Post Tiananmen and Renewed Reform Third Phase of Economic Reform

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Chapter 8

• Post Tiananmen and Renewed Reform Third Phase
  of Economic Reform

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Main Themes

• Tiananmen Square Incidence
• Macroeconomic austerity by hardliners 1989-1990
• 1991 New reform momentum
• 1992-93 A new period of significant reform

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In June 1989, Tiananmen Square Incidence

• Democratic movement by students
• It ended a period of gradual liberalization and
  renewed political depression.
• Hardliners attempted to roll back reforms to
  carry out a program of recontrol of the economy.
• However, in economic terms, Tiananmen did not
  mark a sustained shift to more conservative
  policies. It was just one more cycle of
  retrenchment, followed by renewed growth and
  reform.

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Premier Li Peng Played a Key Role in This Era

• Li is conservative without a vision
• Recall Crisis of inflation in 1988
• Li first attempted to reimpose strict controls on
  the economy.
• November 1989 Thirty Nine Points as economic
  rectification for 1989-1991
• Three main goals
• Macroeconomic austerity
• Recentralization and strengthened planning
• Preferred policy for SOEs

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Macroeconomic Austerity

• How to control inflation and trade deficit by
  1988?
• Reduce domestic demand
• Tight quota on fixed investment and credit growth
• Held down wage increases (to be below inflation)
• Interest rates on loans and savings were raised.
• Price controls were reestablished

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Of Course, Inflation Pressures Eased!

• Fixed investment down from 32 of GDP in 1988 to
  25 in 1990.
• Proportion of total retail sales with market
  price transactions declined from 50 in 1988 to
  45 in 1990.
• Other consequences to be discussed later.

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Another Aspect - On Strengthening Planning

• Conservatives wanted to refocus government
  resources on priority sectors energy,
  transportation, and materials such as steel,
  chemical.
• Preferential interest rate policies to priority
  sectors.
• Wanted a more powerful government.
• The plan track of the dual track system was to
  grow.
• Price control imposing upper limits for market
  prices

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Notables on Preferential Policies for SOEs

• SOEs were shielded from credit crunch, but not
  for TVEs
• Material balance planning to help large SOEs
• SOEs under more control to make more financial
  contributions to the central government.
• In 1990, 234 of the largest SOEs were designated
  as double-guarantee enterprises, i.e., state
  guaranteed supplies in return for enterprise
  guarantees of output delivery.
• Put back party control and involvement in SOE
  management.

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Outcomes of Conservative Policies

• Pushed economy into recession

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In 1990, Recentralization Faced Political
Opposition

• Policies strongly opposed by Ye Xuanping from
  Guangdong and Zhu Rongji from Shanghai
• Worry about -- large-scale unemployment might
  lead to unrest among urban workers
• Li Peng began to distance himself from
  conservative agenda of recontrol
• Li announced his support for the coastal
  development strategy (previously developed by
  Zhao Ziyang) and moderated his opposition to TEVs.

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Problems of SOEs During 1989-1991

• Forced to fulfill the governments social and
  political objectives employment
• Thus, ordered to keep producing regardless of
  market conditions to keep workers occupied
• Not to maximize profit as before
• Profitability was cut deeply
• Demand dropped
• Costs up
• After 1989, losses in SOEs became significant for
  the first time since Chinas reform process began.

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Summary of the Conservative Dominant Period of
1989-1990

• Achievement inflation under control
• Markets were imbalance and supplies abundant due
  to SOEs forced to provide employment
• Ultimate achievement Conclusion by conservatives
  on impossibility to go back to command economy

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New Reform Momentum by End of 1990

• A Communist documentation calling for
  elimination of the dual track system and a
  gradual shift to a market price system.
• Zuo Jianhua (conservative) rediscovered the
  market and added marketization to revitalize SOEs
• Reduction in the plan portion more radical than
  Zhao Ziyang
• Zuo reduction not freezing
• Concerted efforts to restart the SOE reform began
  in 1991

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In 1992, Deng Xioaping Made an Imperial Tour to
South China

• Gave a decisive push for the renewed reform
• In October, 1992, the new reform agenda was
  ratified by the 14th Party Congress
• Proclaimed China would adopt a socialist market
  economy -- socialist as an old term in China
  for 40 years and market a new term
• Official declaration reform objective was
  transition to a market economy

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Summary for 1992-1993

• Remaining plan was cut back substantially
• Market pricing was spread widely
• A level playing field for all ownership systems
  (TVEs, SOEs, joint ventures, etc.) with a new
  tax system
• Reform accelerated through 1993
• Now more details on these continuing reforms

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More on Marketization

• 1992-1993 Rapid progress toward market prices
• The government began to dismantle price control
  on such goods as coal, oil, and steel as well as
  grain.
• Went beyond Growing out of the plan by cutting
  back the plan

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On Grain Prices

• Gradual decontrol of state grain prices in the
  cities
• Grain price control cost billions of yuan in
  subsidies per year in 1980s
• In 1980s there were fears of social unrest
  without cheap grains to urban households
• In 1990s, gradually, pricing authority was
  decentralized to individual provinces, along with
  subsidy burden
• By mid 1993, all but one or two provinces removed
  grain price control and rationing of grain and
  edible oils.

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More on Tax Reform and the Level Playing Field

• Movement to eliminate restrictions on private
  ownership and created the condition for a level
  playing field for all ownership forms.
• In 1993, the State Administration of Industry and
  Commerce (SAIC) specified that private businesses
  were allowed to perform virtually all types of
  industry and commerce with a few exceptions.
• Also doing businesses outside China and joint
  ventures with foreign businesses in China
• SOEs can engage in most types of business ,
  regardless of their original activity

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But Only the New Tax System Made the Level
Playing Field Possible

• New Tax System adopted in January 1994
• Value added tax (VAT) at 17 to all
• Except a handful of basic goods and ag. Inputs at
  13
• 11 goods (cigarette, liquor, gasoline, etc.)
  subject to additional excise tax
• Enterprise income tax at 33 of all ownership
  forms above moderate sizes
• Small firms at 18-27
• Personal income taxes were standardized and
  unified

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New Tax System was a Major Step

• Everyone is subject to the same system!!
• Also the recentralization of tax collection power
• Central government collected all VAT and about
  70 of total tax
• Then rebate tax to local governments
• Before locals gt central
• Now central gt locals
• New system was good for local governments with
  less interference and growing tax revenues (due
  to efficiency)
• Example of dynamics exports were encouraged by
  rebate of VAT on exported goods

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There Were Also Serious Enterprise and Labor
Reforms

• Revive the measures previously discussed for the
  SEO reform during 1984-1988
• Among new things were
• Pension reform or social security system
• Unemployment insurance
• There were many flaws and are still evolving

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Notables on Ownership Reform

• Up to 1991, China has not undertaken a large
  scale privatization of state assets
• Most changes occurred through the growth of
  non-state producers collectives, private,
  foreign invested firms
• Not transformation of SOEs

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In 1992, Chinas Two Stock Exchanges Were
Established

• Where?
• Symbol of a capitalist system and private stake
  holders
• 70 stocks in 1992
• In Shanghai in 1992 62 of share value by
  government, 24 by legal persons (SOEs), 7 by
  individuals, and 7 by foreign capital
• Still in this period, most capitals were raised
  with bonds, not stocks
• But stocks were an important step (symbol) of a
  broader process of ownership change.

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Other Notables in the Reform Package of Late 1993

• New Tax and commercialization of SOEs
• Policy banks established
• National Development Bank, Import-Export Bank and
  Agricultural Development Bank
• Peoples Bank of China No policy-lending and
  concentrating on central bank functions
• Existing specialized banks (such as Industry and
  Commerce Bank) also free of policy
  considerations, as independent commercial banks.
• Dual track exchange rate abolished exchange rate
  unified at the market rate
• Foreign sector played a key role.

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Key Role of Foreign Sector

• Become more important only after 1991!
• Through 1990, direct foreign investment (DFI)
  never amounted to 6 of total domestic fixed
  investment, and mostly in Guangdong province
• DFI surged after 1991
• 25 billion in 1993 20 of total investment
• After 1989, Chinas success with export promotion
  has been striking
• By 1991, Chinas foreign exchange reserves grew
  to US 44 billion
• Export surpluses of 8-9 billion in 1990-1991

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Foreign Sector Made Many Contributions

• Not just DFI sources of capital

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Indicators of the Success during 1992-1993

• GDP growth 13.2 in 1992, 13.4 in 1993
• Real industrial growth 27.5 in 1992, 20 in
  1993
• A phase from Deng Xiaoping
• reaching a new level every few years

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Notables on New Market Context of 1992-1993

• Conservatives realized that they had no role to
  play.
• The dual track system was still there, but the
  compulsory plan was being sharply cut back, but
  the end was in sight.
• China was able to carry out some most difficult
  reform measures
• Tax reform
• To cut subsidies to urban residents and to core
  energy sector

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Post Scripts

• Economic expansion led to inflationary pressures
  ( 22 in 1993)
• Vice Premier Zu Rongji announced a 16-points
  program to restore order to the economy
• This time it was seen as a serious economic
  policy, not for re-control
• The austerity measures in 1993-1994 did not pull
  China back to economic recontrol
• Policy makers attempted to implement these
  measures as a market oriented economic policy
  unlike what happened in 1989
• Reform continued after 1993 to today

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Questions/Comments