural
areas, according to 1982 census figures, and the death rate climbed from
1.2 percent in 1958 to 1.5 percent in 1959, 2.5 percent in 1960, and
then dropped back to 1.4 percent in 1961. From 1958 to 1961, over 14
million people apparently died of starvation, and the number of reported
births was about 23 million fewer than under normal conditions. The
government prevented an even worse disaster by canceling nearly all
orders for foreign technical imports and using the country's foreign
exchange reserves to import over 5 million tons of grain a year
beginning in 1960. Mines and factories continued to expand output
through 1960, partly by overworking personnel and machines but largely
because many new plants constructed during the First Five-Year Plan went
into full production in these years. Thereafter, however, the excessive
strain on equipment and workers, the effects of the agricultural crisis,
the lack of economic coordination, and, in the 1960s, the withdrawal of
Soviet assistance caused industrial output to plummet by 38 percent in
1961 and by a further 16 percent in 1962
China - Readjustment and Recovery: "Agriculture First," 1961-65
Faced with economic collapse in the early 1960s, the government
sharply revised the immediate goals of the economy and devised a new set
of economic policies to replace those of the Great Leap Forward. Top
priority was given to restoring agricultural output and expanding it at
a rate that would meet the needs of the growing population. Planning and
economic coordination were to be revived- -although in a less
centralized form than before the Great Leap Forward--so as to restore
order and efficient allocation of resources to the economy. The rate of
investment was to be reduced and investment priorities reversed, with
agriculture receiving first consideration, light industry second, and
heavy industry third.
In a further departure from the emphasis on heavy industrial
development that persisted during the Great Leap Forward, the government
undertook to mobilize the nation's resources to bring about
technological advancement in agriculture. Organizational changes in
agriculture mainly involved decentralization of production decision
making and income distribution within the commune structure. The role of
the central commune administration was greatly reduced, although it
remained the link between local government and agricultural producers
and was important in carrying out activities that were too large in
scale for the production brigades. Production teams were designated the
basic accounting units and were responsible for making nearly all
decisions concerning production and the distribution of income to their
members. Private plots, which had disappeared on some communes during
the Great Leap Forward, were officially restored to farm families.
Economic support for agriculture took several forms. Agricultural
taxes were reduced, and the prices paid for agricultural products were
raised relative to the prices of industrial supplies for agriculture.
There were substantial increases in supplies of chemical fertilizer and
various kinds of agricultural machinery, notably small electric pumps
for irrigation. Most of the modern supplies were concentrated in areas
that were known to produce "high and stable yields" in order
to ensure the best possible results.
In industry, a few key enterprises were returned to central state
control, but control over most enterprises remained in the hands of
provincial-level and local governments. This decentralization had taken
place in 1957 and 1958 and was reaffirmed and strengthened in the
1961-65 period. Planning rather than politics once again guided
production decisions, and material rewards rather than revolutionary
enthusiasm became the leading incentive for production. Major imports of
advanced foreign machinery, which had come to an abrupt halt with the
withdrawal of Soviet assistance starting in 1960, were initiated with
Japan and West European countries.
During the 1961-65 readjustment and recovery period, economic
stability was restored, and by 1966 production in both agriculture and
industry surpassed the peak levels of the Great Leap Forward period.
Between 1961 and 1966, agricultural output grew at an average rate of
9.6 percent a year. Industrial output was increased in the same years at
an average annual rate of 10.6 percent, largely by reviving plants that
had operated below capacity after the economic collapse in 1961. Another
important source of growth in this period was the spread of rural,
small-scale industries, particularly coal mines, hydroelectric plants,
chemical fertilizer plants, and agricultural machinery plants. The
economic model that emerged in this period combined elements of the
highly centralized, industrially oriented, Soviet-style system of the
First Five-Year Plan with aspects of the decentralization of ownership
and decision making that characterized the Great Leap Forward and with
the strong emphasis on agricultural development and balanced growth of
the "agriculture first" policy. Important changes in economic
policy occurred in later years, but the basic system of ownership,
decision-making structure, and development strategy that was forged in
the early 1960s was not significantly altered until the reform period of
the 1980s.
China - The Cultural Revolution, 1966-76
The Cultural Revolution was set in motion by Mao Zedong in 1966 and
called to a halt in 1968, but the atmosphere of radical leftism
persisted until Mao's death and the fall of the Gang of Four in 1976.
During this period, there were several distinct phases of economic
policy.
High Tide of the Cultural Revolution, 1966-68
The Cultural Revolution, unlike the Great Leap Forward, was primarily
a political upheaval and did not produce major changes in official
economic policies or the basic economic model. Nonetheless, its
influence was felt throughout urban society, and it profoundly affected
the modern sector of the economy. Agricultural production stagnated, but
in general the rural areas experienced less turmoil than the cities.
Production was reduced in the modern nonagricultural sectors in several
ways. The most direct cause of production halts was the political
activity of students and workers in the mines and factories. A second
cause was the extensive disruption of transportation resulting from the
requisitioning of trains and trucks to carry Red Guards around the
country. Output at many factories suffered from shortages of raw
materials and other supplies. A third disruptive influence was that the
direction of factories was placed in the hands of revolutionary
committees, consisting of representatives from the party, the workers,
and the People's Liberation Army, whose members often had little
knowledge of either management or the enterprise they were supposed to
run. In addition, virtually all engineers, managers, scientists,
technicians, and other professional personnel were
"criticized," demoted, "sent down" to the
countryside to "participate in labor," or even jailed, all of
which resulted in their skills and knowledge being lost to the
enterprise. The effect was a 14-percent decline in industrial production
in 1967. A degree of order was restored by the army in late 1967 and
1968, and the industrial sector returned to a fairly high rate of growth
in 1969.
Other aspects of the Cultural Revolution had more far-reaching
effects on the economy. Imports of foreign equipment, required for
technological advancement, were curtailed by rampant xenophobia.
Probably the most serious and long-lasting effect on the economy was the
dire shortage of highly educated personnel caused by the closing of the
universities. China's ability to develop new technology and absorb
imported technology would be limited for years by the hiatus in higher
education.
Resumption of Systematic Growth, 1970-74
As political stability was gradually restored, a renewed drive for
coordinated, balanced development was set in motion under the leadership
of Premier Zhou Enlai. To revive efficiency in industry, Chinese
Communist Party committees were returned to positions of leadership over
the revolutionary committees, and a campaign was carried out to return
skilled and highly educated personnel to the jobs from which they had
been displaced during the Cultural Revolution. Universities began to
reopen, and foreign contacts were expanded. Once again the economy
suffered from imbalances in the capacities of different industrial
sectors and an urgent need for increased supplies of modern inputs for
agriculture. In response to these problems, there was a significant
increase in investment, including the signing of contracts with foreign
firms for the construction of major facilities for chemical fertilizer
production, steel finishing, and oil extraction and refining. The most
notable of these contracts was for thirteen of the world's largest and
most modern chemical fertilizer plants. During this period, industrial
output grew at an average rate of 8 percent a year.
Agricultural production declined somewhat in 1972 because of poor
weather but increased at an average annual rate of 3.8 percent for the
period as a whole. The party and state leadership undertook a general
reevaluation of development needs, and Zhou Enlai presented the
conclusions in a report to the Fourth National People's Congress in
January 1975. In it he called for the Four Modernizations. Zhou
emphasized the mechanization of agriculture and a comprehensive
two-stage program for the modernization of the entire economy by the end
of the century.
The Gang of Four, 1974-76
During the early and mid-1970s, the radical group later known as the
Gang of Four attempted to dominate the power center through their
network of supporters and, most important, through their control of the
media. More moderate leaders, however, were developing and promulgating
a pragmatic program for rapid modernization of the economy that
contradicted the set of policies expressed in the media. Initiatives by
Zhou Enlai and Deng Xiaoping were vehemently attacked in the press and
in political campaigns as "poisonous weeds." Using official
news organs, the Gang of Four advocated the primacy of nonmaterial,
political incentives, radical reduction of income differences,
elimination of private farm plots, and a shift of the basic accounting
unit up to the brigade level in agriculture. They opposed the
strengthening of central planning and denounced the use of foreign
technology.
In the face of such contradictory policy pronouncements and uncertain
political currents, administrators and economic decision makers at all
levels were virtually paralyzed. Economic activity slowed, and the
incipient modernization program almost ground to a halt. Uncertainty and
instability were exacerbated by the death of Zhou Enlai in January 1976
and the subsequent second purge of Deng Xiaoping in April. The effects
of the power struggle and policy disputes were compounded by the
destruction resulting from the Tangshan earthquake in July 1976. Output
for the year in both industry and agriculture showed no growth over
1975. The interlude of uncertainty finally ended when the Gang of Four
was arrested in October--one month after Mao's death.
China - The Post-Mao Interlude, 1976-78
At the milestone Third Plenum of the National Party Congress's
Eleventh Central Committee in December 1978, the party leaders decided
to undertake a program of gradual but fundamental reform of the economic
system. They concluded that the Maoist version of the centrally planned
economy had failed to produce efficient economic growth and had caused
China to fall far behind not only the industrialized nations of the West
but also the new industrial powers of Asia: Japan, the Republic of
Korea, Singapore, Taiwan, and Hong Kong. In the late 1970s, while Japan
and Hong Kong rivaled European countries in modern technology, China's
citizens had to make do with barely sufficient food supplies, rationed
clothing, inadequate housing, and a service sector that was inadequate
and inefficient. All of these shortcomings embarrassed China
internationally.
The purpose of the reform program was not to abandon communism but to
make it work better by substantially increasing the role of market
mechanisms in the system and by reducing--not eliminating-- government
planning and direct control. The process of reform was incremental. New
measures were first introduced experimentally in a few localities and
then were popularized and disseminated nationally if they proved
successful. By 1987 the program had achieved remarkable results in
increasing supplies of food and other consumer goods and had created a
new climate of dynamism and opportunity in the economy. At the same
time, however, the reforms also had created new problems and tensions,
leading to intense questioning and political struggles over the
program's future.
The Period of Readjustment, 1979-81
The first few years of the reform program were designated the
"period of readjustment," during which key imbalances in the
economy were to be corrected and a foundation was to be laid for a
well-planned modernization drive. The schedule of Hua Guofeng's ten-year
plan was discarded, although many of its elements were retained. The
major goals of the readjustment process were to expand exports rapidly;
overcome key deficiencies in transportation, communications, coal, iron,
steel, building materials, and electric power; and redress the imbalance
between light and heavy industry by increasing the growth rate of light
industry and reducing investment in heavy industry. Agricultural
production was stimulated in 1979 by an increase of over 22 percent in
the procurement prices paid for farm products.
The central policies of the reform program were introduced
experimentally during the readjustment period. The most successful
reform policy, the contract responsibility system of production in
agriculture, was suggested by the government in 1979 as a way for poor
rural units in mountainous or arid areas to increase their incomes. The
responsibility system allowed individual farm families to work a piece
of land for profit in return for delivering a set amount of produce to
the collective at a given price. This arrangement created strong
incentives for farmers to reduce production costs and increase
productivity. Soon after its introduction the responsibility system was
adopted by numerous farm units in all sorts of areas.
Agricultural production was also stimulated by official encouragement
to establish free farmers' markets in urban areas, as well as in the
countryside, and by allowing some families to operate as
"specialized households," devoting their efforts to producing
a scarce commodity or service on a profit-making basis.
In industry, the main policy innovations increased the autonomy of
enterprise managers, reduced emphasis on planned quotas, allowed
enterprises to produce goods outside the plan for sale on the market,
and permitted enterprises to experiment with the use of bonuses to
reward higher productivity. The government also tested a fundamental
change in financial procedures with a limited number of state-owned
units: rather than remitting all of their profits to the state, as was
normally done, these enterprises were allowed to pay a tax on their
profits and retain the balance for reinvestment and distribution to
workers as bonuses.
The government also actively encouraged the establishment of
collectively owned and operated industrial and service enterprises as a
means of soaking up some of the unemployment among young people and at
the same time helping to increase supplies of light industrial products.
Individual enterprise--true capitalism--also was allowed, after having
virtually disappeared during the Cultural Revolution, and independent
cobblers, tailors, tinkers, and vendors once again became common sights
in the cities. Foreign-trade procedures were greatly eased, allowing
individual enterprises and administrative departments outside the
Ministry of Foreign Trade (which became the Ministry of Foreign Economic
Relations and Trade in 1984) to engage in direct negotiations with
foreign firms. A wide range of cooperation, trading, and credit
arrangements with foreign firms were legalized so that China could enter
the mainstream of international trade.
Reform and Opening, Beginning in 1982
The period of readjustment produced promising results, increasing
incomes substantially; raising the availability of food, housing, and
other consumer goods; and generating strong rates of growth in all
sectors except heavy industry, which was intentionally restrained. On
the strength of these initial successes, the reform program was
broadened, and the leadership under Deng Xiaoping frequently remarked
that China's basic policy was "reform and opening," that is,
reform of the economic system and opening to foreign trade.
In agriculture the contract responsibility system was adopted as the
organizational norm for the entire country, and the commune structure
was largely dismantled. By the end of 1984, approximately 98 percent of
all farm households were under the responsibility system, and all but a
handful of communes had been dissolved. The communes' administrative
responsibilities were turned over to township and town governments, and
their economic roles were assigned to townships and villages. The role
of free markets for farm produce was further expanded and, with
increased marketing possibilities and rising productivity, farm incomes
rose rapidly.
In industry the complexity and interrelation of production activities
prevented a single, simple policy from bringing about the kind of
dramatic improvement that the responsibility system achieved in
agriculture. Nonetheless, a cluster of policies based on greater
flexibility, autonomy, and market involvement significantly improved the
opportunities available to most enterprises, generated high rates of
growth, and increased efficiency. Enterprise managers gradually gained
greater control over their units, including the right to hire and fire,
although the process required endless struggles with bureaucrats and
party cadres. The practice of remitting taxes on profits and retaining
the balance became universal by 1985, increasing the incentive for
enterprises to maximize profits and substantially adding to their
autonomy. A change of potentially equal importance was a shift in the
source of investment funds from government budget allocations, which
carried no interest and did not have to be repaid, to interest-bearing
bank loans. As of 1987 the interest rate charged on such loans was still
too low to serve as a check on unproductive investments, but the
mechanism was in place.
The role of foreign trade under the economic reforms increased far
beyond its importance in any previous period. Before the reform period,
the combined value of imports and exports had seldom exceeded 10 percent
of national income. In 1980 it was 15 percent, in 1984 it was 21
percent, and in 1986 it reached 35 percent. Unlike earlier periods, when
China was committed to trying to achieve self-sufficiency, under Deng
Xiaoping foreign trade was regarded as an important source of investment
funds and modern technology. As a result, restrictions on trade were
loosened further in the mid-1980s, and foreign investment was legalized.
The most common foreign investments were joint ventures between foreign
firms and Chinese units. Sole ownership by foreign investors also became
legal, but the feasibility of such undertakings remained questionable.
The most conspicuous symbols of the new status of foreign trade were
the four coastal special economic zones, which were created in 1979 as
enclaves where foreign investment could receive special treatment. Three
of the four zones--the cities of Shenzhen, Zhuhai, and Shantou--were
located in Guangdong Province, close to Hong Kong. The fourth, Xiamen,
in Fujian Province, was directly across the strait from Taiwan. More
significant for China's economic development was the designation in
April 1984 of economic development zones in the fourteen largest coastal
cities- -including Dalian, Tianjin, Shanghai, and Guangzhou--all of
which were major commercial and industrial centers. These zones were to
create productive exchanges between foreign firms with advanced
technology and major Chinese economic networks.
Domestic commerce also was stimulated by the reform policies, which
explicitly endeavored to enliven the economy by shifting the primary
burden of the allocation of goods and services from the government plan
to the market. Private entrepreneurship and freemarket activities were
legalized and encouraged in the 1980s, although the central authorities
continuously had to fight the efforts of local government agencies to
impose excessive taxes on independent merchants. By 1987 the state-owned
system of commercial agencies and retail outlets coexisted with a
rapidly growing private and collectively owned system that competed with
it vigorously, providing a wider range of consumption choices for
Chinese citizens than at any previous time.
Although the reform program achieved impressive successes, it also
gave rise to several serious problems. One problem was the challenge to
party authority presented by the principles of freemarket activity and
professional managerial autonomy. Another difficulty was a wave of
crime, corruption, and--in the minds of many older people--moral
deterioration caused by the looser economic and political climate. The
most fundamental tensions were those created by the widening income
disparities between the people who were "getting rich" and
those who were not and by the pervasive threat of inflation. These
concerns played a role in the political struggle that culminated in
party general secretary Hu Yaobang's forced resignation in 1987.
Following Hu's resignation, the leadership engaged in an intense debate
over the future course of the reforms and how to balance the need for
efficiency and market incentives with the need for government guidance
and control. The commitment to further reform was affirmed, but its
pace, and the emphasis to be placed on macroeconomic and microeconomic
levers, remained objects of caution.
China - Roles of the Government and the Party in the Economy
Under China's socialist political and economic system, the government
was explicitly responsible for planning and managing the national
economy. The State Constitution of 1982 specifies that the state is to
guide the country's economic development and that the State Council is
to direct its subordinate bodies in drawing up and carrying out the
national economic plan and the state budget. A major portion of the
governmental apparatus was devoted to managing the economy; all but a
few of the more than 100 ministries, commissions, administrations,
bureaus, academies, and corporations under the State Council were
concerned with economic matters.
Each significant economic sector was supervised and controlled by one
or more of these organizations, which included the People's Bank of
China, State Planning Commission, State Economic Commission, State
Machine-Building Industry Commission, and the ministries of agriculture,
animal husbandry, and fishery; coal industry; commerce; communications;
finance; light industry; metallurgical industry; petroleum industry;
railways; textile industry; and water resources and electric power.
Several aspects of the economy were administered by specialized
departments under the State Council, including the State Statistical
Bureau, General Administration of Civil Aviation of China, and China
Travel and Tourism Bureau. Each of the economic organizations under the
State Council directed the units under its jurisdiction through
subordinate offices at the provincial and local levels.
Economic policies and decisions adopted by the National People's
Congress and the State Council were passed on to the economic
organizations under the State Council, which incorporated them into the
plans for the various sectors of the economy. Economic plans and
policies were implemented by a variety of direct and indirect control
mechanisms. Direct control was exercised by designating specific
physical output quotas and supply allocations for some goods and
services. Indirect instruments--also called "economic
levers"--operated by affecting market incentives. These included
levying taxes, setting prices for products and supplies, allocating
investment funds, monitoring and controlling financial transactions by
the banking system, and controlling the allocation of scarce key
resources, such as skilled labor, electric power, transportation, steel,
and chemical fertilizer. A major objective of the reform program was to
reduce the use of direct controls and to increase the role of indirect
economic levers. Major state-owned enterprises still received detailed
plans specifying physical quantities of key inputs and products from
their ministries. Even these units, however, were increasingly affected
by prices and allocations that were determined through market
interaction and only indirectly influenced by the central plan.
By 1987 the majority of state-owned industrial enterprises, which
were managed at the provincial level or below, were partially regulated
by a combination of specific allocations and indirect controls, but they
also produced goods outside the plan for sale in the market. Important,
scarce resources--for example, engineers or finished steel--might be
assigned to this kind of unit in exact numbers. Less critical
assignments of personnel and materials would be authorized in a general
way by the plan, but with procurement arrangements left up to the
enterprise management. Enterprises had increasing discretion over the
quantities of inputs purchased, the sources of inputs, the variety of
products manufactured, and the production process.
Collectively owned units and the agricultural sector were regulated
primarily by indirect instruments. Each collective unit was
"responsible for its own profit and loss," and the prices of
its inputs and products provided the major production incentives.
Consumer spending was subject to a limited degree of direct
government influence but was primarily determined by the basic market
forces of income levels and commodity prices. Before the reform period,
key goods were rationed when they were in short supply, but by the
mid-1980s availability had increased to the point that rationing was
discontinued for everything except grain, which could also be purchased
in the free markets.
Foreign trade was supervised by the Ministry of Foreign Economic
Relations and Trade, General Administration of Customs, and Bank of
China, the foreign exchange arm of the Chinese banking system, which
controlled access to the scarce foreign currency required for imports.
Because of the reduced restrictions on foreign trade, however, there
were broad opportunities for individual work units to engage in
exchanges with foreign firms without much interference from official
agencies.
The role of the government in the economy was buttressed by the
pervasive influence of the Chinese Communist Party. The structure of the
party organization paralleled that of the government but also extended
below the lowest level of government into individual work units.
Important economic decision makers at all levels, from the members of
the State Council down to the managers of factories, either were party
members themselves or worked closely with colleagues who were party
members. The party served as a powerful supplementary network for
transmitting and implementing the economic goals and policies of the
government.
Although the government dominated the economy, the extent of its
control was limited by the sheer volume of economic activity.
Furthermore, the concept of government supervision of the economy had
changed--at least in the minds of the advocates of reform--from one of
direct but stifling state control to one of indirect guidance of a more
dynamic economy.
China - Agriculture
In the late 1980s, China remained a predominantly agricultural
country. As of 1985 about 63 percent of the population lived in rural
areas, and nearly 63 percent of the national labor force was engaged in
agriculture. Modern technology had spread slowly in the vast farm areas,
and the availability of modern supplies was less than adequate, causing
growth in agricultural output to lag behind production increases in the
rest of the economy. The proportion of GNP produced by agriculture
declined from over 43 percent in the early 1950s to about 29 percent in
1985. The low agricultural growth rate as compared with other sectors of
the economy reflected the fact that the average farmer had far less
machinery and electric power and fewer other modern production aids to
work with than the average worker in industry. Under the responsibility
system, farm households and collective organizations purchased large
amounts of new machinery, particularly small tractors and trucks. The
horsepower of agricultural machinery per farmer increased by almost 30
percent between 1979 and 1985 but still came to less than 1 horsepower
per person.
Before the early 1980s, most of the agricultural sector was organized
according to the three-tier commune system. There were over 50,000
people's communes, most containing around 30,000 members. Each commune
was made up of about sixteen production brigades, and each production
brigade was composed of around seven production teams. The production
teams were the basic agricultural collective units. They corresponded to
small villages and typically included about 30 households and 100 to 250
members. The communes, brigades, and teams owned all major rural
productive assets and provided nearly all administrative, social, and
commercial services in the countryside. The largest part of farm family
incomes consisted of shares of net team income, distributed to members
according to the amount of work each had contributed to the collective
effort. Farm families also worked small private plots and were free to
sell or consume their products.
By the end of 1984, approximately 98 percent of the old production
teams had adopted the contract responsibility system, and all but 249
communes had been dissolved, their governmental functions passed on to
91,000 township and town governments. Production team organizations were
replaced by 940,000 village committees. Under the responsibility system,
farm families no longer devoted most of their efforts to collective
production but instead generally signed contracts with the village or
town to cultivate a given crop on a particular piece of land. After
harvest a certain amount of the crop had to be sold to the unit at a
predetermined price, and any output beyond that amount was the property
of the family, either to be sold in the market or to be consumed. Beyond
the amount contracted for delivery to the collective, farmers were
allowed to determine for themselves what and how to produce.
Market activity played a central role in the rural economy of the
1980s. Farmers sold a growing share of their produce in rural or urban
free markets and purchased many of the inputs that had formerly been
supplied by the team or brigade. A prominent new institution that
thrived in the market environment was the "specialized
household." Specialized households operated in the classic pattern
of the entrepreneur, buying or renting equipment to produce a good or
service that was in short supply locally. Some of the most common
specialties were trucking, chicken raising, pig raising, and technical
agricultural services, such as irrigation and pest control. Many of the
specialized households became quite wealthy relative to the average
farmer.
The new economic climate and the relaxation of restrictions on the
movements of rural residents gave rise to numerous opportunities for
profit-making ventures in the countryside. Towns, villages, and groups
of households referred to as "rural economic unions"
established small factories, processing operations, construction teams,
catering services, and other kinds of nonagricultural concerns. Many of
these organizations had links with urban enterprises that found the
services of these rural units to be less expensive and more efficient
than those of their formal urban counterparts.
The growth of these nonagricultural enterprises in the countryside
created a large number of new jobs, making it possible for many workers
who were no longer needed in agriculture to "leave the land but
stay in the country," significantly changing the structure of the
rural economy and increasing rural incomes. In 1986 nonagricultural
enterprises in the countryside employed 21 percent of the rural labor
force and for the first time produced over half the value of rural
output.
Although the chief characteristic of the new rural system was
household farming for profit, collective organizations still played a
major role. Agricultural land still was owned by township or town
governments, which determined the crops farmers contracted to grow and
the financial terms of the contracts. Many township, town, and village
governments also engaged in major entrepreneurial undertakings,
establishing factories, processing mills, brick works, and other
large-scale enterprises. Finally, the maintenance and operation of
public works, such as irrigation systems, power plants, schools, and
clinics, generally still was regarded as the responsibility of the
collective administrations.
Four percent of the nation's farmland was cultivated by state farms,
which employed 4.9 million people in 1985. State farms were owned and
operated by the government much in the same way as an industrial
enterprise. Management was the responsibility of a director, and workers
were paid set wages, although some elements of the responsibility system
were introduced in the mid-1980s. State farms were scattered throughout
China, but the largest numbers were located in frontier or remote areas,
including Xinjiang-Uygur Autonomous Region in the northwest, Nei Monggol
Autonomous Region, the three northeastern provinces of Heilongjiang,
Jilin, and Liaoning and the southeastern provinces of Guangdong, Fujian,
and Jiangxi.
China - Industry
The industrial sector employed only about 17 percent of the labor
force in 1985 but, as a result of much higher labor productivity than
the agricultural sector, accounted for over 46 percent of national
income. Industrial units were very diverse in size and technological
sophistication, ranging from tiny handicraft manufacturing enterprises
to giant modern complexes producing such goods as steel, chemical
fertilizer, and synthetic fibers. The majority of the country's large
industrial units were clustered in the major industrial centers in the
northeast, the Beijing-Tianjin-Tangshan area, the Chang Jiang (Yangtze
River) Valley, and Shanghai. Small and medium-size units were found
throughout the country, and a number of first-rank plants were located
far from the leading cities. Ownership of industrial enterprises fell
into three general categories: state ownership, urban collective
ownership, and rural collective ownership. Industry was dominated by the
state-owned sector, which included the largest, most technically
advanced, and most important enterprises.
In 1985 state-owned enterprises produced 70 percent of national
industrial output by value, held 75 percent of fixed industrial assets,
and employed 46 percent of the industrial labor force (including rural
industrial enterprises). Although all of these units were owned by
"the state" in the abstract sense, operational control and
effective ownership of specific enterprises were divided among the
different levels of government. A few of the largest enterprises were
under the direct authority of their respective ministries in the central
government. Most major enterprises were owned by the province,
autonomous region, or special municipality where they were located or
were subject to shared control by the central ministry and the
provincial-level government. Small and medium-size units usually were
owned by city, prefecture, county, or town governments. Control of some
enterprises was shared with higher administrative levels.
Workers in state-owned enterprises were paid regular wages according
to an established pay scale, as well as bonuses that were supposed to be
related to personal or enterprise performance or both. In addition, they
received a number of important benefits, including free health care,
subsidized housing, and subsidies for such work-related expenses as
special clothing and commuting costs. The average income of industrial
workers was considerably higher than that of most farmers and was much
more stable.
Urban, collectively owned enterprises (owned by the workers) for the
most part were small units equipped with relatively little machinery.
Many of these units were engaged in handicraft production or other
labor-intensive activities, such as manufacturing furniture or
assembling simple electrical items. In the late 1970s and early 1980s,
the government promoted them as a means of using surplus labor to
increase supplies of consumer and export goods. By 1985 urban collective
industrial enterprises employed over 17 million people, 20 percent of
the total industrial labor force. These enterprises held only 13 percent
of all industrial fixed assets but produced 19 percent of total
industrial output value.
Rural, collectively owned industrial enterprises--commonly referred
to as "township enterprises"--were the most rapidly growing
portion of the industrial sector in the mid-1980s. The government
regarded them as a means of expanding industrialization (without further
taxing the overcrowded major urban centers), alleviating rural
unemployment, and increasing supplies of industrial products in rural
areas. Most of the township enterprises were operated by township and
town governments, but a large number of very small units were operated
by private cooperative organizations called "rural economic
unions." In 1985 township enterprises employed 30 million workers,
over a third of the total industrial labor force. The value of their
fixed assets, however, was only 12 percent of the national total, and
their output value came to less than 10 percent of the national total.
Nonetheless, in 1985 their income grew by 44 percent over the 1984
levels. The most common products of township industries were building
materials, agricultural machinery, textiles, and processed foods.
China - The Banking System
The history of the Chinese banking system has been somewhat
checkered. Nationalization and consolidation of the country's banks
received the highest priority in the earliest years of the People's
Republic, and banking was the first sector to be completely socialized.
In the period of recovery after the Chinese civil war (1949-52), the
People's Bank of China moved very effectively to halt raging inflation
and bring the nation's finances under central control. Over the course
of time, the banking organization was modified repeatedly to suit
changing conditions and new policies.
The banking system was centralized early on under the Ministry of
Finance, which exercised firm control over all financial services,
credit, and the money supply. During the 1980s the banking system was
expanded and diversified to meet the needs of the reform program, and
the scale of banking activity rose sharply. New budgetary procedures
required state enterprises to remit to the state only a tax on income
and to seek investment funds in the form of bank loans. Between 1979 and
1985, the volume of deposits nearly tripled and the value of bank loans
rose by 260 percent. By 1987 the banking system included the People's
Bank of China, Agricultural Bank, Bank of China (which handled foreign
exchange matters), China Investment Bank, China Industrial and
Commercial Bank, People's Construction Bank, Communications Bank,
People's Insurance Company of China, rural credit cooperatives, and
urban credit cooperatives.
The People's Bank of China was the central bank and the foundation of
the banking system. Although the bank overlapped in function with the
Ministry of Finance and lost many of its responsibilities during the
Cultural Revolution, in the 1970s it was restored to its leading
position. As the central bank, the People's Bank of China had sole
responsibility for issuing currency and controlling the money supply. It
also served as the government treasury, the main source of credit for
economic units, the clearing center for financial transactions, the
holder of enterprise deposits, the national savings bank, and a
ubiquitous monitor of economic activities.
Another financial institution, the Bank of China, handled all
dealings in foreign exchange. It was responsible for allocating the
country's foreign exchange reserves, arranging foreign loans, setting
exchange rates for China's currency, issuing letters of credit, and
generally carrying out all financial transactions with foreign firms and
individuals. The Bank of China had offices in Beijing and other cities
engaged in foreign trade and maintained overseas offices in major
international financial centers, including Hong Kong, London, New York,
Singapore, and Luxembourg.
The Agricultural Bank was created in the 1950s to facilitate
financial operations in the rural areas. The Agricultural Bank provided
financial support to agricultural units. It issued loans, handled state
appropriations for agriculture, directed the operations of the rural
credit cooperatives, and carried out overall supervision of rural
financial affairs. The Agricultural Bank was headquartered in Beijing
and had a network of branches throughout the country. It flourished in
the late 1950s and mid-1960s but languished thereafter until the late
1970s, when the functions and autonomy of the Agricultural Bank were
increased substantially to help promote higher agricultural production.
In the 1980s it was restructured again and given greater authority in
order to support the growth and diversification of agriculture under the
responsibility system.
The People's Construction Bank managed state appropriations and loans
for capital construction. It checked the activities of loan recipients
to ensure that the funds were used for their designated construction
purpose. Money was disbursed in stages as a project progressed. The
reform policy shifted the main source of investment funding from the
government budget to bank loans and increased the responsibility and
activities of the People's Construction Bank.
Rural credit cooperatives were small, collectively owned savings and
lending organizations that were the main source of small-scale financial
services at the local level in the countryside. They handled deposits
and short-term loans for individual farm families, villages, and
cooperative organizations. Subject to the direction of the Agricultural
Bank, they followed uniform state banking policies but acted as
independent units for accounting purposes. In 1985 rural credit
cooperatives held total deposits of -Y72.5 billion.
Urban credit cooperatives were a relatively new addition to the
banking system in the mid-1980s, when they first began widespread
operations. As commercial opportunities grew in the reform period, the
thousands of individual and collective enterprises that sprang up in
urban areas created a need for small-scale financial services that the
formal banks were not prepared to meet. Bank officials therefore
encouraged the expansion of urban credit cooperatives as a valuable
addition to the banking system. In 1986 there were more than 1,100 urban
credit cooperatives, which held a total of -Y3.7 billion in deposits and
made loans worth -Y1.9 billion.
In the mid-1980s the banking system still lacked some of the services
and characteristics that were considered basic in most countries.
Interbank relations were very limited, and interbank borrowing and
lending was virtually unknown. Checking accounts were used by very few
individuals, and bank credit cards did not exist. In 1986 initial steps
were taken in some of these areas. Interbank borrowing and lending
networks were created among twenty-seven cities along the Chang Jiang
and among fourteen cities in north China. Interregional financial
networks were created to link banks in eleven leading cities all over
China, including Shenyang, Guangzhou, Wuhan, Chongqing, and Xi'an and
also to link the branches of the Agricultural Bank. The first Chinese
credit card, the Great Wall Card, was introduced in June 1986 to be used
for foreign exchange transactions. Another financial innovation in 1986
was the opening of China's first stock exchanges since 1949. Small stock
exchanges began operations somewhat tentatively in Shenyang, Liaoning
Province, in August 1986 and in Shanghai in September 1986.
Throughout the history of the People's Republic, the banking system
has exerted close control over financial transactions and the money
supply. All government departments, publicly and collectively owned
economic units, and social, political, military, and educational
organizations were required to hold their financial balances as bank
deposits. They were also instructed to keep on hand only enough cash to
meet daily expenses; all major financial transactions were to be
conducted through banks. Payment for goods and services exchanged by
economic units was accomplished by debiting the account of the
purchasing unit and crediting that of the selling unit by the
appropriate amount. This practice effectively helped to minimize the
need for currency.
Since 1949 China's leaders have urged the Chinese people to build up
personal savings accounts to reduce the demand for consumer goods and
increase the amount of capital available for investment. Small branch
offices of savings banks were conveniently located throughout the urban
areas. In the countryside savings were deposited with the rural credit
cooperatives, which could be found in most towns and villages. In 1986
savings deposits for the entire country totaled over -Y223.7 billion.
China - LIVING STANDARDS
Income differences in China since the 1950s have been much smaller
than in most other countries. There was never any attempt, however, at
complete equalization, and a wide range of income levels remained.
Income differences grew even wider in the 1980s as the economic reform
policies opened up new income opportunities. More than two-thirds of all
urban workers were employed in state-owned units, which used an
eight-grade wage system. The pay for each grade differed from one
industry to another, but generally workers in the most senior grades
earned about three times as much as beginning workers, senior managers
could earn half again as much as senior workers, and engineers could
earn twice as much as senior workers. In 1985 the average annual income
of people employed in state-owned units was -Y1,213. An important
component of workers' pay was made up of bonuses and subsidies. In 1985
bonuses contributed 13 percent of the incomes of workers in state-owned
units; subsidies for transportation, food, and clothing added another 15
percent. One of the most important subsidies--one that did not appear in
the income figures--was for housing, nearly all of which was owned and
allocated by the work unit and rented to unit members at prices well
below real value. In 1985 urban consumers spent just over 1 percent of
their incomes on housing.
The 27 percent of the urban labor force that was employed in
collectively owned enterprises earned less on average than workers in
state-owned units. The income of workers in collectively owned
enterprises consisted of a share of the profit earned by the enterprise.
Most such enterprises were small, had little capital, and did not earn
large profits. Many were engaged in traditional services, handicrafts,
or small-scale, part-time assembly work. In 1985 workers in urban
collective units earned an average annual income of -Y968. In the more
open commercial environment of the 1980s, a small but significant number
of people earned incomes much larger than those in regular state-owned
and collectively owned units. Employees of enterprises run by overseas
Chinese, for instance, earned an average of -Y2,437 in 1985, over twice
the average income of workers in state-owned units.
The small but dynamic domestic private sector also produced some
lucrative opportunities. Private, part-time schools, which appeared in
large numbers in the mid-1980s, offered moonlighting work to university
professors, who could double or triple their modest incomes if they were
from prestigious institutions and taught desirable subjects, such as
English, Japanese, or electronics. Small-scale entrepreneurs could earn
considerably more in the free markets than the average income. Business
people who served as a liaison between foreign firms and the domestic
economy could earn incomes many times higher than those of the best-paid
employees of state-owned units. A handful of millionaire businessmen
could be found in the biggest cities. These people had owned firms
before 1949, cooperated with the government in the 1950s in return for
stock in their firms, and then lost their incomes in the political
turmoil of the Cultural Revolution. In the late 1970s and early 1980s,
when these businessmen were politically rehabilitated, their incomes
were returned with the accrued interest, and some suddenly found
themselves quite wealthy. Although the number of people earning incomes
far beyond the normal wage scale was tiny relative to the population,
they were important symbols of the rewards of economic reform and
received a great deal of media attention. In 1985 most of these people
worked in enterprises classified as "units of other ownership"
(private rather than state- or collectively owned enterprises). These
enterprises employed only 440,000 people out of the total urban labor
force of 128 million in 1985 and paid average annual salaries of
-Y1,373, only slightly higher than the overall urban national average.
In China, as in other countries, an important determinant of the
affluence of a household was the dependency ratio--the number of
nonworkers supported by each worker. In 1985 the average cost of living
for one person in urban areas was -Y732 a year, and the average state
enterprise worker, even with food allowance and other benefits added to
the basic wage, had difficulty supporting one other person. Two average
wage earners, however, could easily support one dependent. Families with
several workers and few or no dependents had substantial surplus
earnings, which they saved or used to buy nonessential goods. An
important positive influence on the per capita consumption levels of
urban families was a decline in the number of dependents per urban
worker, from 2.4 in 1964 to 0.7 in 1985. In farm families the dependency
ratio fell from 1.5 in 1978 to 0.7 in 1985. Farm incomes rose rapidly in
the 1980s under the stimulus of the responsibility system but on average
remained considerably lower than urban incomes. Household surveys found
that in 1985 average net per capita income for rural residents was -
Y398, less than half the average per capita urban income, which was
-Y821. The value of goods farmers produced and consumed themselves
accounted for 31 percent of rural income in 1985. The largest component
of income in kind was food, 58 percent of which was self-produced.
Farm family members on average consumed much less of most major kinds
of goods than urban residents. For instance, a household survey found in
1985 that the average urban dweller consumed 148 kilograms of
vegetables, 20 kilograms of meat, 2.6 kilograms of sugar, and 8
kilograms of liquor. At the same time, a survey of rural households
found that the average rural resident consumed 131 kilograms of
vegetables, 11 kilograms of meat, 1.5 kilograms of sugar, and 4
kilograms of liquor. Differences of a similar nature existed for
consumer durables.
Another indication of the gap between urban and rural income levels
was the difference in personal savings accounts, which in 1985 averaged
-Y277 per capita for urban residents but only -Y85 per capita for the
rural population. There was great variation in rural income levels among
different provincial-level units, counties, towns, villages, and
individual families. While the average net per capita income for rural
residents in 1985 was - Y398, provincial-level averages ranged from a
high of -Y805 for farm families living in Shanghai to a low of -Y255 for
the rural population of Gansu Province.
The fundamental influence on rural prosperity was geography. Soil
type and quality, rainfall, temperature range, drainage, and
availability of water determined the kinds and quantities of crops that
could be grown. Equally important geographic factors were access to
transportation routes and proximity to urban areas.
The highest agricultural incomes were earned by suburban units that
were able to sell produce and sideline products in the nearby cities.
Under the responsibility system, household incomes depended on the
number of workers in each household and the household's success in
holding down production costs and in supplying goods and services to
local markets. Most of the rural families with the highest incomes--the
"10,000-yuan households"--were "specialized
households" that concentrated family efforts on supplying a
particular service or good. Many of these families owned their own
equipment, such as trucks or specialized buildings, and operated
essentially as private concerns. An increasingly important influence on
rural incomes in the mid-1980s was the expansion of nonagricultural
rural enterprises, often referred to as "township
enterprises." These were factories, construction teams, and
processing operations, most of which were owned by collectives,
primarily villages, towns, and townships. Some were owned by voluntary
groups of families. Township enterprises were considered by the
government to be the main source of employment for rural workers who
were leaving agriculture because of rising productivity under the
responsibility system. By the end of 1986, township enterprises employed
21 percent of the rural labor force. The movement of rural labor into
township enterprises helped to increase average rural incomes because of
the higher productivity in nonagricultural jobs. In 1986 industrial
workers in rural areas produced an average annual value of -Y4,300 per
person, compared with about -Y1,000 per farmer in the same year.
The change in farm production from primarily collective to primarily
household operations is reflected in household survey data on the
sources of rural incomes. Before the 1980s farmers received income in
the form of shares of the profits earned by their production teams plus
supplementary income from household sideline activities. In 1978
two-thirds of the net income of farm families came from the collective,
and only 27 percent was derived from household production. With the
shift to the responsibility system these ratios were reversed. By 1982
the collective provided only 21 percent of farm income, while household
production provided 69 percent. In 1985 the collective share of farm
income had fallen to just over 8 percent, and the family production
share had risen to 81 percent.
Perhaps the most serious gaps in living standards between rural and
urban areas were in education and health care. Primary schools existed
in most rural localities, and 80 percent of the country's primary-school
teachers worked in rural schools. Secondary schools were less widely
distributed; only 57 percent of the total number of secondary-school
teachers served in rural schools. Most rural schools were less well
equipped, and their staffs less adequately trained than their urban
counterparts. Health care had been greatly improved in rural areas in
the 1960s and 1970s through sanitation campaigns and the introduction of
large numbers of barefoot doctors, midwives, and health workers. Most
modern hospitals, fully trained doctors, and modern medical equipment,
however, were located in urban areas and were not easily accessible to
rural families. In 1985 two-thirds of all hospital beds and medical
staff personnel were located in urban hospitals. The economic reforms
affected rural education and health care positively in places where farm
communities used their higher incomes to improve schools and hospitals
and negatively in localities where the reduced role of the collective
resulted in deterioration of collective services.
