Economic history of China
Encyclopedia
China's economic system before the late-1990s, with state ownership of certain industries 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
.
Analysts estimated that investment accounted for about 25 percent of GNP in 1979, 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proceeded gradually, and outdated equipment continued to be used as long as possible.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 (see Science and technology in the People's Republic of China
). 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 advantage
s 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 subsistence
-level 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 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 to five decades experts in China and abroad agreed that it had a great distance yet to go.
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.
came to power in 1949, its leaders' fundamental long-range goals were to transform China into a modern, powerful, socialist nation. In economic terms these objectives meant industrialization, improvement of living standards, narrowing of income differences
, and production of modern military equipment. As the years passed, the leadership continued to subscribe to these goals. But the economic policies formulated to achieve them were dramatically altered on several occasions in response to major changes in the economy, internal politics, and international political and economic developments.
An important distinction emerged between leaders who felt that the socialist goals of income equalization and heightened political consciousness should take priority over material progress and those who believed that industrialization and general economic modernization
were prerequisites for the attainment of a successful socialist order. Among the prominent leaders who considered politics the prime consideration were Mao Zedong
, Lin Biao
, and the members of the Gang of Four
. Leaders who more often stressed practical economic considerations included Liu Shaoqi
, Zhou Enlai
, and Deng Xiaoping
. For the most part, important policy shifts reflected the alternating emphasis on political and economic goals and were accompanied by major changes in the positions of individuals in the political power structure. An important characteristic in the development of economic policies and the underlying economic model was that each new policy period, while differing significantly from its predecessor, nonetheless retained most of the existing economic organization. Thus the form of the economic model and the policies that expressed it at any given point in Chinese history reflected both the current policy emphasis and a structural foundation built up during the earlier periods.
in 1945, Soviet troops
had dismantled about half the machinery in the major industrial areas of the northeast and shipped it to the Soviet Union
. Transportation, communication, and power systems had been destroyed or had deteriorated because of lack of maintenance. Agriculture was disrupted, and food production was some 30 percent below its pre-war peak level. Further, economic ills were compounded by one of the most virulent inflation
s in world history.
The chief goal of the government for the 1949-1952 period was simply to restore the economy to normal working order. The administration moved quickly to repair transportation and communication links and revive the flow of economic activity. The banking system was nationalized and centralized under the People's Bank of China
. To bring inflation under control by 1951, the government unified the monetary system, tightened credit, restricted government budgets at all levels and put them under central control, and guaranteed the value of the currency
. Commerce was stimulated and partially regulated by the establishment of state trading companies (commercial departments), which competed with private traders in purchasing goods from producers and selling them to consumers or enterprises. Transformation of ownership in industry proceeded slowly. About a third of the country's enterprises had been under state control while the Guomindang government was in power (1927-1949), as was much of the modernized transportation sector. The Communist Party of China immediately made these units state-owned enterprises upon taking power in 1949. The remaining privately owned enterprises were gradually brought under government control, but 17 percent of industrial units were still completely outside the state system in 1952.
In agriculture a major change in landownership was carried out. Under a nationwide land reform program, titles to about 45 percent of the arable land
were redistributed from landlord
s and more prosperous farmers to the 60 to 70 percent of farm families that previously owned little or no land. Once land reform was completed in an area, farmers were encouraged to cooperate in some phases of production through the formation of small "mutual aid teams" of six or seven households each. Thirty-nine percent of all farm households belonged to mutual aid teams in 1952. By 1952 price stability had been established, commerce had been restored, and industry and agriculture had regained their previous peak levels of production. The period of recovery had achieved its goals.
, 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 engineer
s, technician
s, and scientist
s 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 farmer
s 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' cooperative
s, in which families still received some income on the basis of the amount of land they contributed, and eventually to advanced cooperatives, or collective
s. 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.
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.
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.
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.
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 Chinese 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 Chinese 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.
.
To revive efficiency in industry, Communist Party of China 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
(see Glossary). 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.
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.
--and by July 1977 the rehabilitated Deng Xiaoping
-- reaffirmed the modernization program espoused by Zhou Enlai
in 1975. They also set forth a battery of new policies for the purpose of accomplishing the Four Modernizations.
The new policies strengthened the authority of managers and economic decision makers at the expense of party officials, stressed material incentives for workers, and called for expansion of the research and education systems. Foreign trade was to be increased, and exchanges of students and "foreign experts" with developed countries were to be encouraged.
This new policy initiative was capped at the Fifth National People's Congress in February and March 1978, when Hua Guofeng presented the draft of an ambitious ten-year plan for the 1976-85 period. The plan called for high rates of growth in both industry and agriculture and included 120 construction projects that would require massive and expensive imports of foreign technology.
Between 1976 and 1978, the economy quickly recovered from the stagnation of the Cultural Revolution. Agricultural production was sluggish in 1977 because of a third consecutive year of adverse weather conditions but rebounded with a record harvest in 1978. Industrial output jumped by 14 percent in 1977 and by 13 percent in 1978.
At the milestone Third Plenum of the National Party Congress's 11th Central Committee which opened on December 22, 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
, South 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 mechanism
s 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 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.
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 (see Glossary), 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.
- the key research project of the seventh Five-Year Plan of China, as well as completing and publishing the China GDP data by China's own research. The summary of the above has been included in the book "Chinese Macroeconomic Structure and Policy" (June 1988) edited by Fengbo Zhang, and collectively authored by the Research Center of the State Council of China. This is the first GDP data which was published by China.
The research utilized the World Bank
’s method as a reference, and made the numerous appropriate adjustments based on China’s national condition. The GDP also has been converted to USD based data by utilizing the moving average exchange rate
. The research systematically completed China’s GDP and GDP per capita from 1952 to 1986 and analyzed growth rate, the change and contribution rates of each component. The research also included international comparisons. Additionally, the research compared MPS (Material Product System
) and SNA (System of National Accounting
), looking at the results from the two systems from analyzing Chinese economy. This achievement created the foundation for China's GDP research.
The State Council of China issued “The notice regarding implementation of System of National Accounting
” in August 1992, the Western SNA
system officially is introduced to China, replaced Soviet Union
's MPS
system, Western economic indicator GDP became China’s most important economic indicator. Based on Dr. Fengbo Zhang's research, in 1997, the National Bureau of Statistics of China
, in collaboration with Hitotsubashi University
of Japan, estimated China’s GDP Data from 1952 up to 1995 based on the SNA principal.
Sources: WikiChina: China GDP,
Wiki.answers.com, YAHOO!ANSWERS, Wiki-Answers China, Yahoo-Answers Chinese, Google-Answers China, China.com
levels. There were many small handicraft
units and many enterprises using machinery installed or designed in the 1950s and 1960s. There was a significant number of big, up-to-date plants, including textile mills, steel mills, chemical fertilizer plants, and petrochemical facilities but there were also some burgeoning light industries producing consumer goods. China produced most kinds of products made by industrialized nations but limited quantities of high-technology items. Technology transfer
was conducted by importing whole plants, equipment, and designs as an important means of progress. Major industrial centers were in Liaoning
Province, Beijing
-Tianjin
-Tangshan
area, Shanghai
, and Wuhan
. Mineral resources included huge reserves of iron ore and there were adequate to abundant supplies of nearly all other industrial minerals. Outdated mining and ore processing technologies were gradually being replaced with modern processes, techniques and equipment.
because of scant supplies of agricultural machinery
and other modern inputs. Most agricultural processes were still performed by hand. There was very small arable land area (just above 10 percent of total area, as compared with 22 percent in United States) in relation to the size of the country and population. There was intensive use of land; all fields produced at least one crop
a year, and wherever conditions permitted, two or even three crops were grown annually, especially in the south. Grain
was the most the important product, including rice
, wheat
, corn
, sorghum
, barley
, and millet
. Other important crops included cotton
, jute
, oilseeds, sugarcane
, and sugar beets. Eggs
were also a major product. Pork
production increased steadily, and poultry
and pig
s were raised on family plots. Other livestock
were relatively limited in numbers, except for sheep and goat
s, which grazed in large herds on grasslands of the Inner Mongolia
Autonomous Region and the northwest. There was substantial marine and freshwater fishery
. Timber
resources were mainly located in the northeast and southwest, and much of the country was deforest
ed centuries ago. A wide variety of fruits and vegetables were grown.
forms. Coal
and petroleum
were exported since early the 1970s. Its coal reserves were among the world's largest, and mining
technology was inadequately developed but steadily improved in the late 1980s. Petroleum reserves were very large at the time but of varying quality and in disparate locations. Suspected oil deposits in the northwest and offshore tracts were believed to be among the world's largest. Exploration and extraction was limited by scarcity of equipment and trained personnel. Twenty-seven contracts for joint offshore exploration and production by Japanese and Western oil companies were signed by 1982, but by the late 1980s only a handful of wells were producing oil. Substantial natural gas
reserves were in the north, northwest, and offshore. The hydroelectric potential of the country was the greatest in the world and sixth largest in capacity, and very large hydroelectric projects were under construction, with others were in the planning stage. Thermal power, mostly coal fired, produced approximately 68 percent of generating capacity in 1985, and was increased to 72 percent by 1990. Emphasis on thermal power in the late 1980s was seen by policy makers as a quick, shortterm solution to energy needs, and hydroelectric and nuclear power
was seen as a long-term solution. Petroleum production growth continued in order to meet the needs of nationwide mechanization
and provided important foreign exchange
but domestic use was restricted as much as possible until the end of the decade.
, the foreign exchange arm of the central bank
. Substantial decentralization and increased flexibility in foreign trade operations occurred since the late 1970s. Textiles were leading the export category. Other important exports included petroleum
and foodstuffs
. Leading imports included machinery, transport
equipment, manufactured goods, and chemicals. Japan
was the dominant trading partner, and accounted for 28.9 percent of imports and 15.2 percent of exports in 1986. Hong Kong
was a leading market for exports (31.6 percent) but a source of only 13 percent of imports. In 1979 the United States
became China's second largest source of imports and in 1986 was the third largest overall trade partner. Western Europe, particularly the Federal Republic of Germany, was also a major trading partner. Tourism
was encouraged and growing.
China's economy regained momentum in the early 1990s. During a Chinese New Year
visit to southern China in early 1992, China's paramount leader at the time Deng Xiaoping
made a series of political pronouncements designed to give new impetus to and reinvigorate the process of economic reform. The 14th National Communist Party Congress
later in the year backed up Deng's renewed push for market reforms, stating that China's key task in the 1990s was to create a "socialist market economy
". Continuity in the political system but bolder reform in the economic system were announced as the hallmarks of the 10-year development plan for the 1990s.
During 1993, output and prices were accelerating, investment outside the state budget was soaring, and economic expansion was fueled by the introduction of more than 2,000 special economic zone
s (SEZs) and the influx of foreign capital that the SEZs facilitated. The government approved additional long-term reforms aimed at giving still more play to market-oriented institutions and at strengthening central control over the financial system
; state enterprises would continue to dominate many key industries in what was now termed a "socialist market economy". Fearing hyperinflation, the authorities called in speculative loans, raised interest rate
s, and reevaluated investment projects. The growth rate was thus tempered, and the inflation rate dropped from over 17% in 1995 to 8% in early 1996.
In 1996, the Chinese economy continued to grow at a rapid pace, at about 9.5%, accompanied by low inflation. The economy slowed for the next 3 years, influenced in part by the Asian Financial Crisis, with official growth of 8.9% in 1997, 7.8% in 1998 and 7.1% for 1999. From 1995 to 1999, inflation
dropped sharply, reflecting tighter monetary policies
and stronger measures to control food prices. The year 2000 showed a modest reversal of this trend. Gross domestic product in 2000 grew officially at 8.0% that year, and had quadrupled since 1978. In 1999, with its 1.25 billion people but a GDP of just $3,800 per capita (PPP), China became the second largest economy in the world after the US. According to several sources, China did not become the second largest economy until 2010. However, according to gallop polls many Americans rate China's economy as first. Considering GDP per capita, this is far from accurate. The United States remains the largest economy in the world. However, the trend of China Rising is clear.
The Asian financial crisis affected China at the margin, mainly through decreased foreign direct investment
and a sharp drop in the growth of its export
s. However, China had huge reserves, a currency that was not freely convertible, and capital inflows that consisted overwhelmingly of long-term investment. For these reasons it remained largely insulated from the regional crisis and its commitment not to devalue had been a major stabilizing factor for the region. However, China faced slowing growth and rising unemployment based on internal problems, including a financial system burdened by huge amounts of bad loans, and massive layoff
s stemming from aggressive efforts to reform state-owned enterprises (SOEs).
Despite China's impressive economic development
during the past two decades, reforming the state sector and modernizing the banking system remained major hurdles. Over half of China's state-owned enterprises were inefficient and reporting losses. During the 15th National Communist Party Congress
that met in September 1997, General secretary, President Jiang Zemin
announced plans to sell, merge, or close the vast majority of SOEs in his call for increased "non-public ownership" (feigongyou or privatization
in euphemistic terms). The 9th National People's Congress
endorsed the plans at its March 1998 session. In 2000, China claimed success in its three year effort to make the majority of large state owned enterprises (SOEs) profitable.
Following the Chinese Communist Party's Third Plenum, held in October 2003, Chinese legislators unveiled several proposed amendments to the state constitution
. One of the most significant was a proposal to provide protection for private property
rights. Legislators also indicated there would be a new emphasis on certain aspects of overall government economic policy
, including efforts to reduce unemployment
(now in the 8–10% range in urban areas), to rebalance income distribution
between urban and rural regions, and to maintain economic growth while protecting the environment
and improving social equity. The National People's Congress approved the amendments when it met in March 2004.
The Fifth Plenum in October 2005 approved the 11th Five-Year Economic Program (2006–2010) aimed at building a "harmonious society
" through more balanced wealth distribution and improved education
, medical care
, and social security. On March 2006, the National People's Congress
approved the 11th Five-Year Program. The plan called for a relatively conservative 45% increase in GDP and a 20% reduction in energy intensity
(energy consumption per unit of GDP) by 2010.
China's economy grew at an average rate of 10% per year during the period 1990–2004, the highest growth rate in the world. China's GDP grew 10.0% in 2003, 10.1%, in 2004, and even faster 10.4% in 2005 despite attempts by the government to cool the economy. China's total trade in 2006 surpassed $1.76 trillion, making China the world's third-largest trading nation after the U.S. and Germany. Such high growth is necessary if China is to generate the 15 million jobs needed annually—roughly the size of Ecuador
or Cambodia
—to employ new entrants into the job market.
On January 14, 2009 as confirmed by the World Bank
the NBS
published the revised figures for 2007 financial year in which growth happened at 13 percent instead of 11.9 percent (provisional figures). China's gross domestic product stood at US$
3.4 trillion while Germany's
GDP was USD $3.3 trillion for 2007. This made China the world's third largest economy by gross domestic product
. Based on these figures, in 2007 China recorded its fastest growth since 1994 when the GDP grew by 13.1 percent. China may have already overtaken Germany even earlier as China's informal economy
(including the Grey market
and underground economy
) is larger than Germany's. http://www.dw-world.de/dw/article/0,,3944657,00.html Louis Kuijs, a senior economist at World Bank China Office in Beijing, said that China's economy may even be (as of January 2009) as much as 15 percent larger than Germany's. According to Merrill Lynch
China economist Ting Lu, China is projected to overtake Japan in "three to four years".
Social and economic indicators have improved since various recent reforms were launched, but rising inequality is evident between the more highly developed coastal provinces and the less developed, poorer inland regions. According to UN estimates in 2007, around 130 million people in China—mostly in rural areas of the lagging inland provinces—still lived in poverty, on consumption of less than $1 a day
. About 35% of the Chinese population lives under $2 a day.
In the medium-term, economists state that there is ample amount of potential for China to maintain relatively high economic growth
rates and is forecasted to be the world's largest exporter by 2010. http://www.oecd.org/document/15/0,2340,en_2649_201185_35363023_1_1_1_1,00.html Urbanization in China
and technological progress
and catch-up
with developed countries have decades left to run. But future growth is complicated by a rapidly aging population and costs of damage to the environment
.
China launched its Economic Stimulus Plan to specifically deal with the Global financial crisis of 2008–2009. It has primarily focused on increasing affordable housing, easing credit restrictions for mortgage and SMEs, lower taxes such as those on real estate sales and commodities, pumping more public investment into infrastructure development, such as the rail network, roads and ports.
Major natural disasters of 2008, such as the 2008 Chinese winter storms
, the 2008 Sichuan earthquake
, and the 2008 South China floods
mildly affected national economic growth but did do major damage to local and regional economies and infrastructure. Growth rates for Sichuan dropped to 4.6% in the 2nd quarter but recovered to 9.5% annual growth for the whole of 2008 http://in.reuters.com/article/asiaCompanyAndMarkets/idINPEK23256520090116. Major reconstruction efforts are still continuing after the May 12 earthquake, and are expected to last for at least three years. http://www.reliefweb.int/rw/rwb.nsf/db900SID/EDIS-7NBQSE?OpenDocument Despite closures and relocation of some factories because of the 2008 Summer Olympics
, the games had a minor impact on Beijing's overall economic growth. The Chinese economy is significantly affected by the 2008-9 global financial crisis due to the export oriented nature of the economy which depends heavily upon international trade. http://www.chinabusinessreview.com/public/0807/sands.html However, government economic-stimulus has been hugely successful by nearly all accounts.
Corporate income tax (CIT): The income tax for companies is set at 25%, although there are some exceptions. When companies invest in industries supported by the Chinese government tax rates are only 15%. Companies that are investing in these industries also get other advantages.
Transparency: In the Corruption Perception Index of 2009 China is ranked 79th out of 180 countries. China is ranked together with Burkina Faso with a CPI-score of 3.6 and a confidence rate between 3.0 and 4.2.
. The reform program significantly reduced the role of central planning by encouraging off-plan production by state-owned units and by promoting the growth of collective and individual enterprises that did not fall under the planning system. The government also endeavored to replace direct plan control with indirect guidance of the economy through economic levers, such as taxes and investment
support. Despite these changes, overall direction of the economy was still carried out by the central plan, as was allocation of key goods, such as steel and energy.
When China's planning apparatus was first established in the early 1950s, it was patterned after the highly centralized Soviet system
. That system basically depended on a central planning bureaucracy that calculated and balanced quantities of major goods demanded and supplied. This approach was substantially modified during the Great Leap Forward (1958–60), when economic management was extensively decentralized. During the 1960s and 1970s, the degree of centralization
in the planning system fluctuated with the political currents, waxing in times of pragmatic growth and waning under the influence of the Cultural Revolution and the Gang of Four.
At the national level, planning began in the highest bodies of the central government. National economic goals and priorities were determined by the party's Central Committee
, the State Council
, and the National People's Congress
. These decisions were then communicated to the ministries, commissions, and other agencies under the State Council to be put into effect through national economic plans.
The State Planning Commission
worked with the State Economic Commission, State Statistical Bureau, the former State Capital Construction Commission, People's Bank of China
, the economic ministries, and other organs subordinate to the State Council to formulate national plans of varying duration and import. Long-range plans as protracted as ten and twelve years also were announced at various times. These essentially were statements of future goals and the intended general direction of the economy, and they had little direct effect on economic activity. As of late 1987 the most recent such long-range plan was the draft plan for 1976-85, presented by Hua Guofeng
in February 1978.
The primary form of medium-range plan was the five-year plan, another feature adopted from the Soviet system. The purpose of the five-year plan was to guide and integrate the annual plans to achieve balanced growth and progress toward national goals. In practice, this role was only fulfilled by the First Five-Year Plan (1953–57), which served effectively as a blueprint for industrialization. The second (1958–62), third (1966–70), fourth (1971–75), and fifth (1976–80) five-year plans were all interrupted by political upheavals and had little influence. The Sixth Five-Year Plan (1981–85) was drawn up during the planning period and was more a reflection of the results of the reform program than a guide for reform. The Seventh Five-Year Plan (1986–90) was intended to direct the course of the reforms through the second half of the 1980s, but by mid-1987 its future was already clouded by political struggle.
A second form of medium-range planning appeared in the readjustment and recovery periods of 1949-52, 1963–65, and 1979–81, each of which followed a period of chaos - the civil war
, the Great Leap Forward, and the Gang of Four, respectively. In these instances, normal long- and medium-range planning was suspended while basic imbalances in the economy were targeted and corrected. In each case, objectives were more limited and clearly defined than in the five-year plans and were fairly successfully achieved.
The activities of economic units were controlled by annual plans. Formulation of the plans began in the autumn preceding the year being planned, so that agricultural output for the current year could be taken into account. The foundation of an annual plan was a "material balance table." At the national level, the first step in the preparation of a material balance table was to estimate - for each province, autonomous region, special municipality, and enterprise under direct central control - the demand and supply for each centrally controlled good. Transfers of goods between provincial-level units were planned so as to bring quantities supplied and demanded into balance. As a last resort, a serious overall deficit in a good could be made up by imports.
The initial targets were sent to the provincial-level administrations and the centrally controlled enterprises. The provincial-level counterparts of the state economic commissions and ministries broke the targets down for allocation among their subordinate counties, districts, cities, and enterprises under direct provincial-level control. Counties further distributed their assigned quantities among their subordinate towns, townships, and county-owned enterprises, and cities divided their targets into objectives for the enterprises under their jurisdiction. Finally, towns assigned goals to the state-owned enterprises they controlled. Agricultural targets were distributed by townships among their villages and ultimately were reduced to the quantities that villages contracted for with individual farm households.
At each level, individual units received their target input allocations and output quantities. Managers, engineers, and accountants compared the targets with their own projections, and if they concluded that the planned output quotas exceeded their capabilities, they consulted with representatives of the administrative body superior to them. Each administrative level adjusted its targets on the basis of discussions with subordinate units and sent the revised figures back up the planning ladder. The commissions and ministries evaluated the revised sums, repeated the material balance table procedure, and used the results as the final plan, which the State Council then officially approved.
Annual plans formulated at the provincial level provided the quantities for centrally controlled goods and established targets for goods that were not included in the national plan but were important to the province, autonomous region, or special municipality. These figures went through the same process of disaggregation, review, discussion, and reaggregation as the centrally planned targets and eventually became part of the provincial-level unit's annual plan. Many goods that were not included at the provincial level were similarly added to county and city plans.
The final stage of the planning process occurred in the individual producing units. Having received their output quotas and the figures for their allocations of capital, labor, and other supplies, enterprises generally organized their production schedules into ten-day, one-month, three-month, and six-month plans.
The Chinese planning
system has encountered the same problems of inflexibility and inadequate responsiveness that have emerged in other centrally planned economies. The basic difficulty has been that it is impossible for planners to foresee all the needs of the economy and to specify adequately the characteristics of planned inputs and products. Beginning in 1979 and 1980, the first reforms were introduced on an experimental basis. Nearly all of these policies increased the autonomy
and decision-making power of the various economic units and reduced the direct role of central planning. By the mid-1980s planning still was the government's main mechanism for guiding the economy and correcting imbalances, but its ability to predict and control the behavior of the economy had been greatly reduced.
altered, they often failed to reflect the true values of goods, causing many kinds of goods to be misallocated
and producing a price system that the Chinese government itself referred to as "irrational."
The best way to generate the accurate prices required for economic efficiency is through the process of supply and demand
, and government policy in the 1980s increasingly advocated the use of prices that were "mutually agreed upon by buyer and seller," that is, determined through the market. The prices of products in the farm produce free markets were determined by supply and demand, and in the summer of 1985 the state store prices of all food items except grain also were allowed to float in response to market conditions. Prices of most goods produced by private and collectively owned enterprises in both rural and urban areas generally were free to float, as were the prices of many items that state-owned enterprises produced outside the plan. Prices of most major goods produced by state-owned enterprises, however, along with the grain purchased from farmers by state commercial departments for retail sales in the cities, still were set or restricted by government agencies and still were not sufficiently accurate.
In 1987 the price structure in China was chaotic. Some prices were determined in the market through the forces of supply and demand, others were set by government agencies, and still others were produced by procedures that were not clearly defined. In many cases, there was more than one price for the same commodity, depending on how it was exchanged, the kind of unit that produced it, or who the buyer was. While the government was not pleased with this situation, it was committed to continued price reform. It was reluctant, however, to release the remaining fixed prices because of potential political and economic disruption. Sudden unpredictable price changes would leave consumers unable to continue buying some goods; some previously profitable enterprises under the old price structure would begin to take losses, and others would abruptly become very wealthy.
and the increased importance of market exchange and profitability, in the 1980s prices played a central role in determining the production and distribution of goods in most sectors of the economy. Previously, in the strict centrally planned system, enterprises had been assigned output quotas and inputs in physical terms. Under the reform program, the incentive to show a positive profit caused even state-owned enterprises to choose inputs and products on the basis of prices whenever possible. State-owned enterprises could not alter the amounts or prices of goods they were required to produce by the plan, but they could try to increase their profits by purchasing inputs as inexpensively as possible, and their off-plan production decisions were based primarily on price considerations. Prices were the main economic determinant of production decisions in agriculture and in private and collectively owned industrial enterprises despite the fact that regulations, local government fees or harassment, or arrangements based on personal connections often prevented enterprises from carrying out those decisions.
Consumer goods were allocated to households by the price mechanism, except for rationed grain. Families decided what commodities to buy on the basis of the prices of the goods in relation to household income.
There was no clear solution to the price policy dilemma. The approach of the government was to encourage the growth of nonplanned economic activity and thereby expand the proportion of prices determined by market forces. These market prices could then serve as a guide for more accurate pricing of planned items. It was likely that the Chinese economy would continue to operate with a dual price system for some years to come.
. Inflation peaked during the Chinese civil war
of the late 1940s, when wholesale
prices in Shanghai
increased 7.5 million times in the space of 3 years. In the early 1950s, stopping inflation was a major government objective, accomplished through currency reform, unification and nationalization
of the banks, and tight control over prices and the money supply
. These measures were continued until 1979, and China achieved a remarkable record of price stability. Between 1952 and 1978, retail
prices for consumer goods grew at an average rate of only 0.6 percent a year.
During the reform period, higher levels of inflation appeared when government controls were reduced. The first serious jump in the cost of living for urban residents occurred in 1980, when consumer prices rose by 7.5 percent. In 1985 the increase was 11.9 percent, and in 1986 it was 7.6 percent. There were several basic reasons for this burst of inflation after thirty years of steady prices. First, the years before the reform saw a generally high rate of investment and concentration on the manufacture of producer goods. The resultant shortage of consumer commodities caused a gradual accumulation of excess demand: personal savings were relatively large, and, in the late 1970s and early 1980s, there was a booming market for such expensive consumer durables as watches and television sets. Second, the real value of many items changed as some resources became more scarce and as technology altered both manufacturing processes and products. The real cost of producing agricultural products rose with the increased use of modern inputs. Manufactured consumer goods that were more technologically advanced and more expensive than those previously on the market - such as washing machines and color television sets - became available.
During the early 1980s, both consumer incomes and the amount of money in circulation increased fairly rapidly and, at times, unexpectedly. Consumer incomes grew because of the reform program's emphasis on material incentive
s and because of the overall expansion in productivity
and income-earning possibilities. The higher profits earned and retained by enterprises were passed on to workers, in many cases, in the form of wage hikes, bonuses, and higher subsidies. At the same time, the expanded and diversified role of the banking system
caused the amounts of loans and deposits to increase at times beyond officially sanctioned levels, injecting unplanned new quantities of currency into the economy.
and improved living standards
. The potential for further improvements in efficiency and productivity was greatly increased by the revival of the education system, the opening of the economy to broader trade and cooperation with other countries, the expanded use of the market to enliven commerce and production, and the increased decision-making power of individual economic units.
The country's most important resource was its labor force
, the largest in the world. The rapid expansion and improvement of the education system that began in the late 1970s was creating larger numbers of workers who were skilled and well educated, as well as the first substantial numbers of advanced-degree holders to staff the nation's universities and research institutes. In addition, the decentralization of management
encouraged the participation in planning
and decision making
of growing numbers of local and enterprise-level managers, planners, administrators, and scientists. It also trained future economic leaders for higher administrative responsibilities.
In terms of material resources, China was adequately endowed to meet the needs of modernization in all but a few materials. Under the new policy of encouraging cooperation and joint venture
s with foreign firms, advanced technology was more widely used to exploit China's large deposits of iron ore and other important minerals, along with the country's vast coal
and petroleum
reserves and its enormous hydroelectric potential - the largest in the world. Much of the investment
in expanding the transportation network in the 1980s was aimed at improving access to previously remote mineral and energy resources for both domestic needs and foreign trade.
The most stringent resource constraint was the limited amount of arable land
, which actually declined in the 1980s as cropland was appropriated for new rural housing and urban expansion. Between 1978 and 1985, the total area sown to crops declined by over 4 percent. The loss of farmland
, however, was more than compensated for by improved productivity
of the land that remained under cultivation
. Farmers expanded the irrigated
area, increased fertilizer
application, acquired improved crop varieties, and made better use of comparative advantage
in determining which crops to grow, resulting in an average rate of growth in the value of crop production of better than 5 percent a year over the same 7-year period. Although agricultural growth rates had begun to fall off in the mid-1980s, the incentives of the responsibility system and greater access to international technical advances suggested that the farm sector could continue to meet the needs of the growing economy in the foreseeable future.
The industrial sector, while much less advanced than those of the developed countries, was nonetheless a solid base for modernization
. Industrial enterprises were dispersed throughout the country and included units capable of producing all major kinds of machinery, equipment, chemicals, building materials, and light industrial goods. Chinese enterprises could make most of the products required for modernization, and the growing pool of industrial technicians and managers was increasingly capable of effectively integrating advanced foreign technology into Chinese production processes. Key industries were being technologically strengthened by the purchase of advanced foreign equipment and the adoption of modern management techniques. Despite promising potential, formidable obstacles still impeded the drive for modernization. Physical restraints included a renewed increase in birth rates and population growth rates as the number of women of child-bearing age began to rise in 1986 and 1987. Some crucial resources - especially educated personnel and modern equipment - still were in very short supply because of the sheer size of the economy. In the realm of policy, the administration faced the daunting problem of trying to integrate market measures - for efficiency - with government planning and control, the source of stability
. In 1987 both kinds of mechanisms exerted extensive influence with the result that market efficiency was hindered by government intervention and government plans were undermined by off-plan activities. Finally, the most serious concern of government leaders was the possibility of future political upheavals. While nearly all Chinese people enjoyed better living conditions as a result of the progress achieved by the reform program, the new policies also had given rise to new social problems
and political tensions. Increasing crime
and corruption
, greater emphasis on the profit motive, widening income disparities, and inflation aroused resistance in many conservative quarters and resulted in the political struggle that caused Hu Yaobang
to be forced from his position as Chinese Communist Party general secretary in early 1987. By mid-1987 it was not clear what the outcome of the struggle would be or how it would affect the future course of economic reform (see Economic reform in the People's Republic of China).
Chinese financial system
China's financial system is highly regulated and has recently begun to expand rapidly as monetary policy becomes integral to its overall economic policy...
, has enabled the government to mobilize whatever surplus was available and greatly increase the proportion of the national economic output devoted to investment
Investment
Investment has different meanings in finance and economics. Finance investment is putting money into something with the expectation of gain, that upon thorough analysis, has a high degree of security for the principal amount, as well as security of return, within an expected period of time...
.
Analysts estimated that investment accounted for about 25 percent of GNP in 1979, a rate surpassed by few other countries. Because of the comparatively low level of GNP
GNP
Gross National Product is the market value of all products and services produced in one year by labor and property supplied by the residents of a country...
, 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
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
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
Technological change
Technological change is a term that is used to describe the overall process of invention, innovation and diffusion of technology or processes. The term is synonymous with technological development, technological achievement, and technological progress...
proceeded gradually, and outdated equipment continued to be used as long as possible. Consequently, many different levels of technology were in use simultaneously (see Science and technology in the People's Republic of China
Science and technology in the People's Republic of China
Science and technology in the People's Republic of China has been growing rapidly. As China develops and becomes more connected to the global economy, the government has placed a stronger emphasis on science and technology as an integral part of the socio-economic development of the country...
). 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
Agriculture
Agriculture is the cultivation of animals, plants, fungi and other life forms for food, fiber, and other products used to sustain life. Agriculture was the key implement in the rise of sedentary human civilization, whereby farming of domesticated species created food surpluses that nurtured the...
received a smaller share of state investment than industry and remained at a much lower average level of technology
Technology
Technology is the making, usage, and knowledge of tools, machines, techniques, crafts, systems or methods of organization in order to solve a problem or perform a specific function. It can also refer to the collection of such tools, machinery, and procedures. The word technology comes ;...
and productivity
Productivity
Productivity is a measure of the efficiency of production. Productivity is a ratio of what is produced to what is required to produce it. Usually this ratio is in the form of an average, expressing the total output divided by the total input...
. 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
GRAIN
GRAIN is a small international non-profit organisation that works to support small farmers and social movements in their struggles for community-controlled and biodiversity-based food systems. Our support takes the form of independent research and analysis, networking at local, regional and...
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 advantage
Comparative advantage
In economics, the law of comparative advantage says that two countries will both gain from trade if, in the absence of trade, they have different relative costs for producing the same goods...
s of each locality by expanding transportation capacity. The communications
Telecommunication
Telecommunication is the transmission of information over significant distances to communicate. In earlier times, telecommunications involved the use of visual signals, such as beacons, smoke signals, semaphore telegraphs, signal flags, and optical heliographs, or audio messages via coded...
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 subsistence
Subsistence agriculture
Subsistence agriculture is self-sufficiency farming in which the farmers focus on growing enough food to feed their families. The typical subsistence farm has a range of crops and animals needed by the family to eat and clothe themselves during the year. Planting decisions are made with an eye...
-level 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 Inner Mongolia
Inner Mongolia
Inner Mongolia is an autonomous region of the People's Republic of China, located in the northern region of the country. Inner Mongolia shares an international border with the countries of Mongolia and the Russian Federation...
; and poor, struggling grain-producing villages in the arid mountains of Shaanxi
Shaanxi
' is a province in the central part of Mainland China, and it includes portions of the Loess Plateau on the middle reaches of the Yellow River in addition to the Qinling Mountains across the southern part of this province...
and Gansu
Gansu
' is a province located in the northwest of the People's Republic of China.It lies between the Tibetan and Huangtu plateaus, and borders Mongolia, Inner Mongolia, and Ningxia to the north, Xinjiang and Qinghai to the west, Sichuan to the south, and Shaanxi to the east...
provinces. The economy had progressed in major ways since 1949, but after four to five decades experts in China and abroad agreed that it had a great distance yet to go.
Despite formidable constraints and disruptions, the Chinese economy
Economy of the People's Republic of China
The People's Republic of China ranks since 2010 as the world's second largest economy after the United States. It has been the world's fastest-growing major economy, with consistent growth rates of around 10% over the past 30 years. China is also the largest exporter and second largest importer of...
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.
Economic policies, 1949-80
When the Communist Party of ChinaCommunist Party of China
The Communist Party of China , also known as the Chinese Communist Party , is the founding and ruling political party of the People's Republic of China...
came to power in 1949, its leaders' fundamental long-range goals were to transform China into a modern, powerful, socialist nation. In economic terms these objectives meant industrialization, improvement of living standards, narrowing of income differences
Income inequality metrics
The concept of inequality is distinct from that of poverty and fairness. Income inequality metrics or income distribution metrics are used by social scientists to measure the distribution of income, and economic inequality among the participants in a particular economy, such as that of a specific...
, and production of modern military equipment. As the years passed, the leadership continued to subscribe to these goals. But the economic policies formulated to achieve them were dramatically altered on several occasions in response to major changes in the economy, internal politics, and international political and economic developments.
An important distinction emerged between leaders who felt that the socialist goals of income equalization and heightened political consciousness should take priority over material progress and those who believed that industrialization and general economic modernization
Modernization
In the social sciences, modernization or modernisation refers to a model of an evolutionary transition from a 'pre-modern' or 'traditional' to a 'modern' society. The teleology of modernization is described in social evolutionism theories, existing as a template that has been generally followed by...
were prerequisites for the attainment of a successful socialist order. Among the prominent leaders who considered politics the prime consideration were Mao Zedong
Mao Zedong
Mao Zedong, also transliterated as Mao Tse-tung , and commonly referred to as Chairman Mao , was a Chinese Communist revolutionary, guerrilla warfare strategist, Marxist political philosopher, and leader of the Chinese Revolution...
, Lin Biao
Lin Biao
Lin Biao was a major Chinese Communist military leader who was pivotal in the communist victory in the Chinese Civil War, especially in Northeastern China...
, and the members of the Gang of Four
Gang of Four
The Gang of Four was the name given to a political faction composed of four Chinese Communist Party officials. They came to prominence during the Cultural Revolution and were subsequently charged with a series of treasonous crimes...
. Leaders who more often stressed practical economic considerations included Liu Shaoqi
Liu Shaoqi
Liu Shaoqi was a Chinese revolutionary, statesman, and theorist. He was Chairman of the People's Republic of China, China's head of state, from 27 April 1959 to 31 October 1968, during which he implemented policies of economic reconstruction in China...
, Zhou Enlai
Zhou Enlai
Zhou Enlai was the first Premier of the People's Republic of China, serving from October 1949 until his death in January 1976...
, and Deng Xiaoping
Deng Xiaoping
Deng Xiaoping was a Chinese politician, statesman, and diplomat. As leader of the Communist Party of China, Deng was a reformer who led China towards a market economy...
. For the most part, important policy shifts reflected the alternating emphasis on political and economic goals and were accompanied by major changes in the positions of individuals in the political power structure. An important characteristic in the development of economic policies and the underlying economic model was that each new policy period, while differing significantly from its predecessor, nonetheless retained most of the existing economic organization. Thus the form of the economic model and the policies that expressed it at any given point in Chinese history reflected both the current policy emphasis and a structural foundation built up during the earlier periods.
Recovery from war, 1949-52
In 1949 China's economy was suffering from the debilitating effects of decades of warfare. Many mines and factories had been damaged or destroyed. At the end of the war with JapanJapan
Japan is an island nation in East Asia. Located in the Pacific Ocean, it lies to the east of the Sea of Japan, China, North Korea, South Korea and Russia, stretching from the Sea of Okhotsk in the north to the East China Sea and Taiwan in the south...
in 1945, Soviet troops
Military history of the Soviet Union
The military history of the Soviet Union began in the days following the 1917 October Revolution that brought the Bolsheviks to power. The new government formed the Red Army to fight various enemies in the Russian Civil War. The years 1918-1921 saw Red Army's defeats in Polish-Soviet war and...
had dismantled about half the machinery in the major industrial areas of the northeast and shipped it to the Soviet Union
Soviet Union
The Soviet Union , officially the Union of Soviet Socialist Republics , was a constitutionally socialist state that existed in Eurasia between 1922 and 1991....
. Transportation, communication, and power systems had been destroyed or had deteriorated because of lack of maintenance. Agriculture was disrupted, and food production was some 30 percent below its pre-war peak level. Further, economic ills were compounded by one of the most virulent inflation
Inflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...
s in world history.
The chief goal of the government for the 1949-1952 period was simply to restore the economy to normal working order. The administration moved quickly to repair transportation and communication links and revive the flow of economic activity. The banking system was nationalized and centralized under the People's Bank of China
People's Bank of China
The People's Bank of China is the central bank of the People's Republic of China with the power to control monetary policy and regulate financial institutions in mainland China...
. To bring inflation under control by 1951, the government unified the monetary system, tightened credit, restricted government budgets at all levels and put them under central control, and guaranteed the value of the currency
Currency
In economics, currency refers to a generally accepted medium of exchange. These are usually the coins and banknotes of a particular government, which comprise the physical aspects of a nation's money supply...
. Commerce was stimulated and partially regulated by the establishment of state trading companies (commercial departments), which competed with private traders in purchasing goods from producers and selling them to consumers or enterprises. Transformation of ownership in industry proceeded slowly. About a third of the country's enterprises had been under state control while the Guomindang government was in power (1927-1949), as was much of the modernized transportation sector. The Communist Party of China immediately made these units state-owned enterprises upon taking power in 1949. The remaining privately owned enterprises were gradually brought under government control, but 17 percent of industrial units were still completely outside the state system in 1952.
In agriculture a major change in landownership was carried out. Under a nationwide land reform program, titles to about 45 percent of the arable land
Arable land
In geography and agriculture, arable land is land that can be used for growing crops. It includes all land under temporary crops , temporary meadows for mowing or pasture, land under market and kitchen gardens and land temporarily fallow...
were redistributed from landlord
Landlord
A landlord is the owner of a house, apartment, condominium, or real estate which is rented or leased to an individual or business, who is called a tenant . When a juristic person is in this position, the term landlord is used. Other terms include lessor and owner...
s and more prosperous farmers to the 60 to 70 percent of farm families that previously owned little or no land. Once land reform was completed in an area, farmers were encouraged to cooperate in some phases of production through the formation of small "mutual aid teams" of six or seven households each. Thirty-nine percent of all farm households belonged to mutual aid teams in 1952. By 1952 price stability had been established, commerce had been restored, and industry and agriculture had regained their previous peak levels of production. The period of recovery had achieved its goals.
First Five-Year Plan, 1953-57
Having restored a viable economic base, the leadership under Mao ZedongMao Zedong
Mao Zedong, also transliterated as Mao Tse-tung , and commonly referred to as Chairman Mao , was a Chinese Communist revolutionary, guerrilla warfare strategist, Marxist political philosopher, and leader of the Chinese Revolution...
, Zhou Enlai
Zhou Enlai
Zhou Enlai was the first Premier of the People's Republic of China, serving from October 1949 until his death in January 1976...
, and other revolutionary veterans was prepared to embark on an intensive program of industrial
Industry
Industry refers to the production of an economic good or service within an economy.-Industrial sectors:There are four key industrial economic sectors: the primary sector, largely raw material extraction industries such as mining and farming; the secondary sector, involving refining, construction,...
growth and socialization
Socialization
Socialization is a term used by sociologists, social psychologists, anthropologists, political scientists and educationalists to refer to the process of inheriting and disseminating norms, customs and ideologies...
. For this purpose the administration adopted the Soviet economic model, based on state ownership
State ownership
State ownership, also called public ownership, government ownership or state property, are property interests that are vested in the state, rather than an individual or communities....
in the modern sector, large collective
Collective
A collective is a group of entities that share or are motivated by at least one common issue or interest, or work together on a specific project to achieve a common objective...
units in agriculture
Agriculture
Agriculture is the cultivation of animals, plants, fungi and other life forms for food, fiber, and other products used to sustain life. Agriculture was the key implement in the rise of sedentary human civilization, whereby farming of domesticated species created food surpluses that nurtured the...
, and centralized economic planning
Planned economy
A planned economy is an economic system in which decisions regarding production and investment are embodied in a plan formulated by a central authority, usually by a government agency...
. The Soviet approach to economic development was manifested in the First Five-Year Plan
Five-Year Plans of China
The five-year plans of People's Republic of China are a series of economic development initiatives. The economy was shaped by the Communist Party of China through the plenary sessions of the Central Committee and national congresses...
(1953–57). As in the Soviet economy, the main objective was a high rate of economic growth
Economic growth
In economics, economic growth is defined as the increasing capacity of the economy to satisfy the wants of goods and services of the members of society. Economic growth is enabled by increases in productivity, which lowers the inputs for a given amount of output. Lowered costs increase demand...
, with primary emphasis on industrial development at the expense of agriculture
Agriculture
Agriculture is the cultivation of animals, plants, fungi and other life forms for food, fiber, and other products used to sustain life. Agriculture was the key implement in the rise of sedentary human civilization, whereby farming of domesticated species created food surpluses that nurtured the...
and particular concentration on heavy industry
Heavy industry
Heavy industry does not have a single fixed meaning as compared to light industry. It can mean production of products which are either heavy in weight or in the processes leading to their production. In general, it is a popular term used within the name of many Japanese and Korean firms, meaning...
and capital-intensive technology. Soviet planners helped their Chinese counterparts formulate the plan. Large numbers of Soviet engineer
Engineer
An engineer is a professional practitioner of engineering, concerned with applying scientific knowledge, mathematics and ingenuity to develop solutions for technical problems. Engineers design materials, structures, machines and systems while considering the limitations imposed by practicality,...
s, technician
Technician
A technician is a worker in a field of technology who is proficient in the relevant skills and techniques, with a relatively practical understanding of the theoretical principles. Experienced technicians in a specific tool domain typically have intermediate understanding of theory and expert...
s, and scientist
Scientist
A scientist in a broad sense is one engaging in a systematic activity to acquire knowledge. In a more restricted sense, a scientist is an individual who uses the scientific method. The person may be an expert in one or more areas of science. This article focuses on the more restricted use of the word...
s assisted in developing and installing new heavy industrial
Industry
Industry refers to the production of an economic good or service within an economy.-Industrial sectors:There are four key industrial economic sectors: the primary sector, largely raw material extraction industries such as mining and farming; the secondary sector, involving refining, construction,...
facilities, including many entire plants and pieces of equipment purchased from the Soviet Union
Soviet Union
The Soviet Union , officially the Union of Soviet Socialist Republics , was a constitutionally socialist state that existed in Eurasia between 1922 and 1991....
. 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
Business
A business is an organization engaged in the trade of goods, services, or both to consumers. Businesses are predominant in capitalist economies, where most of them are privately owned and administered to earn profit to increase the wealth of their owners. Businesses may also be not-for-profit...
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 farmer
Farmer
A farmer is a person engaged in agriculture, who raises living organisms for food or raw materials, generally including livestock husbandry and growing crops, such as produce and grain...
s 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' cooperative
Cooperative
A cooperative is a business organization owned and operated by a group of individuals for their mutual benefit...
s, in which families still received some income on the basis of the amount of land they contributed, and eventually to advanced cooperatives, or collective
Collective
A collective is a group of entities that share or are motivated by at least one common issue or interest, or work together on a specific project to achieve a common objective...
s. 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
Iron
Iron is a chemical element with the symbol Fe and atomic number 26. It is a metal in the first transition series. It is the most common element forming the planet Earth as a whole, forming much of Earth's outer and inner core. It is the fourth most common element in the Earth's crust...
and steel
Steel
Steel is an alloy that consists mostly of iron and has a carbon content between 0.2% and 2.1% by weight, depending on the grade. Carbon is the most common alloying material for iron, but various other alloying elements are used, such as manganese, chromium, vanadium, and tungsten...
manufacturing, coal mining
Coal mining
The goal of coal mining is to obtain coal from the ground. Coal is valued for its energy content, and since the 1880s has been widely used to generate electricity. Steel and cement industries use coal as a fuel for extraction of iron from iron ore and for cement production. In the United States,...
, cement
Cement
In the most general sense of the word, a cement is a binder, a substance that sets and hardens independently, and can bind other materials together. The word "cement" traces to the Romans, who used the term opus caementicium to describe masonry resembling modern concrete that was made from crushed...
production, electricity
Electricity
Electricity is a general term encompassing a variety of phenomena resulting from the presence and flow of electric charge. These include many easily recognizable phenomena, such as lightning, static electricity, and the flow of electrical current in an electrical wire...
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
Rural
Rural areas or the country or countryside are areas that are not urbanized, though when large areas are described, country towns and smaller cities will be included. They have a low population density, and typically much of the land is devoted to agriculture...
units for urban
Urban area
An urban area is characterized by higher population density and vast human features in comparison to areas surrounding it. Urban areas may be cities, towns or conurbations, but the term is not commonly extended to rural settlements such as villages and hamlets.Urban areas are created and further...
consumption.
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 (1958-1962), 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
Great Leap Forward
The Great Leap Forward of the People's Republic of China was an economic and social campaign of the Communist Party of China , reflected in planning decisions from 1958 to 1961, which aimed to use China's vast population to rapidly transform the country from an agrarian economy into a modern...
, 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.
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.
Events during the Cultural Revolution decade, 1966-76
The Cultural RevolutionCultural Revolution
The Great Proletarian Cultural Revolution, commonly known as the Cultural Revolution , was a socio-political movement that took place in the People's Republic of China from 1966 through 1976...
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 Chinese 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 Chinese 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
Xenophobia
Xenophobia is defined as "an unreasonable fear of foreigners or strangers or of that which is foreign or strange". It comes from the Greek words ξένος , meaning "stranger," "foreigner" and φόβος , meaning "fear."...
.
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 EnlaiZhou Enlai
Zhou Enlai was the first Premier of the People's Republic of China, serving from October 1949 until his death in January 1976...
.
To revive efficiency in industry, Communist Party of China 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
National People's Congress
The National People's Congress , abbreviated NPC , is the highest state body and the only legislative house in the People's Republic of China. The National People's Congress is held in the Great Hall of the People, Beijing, capital of the People's Republic of China; with 2,987 members, it is the...
in January 1975. In it he called for the Four Modernizations
Four Modernizations
The Four Modernizations were goals, set forth by Zhou Enlai in 1963, to strengthen the fields of agriculture, industry, national defense, science and technology...
(see Glossary). 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.
Gang of Four, 1974-76
During the early and mid-1970s, the radical group later known as the Gang of FourGang of Four
The Gang of Four was the name given to a political faction composed of four Chinese Communist Party officials. They came to prominence during the Cultural Revolution and were subsequently charged with a series of treasonous crimes...
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.
Post-Mao interlude, 1976-78
After the fall of the Gang of Four, the leadership under Hua GuofengHua Guofeng
Su Zhu, better known by the nom de guerre Hua Guofeng , was Mao Zedong's designated successor as the Paramount Leader of the Communist Party of China and the People's Republic of China. Upon Zhou Enlai's death in 1976, he succeeded Zhou as the second Premier of the People's Republic of China...
--and by July 1977 the rehabilitated Deng Xiaoping
Deng Xiaoping
Deng Xiaoping was a Chinese politician, statesman, and diplomat. As leader of the Communist Party of China, Deng was a reformer who led China towards a market economy...
-- reaffirmed the modernization program espoused by Zhou Enlai
Zhou Enlai
Zhou Enlai was the first Premier of the People's Republic of China, serving from October 1949 until his death in January 1976...
in 1975. They also set forth a battery of new policies for the purpose of accomplishing the Four Modernizations.
The new policies strengthened the authority of managers and economic decision makers at the expense of party officials, stressed material incentives for workers, and called for expansion of the research and education systems. Foreign trade was to be increased, and exchanges of students and "foreign experts" with developed countries were to be encouraged.
This new policy initiative was capped at the Fifth National People's Congress in February and March 1978, when Hua Guofeng presented the draft of an ambitious ten-year plan for the 1976-85 period. The plan called for high rates of growth in both industry and agriculture and included 120 construction projects that would require massive and expensive imports of foreign technology.
Between 1976 and 1978, the economy quickly recovered from the stagnation of the Cultural Revolution. Agricultural production was sluggish in 1977 because of a third consecutive year of adverse weather conditions but rebounded with a record harvest in 1978. Industrial output jumped by 14 percent in 1977 and by 13 percent in 1978.
Reform of the economic system, beginning in 1978
| "What is socialism Socialism Socialism is an economic system characterized by social ownership of the means of production and cooperative management of the economy; or a political philosophy advocating such a system. "Social ownership" may refer to any one of, or a combination of, the following: cooperative enterprises,... and what is Marxism Marxism Marxism is an economic and sociopolitical worldview and method of socioeconomic inquiry that centers upon a materialist interpretation of history, a dialectical view of social change, and an analysis and critique of the development of capitalism. Marxism was pioneered in the early to mid 19th... ? We were not quite clear about this in the past. Marxism attaches utmost importance to developing the productive forces. We have said that socialism is the primary stage of communism and that at the advanced stage the principle of from each, according to his ability, to each, according to his needs, will be applied. This calls for highly developed productive forces and an overwhelming abundance of material wealth. Therefore, the fundamental task for the socialist stage is to develop the productive forces. The superiority of the socialist system is demonstrated, in the final analysis, by faster and greater development of those forces than under the capitalist system. As they develop, the people's material and cultural life will constantly improve. One of our shortcomings after the founding of the People's Republic was that we didn't pay enough attention to developing the productive forces. Socialism means eliminating poverty. Pauperism is not socialism, still less communism." |
| — Chinese paramount leader Deng Xiaoping Deng Xiaoping Deng Xiaoping was a Chinese politician, statesman, and diplomat. As leader of the Communist Party of China, Deng was a reformer who led China towards a market economy... on June 30, 1984 |
At the milestone Third Plenum of the National Party Congress's 11th Central Committee which opened on December 22, 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
Asia
Asia is the world's largest and most populous continent, located primarily in the eastern and northern hemispheres. It covers 8.7% of the Earth's total surface area and with approximately 3.879 billion people, it hosts 60% of the world's current human population...
: Japan
Japan
Japan is an island nation in East Asia. Located in the Pacific Ocean, it lies to the east of the Sea of Japan, China, North Korea, South Korea and Russia, stretching from the Sea of Okhotsk in the north to the East China Sea and Taiwan in the south...
, South Korea
South Korea
The Republic of Korea , , is a sovereign state in East Asia, located on the southern portion of the Korean Peninsula. It is neighbored by the People's Republic of China to the west, Japan to the east, North Korea to the north, and the East China Sea and Republic of China to the south...
, Singapore
Singapore
Singapore , officially the Republic of Singapore, is a Southeast Asian city-state off the southern tip of the Malay Peninsula, north of the equator. An island country made up of 63 islands, it is separated from Malaysia by the Straits of Johor to its north and from Indonesia's Riau Islands by the...
, Taiwan
Taiwan
Taiwan , also known, especially in the past, as Formosa , is the largest island of the same-named island group of East Asia in the western Pacific Ocean and located off the southeastern coast of mainland China. The island forms over 99% of the current territory of the Republic of China following...
, and Hong Kong
Hong Kong
Hong Kong is one of two Special Administrative Regions of the People's Republic of China , the other being Macau. A city-state situated on China's south coast and enclosed by the Pearl River Delta and South China Sea, it is renowned for its expansive skyline and deep natural harbour...
.
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
Communism
Communism is a social, political and economic ideology that aims at the establishment of a classless, moneyless, revolutionary and stateless socialist society structured upon common ownership of the means of production...
but to make it work better by substantially increasing the role of market mechanism
Market mechanism
Market mechanism is a term from economics referring to the use of money exchanged by buyers and sellers with an open and understood system of value and time trade offs to produce the best distribution of goods and services...
s 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.
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 XiaopingDeng Xiaoping
Deng Xiaoping was a Chinese politician, statesman, and diplomat. As leader of the Communist Party of China, Deng was a reformer who led China towards a market economy...
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 (see Glossary), which were created in 1979 as enclaves where foreign investment could receive special treatment. Three of the four zones—the cities of Shenzhen
Shenzhen
Shenzhen is a major city in the south of Southern China's Guangdong Province, situated immediately north of Hong Kong. The area became China's first—and one of the most successful—Special Economic Zones...
, Zhuhai, and Shantou
Shantou
Shantou , historically known as Swatow or Suátao, is a prefecture-level city on the eastern coast of Guangdong province, People's Republic of China, with a total population of 5,391,028 as of 2010 and an administrative area of...
--were located in Guangdong
Guangdong
Guangdong is a province on the South China Sea coast of the People's Republic of China. The province was previously often written with the alternative English name Kwangtung Province...
Province, close to Hong Kong. The fourth, Xiamen
Xiamen
Xiamen , also known as Amoy , is a major city on the southeast coast of the People's Republic of China. It is administered as a sub-provincial city of Fujian province with an area of and population of 3.53 million...
, 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
Dalian
Dalian is a major city and seaport in the south of Liaoning province, Northeast China. It faces Shandong to the south, the Yellow Sea to the east and the Bohai Sea to the west and south. Holding sub-provincial administrative status, Dalian is the southernmost city of Northeast China and China's...
, Tianjin
Tianjin
' is a metropolis in northern China and one of the five national central cities of the People's Republic of China. It is governed as a direct-controlled municipality, one of four such designations, and is, thus, under direct administration of the central government...
, Shanghai
Shanghai
Shanghai is the largest city by population in China and the largest city proper in the world. It is one of the four province-level municipalities in the People's Republic of China, with a total population of over 23 million as of 2010...
, and Guangzhou
Guangzhou
Guangzhou , known historically as Canton or Kwangchow, is the capital and largest city of the Guangdong province in the People's Republic of China. Located in southern China on the Pearl River, about north-northwest of Hong Kong, Guangzhou is a key national transportation hub and trading port...
--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
Hu Yaobang
Hu Yaobang was a leader of the People's Republic of China who served as both Chairman and Party General Secretary. Hu joined the Chinese Communist Party in the 1930s, and rose to prominence as a comrade of Deng Xiaoping...
'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 GDP
In 1985, the State Council of China approved to establish a SNA (System of National Accounting), use the GDP to measure the national economy. China started the study of theoretical foundation, guiding, and accounting model etc., for establishing a new system of national economic accounting. In 1986, as the first citizen of the People's Republic of China to receive a Ph.D. in economics from an overseas country, Dr. Fengbo Zhang headed Chinese Macroeconomic ResearchAnalysis of Chinese Macroeconomy
Analysis of Chinese Macroeconomy is a book written by , a Chinese economist.-Reception:The first edition was published in Chinese by People's Press. the first place winner of the annual Chinese National Book Award in 1987...
- the key research project of the seventh Five-Year Plan of China, as well as completing and publishing the China GDP data by China's own research. The summary of the above has been included in the book "Chinese Macroeconomic Structure and Policy" (June 1988) edited by Fengbo Zhang, and collectively authored by the Research Center of the State Council of China. This is the first GDP data which was published by China.
The research utilized the World Bank
World Bank
The World Bank is an international financial institution that provides loans to developing countries for capital programmes.The World Bank's official goal is the reduction of poverty...
’s method as a reference, and made the numerous appropriate adjustments based on China’s national condition. The GDP also has been converted to USD based data by utilizing the moving average exchange rate
Exchange rate
In finance, an exchange rate between two currencies is the rate at which one currency will be exchanged for another. It is also regarded as the value of one country’s currency in terms of another currency...
. The research systematically completed China’s GDP and GDP per capita from 1952 to 1986 and analyzed growth rate, the change and contribution rates of each component. The research also included international comparisons. Additionally, the research compared MPS (Material Product System
Material Product System
Material Product System refers to the system of national accounts used in the former Soviet Union and the Eastern Bloc countries, as well as in China until 1993 introduced the Western SNA system and GDP to China,...
) and SNA (System of National Accounting
United Nations System of National Accounts
The United Nations System of National Accounts is an international standard system of national accounts, the first international standard being published in 1953...
), looking at the results from the two systems from analyzing Chinese economy. This achievement created the foundation for China's GDP research.
The State Council of China issued “The notice regarding implementation of System of National Accounting
United Nations System of National Accounts
The United Nations System of National Accounts is an international standard system of national accounts, the first international standard being published in 1953...
” in August 1992, the Western SNA
United Nations System of National Accounts
The United Nations System of National Accounts is an international standard system of national accounts, the first international standard being published in 1953...
system officially is introduced to China, replaced Soviet Union
Soviet Union
The Soviet Union , officially the Union of Soviet Socialist Republics , was a constitutionally socialist state that existed in Eurasia between 1922 and 1991....
's MPS
Material Product System
Material Product System refers to the system of national accounts used in the former Soviet Union and the Eastern Bloc countries, as well as in China until 1993 introduced the Western SNA system and GDP to China,...
system, Western economic indicator GDP became China’s most important economic indicator. Based on Dr. Fengbo Zhang's research, in 1997, the National Bureau of Statistics of China
National Bureau of Statistics of China
The National Bureau of Statistics is an agency within the State Council of the People's Republic of China charged with the collection and publication of statistics related to the economy, population and society of the People's Republic of China at national and local levels.-List of Directors:*Xue...
, in collaboration with Hitotsubashi University
Hitotsubashi University
is a national university specialised in the social sciences in Tokyo, Japan. The University has campuses in Kunitachi, Kodaira, and Kanda.Hitotsubashi is considered as one of the most prestigious universities in Japan. It is ranked 25th in the world in 2011 by École des Mines de Paris.Hitotsubashi...
of Japan, estimated China’s GDP Data from 1952 up to 1995 based on the SNA principal.
Sources: WikiChina: China GDP,
Wiki.answers.com, YAHOO!ANSWERS, Wiki-Answers China, Yahoo-Answers Chinese, Google-Answers China, China.com
Industry
In 1985, industry employed about 17 percent of the labor force but produced more than 46 percent of gross national product (GNP). It was the fastest growing sector with an average annual growth of 11 percent from 1952 to 1985. There was a wide range of technologicalTechnology
Technology is the making, usage, and knowledge of tools, machines, techniques, crafts, systems or methods of organization in order to solve a problem or perform a specific function. It can also refer to the collection of such tools, machinery, and procedures. The word technology comes ;...
levels. There were many small handicraft
Handicraft
Handicraft, more precisely expressed as artisanic handicraft, sometimes also called artisanry, is a type of work where useful and decorative devices are made completely by hand or by using only simple tools. It is a traditional main sector of craft. Usually the term is applied to traditional means...
units and many enterprises using machinery installed or designed in the 1950s and 1960s. There was a significant number of big, up-to-date plants, including textile mills, steel mills, chemical fertilizer plants, and petrochemical facilities but there were also some burgeoning light industries producing consumer goods. China produced most kinds of products made by industrialized nations but limited quantities of high-technology items. Technology transfer
Technology transfer
Technology Transfer, also called Transfer of Technology and Technology Commercialisation, is the process of skill transferring, knowledge, technologies, methods of manufacturing, samples of manufacturing and facilities among governments or universities and other institutions to ensure that...
was conducted by importing whole plants, equipment, and designs as an important means of progress. Major industrial centers were in Liaoning
Liaoning
' is a province of the People's Republic of China, located in the northeast of the country. Its one-character abbreviation is "辽" , a name taken from the Liao River that flows through the province. "Níng" means "peace"...
Province, Beijing
Beijing
Beijing , also known as Peking , is the capital of the People's Republic of China and one of the most populous cities in the world, with a population of 19,612,368 as of 2010. The city is the country's political, cultural, and educational center, and home to the headquarters for most of China's...
-Tianjin
Tianjin
' is a metropolis in northern China and one of the five national central cities of the People's Republic of China. It is governed as a direct-controlled municipality, one of four such designations, and is, thus, under direct administration of the central government...
-Tangshan
Tangshan
"唐山"redirects here. For an alternative name of China, see Names of China#TangTangshan is a largely industrial prefecture-level city in Hebei province, People's Republic of China. It has become known for the 1976 Tangshan earthquake which measured 7.8 on the Richter scale and killed at least...
area, Shanghai
Shanghai
Shanghai is the largest city by population in China and the largest city proper in the world. It is one of the four province-level municipalities in the People's Republic of China, with a total population of over 23 million as of 2010...
, and Wuhan
Wuhan
Wuhan is the capital of Hubei province, People's Republic of China, and is the most populous city in Central China. It lies at the east of the Jianghan Plain, and the intersection of the middle reaches of the Yangtze and Han rivers...
. Mineral resources included huge reserves of iron ore and there were adequate to abundant supplies of nearly all other industrial minerals. Outdated mining and ore processing technologies were gradually being replaced with modern processes, techniques and equipment.
Agriculture
In 1985, the agricultural sector employed about 63 percent of the labor force and its proportion of GNP was about 33 percent. There was low worker productivityProductivity
Productivity is a measure of the efficiency of production. Productivity is a ratio of what is produced to what is required to produce it. Usually this ratio is in the form of an average, expressing the total output divided by the total input...
because of scant supplies of agricultural machinery
Agricultural machinery
Agricultural machinery is machinery used in the operation of an agricultural area or farm.-Hand tools:The first person to turn from the hunting and gathering lifestyle to farming probably did so by using his bare hands, and perhaps some sticks or stones. Tools such as knives, scythes, and wooden...
and other modern inputs. Most agricultural processes were still performed by hand. There was very small arable land area (just above 10 percent of total area, as compared with 22 percent in United States) in relation to the size of the country and population. There was intensive use of land; all fields produced at least one crop
Crop
Crop may refer to:* Crop, a plant grown and harvested for agricultural use* Crop , part of the alimentary tract of some animals* Crop , a modified whip used in horseback riding or disciplining humans...
a year, and wherever conditions permitted, two or even three crops were grown annually, especially in the south. Grain
GRAIN
GRAIN is a small international non-profit organisation that works to support small farmers and social movements in their struggles for community-controlled and biodiversity-based food systems. Our support takes the form of independent research and analysis, networking at local, regional and...
was the most the important product, including rice
Rice
Rice is the seed of the monocot plants Oryza sativa or Oryza glaberrima . As a cereal grain, it is the most important staple food for a large part of the world's human population, especially in East Asia, Southeast Asia, South Asia, the Middle East, and the West Indies...
, wheat
Wheat
Wheat is a cereal grain, originally from the Levant region of the Near East, but now cultivated worldwide. In 2007 world production of wheat was 607 million tons, making it the third most-produced cereal after maize and rice...
, corn
Maize
Maize known in many English-speaking countries as corn or mielie/mealie, is a grain domesticated by indigenous peoples in Mesoamerica in prehistoric times. The leafy stalk produces ears which contain seeds called kernels. Though technically a grain, maize kernels are used in cooking as a vegetable...
, sorghum
Sorghum
Sorghum is a genus of numerous species of grasses, one of which is raised for grain and many of which are used as fodder plants either cultivated or as part of pasture. The plants are cultivated in warmer climates worldwide. Species are native to tropical and subtropical regions of all continents...
, barley
Barley
Barley is a major cereal grain, a member of the grass family. It serves as a major animal fodder, as a base malt for beer and certain distilled beverages, and as a component of various health foods...
, and millet
Millet
The millets are a group of small-seeded species of cereal crops or grains, widely grown around the world for food and fodder. They do not form a taxonomic group, but rather a functional or agronomic one. Their essential similarities are that they are small-seeded grasses grown in difficult...
. Other important crops included cotton
Cotton
Cotton is a soft, fluffy staple fiber that grows in a boll, or protective capsule, around the seeds of cotton plants of the genus Gossypium. The fiber is almost pure cellulose. The botanical purpose of cotton fiber is to aid in seed dispersal....
, jute
Jute
Jute is a long, soft, shiny vegetable fibre that can be spun into coarse, strong threads. It is produced from plants in the genus Corchorus, which has been classified in the family Tiliaceae, or more recently in Malvaceae....
, oilseeds, sugarcane
Sugarcane
Sugarcane refers to any of six to 37 species of tall perennial grasses of the genus Saccharum . Native to the warm temperate to tropical regions of South Asia, they have stout, jointed, fibrous stalks that are rich in sugar, and measure two to six metres tall...
, and sugar beets. Eggs
Egg (food)
Eggs are laid by females of many different species, including birds, reptiles, amphibians, and fish, and have probably been eaten by mankind for millennia. Bird and reptile eggs consist of a protective eggshell, albumen , and vitellus , contained within various thin membranes...
were also a major product. Pork
Pork
Pork is the culinary name for meat from the domestic pig , which is eaten in many countries. It is one of the most commonly consumed meats worldwide, with evidence of pig husbandry dating back to 5000 BC....
production increased steadily, and poultry
Poultry
Poultry are domesticated birds kept by humans for the purpose of producing eggs, meat, and/or feathers. These most typically are members of the superorder Galloanserae , especially the order Galliformes and the family Anatidae , commonly known as "waterfowl"...
and pig
Pig
A pig is any of the animals in the genus Sus, within the Suidae family of even-toed ungulates. Pigs include the domestic pig, its ancestor the wild boar, and several other wild relatives...
s were raised on family plots. Other livestock
Livestock
Livestock refers to one or more domesticated animals raised in an agricultural setting to produce commodities such as food, fiber and labor. The term "livestock" as used in this article does not include poultry or farmed fish; however the inclusion of these, especially poultry, within the meaning...
were relatively limited in numbers, except for sheep and goat
Goat
The domestic goat is a subspecies of goat domesticated from the wild goat of southwest Asia and Eastern Europe. The goat is a member of the Bovidae family and is closely related to the sheep as both are in the goat-antelope subfamily Caprinae. There are over three hundred distinct breeds of...
s, which grazed in large herds on grasslands of the Inner Mongolia
Inner Mongolia
Inner Mongolia is an autonomous region of the People's Republic of China, located in the northern region of the country. Inner Mongolia shares an international border with the countries of Mongolia and the Russian Federation...
Autonomous Region and the northwest. There was substantial marine and freshwater fishery
Fishery
Generally, a fishery is an entity engaged in raising or harvesting fish which is determined by some authority to be a fishery. According to the FAO, a fishery is typically defined in terms of the "people involved, species or type of fish, area of water or seabed, method of fishing, class of boats,...
. Timber
Timber
Timber may refer to:* Timber, a term common in the United Kingdom and Australia for wood materials * Timber, Oregon, an unincorporated community in the U.S...
resources were mainly located in the northeast and southwest, and much of the country was deforest
DeForest
DeForest, also spelled De Forest and deForest, may refer to:*Calvert DeForest , a United States actor and comedian, best known for his appearances on David Letterman's shows...
ed centuries ago. A wide variety of fruits and vegetables were grown.
Energy resources
China was self-sufficient in nearly all energyEnergy
In physics, energy is an indirectly observed quantity. It is often understood as the ability a physical system has to do work on other physical systems...
forms. Coal
Coal
Coal is a combustible black or brownish-black sedimentary rock usually occurring in rock strata in layers or veins called coal beds or coal seams. The harder forms, such as anthracite coal, can be regarded as metamorphic rock because of later exposure to elevated temperature and pressure...
and petroleum
Petroleum
Petroleum or crude oil is a naturally occurring, flammable liquid consisting of a complex mixture of hydrocarbons of various molecular weights and other liquid organic compounds, that are found in geologic formations beneath the Earth's surface. Petroleum is recovered mostly through oil drilling...
were exported since early the 1970s. Its coal reserves were among the world's largest, and mining
Mining
Mining is the extraction of valuable minerals or other geological materials from the earth, from an ore body, vein or seam. The term also includes the removal of soil. Materials recovered by mining include base metals, precious metals, iron, uranium, coal, diamonds, limestone, oil shale, rock...
technology was inadequately developed but steadily improved in the late 1980s. Petroleum reserves were very large at the time but of varying quality and in disparate locations. Suspected oil deposits in the northwest and offshore tracts were believed to be among the world's largest. Exploration and extraction was limited by scarcity of equipment and trained personnel. Twenty-seven contracts for joint offshore exploration and production by Japanese and Western oil companies were signed by 1982, but by the late 1980s only a handful of wells were producing oil. Substantial natural gas
Natural gas
Natural gas is a naturally occurring gas mixture consisting primarily of methane, typically with 0–20% higher hydrocarbons . It is found associated with other hydrocarbon fuel, in coal beds, as methane clathrates, and is an important fuel source and a major feedstock for fertilizers.Most natural...
reserves were in the north, northwest, and offshore. The hydroelectric potential of the country was the greatest in the world and sixth largest in capacity, and very large hydroelectric projects were under construction, with others were in the planning stage. Thermal power, mostly coal fired, produced approximately 68 percent of generating capacity in 1985, and was increased to 72 percent by 1990. Emphasis on thermal power in the late 1980s was seen by policy makers as a quick, shortterm solution to energy needs, and hydroelectric and nuclear power
Nuclear power
Nuclear power is the use of sustained nuclear fission to generate heat and electricity. Nuclear power plants provide about 6% of the world's energy and 13–14% of the world's electricity, with the U.S., France, and Japan together accounting for about 50% of nuclear generated electricity...
was seen as a long-term solution. Petroleum production growth continued in order to meet the needs of nationwide mechanization
Mechanization
Mechanization or mechanisation is providing human operators with machinery that assists them with the muscular requirements of work or displaces muscular work. In some fields, mechanization includes the use of hand tools...
and provided important foreign exchange
Foreign exchange reserves
Foreign-exchange reserves in a strict sense are 'only' the foreign currency deposits and bonds held by central banks and monetary authorities. However, the term in popular usage commonly includes foreign exchange and gold, Special Drawing Rights and International Monetary Fund reserve positions...
but domestic use was restricted as much as possible until the end of the decade.
Foreign trade
Foreign trade was small by international standards but was growing rapidly in size and importance, as it represented 20 percent of GNP in 1985. Trade was controlled by the Ministry of Foreign Economic Relations and Trade and subordinate units and by the Bank of ChinaBank of China
Bank of China Limited is one of the big four state-owned commercial banks of the People's Republic of China. It was founded in 1912 by the Government of the Republic of China, to replace the Government Bank of Imperial China. It is the oldest bank in China...
, the foreign exchange arm of the central bank
People's Bank of China
The People's Bank of China is the central bank of the People's Republic of China with the power to control monetary policy and regulate financial institutions in mainland China...
. Substantial decentralization and increased flexibility in foreign trade operations occurred since the late 1970s. Textiles were leading the export category. Other important exports included petroleum
Petroleum
Petroleum or crude oil is a naturally occurring, flammable liquid consisting of a complex mixture of hydrocarbons of various molecular weights and other liquid organic compounds, that are found in geologic formations beneath the Earth's surface. Petroleum is recovered mostly through oil drilling...
and foodstuffs
Foodstuffs
Foodstuffs is a group of three New Zealand grocery and liquor retailers' cooperatives based in Auckland, Wellington and Christchurch which collectively control an estimated 57% of the New Zealand grocery market...
. Leading imports included machinery, transport
Transport
Transport or transportation is the movement of people, cattle, animals and goods from one location to another. Modes of transport include air, rail, road, water, cable, pipeline, and space. The field can be divided into infrastructure, vehicles, and operations...
equipment, manufactured goods, and chemicals. Japan
Economy of Japan
The economy of Japan, a free market economy, is the third largest in the world after the United States and the People's Republic of China, and ahead of Germany at 4th...
was the dominant trading partner, and accounted for 28.9 percent of imports and 15.2 percent of exports in 1986. Hong Kong
Economy of Hong Kong
As one of the world's leading international financial centres, Hong Kong has a major capitalist service economy characterised by low taxation and free trade, and the currency, Hong Kong dollar, is the ninth most traded currency in the world. Hong Kong has remained as the world's freest economy,...
was a leading market for exports (31.6 percent) but a source of only 13 percent of imports. In 1979 the United States
Economy of the United States
The economy of the United States is the world's largest national economy. Its nominal GDP was estimated to be nearly $14.5 trillion in 2010, approximately a quarter of nominal global GDP. The European Union has a larger collective economy, but is not a single nation...
became China's second largest source of imports and in 1986 was the third largest overall trade partner. Western Europe, particularly the Federal Republic of Germany, was also a major trading partner. Tourism
Tourism
Tourism is travel for recreational, leisure or business purposes. The World Tourism Organization defines tourists as people "traveling to and staying in places outside their usual environment for not more than one consecutive year for leisure, business and other purposes".Tourism has become a...
was encouraged and growing.
1990–2000
Chinese New Year
Chinese New Year – often called Chinese Lunar New Year although it actually is lunisolar – is the most important of the traditional Chinese holidays. It is an all East and South-East-Asia celebration...
visit to southern China in early 1992, China's paramount leader at the time Deng Xiaoping
Deng Xiaoping
Deng Xiaoping was a Chinese politician, statesman, and diplomat. As leader of the Communist Party of China, Deng was a reformer who led China towards a market economy...
made a series of political pronouncements designed to give new impetus to and reinvigorate the process of economic reform. The 14th National Communist Party Congress
National Congress of the Communist Party of China
The National Congress of the Communist Party of China is a party congress that is held about once every five years. The National Congress is theoretically the highest body within the Communist Party of China, but in practice important decisions are made before the meeting. Since 1987 the National...
later in the year backed up Deng's renewed push for market reforms, stating that China's key task in the 1990s was to create a "socialist market economy
Socialist market economy
The socialist market economy or socialist market economy with Chinese characteristics is the official term used to refer to the economic system of the People's Republic of China after the reforms of Deng Xiaoping. It is also referred to as socialism with Chinese characteristics...
". Continuity in the political system but bolder reform in the economic system were announced as the hallmarks of the 10-year development plan for the 1990s.
During 1993, output and prices were accelerating, investment outside the state budget was soaring, and economic expansion was fueled by the introduction of more than 2,000 special economic zone
Special Economic Zone
A Special Economic Zone is a geographical region that has economic and other laws that are more free-market-oriented than a country's typical or national laws...
s (SEZs) and the influx of foreign capital that the SEZs facilitated. The government approved additional long-term reforms aimed at giving still more play to market-oriented institutions and at strengthening central control over the financial system
Chinese financial system
China's financial system is highly regulated and has recently begun to expand rapidly as monetary policy becomes integral to its overall economic policy...
; state enterprises would continue to dominate many key industries in what was now termed a "socialist market economy". Fearing hyperinflation, the authorities called in speculative loans, raised interest rate
Interest rate
An interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender. For example, a small company borrows capital from a bank to buy new assets for their business, and in return the lender receives interest at a predetermined interest rate for...
s, and reevaluated investment projects. The growth rate was thus tempered, and the inflation rate dropped from over 17% in 1995 to 8% in early 1996.
In 1996, the Chinese economy continued to grow at a rapid pace, at about 9.5%, accompanied by low inflation. The economy slowed for the next 3 years, influenced in part by the Asian Financial Crisis, with official growth of 8.9% in 1997, 7.8% in 1998 and 7.1% for 1999. From 1995 to 1999, inflation
Inflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...
dropped sharply, reflecting tighter monetary policies
Monetary policy
Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability. The official goals usually include relatively stable prices and low unemployment...
and stronger measures to control food prices. The year 2000 showed a modest reversal of this trend. Gross domestic product in 2000 grew officially at 8.0% that year, and had quadrupled since 1978. In 1999, with its 1.25 billion people but a GDP of just $3,800 per capita (PPP), China became the second largest economy in the world after the US. According to several sources, China did not become the second largest economy until 2010. However, according to gallop polls many Americans rate China's economy as first. Considering GDP per capita, this is far from accurate. The United States remains the largest economy in the world. However, the trend of China Rising is clear.
The Asian financial crisis affected China at the margin, mainly through decreased foreign direct investment
Foreign direct investment
Foreign direct investment or foreign investment refers to the net inflows of investment to acquire a lasting management interest in an enterprise operating in an economy other than that of the investor.. It is the sum of equity capital,other long-term capital, and short-term capital as shown in...
and a sharp drop in the growth of its export
Export
The term export is derived from the conceptual meaning as to ship the goods and services out of the port of a country. The seller of such goods and services is referred to as an "exporter" who is based in the country of export whereas the overseas based buyer is referred to as an "importer"...
s. However, China had huge reserves, a currency that was not freely convertible, and capital inflows that consisted overwhelmingly of long-term investment. For these reasons it remained largely insulated from the regional crisis and its commitment not to devalue had been a major stabilizing factor for the region. However, China faced slowing growth and rising unemployment based on internal problems, including a financial system burdened by huge amounts of bad loans, and massive layoff
Layoff
Layoff , also called redundancy in the UK, is the temporary suspension or permanent termination of employment of an employee or a group of employees for business reasons, such as when certain positions are no longer necessary or when a business slow-down occurs...
s stemming from aggressive efforts to reform state-owned enterprises (SOEs).
Despite China's impressive economic development
Economic development
Economic development generally refers to the sustained, concerted actions of policymakers and communities that promote the standard of living and economic health of a specific area...
during the past two decades, reforming the state sector and modernizing the banking system remained major hurdles. Over half of China's state-owned enterprises were inefficient and reporting losses. During the 15th National Communist Party Congress
National Congress of the Communist Party of China
The National Congress of the Communist Party of China is a party congress that is held about once every five years. The National Congress is theoretically the highest body within the Communist Party of China, but in practice important decisions are made before the meeting. Since 1987 the National...
that met in September 1997, General secretary, President Jiang Zemin
Jiang Zemin
Jiang Zemin is a former Chinese politician, who served as General Secretary of the Communist Party of China from 1989 to 2002, as President of the People's Republic of China from 1993 to 2003, and as Chairman of the Central Military Commission from 1989 to 2005...
announced plans to sell, merge, or close the vast majority of SOEs in his call for increased "non-public ownership" (feigongyou or privatization
Privatization
Privatization is the incidence or process of transferring ownership of a business, enterprise, agency or public service from the public sector to the private sector or to private non-profit organizations...
in euphemistic terms). The 9th National People's Congress
9th National People's Congress
The 9th National People's Congress was in session from 1998 to 2003. It held five plenary sessions in this period. There were 2,979 deputies to this Congress.-Elected state leaders:*President of the People's Republic of China: Jiang Zemin...
endorsed the plans at its March 1998 session. In 2000, China claimed success in its three year effort to make the majority of large state owned enterprises (SOEs) profitable.
2000–present
Constitution of the People's Republic of China
The Constitution of the People's Republic of China is the highest law within the People's Republic of China. The current version was adopted by the 5th National People's Congress on December 4, 1982 with further revisions in 1988, 1993, 1999, and 2004. Three previous state constitutions—those of...
. One of the most significant was a proposal to provide protection for private property
Private property
Private property is the right of persons and firms to obtain, own, control, employ, dispose of, and bequeath land, capital, and other forms of property. Private property is distinguishable from public property, which refers to assets owned by a state, community or government rather than by...
rights. Legislators also indicated there would be a new emphasis on certain aspects of overall government economic policy
Economic policy
Economic policy refers to the actions that governments take in the economic field. It covers the systems for setting interest rates and government budget as well as the labor market, national ownership, and many other areas of government interventions into the economy.Such policies are often...
, including efforts to reduce unemployment
Unemployment
Unemployment , as defined by the International Labour Organization, occurs when people are without jobs and they have actively sought work within the past four weeks...
(now in the 8–10% range in urban areas), to rebalance income distribution
Income distribution
In economics, income distribution is how a nation’s total economy is distributed amongst its population.Income distribution has always been a central concern of economic theory and economic policy...
between urban and rural regions, and to maintain economic growth while protecting the environment
Environmental protection
Environmental protection is a practice of protecting the environment, on individual, organizational or governmental level, for the benefit of the natural environment and humans. Due to the pressures of population and our technology the biophysical environment is being degraded, sometimes permanently...
and improving social equity. The National People's Congress approved the amendments when it met in March 2004.
The Fifth Plenum in October 2005 approved the 11th Five-Year Economic Program (2006–2010) aimed at building a "harmonious society
Harmonious society
The construction of a Harmonious Society is a socio-economic vision that is said to be the ultimate end result of Chinese leader Hu Jintao's signature ideology of the Scientific Development Concept. It serves as the ultimate goal for the ruling Communist Party of China along with Xiaokang society,...
" through more balanced wealth distribution and improved education
Education in China
Education in China may refer to:*Education in the People's Republic of China*Education in Hong Kong*Education in Macau*Education in the Republic of China For historical perspectives, see*History of education in China*Imperial examination...
, medical care
Healthcare system reform in the People's Republic of China
The healthcare system reform in the People's Republic of China refers to the healthcare system transition in modern China.The Ministry of Health of the State Council oversees the health services system, which includes a substantial rural collective sector but little private sector...
, and social security. On March 2006, the National People's Congress
National People's Congress
The National People's Congress , abbreviated NPC , is the highest state body and the only legislative house in the People's Republic of China. The National People's Congress is held in the Great Hall of the People, Beijing, capital of the People's Republic of China; with 2,987 members, it is the...
approved the 11th Five-Year Program. The plan called for a relatively conservative 45% increase in GDP and a 20% reduction in energy intensity
Energy intensity
]Energy intensity is a measure of the energy efficiency of a nation's economy. It is calculated as units of energy per unit of GDP.* High energy intensities indicate a high price or cost of converting energy into GDP....
(energy consumption per unit of GDP) by 2010.
China's economy grew at an average rate of 10% per year during the period 1990–2004, the highest growth rate in the world. China's GDP grew 10.0% in 2003, 10.1%, in 2004, and even faster 10.4% in 2005 despite attempts by the government to cool the economy. China's total trade in 2006 surpassed $1.76 trillion, making China the world's third-largest trading nation after the U.S. and Germany. Such high growth is necessary if China is to generate the 15 million jobs needed annually—roughly the size of Ecuador
Ecuador
Ecuador , officially the Republic of Ecuador is a representative democratic republic in South America, bordered by Colombia on the north, Peru on the east and south, and by the Pacific Ocean to the west. It is one of only two countries in South America, along with Chile, that do not have a border...
or Cambodia
Cambodia
Cambodia , officially known as the Kingdom of Cambodia, is a country located in the southern portion of the Indochina Peninsula in Southeast Asia...
—to employ new entrants into the job market.
On January 14, 2009 as confirmed by the World Bank
World Bank
The World Bank is an international financial institution that provides loans to developing countries for capital programmes.The World Bank's official goal is the reduction of poverty...
the NBS
National Bureau of Statistics of China
The National Bureau of Statistics is an agency within the State Council of the People's Republic of China charged with the collection and publication of statistics related to the economy, population and society of the People's Republic of China at national and local levels.-List of Directors:*Xue...
published the revised figures for 2007 financial year in which growth happened at 13 percent instead of 11.9 percent (provisional figures). China's gross domestic product stood at US$
United States dollar
The United States dollar , also referred to as the American dollar, is the official currency of the United States of America. It is divided into 100 smaller units called cents or pennies....
3.4 trillion while Germany's
Economy of Germany
Germany is the largest national economy in Europe, the fourth-largest by nominal GDP in the world, and fifth by GDP in 2008. Since the age of industrialisation, the country has been a driver, innovator, and beneficiary of an ever more globalised economy...
GDP was USD $3.3 trillion for 2007. This made China the world's third largest economy by gross domestic product
Gross domestic product
Gross domestic product refers to the market value of all final goods and services produced within a country in a given period. GDP per capita is often considered an indicator of a country's standard of living....
. Based on these figures, in 2007 China recorded its fastest growth since 1994 when the GDP grew by 13.1 percent. China may have already overtaken Germany even earlier as China's informal economy
Informal economy
The informal sector or informal economy as defined by governments, scholars, banks, etc. is the part of an economy that is not taxed, monitored by any form of government, or included in any gross national product , unlike the formal economy....
(including the Grey market
Grey market
A grey market or gray market also known as parallel market is the trade of a commodity through distribution channels which, while legal, are unofficial, unauthorized, or unintended by the original manufacturer...
and underground economy
Underground economy
A black market or underground economy is a market in goods or services which operates outside the formal one supported by established state power. Typically the totality of such activity is referred to with the definite article as a complement to the official economies, by market for such goods and...
) is larger than Germany's. http://www.dw-world.de/dw/article/0,,3944657,00.html Louis Kuijs, a senior economist at World Bank China Office in Beijing, said that China's economy may even be (as of January 2009) as much as 15 percent larger than Germany's. According to Merrill Lynch
Merrill Lynch
Merrill Lynch is the wealth management division of Bank of America. With over 15,000 financial advisors and $2.2 trillion in client assets it is the world's largest brokerage. Formerly known as Merrill Lynch & Co., Inc., prior to 2009 the firm was publicly owned and traded on the New York...
China economist Ting Lu, China is projected to overtake Japan in "three to four years".
Social and economic indicators have improved since various recent reforms were launched, but rising inequality is evident between the more highly developed coastal provinces and the less developed, poorer inland regions. According to UN estimates in 2007, around 130 million people in China—mostly in rural areas of the lagging inland provinces—still lived in poverty, on consumption of less than $1 a day
Poverty threshold
The poverty threshold, or poverty line, is the minimum level of income deemed necessary to achieve an adequate standard of living in a given country...
. About 35% of the Chinese population lives under $2 a day.
In the medium-term, economists state that there is ample amount of potential for China to maintain relatively high economic growth
Economic growth
In economics, economic growth is defined as the increasing capacity of the economy to satisfy the wants of goods and services of the members of society. Economic growth is enabled by increases in productivity, which lowers the inputs for a given amount of output. Lowered costs increase demand...
rates and is forecasted to be the world's largest exporter by 2010. http://www.oecd.org/document/15/0,2340,en_2649_201185_35363023_1_1_1_1,00.html Urbanization in China
Urbanization in China
Urbanization in the People's Republic of China increased in speed following the initiation of the reform and opening policy. By the end of 2010, the mainland of the People's Republic of China had a total urban population of 665.57 million or 49.68 percent of the total population.The rural-to-urban...
and technological progress
History of technology
The history of technology is the history of the invention of tools and techniques, and is similar in many ways to the history of humanity. Background knowledge has enabled people to create new things, and conversely, many scientific endeavors have become possible through technologies which assist...
and catch-up
Catch-up effect
The idea of convergence in economics is the hypothesis that poorer economies' per capita incomes will tend to grow at faster rates than richer economies. As a result, all economies should eventually converge in terms of per capita income...
with developed countries have decades left to run. But future growth is complicated by a rapidly aging population and costs of damage to the environment
Environment of China
The environment in the People's Republic of China has traditionally been neglected as the country concentrates on its rise as an economic power. Chasing the political gains of economic development, local officials in China often overlook environmental pollution, worker safety and public health...
.
China launched its Economic Stimulus Plan to specifically deal with the Global financial crisis of 2008–2009. It has primarily focused on increasing affordable housing, easing credit restrictions for mortgage and SMEs, lower taxes such as those on real estate sales and commodities, pumping more public investment into infrastructure development, such as the rail network, roads and ports.
Major natural disasters of 2008, such as the 2008 Chinese winter storms
2008 Chinese winter storms
The 2008 Chinese winter storms（2008年中国雪灾、2008年中国南方雪灾）are a series of winter storm events that affected large portions of southern and central China starting on 25 January 2008 until 6 February 2008. The systems affected most of the area with heavy snows, ice and cold temperatures causing extensive...
, the 2008 Sichuan earthquake
2008 Sichuan earthquake
The 2008 Sichuan earthquake or the Great Sichuan Earthquake was a deadly earthquake that measured at 8.0 Msand 7.9 Mw occurred at 14:28:01 CST...
, and the 2008 South China floods
2008 South China floods
The 2008 South China floods began on 26 May 2008. Four rounds of torrential rains with landslides and flooding lasted for 20 days and affected fifteen provinces in Eastern and Southern China....
mildly affected national economic growth but did do major damage to local and regional economies and infrastructure. Growth rates for Sichuan dropped to 4.6% in the 2nd quarter but recovered to 9.5% annual growth for the whole of 2008 http://in.reuters.com/article/asiaCompanyAndMarkets/idINPEK23256520090116. Major reconstruction efforts are still continuing after the May 12 earthquake, and are expected to last for at least three years. http://www.reliefweb.int/rw/rwb.nsf/db900SID/EDIS-7NBQSE?OpenDocument Despite closures and relocation of some factories because of the 2008 Summer Olympics
2008 Summer Olympics
The 2008 Summer Olympics, officially known as the Games of the XXIX Olympiad, was a major international multi-sport event that took place in Beijing, China, from August 8 to August 24, 2008. A total of 11,028 athletes from 204 National Olympic Committees competed in 28 sports and 302 events...
, the games had a minor impact on Beijing's overall economic growth. The Chinese economy is significantly affected by the 2008-9 global financial crisis due to the export oriented nature of the economy which depends heavily upon international trade. http://www.chinabusinessreview.com/public/0807/sands.html However, government economic-stimulus has been hugely successful by nearly all accounts.
Corporate income tax (CIT): The income tax for companies is set at 25%, although there are some exceptions. When companies invest in industries supported by the Chinese government tax rates are only 15%. Companies that are investing in these industries also get other advantages.
Transparency: In the Corruption Perception Index of 2009 China is ranked 79th out of 180 countries. China is ranked together with Burkina Faso with a CPI-score of 3.6 and a confidence rate between 3.0 and 4.2.
Economic planning
Until the 1980s the economy was directed and coordinated by means of economic plans that were formulated at all levels of administrationAdministration (government)
The term administration, as used in the context of government, differs according to jurisdiction.-United States:In United States usage, the term refers to the executive branch under a specific president , for example: the "Barack Obama administration." It can also mean an executive branch agency...
. The reform program significantly reduced the role of central planning by encouraging off-plan production by state-owned units and by promoting the growth of collective and individual enterprises that did not fall under the planning system. The government also endeavored to replace direct plan control with indirect guidance of the economy through economic levers, such as taxes and investment
Investment
Investment has different meanings in finance and economics. Finance investment is putting money into something with the expectation of gain, that upon thorough analysis, has a high degree of security for the principal amount, as well as security of return, within an expected period of time...
support. Despite these changes, overall direction of the economy was still carried out by the central plan, as was allocation of key goods, such as steel and energy.
When China's planning apparatus was first established in the early 1950s, it was patterned after the highly centralized Soviet system
Soviet Union
The Soviet Union , officially the Union of Soviet Socialist Republics , was a constitutionally socialist state that existed in Eurasia between 1922 and 1991....
. That system basically depended on a central planning bureaucracy that calculated and balanced quantities of major goods demanded and supplied. This approach was substantially modified during the Great Leap Forward (1958–60), when economic management was extensively decentralized. During the 1960s and 1970s, the degree of centralization
Centralization
Centralisation, or centralization , is the process by which the activities of an organisation, particularly those regarding planning and decision-making, become concentrated within a particular location and/or group....
in the planning system fluctuated with the political currents, waxing in times of pragmatic growth and waning under the influence of the Cultural Revolution and the Gang of Four.
At the national level, planning began in the highest bodies of the central government. National economic goals and priorities were determined by the party's Central Committee
Central Committee of the Communist Party of China
The Central Committee of the Communist Party of China is the highest authority within the Communist Party of China. Its approximately 350 members and alternates are selected once every five years by the National Party Congress....
, the State Council
State Council of the People's Republic of China
The State Council of the People's Republic of China , which is largely synonymous with the Central People's Government after 1954, is the chief administrative authority of the People's Republic of China. It is chaired by the Premier and includes the heads of each governmental department and agency...
, and the National People's Congress
National People's Congress
The National People's Congress , abbreviated NPC , is the highest state body and the only legislative house in the People's Republic of China. The National People's Congress is held in the Great Hall of the People, Beijing, capital of the People's Republic of China; with 2,987 members, it is the...
. These decisions were then communicated to the ministries, commissions, and other agencies under the State Council to be put into effect through national economic plans.
The State Planning Commission
State Planning Commission
State Planning Commission may refer to:# Gosplan, ministry of Soviet Union# State Planning Commission of China, former name of the National Development and Reform Commission of the People's Republic of China....
worked with the State Economic Commission, State Statistical Bureau, the former State Capital Construction Commission, People's Bank of China
People's Bank of China
The People's Bank of China is the central bank of the People's Republic of China with the power to control monetary policy and regulate financial institutions in mainland China...
, the economic ministries, and other organs subordinate to the State Council to formulate national plans of varying duration and import. Long-range plans as protracted as ten and twelve years also were announced at various times. These essentially were statements of future goals and the intended general direction of the economy, and they had little direct effect on economic activity. As of late 1987 the most recent such long-range plan was the draft plan for 1976-85, presented by Hua Guofeng
Hua Guofeng
Su Zhu, better known by the nom de guerre Hua Guofeng , was Mao Zedong's designated successor as the Paramount Leader of the Communist Party of China and the People's Republic of China. Upon Zhou Enlai's death in 1976, he succeeded Zhou as the second Premier of the People's Republic of China...
in February 1978.
The primary form of medium-range plan was the five-year plan, another feature adopted from the Soviet system. The purpose of the five-year plan was to guide and integrate the annual plans to achieve balanced growth and progress toward national goals. In practice, this role was only fulfilled by the First Five-Year Plan (1953–57), which served effectively as a blueprint for industrialization. The second (1958–62), third (1966–70), fourth (1971–75), and fifth (1976–80) five-year plans were all interrupted by political upheavals and had little influence. The Sixth Five-Year Plan (1981–85) was drawn up during the planning period and was more a reflection of the results of the reform program than a guide for reform. The Seventh Five-Year Plan (1986–90) was intended to direct the course of the reforms through the second half of the 1980s, but by mid-1987 its future was already clouded by political struggle.
A second form of medium-range planning appeared in the readjustment and recovery periods of 1949-52, 1963–65, and 1979–81, each of which followed a period of chaos - the civil war
Chinese Civil War
The Chinese Civil War was a civil war fought between the Kuomintang , the governing party of the Republic of China, and the Communist Party of China , for the control of China which eventually led to China's division into two Chinas, Republic of China and People's Republic of...
, the Great Leap Forward, and the Gang of Four, respectively. In these instances, normal long- and medium-range planning was suspended while basic imbalances in the economy were targeted and corrected. In each case, objectives were more limited and clearly defined than in the five-year plans and were fairly successfully achieved.
The activities of economic units were controlled by annual plans. Formulation of the plans began in the autumn preceding the year being planned, so that agricultural output for the current year could be taken into account. The foundation of an annual plan was a "material balance table." At the national level, the first step in the preparation of a material balance table was to estimate - for each province, autonomous region, special municipality, and enterprise under direct central control - the demand and supply for each centrally controlled good. Transfers of goods between provincial-level units were planned so as to bring quantities supplied and demanded into balance. As a last resort, a serious overall deficit in a good could be made up by imports.
The initial targets were sent to the provincial-level administrations and the centrally controlled enterprises. The provincial-level counterparts of the state economic commissions and ministries broke the targets down for allocation among their subordinate counties, districts, cities, and enterprises under direct provincial-level control. Counties further distributed their assigned quantities among their subordinate towns, townships, and county-owned enterprises, and cities divided their targets into objectives for the enterprises under their jurisdiction. Finally, towns assigned goals to the state-owned enterprises they controlled. Agricultural targets were distributed by townships among their villages and ultimately were reduced to the quantities that villages contracted for with individual farm households.
At each level, individual units received their target input allocations and output quantities. Managers, engineers, and accountants compared the targets with their own projections, and if they concluded that the planned output quotas exceeded their capabilities, they consulted with representatives of the administrative body superior to them. Each administrative level adjusted its targets on the basis of discussions with subordinate units and sent the revised figures back up the planning ladder. The commissions and ministries evaluated the revised sums, repeated the material balance table procedure, and used the results as the final plan, which the State Council then officially approved.
Annual plans formulated at the provincial level provided the quantities for centrally controlled goods and established targets for goods that were not included in the national plan but were important to the province, autonomous region, or special municipality. These figures went through the same process of disaggregation, review, discussion, and reaggregation as the centrally planned targets and eventually became part of the provincial-level unit's annual plan. Many goods that were not included at the provincial level were similarly added to county and city plans.
The final stage of the planning process occurred in the individual producing units. Having received their output quotas and the figures for their allocations of capital, labor, and other supplies, enterprises generally organized their production schedules into ten-day, one-month, three-month, and six-month plans.
The Chinese planning
Planning
Planning in organizations and public policy is both the organizational process of creating and maintaining a plan; and the psychological process of thinking about the activities required to create a desired goal on some scale. As such, it is a fundamental property of intelligent behavior...
system has encountered the same problems of inflexibility and inadequate responsiveness that have emerged in other centrally planned economies. The basic difficulty has been that it is impossible for planners to foresee all the needs of the economy and to specify adequately the characteristics of planned inputs and products. Beginning in 1979 and 1980, the first reforms were introduced on an experimental basis. Nearly all of these policies increased the autonomy
Autonomy
Autonomy is a concept found in moral, political and bioethical philosophy. Within these contexts, it is the capacity of a rational individual to make an informed, un-coerced decision...
and decision-making power of the various economic units and reduced the direct role of central planning. By the mid-1980s planning still was the government's main mechanism for guiding the economy and correcting imbalances, but its ability to predict and control the behavior of the economy had been greatly reduced.
Determination of prices
Until the reform period of the late 1970s and 1980s, the prices of most commodities were set by government agencies and changed infrequently. Because prices did not change when production costs or demand for a commodityCommodity
In economics, a commodity is the generic term for any marketable item produced to satisfy wants or needs. Economic commodities comprise goods and services....
altered, they often failed to reflect the true values of goods, causing many kinds of goods to be misallocated
Allocation
Allocation may refer to:* Computers** Delayed allocation** Block allocation map** FAT** IP address allocation** Memory allocation** C++ allocators** No-write allocation ** Register allocation* Economics** Economic system** Asset allocation...
and producing a price system that the Chinese government itself referred to as "irrational."
The best way to generate the accurate prices required for economic efficiency is through the process of supply and demand
Supply and demand
Supply and demand is an economic model of price determination in a market. It concludes that in a competitive market, the unit price for a particular good will vary until it settles at a point where the quantity demanded by consumers will equal the quantity supplied by producers , resulting in an...
, and government policy in the 1980s increasingly advocated the use of prices that were "mutually agreed upon by buyer and seller," that is, determined through the market. The prices of products in the farm produce free markets were determined by supply and demand, and in the summer of 1985 the state store prices of all food items except grain also were allowed to float in response to market conditions. Prices of most goods produced by private and collectively owned enterprises in both rural and urban areas generally were free to float, as were the prices of many items that state-owned enterprises produced outside the plan. Prices of most major goods produced by state-owned enterprises, however, along with the grain purchased from farmers by state commercial departments for retail sales in the cities, still were set or restricted by government agencies and still were not sufficiently accurate.
In 1987 the price structure in China was chaotic. Some prices were determined in the market through the forces of supply and demand, others were set by government agencies, and still others were produced by procedures that were not clearly defined. In many cases, there was more than one price for the same commodity, depending on how it was exchanged, the kind of unit that produced it, or who the buyer was. While the government was not pleased with this situation, it was committed to continued price reform. It was reluctant, however, to release the remaining fixed prices because of potential political and economic disruption. Sudden unpredictable price changes would leave consumers unable to continue buying some goods; some previously profitable enterprises under the old price structure would begin to take losses, and others would abruptly become very wealthy.
Role of prices
As a result of the economic reform programChinese economic reform
The Chinese economic reform refers to the program of economic reforms called "Socialism with Chinese characteristics" in the People's Republic of China that were started in December 1978 by reformists within the Communist Party of China led by Deng Xiaoping.China had one of the world's largest...
and the increased importance of market exchange and profitability, in the 1980s prices played a central role in determining the production and distribution of goods in most sectors of the economy. Previously, in the strict centrally planned system, enterprises had been assigned output quotas and inputs in physical terms. Under the reform program, the incentive to show a positive profit caused even state-owned enterprises to choose inputs and products on the basis of prices whenever possible. State-owned enterprises could not alter the amounts or prices of goods they were required to produce by the plan, but they could try to increase their profits by purchasing inputs as inexpensively as possible, and their off-plan production decisions were based primarily on price considerations. Prices were the main economic determinant of production decisions in agriculture and in private and collectively owned industrial enterprises despite the fact that regulations, local government fees or harassment, or arrangements based on personal connections often prevented enterprises from carrying out those decisions.
Consumer goods were allocated to households by the price mechanism, except for rationed grain. Families decided what commodities to buy on the basis of the prices of the goods in relation to household income.
Problems in price policy
The grain market was a typical example of a situation in which the government was confronted with major problems whether it allowed the irrational price structure to persist or carried out price reform. State commercial agencies paid farmers a higher price for grain than the state received from the urban residents to whom they sold it. In 1985 state commercial agencies paid farmers an average price of ¥416.4 per ton of grain and then sold it in the cities at an average price of ¥383.3 a ton, for a loss of ¥33.1 per ton. Ninety million tons were sold under this arrangement, causing the government to lose nearly ¥3 billion. If the state reduced the procurement price, farmers would reduce their grain production. Because grain was the staple Chinese diet, this result was unacceptable. If the state increased the urban retail price to equal the procurement price, the cost of the main food item for Chinese families would rise 9 percent, generating enormous resentment. But even this alternative would probably not entirely resolve the problem, as the average free-market price of grain - ¥510.5 a ton in 1987 - indicated that its true value was well above the state procurement price.There was no clear solution to the price policy dilemma. The approach of the government was to encourage the growth of nonplanned economic activity and thereby expand the proportion of prices determined by market forces. These market prices could then serve as a guide for more accurate pricing of planned items. It was likely that the Chinese economy would continue to operate with a dual price system for some years to come.
Inflation
One of the most striking manifestations of economic instability in China in the 1930s and 1940s was runaway inflationInflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...
. Inflation peaked during the Chinese civil war
Chinese Civil War
The Chinese Civil War was a civil war fought between the Kuomintang , the governing party of the Republic of China, and the Communist Party of China , for the control of China which eventually led to China's division into two Chinas, Republic of China and People's Republic of...
of the late 1940s, when wholesale
Wholesale
Wholesaling, jobbing, or distributing is defined as the sale of goods or merchandise to retailers, to industrial, commercial, institutional, or other professional business users, or to other wholesalers and related subordinated services...
prices in Shanghai
Shanghai
Shanghai is the largest city by population in China and the largest city proper in the world. It is one of the four province-level municipalities in the People's Republic of China, with a total population of over 23 million as of 2010...
increased 7.5 million times in the space of 3 years. In the early 1950s, stopping inflation was a major government objective, accomplished through currency reform, unification and nationalization
Nationalization
Nationalisation, also spelled nationalization, is the process of taking an industry or assets into government ownership by a national government or state. Nationalization usually refers to private assets, but may also mean assets owned by lower levels of government, such as municipalities, being...
of the banks, and tight control over prices and the money supply
Money supply
In economics, the money supply or money stock, is the total amount of money available in an economy at a specific time. There are several ways to define "money," but standard measures usually include currency in circulation and demand deposits .Money supply data are recorded and published, usually...
. These measures were continued until 1979, and China achieved a remarkable record of price stability. Between 1952 and 1978, retail
Retail
Retail consists of the sale of physical goods or merchandise from a fixed location, such as a department store, boutique or kiosk, or by mail, in small or individual lots for direct consumption by the purchaser. Retailing may include subordinated services, such as delivery. Purchasers may be...
prices for consumer goods grew at an average rate of only 0.6 percent a year.
During the reform period, higher levels of inflation appeared when government controls were reduced. The first serious jump in the cost of living for urban residents occurred in 1980, when consumer prices rose by 7.5 percent. In 1985 the increase was 11.9 percent, and in 1986 it was 7.6 percent. There were several basic reasons for this burst of inflation after thirty years of steady prices. First, the years before the reform saw a generally high rate of investment and concentration on the manufacture of producer goods. The resultant shortage of consumer commodities caused a gradual accumulation of excess demand: personal savings were relatively large, and, in the late 1970s and early 1980s, there was a booming market for such expensive consumer durables as watches and television sets. Second, the real value of many items changed as some resources became more scarce and as technology altered both manufacturing processes and products. The real cost of producing agricultural products rose with the increased use of modern inputs. Manufactured consumer goods that were more technologically advanced and more expensive than those previously on the market - such as washing machines and color television sets - became available.
During the early 1980s, both consumer incomes and the amount of money in circulation increased fairly rapidly and, at times, unexpectedly. Consumer incomes grew because of the reform program's emphasis on material incentive
Incentive
In economics and sociology, an incentive is any factor that enables or motivates a particular course of action, or counts as a reason for preferring one choice to the alternatives. It is an expectation that encourages people to behave in a certain way...
s and because of the overall expansion in productivity
Productivity
Productivity is a measure of the efficiency of production. Productivity is a ratio of what is produced to what is required to produce it. Usually this ratio is in the form of an average, expressing the total output divided by the total input...
and income-earning possibilities. The higher profits earned and retained by enterprises were passed on to workers, in many cases, in the form of wage hikes, bonuses, and higher subsidies. At the same time, the expanded and diversified role of the banking system
Banking in China
China's banking system has undergone significant changes in the last two decades: banks are now functioning more like banks than before. Nevertheless, China's banking industry has remained in the government's hands even though banks have gained more autonomy...
caused the amounts of loans and deposits to increase at times beyond officially sanctioned levels, injecting unplanned new quantities of currency into the economy.
National goals
By 1987, under the stimulus of the reform program, the Chinese economy had made major strides toward achieving modernizationModernization
In the social sciences, modernization or modernisation refers to a model of an evolutionary transition from a 'pre-modern' or 'traditional' to a 'modern' society. The teleology of modernization is described in social evolutionism theories, existing as a template that has been generally followed by...
and improved living standards
Standard of living in the People's Republic of China
Before 1949 the Chinese economy was characterized by widespread poverty, extreme income inequalities, and endemic insecurity of livelihood. By means of centralized economic planning, the People's Republic was able to redistribute national income so as to provide the entire population with at least...
. The potential for further improvements in efficiency and productivity was greatly increased by the revival of the education system, the opening of the economy to broader trade and cooperation with other countries, the expanded use of the market to enliven commerce and production, and the increased decision-making power of individual economic units.
The country's most important resource was its labor force
Human resources
Human resources is a term used to describe the individuals who make up the workforce of an organization, although it is also applied in labor economics to, for example, business sectors or even whole nations...
, the largest in the world. The rapid expansion and improvement of the education system that began in the late 1970s was creating larger numbers of workers who were skilled and well educated, as well as the first substantial numbers of advanced-degree holders to staff the nation's universities and research institutes. In addition, the decentralization of management
Management
Management in all business and organizational activities is the act of getting people together to accomplish desired goals and objectives using available resources efficiently and effectively...
encouraged the participation in planning
Planning
Planning in organizations and public policy is both the organizational process of creating and maintaining a plan; and the psychological process of thinking about the activities required to create a desired goal on some scale. As such, it is a fundamental property of intelligent behavior...
and decision making
Decision making
Decision making can be regarded as the mental processes resulting in the selection of a course of action among several alternative scenarios. Every decision making process produces a final choice. The output can be an action or an opinion of choice.- Overview :Human performance in decision terms...
of growing numbers of local and enterprise-level managers, planners, administrators, and scientists. It also trained future economic leaders for higher administrative responsibilities.
In terms of material resources, China was adequately endowed to meet the needs of modernization in all but a few materials. Under the new policy of encouraging cooperation and joint venture
Joint venture
A joint venture is a business agreement in which parties agree to develop, for a finite time, a new entity and new assets by contributing equity. They exercise control over the enterprise and consequently share revenues, expenses and assets...
s with foreign firms, advanced technology was more widely used to exploit China's large deposits of iron ore and other important minerals, along with the country's vast coal
Coal
Coal is a combustible black or brownish-black sedimentary rock usually occurring in rock strata in layers or veins called coal beds or coal seams. The harder forms, such as anthracite coal, can be regarded as metamorphic rock because of later exposure to elevated temperature and pressure...
and petroleum
Petroleum
Petroleum or crude oil is a naturally occurring, flammable liquid consisting of a complex mixture of hydrocarbons of various molecular weights and other liquid organic compounds, that are found in geologic formations beneath the Earth's surface. Petroleum is recovered mostly through oil drilling...
reserves and its enormous hydroelectric potential - the largest in the world. Much of the investment
Investment
Investment has different meanings in finance and economics. Finance investment is putting money into something with the expectation of gain, that upon thorough analysis, has a high degree of security for the principal amount, as well as security of return, within an expected period of time...
in expanding the transportation network in the 1980s was aimed at improving access to previously remote mineral and energy resources for both domestic needs and foreign trade.
The most stringent resource constraint was the limited amount of arable land
Arable land
In geography and agriculture, arable land is land that can be used for growing crops. It includes all land under temporary crops , temporary meadows for mowing or pasture, land under market and kitchen gardens and land temporarily fallow...
, which actually declined in the 1980s as cropland was appropriated for new rural housing and urban expansion. Between 1978 and 1985, the total area sown to crops declined by over 4 percent. The loss of farmland
Arable land
In geography and agriculture, arable land is land that can be used for growing crops. It includes all land under temporary crops , temporary meadows for mowing or pasture, land under market and kitchen gardens and land temporarily fallow...
, however, was more than compensated for by improved productivity
Productivity
Productivity is a measure of the efficiency of production. Productivity is a ratio of what is produced to what is required to produce it. Usually this ratio is in the form of an average, expressing the total output divided by the total input...
of the land that remained under cultivation
Tillage
Tillage is the agricultural preparation of the soil by mechanical agitation of various types, such as digging, stirring, and overturning. Examples of human-powered tilling methods using hand tools include shovelling, picking, mattock work, hoeing, and raking...
. Farmers expanded the irrigated
Irrigation
Irrigation may be defined as the science of artificial application of water to the land or soil. It is used to assist in the growing of agricultural crops, maintenance of landscapes, and revegetation of disturbed soils in dry areas and during periods of inadequate rainfall...
area, increased fertilizer
Fertilizer
Fertilizer is any organic or inorganic material of natural or synthetic origin that is added to a soil to supply one or more plant nutrients essential to the growth of plants. A recent assessment found that about 40 to 60% of crop yields are attributable to commercial fertilizer use...
application, acquired improved crop varieties, and made better use of comparative advantage
Comparative advantage
In economics, the law of comparative advantage says that two countries will both gain from trade if, in the absence of trade, they have different relative costs for producing the same goods...
in determining which crops to grow, resulting in an average rate of growth in the value of crop production of better than 5 percent a year over the same 7-year period. Although agricultural growth rates had begun to fall off in the mid-1980s, the incentives of the responsibility system and greater access to international technical advances suggested that the farm sector could continue to meet the needs of the growing economy in the foreseeable future.
The industrial sector, while much less advanced than those of the developed countries, was nonetheless a solid base for modernization
Modernization
In the social sciences, modernization or modernisation refers to a model of an evolutionary transition from a 'pre-modern' or 'traditional' to a 'modern' society. The teleology of modernization is described in social evolutionism theories, existing as a template that has been generally followed by...
. Industrial enterprises were dispersed throughout the country and included units capable of producing all major kinds of machinery, equipment, chemicals, building materials, and light industrial goods. Chinese enterprises could make most of the products required for modernization, and the growing pool of industrial technicians and managers was increasingly capable of effectively integrating advanced foreign technology into Chinese production processes. Key industries were being technologically strengthened by the purchase of advanced foreign equipment and the adoption of modern management techniques. Despite promising potential, formidable obstacles still impeded the drive for modernization. Physical restraints included a renewed increase in birth rates and population growth rates as the number of women of child-bearing age began to rise in 1986 and 1987. Some crucial resources - especially educated personnel and modern equipment - still were in very short supply because of the sheer size of the economy. In the realm of policy, the administration faced the daunting problem of trying to integrate market measures - for efficiency - with government planning and control, the source of stability
Economic stability
Economic stability refers to an absence of excessive fluctuations in the macroeconomy. An economy with fairly constant output growth and low and stable inflation would be considered economically stable. An economy with frequent large recessions, a pronounced business cycle, very high or variable...
. In 1987 both kinds of mechanisms exerted extensive influence with the result that market efficiency was hindered by government intervention and government plans were undermined by off-plan activities. Finally, the most serious concern of government leaders was the possibility of future political upheavals. While nearly all Chinese people enjoyed better living conditions as a result of the progress achieved by the reform program, the new policies also had given rise to new social problems
Social problems
Social problems are problems and difficulties that people often face in society. These include:*crime*corruption*poverty*homelessness*hunger*disease*drug addiction*alcoholism*schizophrenia*depression*pollution...
and political tensions. Increasing crime
Crime
Crime is the breach of rules or laws for which some governing authority can ultimately prescribe a conviction...
and corruption
Political corruption
Political corruption is the use of legislated powers by government officials for illegitimate private gain. Misuse of government power for other purposes, such as repression of political opponents and general police brutality, is not considered political corruption. Neither are illegal acts by...
, greater emphasis on the profit motive, widening income disparities, and inflation aroused resistance in many conservative quarters and resulted in the political struggle that caused Hu Yaobang
Hu Yaobang
Hu Yaobang was a leader of the People's Republic of China who served as both Chairman and Party General Secretary. Hu joined the Chinese Communist Party in the 1930s, and rose to prominence as a comrade of Deng Xiaoping...
to be forced from his position as Chinese Communist Party general secretary in early 1987. By mid-1987 it was not clear what the outcome of the struggle would be or how it would affect the future course of economic reform (see Economic reform in the People's Republic of China).
See also
- Chinese economic reformChinese economic reformThe Chinese economic reform refers to the program of economic reforms called "Socialism with Chinese characteristics" in the People's Republic of China that were started in December 1978 by reformists within the Communist Party of China led by Deng Xiaoping.China had one of the world's largest...
- Economic history of China (pre-1911)
- Economy of the People's Republic of ChinaEconomy of the People's Republic of ChinaThe People's Republic of China ranks since 2010 as the world's second largest economy after the United States. It has been the world's fastest-growing major economy, with consistent growth rates of around 10% over the past 30 years. China is also the largest exporter and second largest importer of...
- Historical GDP of the People's Republic of ChinaHistorical GDP of the People's Republic of ChinaThis article includes a list of China's historical gross domestic product values, the market value of all final goods and services produced by a nation in a given year. The GDP dollar estimates presented here are calculated at market or government official exchange rates and derived from...
- Special Economic Zones of the People's Republic of China
Further reading
- Bardhan, Pranab. Awakening Giants, Feet of Clay: Assessing the Economic Rise of China and India (Princeton University Press; 2010) 172 pages
- Fengbo Zhang : Analysis of Chinese MacroeconomyAnalysis of Chinese MacroeconomyAnalysis of Chinese Macroeconomy is a book written by , a Chinese economist.-Reception:The first edition was published in Chinese by People's Press. the first place winner of the annual Chinese National Book Award in 1987...
- Chow, Gregory C. China's Economic Transformation (2nd ed. 2007) excerpt and text search
- Feenstra, Robert C., and Shang-Jin Wei, eds. China's Growing Role in World Trade (University of Chicago Press; 2010) 608 pages; studies of the microstructure of trade, sector-level issues, and foreign direct investment.
- Naughton, Barry. The Chinese Economy: Transitions and Growth (2007), important new survey
- Oi, Jean C. Rural China Takes Off: Institutional Foundations of Economic Reform, U of California Press, (1999) complete text online free
External links
- China and the Knowledge Economy - World Bank InstituteWorld Bank InstituteThe World Bank Institute is the capacity development branch of the World Bank. It provides learning programs, policy advice and technical assistance to policy makers, government and non-government agencies and development practitioners of developing countries...
report - "This Time, China Is Different" by economist Chen Jing