At the Third Plenum of the Eleventh Central Committee in 1978, the realist Party leaders headed by Deng Xiaoping officially adopted a series of significant measures to save China from its calamity. These were later known to become the ‘open door policies’ (John King Fairbank: page 285). Thus it could be said that the reform procedure was put into drive when Deng Xiaoping took over control of the Communist Party in 1978. At the same time, there was public dissatisfaction, where the party members knew that they needed to move away from the old regime and make adjustments, in order to receive the support of the Chinese people (John King Fairbank: page 293).
China has used a dual track system to reform, which refers to adopting some features of a market economy, while at the same time functioning under the old planned economy. The transition from a planned economy to a market economy- through the dual-track method- reflects the most elemental characteristic of Chinese growth and economic system reform. It works by developing the fundamentals of a new system side by side with the old unreformed system. It then looks at the results it will implement on the new system, by steadily phasing out the old system. It was an experimental system. This system may seem very time-consuming, comparing to “big bang reforms” or shock therapy used in Russia and Poland, but it was a way the Chinese government could evade political conflict that rapid reform may produce.
When agricultural reform was introduced under the household responsibility system, Chinese economic reform began; leading later to growth. Prior to the introduction of reform, Chinese agriculture, under the commune system was inefficient. There were no incentives for farmers to produce more than the required quota as this did not benefit them. The concept of ‘increasing productivity’ was nonexistent. This is because the systems that the farmers worked under made sure that they were not rewarded for any further production (Simon G. Powell: page 15). The household liability system was a system that was made to improve the income and output of rural households. The idea was that once the government agricultural output quotas were content, the farm households could sell their agricultural surplus in the private market. The new system was verified to be effective as it produced incentive for the farmers to work harder and enhance productivity. There was a rapid increase in agricultural output and also in the incomes of the farmers which provided ongoing support for the household responsibility system (Simon G. Powell: page 19). The accomplishment of this system was a stepping stone to reform other areas in order to move forward in creating a market economy and experience growth.
After the agricultural reforms, the Chinese government then set out to reform its state owned enterprises (SOEs). In the command economy, the SOEs served merely as a means of production where raw materials turn into industrial products. The planning commissions in national or local governments decide for each SOE what needs to be produced and how much. In such a system, the government agencies plan what to produce, provide resources, and dispense the products. This is known as the centralised command economy. As there is no free market, there are no free enterprises either. Reform of SOEs was not as successful as agricultural reform as it is much more difficult to reform large state enterprises compared to small farm households. Members of the communist party believed in control of these major means of production. They were unwilling to give up power as they did not want non government officials to profit from the state owned enterprises (Elizabeth J. Perry and Christine Wong: page 150).
However, in October of 1984, the initial stages of reform of SOEs were limited in success. The communist party adopted some major elements to reform. Firstly, firms were allowed to produce more than the plan quota, and sell the extra to the market. In addition, the firms were allowed to divide their profit with the state. In general, the firms were given more freedom regarding to making management decisions (production, marketing, investment, and profit distribution). This resulted in the increase of productivity and efficiency of the firms. They also allowed for the prices of more products to be determined by the forces of demand and supply, as for the reform of SOEs to succeed, the whole price system had to become more market determined.
Furthermore, reform for the SOEs two additional steps was taken and in 1987 the contract responsibility system was initiated. Under this system, the manager of a firm signed a contract with a state agency. Under this new system the SOE would pay a fixed annual tax and would be permitted to retain all other profits; therefore increasing the productivity and efficiency of SOEs. Nonetheless, even under this new and improved system problems emerged. In general, by the mid 90s, it became evident that the reform of SOEs had resulted in numerous major political economy problems. A free market economy modelled after western industrialized systems with a group of substantial state-owned players in many key industries, such as manufacturing, electricity, transportation, communication, petroleum, and finance and banking, seems to be the goal in their mind as they are working to build a “socialist market economy” but whether this picture will become a reality still remains a topic to be looked upon (“Suggestion to the Writing of the Tenth Five-Year Plan”, published by Xinhua, 18 October 2000).
The third important economic establishment which needed to be reformed was the price system. The price system in China was controlled and the reform was put into place to decontrol the prices by steadily allowing the prices to be market determined. As mentioned previously, this process of decontrolling was also crucial in SOE reform. However there were many problems to implementing a market determined price system immediately. The solution that the Chinese government took was to introduce a “two-tier price system”. Under this system one set of prices would remain the same as before and a second set for the same goods would be determined by the market. Under this system, state enterprises in China, once they had fulfilled their production quota specified in the plan, were allowed to sell any above-quota output at the free market price (Dali L. Yang: page 216). They were also allowed to purchase inputs in quantities above the plan quota at free market prices. This two-tier price system was an economically efficient system. Slowly but surely the administered prices were becoming increasingly the same as the market prices and by the 1990’s the two tier system was no longer needed as most of the products in China were being sold at the market determined price.
Lastly, it was obvious that the banking system had to be changed. The old banking system only consisted of the People’s Bank of China and a modern banking system had to be established in order to maintain a market economy. “The People’s Bank of China was a monobank” which only had the authority to issue currency and to extend loans to the SOEs and even this needed to be approved by the planning authority (Dali L. Yang: page 225). In practice, it had no influence as a bank. In 1983 the People’s Bank was transformed into a central bank. By giving these specialised banks the power to extend credits, it increased the supply of currency and China was facing a bad case of inflation by 1985 (Elizabeth J. Perry and Christine Wong: page 255).
In 1993 the Communist party decided to reform the financial sector by giving more independence to the People’s Bank and also transforming the specialised banks into commercial banks. The central bank was to function like the Federal Reserve Bank in the United States and the commercial banks were to function much like the modern commercial banks in other countries.
March 18 and May 10 of 1995 were two major dates, when the People’s Congress passed the Law on The People’s Bank of China and the Commercial Banking Law. Even though it states that more sovereignty will be given to the People’s Bank it was still a central bank under the direction of the exclusive branch of the Chinese government and did not have the independent influence exercised by the Federal Reserve Bank in the states. Another distinction is that the bank’s capital is completely supplied by the state and is owned by the state whereas in the U.S, the Federal Reserve Banks generate their own income, primarily from interest earned on government securities that are acquired in the course of Federal Reserve monetary policy actions (Elizabeth J. Perry and Christine Wong: page 88). Another crucial disparity in banking reform is that the United States has a two party system whereas China does not which means that prior to a presidential election the administration tends to pressure the Federal Reserve Bank to adopt an expansionary monetary policy to increase aggregate demand whereas in China, political pressure can come from the desire of a political leader to seek more rapid growth, or to stop inflation rapidly for the fear of public discontent. In China the state council conducts monetary policy. It believes that if macroeconomic planning is an important responsibility of the State Council then the conduct of monetary policy should be a part of its responsibilities as well. In the U.S, Monetary policy is made by the Federal Open Market Committee, which consists of the Board of Governors of the Federal Reserve System and the Reserve Bank presidents. Banking reform in China has transformed the Banks since 1980’s, to make them suited to a market economy, but by looking at the variations in the central banks of China and the United states, it is still deficient as the central back is not given adequate self-sufficiency and independence from the government.
Today, economic growth for China is bright and Chinas economy has grown a great deal since the Qing Dynasty. Foreign trade and expansion of businesses persisted by joining the World Trade Organisation in 2001. Although China will have to alter many of its policies, such as tariffs on imports, agricultural products and open up to foreign competition by joining the WTO. China will also benefit by bringing in much needed foreign investment and also be able to bring required new technology or help grow China’s own capabilities for technological development (Simon G. Powell: page 197). International trade is expected to nearly double, and increases in efficiency are expected to increase average gross domestic product. Trade will amplify in both directions, Chinese tariffs will be lowered and Chinese goods will have better access to world markets open to members of the WTO (Simon G. Powell: page 201). Chinese products will be open to competition and this will in turn improve quality by stimulating the domestic economy. We can expect that private enterprises, joint ventures and foreign owned enterprises, under a better legal system and in an improved economic environment with China a member of WTO, will contribute positively to growth in the next two decades.
To conclude, the economic reforms that China had undergone have considerably enhanced its economy today. The planned market economy was successfully transformed into a free market economy and by joining the WTO China has seen extensive benefits and increased efficiency in the economy. Since China opened up to market forces both domestically and internationally in 1978, China has experienced extraordinary development performance and growth in terms of rapid economic growth, the rise of efficiency in economic sector and accelerated urbanisation. The open door policy adopted by Deng Xiaoping in 1978 truly did improve the economic situation for China. China’s economic reform was slow but certain.
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Bibliography
Books:
Fairbank, J.K, (1982) “The Great Chinese Revolution 1800-1985”, New York, Harper & Row Publishers.
Perry, E.J. and Wong, C, (1985) “The Political Economy of Reform in Post-Mao China”, USA, President and Fellows of Harvard university publisher.
Powell, S. G, (1992) “Agricultural reform in China: from communes to commodity economy 1078-1990”, Great Britain, Manchester University Press.
Yang, D.L, (1996) “Calamity and Reform in China”, Stanford, California, Stanford University Press.
Zeng D, (2010) “Building Engines for Growth and Competitiveness in China”, World Bank Publication, Washington
Journal:
“Suggestion to the Writing of the Tenth Five-Year Plan”, published by Xinhua, 18 October 2000
Online sources:
BBC News (2011) “China country Profile” retrieved on 04/04/11 from
New York Post (2011) “There’s no stopping China” retrieved on 05/04/11 from
