China’s Economic System Reform (1978–2018) (Research Series on the Chinese Dream and China’s Development Path) 9819992664, 9789819992669

Table of contents :
Series Preface
Foreword: Fundamental Features and Key Framework of China’s Market Economy
Contents
1 Initial Stage: Marketization Reform, 1979–1984
1.1 Introduction
1.2 The First Breakthrough in the Rural Economic System Reform Characterized by the Separation of “Two Rights”
1.3 State-Owned Economy Implements Reforms Characterized by the Expansion of Enterprise Autonomy
1.3.1 1979–1980: Pilot to Expand the Autonomy of State-Owned Enterprises
1.3.2 1981–1982: Full Implementation of the Industrial Economic Responsibility System
1.3.3 After 1983: Replacing Profit Delivery by Tax Payment
1.4 Start of Collective Economic Reform
1.4.1 Beginning of Collective Economic Reform in Towns and Cities
1.4.2 The Start of Township Collective Economic Reform
1.5 Restoration of Individual Entrepreneurship
1.6 Modern Market System Began to Develop
1.7 Start of Macroeconomic Management System Reform
1.8 Initial Development in Opening Up
1.9 Concluding Remarks
2 Full Speed Ahead, 1985–1992
2.1 Introduction
2.2 State-Owned Economy Implements Reforms Characterized by the Contract Management Responsibility System in Enterprises
2.2.1 State-Owned Enterprises Mainly Implement the Contract Management Responsibility System
2.2.2 Start of the State-Owned Asset Management Reform
2.3 Continue to Promote the Reform of Collective Economy
2.3.1 Continue to Promote the Reform of Urban Collective Economy
2.3.2 Continue to Promote the Reform of the Township Collective Economy
2.4 Development of Non-public Economy
2.4.1 Development of Individual Entrepreneurship
2.4.2 Initial Development of the Private Economy
2.5 Continue to Develop Modern Market System
2.6 Deepen the Reform of Macroeconomic Management System
2.7 Further Development of Opening up to the Outside World
2.8 Concluding Remarks
3 Market Institutions Beginning to Take Shape, 1993–2000
3.1 Introduction
3.2 State-Owned Economy Implements Reforms Characterized by the Establishment of a Modern Enterprise System and Strategic Restructuring
3.2.1 The Primary Focus of the Reform is to Establish a Modern Enterprise System in State-Owned Enterprises
3.2.2 Strategic Restructuring of State-Owned Enterprises
3.2.3 The Reform of State-Owned Asset Management System Zigzagged Forward in Exploration
3.3 Deepening the Reform of Collective Economy
3.3.1 Deepening the Reform of Urban Collective Economy
3.3.2 Deepening the Reform of Township Collective Economy
3.4 Continued Development of the Non-public Economy
3.4.1 Continued Rapid Development of the Individual Entrepreneurship
3.4.2 High Growth of Private Economy
3.5 The Modern Market System in Its Initial Stage of Formation
3.6 Initial Establishment of the Institutional Framework for Macroeconomic Management
3.7 Initial Formation of the Overall Pattern of Opening up to the Outside World
3.8 Concluding Remarks
4 Market Institutions Nearing Maturity, 2001–2011
4.1 Introduction
4.2 Reform of the State-Owned Economy Characterized by Continued Strategic Adjustment and Establishment of a Modern Enterprise System
4.2.1 Continue to Promote the Strategic Adjustment of the Layout of the State-Owned Economy
4.2.2 Continuing to Build a Modern Enterprise System
4.2.3 Continuing the Establishment of a State-Owned Asset Management System
4.3 Comprehensively Deepening Rural Economic Reform
4.3.1 Enforcing the Strictest System for Protecting Farmland
4.3.2 Improving Rural Land Management System
4.3.3 Implementing Rural Tax and Fee Reform
4.4 Deepening the Reform of Collective Economy
4.5 Non-public Economy Continuing to Develop Rapidly
4.6 Improving the Modern Market System
4.7 Improving Macroeconomic Management System
4.8 Development of the Overall Opening-Up Pattern
4.9 Concluding Remarks
5 Comprehensive Deepening of Market Reform, 2012–2018
5.1 Introduction
5.2 Reform of State-Owned Enterprises: Embracing Capital-Oriented Management and Expediting the Growth of Mixed-Ownership Enterprises
5.2.1 The Transformation from Enterprise-Oriented Management to Capital-Oriented Management
5.2.2 Accelerate the Development of Mixed Ownership Economy
5.2.3 Further Promote the Restructuring and Reorganization of State-Owned Enterprises
5.2.4 Improve the Corporate Governance Structure of State-Owned Enterprises
5.3 Promote the Reform of the Rural Economic System Featuring the “Separation of Three Rights”
5.4 Accelerate the Development of Non-public Economy
5.5 Continue to Improve the Modern Market System
5.6 Comprehensive Deepening of the Macroeconomic Management System Reform
5.7 A New Stage in the Development of the Overall Pattern of Opening up to the Outside World
5.8 Concluding Remarks
Concluding Remarks: Achievements of China’s Economic System Reform and Its Significance
A.1 Achievements of China’s Economic Reform
A.2 The Reform Has Propelled China from a Major World Economy to an Economic Powerhouse
A.3 The Driving Force of China’s Economic Development

Citation preview

Research Series on the Chinese Dream and China’s Development Path

Haibo Wang

China’s Economic System Reform (1978–2018)

Research Series on the Chinese Dream and China’s Development Path Series Editors Yang Li, Chinese Academy of Social Sciences, Beijing, China Peilin Li, Chinese Academy of Social Sciences, Beijing, China

Drawing on a large body of empirical studies done over the last two decades, this Series provides its readers with in-depth analyses of the past and present and forecasts for the future course of China’s development. It contains the latest research results made by members of the Chinese Academy of Social Sciences. This series is an invaluable companion to every researcher who is trying to gain a deeper understanding of the development model, path and experience unique to China. Thanks to the adoption of Socialism with Chinese characteristics, and the implementation of comprehensive reform and opening-up, China has made tremendous achievements in areas such as political reform, economic development, and social construction, and is making great strides towards the realization of the Chinese dream of national rejuvenation. In addition to presenting a detailed account of many of these achievements, the authors also discuss what lessons other countries can learn from China’s experience. Project Director Shouguang Xie, President, Social Sciences Academic Press Academic Advisors Fang Cai, Peiyong Gao, Lin Li, Qiang Li, Huaide Ma, Jiahua Pan, Changhong Pei, Ye Qi, Lei Wang, Ming Wang, Yuyan Zhang, Yongnian Zheng, Hong Zhou

Haibo Wang

China’s Economic System Reform (1978–2018)

Haibo Wang Institute of Industrial Economics Chinese Academy of Social Sciences Beijing, China

ISSN 2363-6866 ISSN 2363-6874 (electronic) Research Series on the Chinese Dream and China’s Development Path ISBN 978-981-99-9266-9 ISBN 978-981-99-9267-6 (eBook) https://doi.org/10.1007/978-981-99-9267-6 Jointly published with Social Sciences Academic Press The print edition is not for sale in China (Mainland). Customers from China (Mainland) please order the print book from: Social Sciences Academic Press. Translation from the Chinese Simplified language edition: “中国经济体制改革 (1978~2018)” by Haibo Wang, © Social Science Academic Press 2018. Published by Social Science Academic Press. All Rights Reserved. © Social Sciences Academic Press 2024 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publishers, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publishers nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publishers remain neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Singapore Pte Ltd. The registered company address is: 152 Beach Road, #21-01/04 Gateway East, Singapore 189721, Singapore Paper in this product is recyclable.

Series Preface

Since China’s reform and opening began in 1978, the country has come a long way on the path of Socialism with Chinese characteristics, under the leadership of the Communist Party of China. Over 30 years of reform, efforts and sustained spectacular economic growth have turned China into the world’s second-largest economy and wrought many profound changes in the Chinese society. These historically significant developments have been garnering increasing attention from scholars, governments, and the general public alike around the world since the 1990s, when the newest wave of China studies began to gather steam. Some of the hottest topics have included the so-called China miracle, Chinese phenomenon, Chinese experience, Chinese path, and the Chinese model. Homegrown researchers have soon followed suit. Already hugely productive, this vibrant field is putting out a large number of books each year, with Social Sciences Academic Press alone having published hundreds of titles on a wide range of subjects. Because most of these books have been written and published in Chinese, however, readership has been limited outside China—even among many who study China—for whom English is still the lingua franca. This language barrier has been an impediment to efforts by academia, business communities, and policy-makers in other countries to form a thorough understanding of contemporary China, of what is distinct about China’s past and present may mean not only for her future but also for the future of the world. The need to remove such an impediment is both real and urgent, and the Research Series on the Chinese Dream and China’s Development Path is my answer to the call. This series features some of the most notable achievements from the last 20 years by scholars in China in a variety of research topics related to reform and opening. They include both theoretical explorations and empirical studies, and cover economy, society, politics, law, culture, and ecology, the six areas in which reform and opening policies have had the deepest impact and farthest-reaching consequences for the country. Authors for the series have also tried to articulate their visions of the “Chinese Dream” and how the country can realize it in these fields and beyond. All of the editors and authors for the Research Series on the Chinese Dream and China’s Development Path are both longtime students of reform and opening v

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Series Preface

and recognized authorities in their respective academic fields. Their credentials and expertise lend credibility to these books, each of which has been subject to a rigorous peer review process for inclusion in the series. As part of the Reform and Development Program under the State Administration of Press, Publication, Radio, Film, and Television of the People’s Republic of China, the series is published by Springer, a Germany-based academic publisher of international repute, and distributed overseas. I am confident that it will help fill a lacuna in studies of China in the era of reform and opening. Beijing, China

Shouguang Xie

Foreword: Fundamental Features and Key Framework of China’s Market Economy

China’s socialist market economy is similar to the market economy of contemporary developed countries in that it is also a modern market economy with macroeconomic regulation by the government. In terms of its particularities, China’s socialist market economy has the fundamental characteristics: (1) It is integrated with the basic economic system of socialist society; (2) it is established and developed under the guidance of the Communist Party of China (CPC) as the core leading force; (3) it is people-centered and operates with the fundamental interests of the people as its starting point and objective goal. To achieve the goal of establishing a socialist market economy system is to build the main framework of the socialist market economy system. Based on the objective requirements of establishing a socialist market economy system and the experience of reform practice, this main framework can be summarized as follows: The basic economic system of China’s primary stage of socialism is to take the public ownership as the mainstay with multiple ownership systems developing together; with this as the cornerstone, it consists of six main pillars: modern enterprise system, modern market system, macroeconomic control system, modern distribution system, social security system, and open economy. This cornerstone and the six pillars together construct the edifice of socialist market economy. China’s economic reform, which began in 1978, has gone through the following five stages.

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Contents

1 Initial Stage: Marketization Reform, 1979–1984 . . . . . . . . . . . . . . . . . . . 1.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2 The First Breakthrough in the Rural Economic System Reform Characterized by the Separation of “Two Rights” . . . . . . . . 1.3 State-Owned Economy Implements Reforms Characterized by the Expansion of Enterprise Autonomy . . . . . . . . . . . . . . . . . . . . . 1.3.1 1979–1980: Pilot to Expand the Autonomy of State-Owned Enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3.2 1981–1982: Full Implementation of the Industrial Economic Responsibility System . . . . . . . . . . . . . . . . . . . . . . . 1.3.3 After 1983: Replacing Profit Delivery by Tax Payment . . . . 1.4 Start of Collective Economic Reform . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4.1 Beginning of Collective Economic Reform in Towns and Cities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4.2 The Start of Township Collective Economic Reform . . . . . . 1.5 Restoration of Individual Entrepreneurship . . . . . . . . . . . . . . . . . . . . . 1.6 Modern Market System Began to Develop . . . . . . . . . . . . . . . . . . . . . 1.7 Start of Macroeconomic Management System Reform . . . . . . . . . . . 1.8 Initial Development in Opening Up . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.9 Concluding Remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Full Speed Ahead, 1985–1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 State-Owned Economy Implements Reforms Characterized by the Contract Management Responsibility System in Enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2.1 State-Owned Enterprises Mainly Implement the Contract Management Responsibility System . . . . . . . . . 2.2.2 Start of the State-Owned Asset Management Reform . . . . . .

1 1 2 3 4 5 7 9 9 10 11 12 14 18 21 23 23

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2.3 Continue to Promote the Reform of Collective Economy . . . . . . . . . 2.3.1 Continue to Promote the Reform of Urban Collective Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3.2 Continue to Promote the Reform of the Township Collective Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4 Development of Non-public Economy . . . . . . . . . . . . . . . . . . . . . . . . . 2.4.1 Development of Individual Entrepreneurship . . . . . . . . . . . . . 2.4.2 Initial Development of the Private Economy . . . . . . . . . . . . . 2.5 Continue to Develop Modern Market System . . . . . . . . . . . . . . . . . . . 2.6 Deepen the Reform of Macroeconomic Management System . . . . . 2.7 Further Development of Opening up to the Outside World . . . . . . . . 2.8 Concluding Remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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3 Market Institutions Beginning to Take Shape, 1993–2000 . . . . . . . . . . 3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 State-Owned Economy Implements Reforms Characterized by the Establishment of a Modern Enterprise System and Strategic Restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2.1 The Primary Focus of the Reform is to Establish a Modern Enterprise System in State-Owned Enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2.2 Strategic Restructuring of State-Owned Enterprises . . . . . . . 3.2.3 The Reform of State-Owned Asset Management System Zigzagged Forward in Exploration . . . . . . . . . . . . . . . 3.3 Deepening the Reform of Collective Economy . . . . . . . . . . . . . . . . . . 3.3.1 Deepening the Reform of Urban Collective Economy . . . . . 3.3.2 Deepening the Reform of Township Collective Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4 Continued Development of the Non-public Economy . . . . . . . . . . . . 3.4.1 Continued Rapid Development of the Individual Entrepreneurship . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4.2 High Growth of Private Economy . . . . . . . . . . . . . . . . . . . . . . 3.5 The Modern Market System in Its Initial Stage of Formation . . . . . . 3.6 Initial Establishment of the Institutional Framework for Macroeconomic Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.7 Initial Formation of the Overall Pattern of Opening up to the Outside World . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.8 Concluding Remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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4 Market Institutions Nearing Maturity, 2001–2011 . . . . . . . . . . . . . . . . . 4.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 Reform of the State-Owned Economy Characterized by Continued Strategic Adjustment and Establishment of a Modern Enterprise System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

73 73

31 33 35 35 36 38 39 43 47

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49 54 55 58 58 59 61 61 61 62 63 68 72

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4.3

4.4 4.5 4.6 4.7 4.8 4.9

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4.2.1 Continue to Promote the Strategic Adjustment of the Layout of the State-Owned Economy . . . . . . . . . . . . . . 73 4.2.2 Continuing to Build a Modern Enterprise System . . . . . . . . . 78 4.2.3 Continuing the Establishment of a State-Owned Asset Management System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 Comprehensively Deepening Rural Economic Reform . . . . . . . . . . . 85 4.3.1 Enforcing the Strictest System for Protecting Farmland . . . . 85 4.3.2 Improving Rural Land Management System . . . . . . . . . . . . . 87 4.3.3 Implementing Rural Tax and Fee Reform . . . . . . . . . . . . . . . . 88 Deepening the Reform of Collective Economy . . . . . . . . . . . . . . . . . . 90 Non-public Economy Continuing to Develop Rapidly . . . . . . . . . . . . 92 Improving the Modern Market System . . . . . . . . . . . . . . . . . . . . . . . . . 93 Improving Macroeconomic Management System . . . . . . . . . . . . . . . . 95 Development of the Overall Opening-Up Pattern . . . . . . . . . . . . . . . . 100 Concluding Remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105

5 Comprehensive Deepening of Market Reform, 2012–2018 . . . . . . . . . . 5.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2 Reform of State-Owned Enterprises: Embracing Capital-Oriented Management and Expediting the Growth of Mixed-Ownership Enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2.1 The Transformation from Enterprise-Oriented Management to Capital-Oriented Management . . . . . . . . . . . 5.2.2 Accelerate the Development of Mixed Ownership Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2.3 Further Promote the Restructuring and Reorganization of State-Owned Enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2.4 Improve the Corporate Governance Structure of State-Owned Enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3 Promote the Reform of the Rural Economic System Featuring the “Separation of Three Rights” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4 Accelerate the Development of Non-public Economy . . . . . . . . . . . . 5.5 Continue to Improve the Modern Market System . . . . . . . . . . . . . . . . 5.6 Comprehensive Deepening of the Macroeconomic Management System Reform . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.7 A New Stage in the Development of the Overall Pattern of Opening up to the Outside World . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.8 Concluding Remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

107 107

108 108 110 114 116 119 126 130 131 140 144

Concluding Remarks: Achievements of China’s Economic System Reform and Its Significance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145

Chapter 1

Initial Stage: Marketization Reform, 1979–1984

1.1 Introduction The Third Plenary Session of the Eleventh Central Committee of the Communist Party of China (CPC) held in December 1978 reiterated the Marxist commitment to seeking truth from facts, focusing on socialist modernization, reforming the economic management system, and actively developing economic cooperation with other countries in the world on an equal and mutually beneficial basis. In order to implement the guidelines of the Third Plenary Session of the Eleventh Central Committee of the CPC, the Central Working Conference held in April 1979 put forward the policy of adjustment, reform, rectification and improvement. The 12th Party Congress in September 1982 emphasized that during the Sixth Five-Year Plan period, we should continue to firmly implement the policy of adjustment, reform, rectification and improvement, and all economic work should be focused on improving economic efficiency. In terms of reform, the following important principles were put forward: insisting on the dominant position of the state economy and developing various forms of economy; correctly implementing the principle of taking planned economy as the mainstay and market regulation as a supporting tool; insisting on self-reliance and expanding foreign economic and technological exchanges. In this way, in 1979 the economic reform was launched and the period till 1984 could be regarded as the initial stage China’s economic reform.

© Social Sciences Academic Press 2024 H. Wang, China’s Economic System Reform (1978–2018), Research Series on the Chinese Dream and China’s Development Path, https://doi.org/10.1007/978-981-99-9267-6_1

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1 Initial Stage: Marketization Reform, 1979–1984

1.2 The First Breakthrough in the Rural Economic System Reform Characterized by the Separation of “Two Rights”1 The Third Plenary Session of the Eleventh Central Committee of the CPC marked the start of the reform of the economic system, and rural areas were the first to achieve a breakthrough in reform. The rural economic system reform in the initial period from 1979 to 1984 mainly consisted of abolishing the system of rural people’s communes and establishing a two-tier economic system based on household contract operation2 with the combination of collective management. The household contract responsibility system in agricultural production originated in the 1950s during the cooperative movement and reappeared in the early 1960s during the period of economic restructuring. However, under the “leftist” guiding ideology, it was regarded as “capitalist” and was condemned and suppressed, especially during the Cultural Revolution, when it was prohibited for ten consecutive years. However, this system is suitable for agricultural production and the development of productive forces, and can fundamentally break the “two pieces of rope” with which the rural People Commune System (i.e. the deprivation of the farmers of their autonomy in production and in income distribution) “tied up” the farmers (one depriving them of the right to operate the land as they see fit and the other their right to distribute income as they see fit), so the farmers never forgot it, something with strong appeal to them. After the Third Plenary Session of the Eleventh Central Committee of the CPC, among the various forms of agricultural production responsibility system established in rural areas, the household contract responsibility system rapidly developed into the dominant form of agricultural operation with its superiority and strong vitality. Although the influence of the long-standing “leftist” ideology was eliminated, it took time to further demonstrate the superiority of this contract responsibility system, to change people’s mindset, and to end the debate between those in favor of and those against this system. Thus, the development of the household contract responsibility system in the countryside had gone through three stages: (1) from the autumn of 1978 to the winter of 1979 as the initial stage; (2) from the spring of 1980 to the end of 1981 as the promotion stage; (3) the year 1982 as the stage of general implementation.

1

The separation between the “two rights” refers to the separation between ownership right of land which belongs to the collective and the operational right which belongs to the contracting households. 2 The words “joint production” are omitted here because this particular feature was being phased out as the system developed widely.

1.3 State-Owned Economy Implements Reforms Characterized …

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Among the “various production contract responsibility systems” that were being introduced, the one in which land collectively owned was leased to individual households to be farmed became dominant because it made it easy for farmers to benefit directly. Under this system, the contracting households were able to purchase draft animals and small and medium-sized farming instruments at a discount, and keep whatever is left of the earning from selling their products after agricultural taxes are paid, and other required mandatory payments made In the farmers’ words: “the state gets its fare share, the collective gets its, and one keeps the rest for oneself”. This joint production contracting system abolished the practices of people working in congregate settings and distributing earning based on work points, and linked labor output directly with remuneration, which generated maximum incentives among the farmers and improved the relationship among the state, the collective and farmer households in the distribution of benefits. By the end of 1983, 99.5% of the production teams in rural areas nationwide had implemented the contract responsibility system, and the household was the contractor in 97.8% of these. After 1982, the forestry, animal husbandry, fishery and township enterprises operated collectively by rural community teams also drew on the experience of the household contract responsibility system in the plantation industry, and gradually established various forms of household contract responsibility system according to their respective characteristics. This system has also been gradually extended to state-run agriculture, forestry, animal husbandry and fishery farms. In parallel with the formation of the two-tier operational system of the rural collective economy, government administration and commune management were also separated. This marked the end of the people’s commune system, whose defining features were “three-tier public ownership, production team-based operations”3 and the integration of government administration with commune management.

1.3 State-Owned Economy Implements Reforms Characterized by the Expansion of Enterprise Autonomy The reform to expand the autonomy of state-owned enterprises during this period broadly went through the following three stages.

3

The ownership of the original people’s commune system belonged to the production teams, and the means of production and products were owned by the people’s commune, production brigades and production teams at three levels.

4

1 Initial Stage: Marketization Reform, 1979–1984

1.3.1 1979–1980: Pilot to Expand the Autonomy of State-Owned Enterprises4 The main elements of the pilot project to expand the autonomy of enterprises during this period are as follows. ➀ Provided the national plan would be carried out, enterprises are allowed to make supplementary plans according to the their specific situations with regard to fuel, power, raw materials, as well as production and market needs. For the products produced according to the supplementary plan, if departments of commerce, foreign trade, materials do not purchase, enterprises can engage in selling the products themselves at the price regulated by the state. ➁ The implementation of profit retention changes the practice of withdrawing enterprise funds based on the total amount of wages, which links the operation of the enterprise with the material interests of employees. Profit retention is based on the specific circumstances of different enterprises, according to which different proportions are determined. Enterprises establish the production development fund, collective welfare fund and employee incentive fund, with the right to arrange for use on their own. ➂ Gradually increase the depreciation rate of fixed assets and the proportion of retained profits of enterprises. Since 1980, 70% of the depreciation fees of fixed assets withdrawn by enterprises could be arranged for use by the enterprises, and 30% should be handed over to the competent authorities according to their affiliations, which could be transferred for use with compensations among the enterprises arranged by the competent authority. All depreciation fees for small enterprises with fixed assets with the original value of less than 1 million yuan will be reserved for the use of the enterprises. From 1979 to 1980, the pilot work of expanding the autonomy of enterprises developed continuously and took on a considerable scale. By the end of 1980, except for Xizang, there were more than 6000 state-owned industrial enterprises in the provinces, autonomous regions and municipalities participating in the pilot project, accounting for 15% of the 42,000 industrial enterprises within the national budget, with the output value accounting for 60% and the profit, 70%. The pilot enterprises had different degrees of autonomy in profit retention, production planning, product sales, trial production of new product, use of funds, incentives, institutional settings and personnel. The expansion of enterprise autonomy brought a certain degree of vitality to enterprises and achieved remarkable economic results. According to the statistics of 5777 pilot enterprises (excluding the self-financing pilot enterprises), in 1980, the total industrial output value increased by 6.89% over the previous year, with profit increased by 11.8%, and the profit handed over to the state increased by 7.4%. The profit handed over to the state accounted for 87% of the total realized profit, and the enterprise retained 10% of the realized profit, with the remaining 3% for loan 4

In Chinese government documents, the terms “state-operated enterprises” and “state-run economy” were used before and after the start of reform, and later “state-owned enterprises” and “state-owned economy” were used. This book discards the differences of the connotation and extension between these two groups of concepts and uses them as synonyms.

1.3 State-Owned Economy Implements Reforms Characterized …

5

payment and policy subsidies. Most of the increased profit also went to the state. This shows that expanding the autonomy of enterprises had resulted in increased production and revenue, and both the state and enterprises had benefited from it. However, some new problems also appeared in the reform. The main problem is that while the micro economy was being invigorated, macro-control lag behind. There appeared some cases of production out of the state plan, redundant construction and excessive bonuses.

1.3.2 1981–1982: Full Implementation of the Industrial Economic Responsibility System The industrial economic responsibility system, which is developed on the basis of the pilot project to expand the autonomy of enterprises, is the continuation and deepening of the enlarging of enterprises’ power. The industrial economic responsibility system is a production and management system that closely integrates responsibility, power and profit under the guidance of the national plan and for the purpose of improving social and economic efficiency. It requires the competent departments, enterprises, workshops, teams and workers to clarify their economic responsibilities to the state, to establish and improve the production, technology and management systems and job responsibility system, and to provide the state with high-quality and marketable products and more accumulation. It requires the correct handling of the interests of the state, enterprises and workers, and to link the economic responsibilities, economic effects with the financial interests of the enterprises and employees. It requires the conscientious implementation of the principle of distribution on the basis of one’s work contribution and that everyone should try his best. The ones who contribute more should be rewarded more, and reward and punishment coexist in the system. Egalitarianism should be abandoned. Further expansion of enterprise autonomy is called for, so that enterprises could gradually become relatively independent economic entities. The implementation of the industrial economic responsibility system requires industrial administration agencies at all levels and industrial enterprises to follow the principles, mainly in the following areas: ➀ The enterprises must fully complete the national plan and organize production according to the needs of the society. Production should ensure the supply of low-profit products and small commodities that are in great demand in the market. ➁ The product quality must be ensured, shoddy products or transferring the cost burden to consumers are not allowed. ➂ Cost can only be reduced, not increased; ➃ State revenue should be ensured of annual increase; ➄ The income of staff and workers can only increase steadily on the basis of the development of production, and personal income should not be raised too high at once. ➅ There must be clear distinction and criteria between rewards and punishments. ➆ Leadership and state supervision must be strengthened, and a strong ideological and political work must be guaranteed.

6

1 Initial Stage: Marketization Reform, 1979–1984

To implement the industrial economic responsibility system, two links must be strengthened. The first link is the economic responsibility system applied by the state to enterprises, in which the relationship between the state and enterprises should be properly handled, and the problem of egalitarianism despite whether the enterprises are well or badly run should be solved. The other link is the establishment of the internal economic responsibility system of enterprises, to deal with the internal relationship within the enterprises, and to solve the problem of income egalitarianism for employees despite of their different work contributions. The state implements the economic responsibility system on enterprises. There are mainly three types of distribution: first, profit retention; second, after the state collects industrial and commercial taxes, regulation taxes, income taxes and payment for the use of state funds, all profits of small state-owned enterprises shall be left to the enterprises and losses shall not be covered by the State; third, substitution of tax payments for profit delivery, and the enterprises should be responsible for profits and losses. The internal implementation of the economic responsibility system in the enterprises is to link the responsibility of each position, assessment standards, and economic results with the income of employees, and to implement comprehensive economic accounting. There are generally the following forms of distribution: ➀ indicator decomposition, that is, the workload is broken down into a number of indicators, and each indicator is linked to wages and awards; ➁ piecework wages, including excess piecework wages and excess piecework wages of small collectives; ➂ overproduction bonus; ➃ fixed-task-guarantee bonus, which means the time limit, consumption index and quality requirements are fixed for specific tasks, and workshops and teams make specific guarantees for the completion of the task, time and quality; ➄ adjustable-rate wages. From the beginning of 1981 to the end of 1982, industrial enterprises had implemented the economic responsibility system to a large extent. In state-owned enterprises above the county level, 80% of the enterprises implemented the industrial economic responsibility system, and achieved relatively good results. The main reason is that the enthusiasm of enterprises and workers was mobilized, and therefore production was promoted and income was enhanced. However, some problems emerged in the reform. For example, as the implementation of economic responsibility system and planning management were not well integrated. In dealing with the relationship between the state and enterprises, enterprises tended to put too much emphasis on their own interests. The internal economic responsibility system of some enterprises was not solidly implemented, and the problem of egalitarianism in distribution persisted.

1.3 State-Owned Economy Implements Reforms Characterized …

7

1.3.3 After 1983: Replacing Profit Delivery by Tax Payment Starting from 1980, a pilot project of replacing profit delivery to the state with tax payment was launched in more than 400 industrial enterprises. On the whole, the pilots produced fairly satisfactory results. The growth of sales revenue of all the enterprises participating in the pilot project was significantly higher than the growth of total output value, and the growth of profits and taxes paid was much higher than that of the total output value and sales revenue. Most of the increase in corporate profits was paid to the state in the form of taxes and payment for use of state funds, and corporate income also increased. In 1983, the first step in replacing profit delivery with tax payment was implemented, in which tax and profit co-existed. A certain percentage of the profits realized by the enterprises was collected as income tax and local tax, and then the after-tax profits were distributed between the state and the enterprises in various forms. According to the regulations, all profitable large and medium-sized state-owned enterprises were required to pay income tax at a rate of 55% on their profits. After paying income tax, part of the profit shall be paid to the state and part could be reserved for the enterprise according to the level of retained profits approved by the state. The part to be paid to the state can be taken in such four different forms as incremental lump sum, fixed proportional lump sum, regulatory tax (the regulatory tax rate is determined according to the proportion of the profit to be paid to the state to the realized profit; tax on the base profit is paid at the regulatory tax rate; tax on the part of profit increase over the previous year is reduced by 60%) and fixed lump sum, according to the specific situations of the enterprises. According to the statistics of 17 industrial departments of the central government and 27 provinces, autonomous regions and municipalities directly under the central government, by the end of 1983, there were 26,500 state-owned industrial enterprises that had finished the first step of substitution of tax payment for profit delivery to the state, accounting for 94.2% of the total number of profitable enterprises. In 1983, for the state-owned enterprises which implemented the reform of substitution of tax payment for profit delivery, about 70% of the newly increased income was handed over to the state in the form of taxes and profits, and about 30% was reserved for the enterprises themselves, of which about 8% was used for employee bonus funds. By 1984, the share of retained profits in the realized profits of state-owned enterprises rose from 5% before the reform to 25%. The result of the tax reform showed that a better way was found to solve the distribution relationship between the state and the enterprises. After the tax reform, the tax rate was fixed, and the distribution relationship between enterprises and the state was fixed, which legally ensured the stability and balance of the state’s fiscal revenue and ensured that the state get the big share, enterprises get the middle share and individuals get the small share. This approach not only made the state’s fiscal revenue grow steadily, but also gave enterprises a clear idea of how much they would get, and the retained profits of enterprises could also grow steadily through production and revenue enhancement. If the enterprise is well managed, it can get more; otherwise, it can only get less.

8

1 Initial Stage: Marketization Reform, 1979–1984

However, the first step of tax reform was still flawed, and the main problem is that it did not fundamentally address the issue of the distributive relationship between the state and enterprises. With the tax-profit coexistence, enterprises still retained a piece of after-tax profits after paying taxes to the state, and the state and enterprises still had to redistribute by such methods as lump sum or share-taking, so it could not really reflect the profit and loss responsibility system of enterprises. On October 1, 1984, the second step of profit-tax reform was implemented on a trial basis in order to overcome the various drawbacks of the first step of profit-tax reform, to further improve the tax system, make better use of the regulating function of taxation, and strive to better regulate the distribution relationship between the state and enterprises and among enterprises themselves through reasonable setting of tax types and tax rates. Thus the stable growth of state revenue could be ensured, while also allowing enterprises greater autonomy, greater vitality, as well as exerting greater pressure and responsibility. The basic content of the second step of profit-tax reform is: the profits of stateowned enterprises that should be paid to the state treasury will be taxed in 11 tax types, that is, the state will realize the gradual transition from the coexistence of tax and profit to the complete replacement of tax payment by profit delivery, and the profits after tax will be arranged and used by the enterprises themselves. The main methods to implement the second step of profit-tax reform are: large and mediumsized state-owned enterprises pay income tax at a proportional rate of 55%, and then regulatory tax is levied according to the different conditions of the enterprises. Small state enterprises will be taxed at a new eight-tier excess progressive rate. However, the second step toward replacing profit delivery with tax payment also had obvious defects and limitations. In essence, neither the first nor the second step in this reform was able to separate the government and enterprises and to turn enterprises into financially self-sustaining and operationally independent market entities. Moreover, the first and second steps of profit-tax reform were improper in confusing the different functions of tax and profit. The more important problem is that the second step of profit-tax reform did not and could not solve the problem of unreasonable determination of regulatory tax, and thus cannot solve the problem of imbalance among enterprises. As a result, most of the profits generated by enterprises were paid to the state due to the high corporate tax rate, which seriously hurt the incentives and development of enterprises. With the passage of time, this drawback became more and more serious, so that the second step of the profit-to-tax reform morphed into a variety of forms of operational responsibility system, with emphasis on contracting, which was the inevitable trend of reform and further development.

1.4 Start of Collective Economic Reform

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1.4 Start of Collective Economic Reform 1.4.1 Beginning of Collective Economic Reform in Towns and Cities From 1966 to 1976, the development of the collective economy in cities and towns was greatly restricted due to the “leftist” line. The most fundamental manifestation of this “leftist” error was the denial of the status and role of collective ownership in our socialist economy. After the reform, under the guidance of the ideological line of seeking truth from facts reiterated by the Third Plenary Session of the Eleventh Central Committee of the CPC, the Party Central Committee and the State Council issued a series of policies. The policies clearly defined the status and role of the collective economy in the primary stage of socialism. The urban collective ownership economy was an important part of the socialist public ownership economy and was one of the basic economic forms in China. It was suitable for the level of productive forces in China and had a vigorous vitality. The development of urban collective ownership economy was a long-term, important policy of the CPC and the State, not a stopgap measure. This provision negated the long-standing “leftist” line of denying collective ownership at all. At the same time, the management system of collectively owned enterprises was reformed, and the main practices were as follows: ➀ Power shall be returned to the collective ownership enterprises. ➁ The unified accounting and unified responsibility for profit and loss shall be changed into independent accounting and self-responsibility for profit and loss. ➂ Fixed wages shall be changed to adjustablerate wages, and other forms of wages such as piecework, share-taken, point system and contracting shall be adopted. In the aftermath of the Cultural Revolution, which caused serious damage to the internal management system of collective enterprises and resulted in chaotic management of enterprises, a series of corresponding reform measures were adopted. ➀ Democratic election of cadres and the implementation of democratic management. ➁ Adjustment of the enterprise structure and streamlining the management structure. ➂ Implementation of shareholding and dividends according to shares. ➃ Restoration of the tradition of flexible operation and change of production-oriented enterprises to production and operation-oriented enterprises. ➄ Attaching importance to basic management. The reform of the urban collective economy mobilized the enthusiasm of enterprises and workers, and the production of collective enterprises continued to develop. During the period from 1978 to 1984, the output value of collective industries, including urban collective industries, increased from 94.78 billion yuan to 226.31 billion yuan, and its share in the national total industrial output value rose from 22.4 to 29.7%.

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1 Initial Stage: Marketization Reform, 1979–1984

1.4.2 The Start of Township Collective Economic Reform5 Like the urban collective economy, after the start of reform, the township collective economy was facing the task of correcting the mistakes of the “leftist” line. To this end, the CPC Central Committee and the State Council also issued a series of policies, which clearly defined the status and role of the township collective enterprises in the rural areas and in the national economy as a whole. Commune and brigade enterprises were not only an important part of the rural economy, but also an important part of the national economy. In terms of reform, compared to urban collective enterprises, most of the township collective enterprises developed after the start of reform were self-sustaining from the beginning, and the production and sale of most products were regulated by the market, thus the task of reforming the latter was not as urgent as that of the former. However, most of the commune and brigade enterprises were established and run by the communes and brigades, which in essence were the integration of government and communes (or villages as the grassroots power), and therefore there existed the problem of realizing the separation of government and enterprises. As for the internal management system of commune and brigade enterprises, it was even more influenced by the traditional system, such as the “iron chair”, “iron rice bowl”, and “iron salary” (which mean the positions, jobs and salaries were guaranteed) in the personnel, labor, and wage systems to a certain extent. During this period, certain reforms were carried out in both areas. For example, many villages decentralized their enterprises, contracting them out to collectives or individuals through collective contracting or factory directors (managers) contracting, etc., and implemented the factory director (manager) responsibility system to give full autonomy to the enterprises. At the same time, the cadre appointment system was changed to the election system or recruitment system, the recommendation system was changed to the merit-based employment system, the fixed-job system was changed to the 5

Two points should be explained here. First, with the separation of rural government and enterprises in 1983, communes and production brigades were to be gradually reconfigured into township and village cooperative economic organizations. Since the start of reform, there have appeared many cooperative enterprises in the form of joint production and joint operation, inter-regional joint operation and individual as well as private enterprises in rural areas. These enterprises were supposed to be gradually concentrated in small towns. Therefore, the originally used appellation “commune and brigade enterprises” can no longer reflect the above new situation. Therefore, the Central Committee of the Communist Party of China and the State Council put forward on March 1, 1984 “to rename commune and brigade enterprises as township enterprises”. Therefore, when describing the development of rural collective enterprises in this book, the label “commune and brigade enterprises” was used for the period before 1984, and “township enterprises” was used the the period thereafter. Secondly, before the start of reform, commune and brigade enterprises were simply enterprises under collective ownership. After reform started, the commune and brigade (township) enterprises include the following types: commune and brigade (township) enterprises, joint ventures of community members, other forms of cooperative enterprises as well as individual and private enterprises, etc. In this book, only the first three types are included in the description of the development process of rural collective enterprises since the reform. Individual and private enterprises will be described in the section on non-public ownership enterprises.

1.5 Restoration of Individual Entrepreneurship

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contract system, and the fixed-wage system was changed to the piecework system or the variable wage system. These reforms promoted the rapid growth of commune and brigade (township) enterprises. From 1978 to 1985, the added value of commune and brigade (township) enterprises (mainly collective enterprises) increased from 20.832 billion yuan to 77.231 billion yuan, and its share in GDP rose from 5.7 to 8.6%. The growth rate of commune and brigade (township) enterprises far exceeded that of the national economy and the great potential of township enterprises became apparent. However, in general, township enterprises in this period were still in the initial development stage since the reform.

1.5 Restoration of Individual Entrepreneurship During the period of socialist reform in China, the socialist transformation of private ownership of the means of production was too thorough, so that in 1957, after the transformation was basically completed, there were very few self-employed workers left. Among them, there were only 640,000 self-employed urban industrial workers, 3.11 million fewer than the 3.75 million in 1953. The “Great Leap Forward” movement, which began in 1958, was a “communist wind” that further devastated the individual entrepreneurship, which was in fact a necessary component of the national economy in the primary stage of socialism. During the “Cultural Revolution” from 1966 to 1976, the individual entrepreneurship was almost wiped out, and only 40,000 workers remained in the urban self-employed industry in 1976. As for the rural self-employed sector, it was even more severely destroyed during the “Great Leap Forward” movement and the Cultural Revolution than the urban self-employed sector, so much so that no data on it could be found in the statistics. After the Third Plenary Session of the Eleventh Central Committee of the CPC held at the end of 1978, the individual entrepreneurship was gradually restored and developed. To this end, the Party and the government made a series of policy provisions. The relevant provision of the “Constitution of the People’s Republic of China”, enacted at the Fifth Session of the Fifth National People’s Congress on December 4, 1982, should be highlighted here: “The individual entrepreneurship of urban and rural areas is a supplement to the socialist public ownership economy.” During this period, the restoration and development of the individual entrepreneurship was regulated and guided by these policies and laws. Experience has proved that, under the premise of maintaining the main position of the public ownership economy, the restoration and development of the urban and rural individual entrepreneurship is of great significance in developing production, activating the market, expanding employment and meeting the needs of the people. Therefore, the government departments concerned should give support to the selfemployed business operators in terms of capital, source of goods, site, price, taxation and market management. Moreover, state-run enterprises and collective enterprises should lease or contract out part of the handicraft business which is suitable for

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1 Initial Stage: Marketization Reform, 1979–1984

decentralized operation to individual business operators according to the particular situations. Individual businesses are generally operated by one person or a household; when necessary, one or two helpers could be hired; those with strong technical skills or special skills can take 2–3 apprentices, with a maximum of 5. When hiring helpers and apprentices, contracts should be concluded to stipulate the rights and obligations of both parties, duration and remuneration etc. In order to give full play to the advantages of flexible operation and convenience to the masses, self-employed business operators are allowed to adopt a variety of ways, such as processing with supplied materials, self-production and self-marketing, distribution and consignment sales, construction of stalls, itinerant hawking, mobile vending, etc. Self-employers can apply for insurance from insurance institutions to solve the problems of old age and medical treatment. Self-employers enjoy the same political rights and social status as workers in workplaces under national ownership and collective ownership. The state protects the legitimate operation, income and assets of the self-employers, and they must also comply with the state’s policies and ordinances. The implementation of a series of policies to protect the individual entrepreneurship promoted the rapid recovery of the individual entrepreneurship. From 1981 to 1984, the number of privately or individually-owned businesses increased from 1.83 million to 9.33 million, an increase of 4.1 times; the number of practitioners increased from 2.27 million to 13.04 million, an increase of 4.7 times; and the registered capital increased from 500 million yuan to 10 billion yuan, an increase of 19 times. With the development of the individual entrepreneurship, private economies of capitalist nature emerged. Under the conditions of the time, however, these private economies were operating under the name of individual entrepreneurship or even under the name of collective economy in order to obtain legal status. It was not until 1984 that the Party Central Committee adopted a cautious approach to the private economy by allowing its existence and development.

1.6 Modern Market System Began to Develop The initial development of a variety of ownership economies with public ownership as the mainstay created the micro foundation for the development of the market system. The beginning of macroeconomic management system reform provided the preconditions for the development of the market system. The initial development of opening to the outside world became an important factor in promoting the development of the market system. The development of socialist modern production construction laid the material foundation for the development of the market system. From 1979 to 1984 the market system, including product (service) and factor markets, also began to develop.

1.6 Modern Market System Began to Develop

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In terms of product market, the original coexistence of partial commodity trading and partial product distribution of consumer goods has basically evolved into commodity trading, and some investment goods could be traded in the market from the original state allocation. Coupled with the rapid growth of the volume of commodity trading based on the development of production, the product market has gained dramatic growth. In 1984, the total retail sales of consumer goods increased from 155.86 billion yuan in 1978 to 337.64 billion yuan, and the total sales of social production materials increased from 282.6 billion yuan in 1980 to 450 billion yuan in 1984. As a result, the tight market supply situation inherent in the planned economy system began to change. After the reform, the labor market in China started from scratch. With the reform of rural economy, the reform of state-owned enterprises and the development of nonpublic ownership economy, the labor market also began to develop. According to a rough estimate, by 1984, the labor force employed by private enterprises (many of which were under the disguise of individual entrepreneurship and collective economy) and “three-funded” enterprises was no less than 4 million, accounting for more than 3% of the total number of employees in that year. During this period, the financial market began to develop. In the bank credit market, the balance of deposits and loans of financial institutions nationwide increased from 115.5 billion yuan in 1978 to 373.53 billion yuan in 1984 and from 189.04 billion yuan to 474.68 billion yuan respectively. As a form of money market, the bill market was tried out by the Shanghai Branch of the People’s Bank of China in 1981, and then continued to be tried out in Hebei, Chongqing and other places. In 1984, with the reform of the central bank’s credit fund management system, the interbank money market came into being. As a form of capital market, the treasury bond market began in 1981 when the government issued 4.866 billion yuan of treasury bonds to cover the fiscal deficit. In 1983, Shenzhen Baoan County Joint Investment Company issued shares to the public for the first time in Shenzhen. In 1984, Shanghai Feile Audio Company issued shares to the public for the first time in Shanghai. During this period, the insurance industry, an important part of the financial sector, began to recover after a 20-year hiatus. From 1980 to 1985, premium income totaled 8.5 billion yuan and claims were 3.3 billion yuan. In addition, from 1980, the Bank of China started foreign exchange transfer business in a dozen major cities across the country. The real estate market also took off during this period. In 1980, Shenzhen, as a Special Economic Zone (SEZ), took the lead in China in implementing the system of compensated use of urban land and the public sale of public housing in order to meet the needs of opening-up. In 1984, coastal cities also had this practice in the construction of development zones. In 1981, there were only 12 real estate development companies, however, by 1986, the number had grown rapidly to more than 2200. Moreover, starting from 1979, the government explored the commercialization of housing for urban workers. By 1982, the state had allocated special funds from the subsidized housing investment to build houses for sale to urban residents, and the housing area in 23 provinces, autonomous regions and municipalities directly

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1 Initial Stage: Marketization Reform, 1979–1984

under the central government totaled 365,900 m2 . In this kind of sale, the government provides preferential terms, the enterprise puts up part of the money, and the individual worker pays a certain percentage of the fee, and then he will own the right to use the house. Obviously, this kind of housing sale still had a strong implication of the original welfare housing, far from the strict sense of housing commercialization, but was a meaningful exploration in this regard. With the reform and opening up, the tourism market also began to take off. From 1978 to 1984, international tourism revenues grew from 263 million U.S. dollars to 1.131 billion U.S. dollars. As can be seen, a modern market system consisting of product markets and multiple factor markets began to develop during this period.

1.7 Start of Macroeconomic Management System Reform The reform of the macroeconomic management system involves reforms in planning, investment, prices, fiscal taxation, finance, commerce, foreign trade, labor, wages, social security, as well as administration and state institutions. The reform of the foreign trade system is left to be discussed in Sect. 1.8. During this period, the reform of planned investment system characterized by mandatory plans began, mainly through decentralization of the management authority and narrowing of the scope of mandatory plans. In terms of construction, the state used to implement mandatory plans for construction using budgetary funds, self-financing funds, and foreign capital. During this period, only capital construction investments that were financed from the budget, capital construction loans that were included in the national credit program, and capital construction projects that utilized loans from international financial organizations and foreign governments would be subject to directive plans. Capital construction arranged by local governments, departments and enterprises with self-raised funds or with foreign capital under a borrow-repay programme shall be subject to directive plans. The authority for examining and approving projects for capital construction, technological transformation and utilization of foreign capital was also relaxed. In terms of production, the industrial products managed by the state directive plan, which were more than 120 kinds before the reform, were reduced to more than 60 kinds in 1984; the proportion of its output value in the total industrial output value also decreased from about 80% to about 40%. A large number of industrial products were subject to directive planning, and many small commodities for daily use were completely regulated by the market. In terms of circulation, the number of kinds of important commodities acquired and allocated by the state was reduced from 65 before the reform to 20 in 1984; the number of kinds of commodities supplied by the state for export was reduced from more than 70 to 36; and the number of kinds of materials distributed by the state was reduced from 256 to 65. In terms of price reform, the principle of combining adjustment (adjusting unreasonable relative prices) with release (freeing up mandatory prices) with the focus on

1.7 Start of Macroeconomic Management System Reform

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adjustment was adopted. ➀ The prices of agricultural and sideline products as well as coal, ore, metallurgy, building materials, railroad and water transportation were raised, and the prices of a part of the electronics, machinery and other products were lowered, so that some improvement in the pricing imbalance between agricultural products and industrial products, and between energy, transportation, and raw materials and processed industrial products could be achieved. ➁ In accordance with the direction of reducing state pricing and expanding enterprise pricing, the proportion of state-directed prices was reduced, and the proportion of state-guided prices and market-regulated prices was expanded. From 1978 to 1984, the proportion of statepriced agricultural products fell from 92.7 to 40%, the proportion of state-priced retail commodities fell from 97 to 50%, and the proportion of state-priced means of production fell from 100 to 60%. The corresponding data is the proportion of government-directed and market-regulated prices. This is the overall picture of the price system reform in this period. Specifically, the reform of the price system made important breakthroughs in the following two areas. ➀ For the prices of hundreds of daily commodities and most repair services, the state no longer provided a unified pricing system, and enterprises set their own prices. ➁ For coal and other important means of production, a “dual-track” pricing system was implemented, which allowed enterprises to sell their overstock at prices higher or lower than those set by the state, on the premise that the prices of the products within the planned range shall be set by the state. In order to change the situation of unified state control over revenue and expenditure, reforms in the fiscal and taxation system were started. In terms of the financial relationship between the government and enterprises, the main elements of the reform are as follows: ➀ Starting from 1978, the government increased the proportion of the depreciation fund retained by enterprises from 40 to 50%. ➁ After 1979, the enterprise’s normed current fund which was originally appropriated by the government was provided by bank loans. ➂ From 1980, funds for technological transformation of enterprises was also provided by bank loans instead of financial appropriations. ➃ In 1979, the pilot project of changing financial appropriation to bank loans for capital construction investment was started. From 1981, all the enterprises with independent accounting and repayment capability had their capital construction investment financed by bank loans instead of government appropriations. These reforms have made some progress in breaking the “pot-luck” system between the state and enterprises. With regard to the financial relationship between the central government and the local governments, the system of “separate meals” was introduced in 1980 to break the previous “pot luck” system. The basic principles are: the scope of revenue and expenditure between the central government and local governments is divided based on the administrative affiliation of state-owned enterprises and institutions, by which the lump-sum base of each local government is determined; the ratio of the share between the central government and local governments and the amount of subsidies from the central government to local governments is fixed for five years, and local governments can arrange their own budgets, so that they can spend more

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1 Initial Stage: Marketization Reform, 1979–1984

if they receive more, or spend less if they receive less, and seek to balance their own revenue and expenditure. In terms of taxation reform, in addition to the aforementioned explorations made in the substitution of tax payment for profit delivery, the following important reforms were carried out. First, the original tax system was improved. For example, in 1984, the original single industrial and commercial tax was broken down into four types: product tax, value-added tax, business tax and salt tax, while the scope of product tax was later narrowed and the scope of value-added tax was expanded. Second, new taxes were established, such as bonus tax as well as income tax for foreign-invested enterprises and personal income tax. The purpose of all these measures were to meet the needs of reform and opening up and to play the regulatory role of taxation. The main measures of the financial reform are as follows. ➀ From 1981 to 1983, the State Council put forward the plan for and subsequently formally established the People’s Bank of China as the Central Bank and made it concentrate on the macroeconomic management of the country’s finances. The credit and deposit businesses formerly concurrently operated by the People’s Bank of China will be undertaken by the restored and newly established commercial banks such as the Industrial and Commercial Bank of China, the Agricultural Bank of China, the Bank of China and the Construction Bank. In 1982, the State Council also decided to put the State Administration of Foreign Exchange (SAFE) under the direct leadership of the People’s Bank of China, changing the status quo between SAFE and the Bank of China, which is two institutions under same administration. ➁ Before 1979, the People’s Bank of China mainly used the administrative instructions to control the cash circulation. In credit management, the target control method was implemented, that is, the credit funds were centrally managed, with unified revenue and expenditure. All deposits absorbed by branches would be handed over to the head office, and all loans of branches would be issued according to the targets established by the head office. After 1983, the Central Bank began to use economic instruments such as loan rates and deposit reserves to regulate the money supply. In terms of credit management, the management of the total amount of deposits and loans was changed to the management of the deposit-lending difference, i.e., on the premise of completing the head office plan, branches could deposit more and lend more, thus having a certain degree of lending autonomy. ➂ Financial market began to develop, which has been mentioned before and will not be repeated here. The reform of the commercial system was started, which mainly included the following aspects. ➀ Reform on the commodity purchase and sale system. First, the system of purchasing and selling agricultural and sideline products was reformed. Before the reform, the state divided agricultural and sideline products into first, second and third categories according to their roles in the economy, and implemented the system of unified purchase, purchase by state quotas and purchase on negotiation respectively. From 1979 to 1984, the kinds of commodities of unified purchase and purchase by state quotas were reduced. The number of agricultural and sideline products in the first and second categories was reduced from 46 to 12. Second, reform on the system of purchasing and marketing of daily industrial products. During this period, the number of planned commodities managed by the

1.7 Start of Macroeconomic Management System Reform

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Ministry of Commerce decreased from 135 to 26, and the control over the prices of all small commodities was eased. Gradually, the marketing for the three categories of daily industrial products would be changed from exclusive marketing by state commercial departments to six forms, i.e. unified purchase and marketing, planned purchase, ordering, selective purchasing, sales on commission basis and industrial and commercial joint marketing. Third, the reform on the wholesale system of daily industrial products. The wholesale system of first, second and third level between the Ministry of Commerce and the cities was broken. Instead, state-owned commercial wholesale companies with independent management were set up in the cities, and trade centers were established. ➁ The structure of commercial ownership was adjusted. First, the state-owned small commercial, catering and service businesses suitable for collective and individual operation were transferred to collective or individual ownership. Second, the development of collective and individual ownership of business was encouraged. The third is to restore and develop the trade in rural bazaars. ➂ Reform the management system of state-owned commercial enterprises. The management responsibility system was tried out during 1979 to 1981. During 1982 to 1983 the responsibility system of business contracting was tried out. In 1984, small businesses were reformed (changed to state ownership, collective operation, and self-financing), transferred (to collective ownership), leased (to individuals for operation), and sold (to collectives or individuals) on a trial basis. The reform of the original labor system of centralized allocation of labor was implemented in three main aspects. ➀ Under the guidance of national planning, introduction of employment by labor departments, voluntary employment and selfemployment were implemented. ➁ Labor service companies were established. As social labor organizations, they were responsible for the organization, management, training, transportation and regulation of labor. By the end of 1984, there were 27,000 labor service companies of all kinds at all levels nationwide. ➂ The labor system was reformed. The labor contract system began to be implemented among newly recruited workers. In 1982, the number of contract workers employed by state-owned enterprises was 160,000; in 1983, it was 576,000; and in 1984, the number increased to 1.74 million, accounting for 2% of the total number of workers. The power to recruit contract workers was also decentralized in some places on a trial basis. If the increase of the total number of employees in an enterprise does not exceed a certain proportion of the increase of production, it may recruit contract workers on its own according to the needs of production, or increase or decrease the number of employees according to relevant policies without exceeding the total amount of wages. The reform of the wage system mainly involves the government delegating certain wage management authority to enterprises. At first, enterprises were allowed to withdraw the incentive fund based on their business performance, and they could use the incentive fund (including for increasing bonuses and adjustable-rate wages) autonomously. On this basis, many enterprises have experimented with the system of linking total wages to business performance. At the same time, enterprises could try out new forms of wages internally, such as variable wage system, structural wage system and job post wage system.

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Organizational preparation, legal preparation for the reform of the social security system were made and trial work was prepared. In 1978, a decision was passed at the First Session of the Fifth National People’s Congress to re-instate the Ministry of Civil Affairs to consolidate the management of social insurance, social relief, social welfare and other social security work nationwide. The “Constitution of the People’s Republic of China”, enacted at the Fifth Session of the Fifth National People’s Congress in 1982, specifically provides for social security in a more comprehensive manner than before. Starting from 1984, the issue of social coordination of retirement expenses for employees of state-owned enterprises was first piloted in some counties and cities in Jiangsu and Guangdong provinces, i.e., the retirement expenses were collected, managed and coordinated for use uniformly by specialized agencies. In principle, the pooling fund was used for the long-term expenses of retirees, and was generally drawn in certain proportion to the total salary. To meet the needs of economic reform and development, a large-scale reform of government institutions was carried out in 1982. This reform played an important role in streamlining government agencies, address aging among the cadres, abolishing the de facto life-time tenure of leadership positions, and strengthening the revolutionary credentials, lowering the average age, improving the education and professional training of the cadres. As a result of the 1982 governmental reform, the number of State Council agencies was reduced from 100 to 61. It can be seen that during this period, all the reforms to adapt to the requirements of the socialist market economy began to take steps.

1.8 Initial Development in Opening Up Under the planned economic system, there existed a certain range of commodity economy and a certain range of foreign economic and trade relations. The development of foreign economic relations is an inevitable requirement for the development of market economy, and opening up to the outside world is an inevitable extension and an important element of market-oriented reform. In this respect, there is a significant difference in principles between the foreign economic relations under these two systems. Moreover, in the actual situation of China, due to the international situation and the influence of the “leftist” policy, foreign economic relations were far from being developed to the extent that the planned economic system allows. The Third Plenary Session of the Eleventh Central Committee of the CPC, held at the end of 1978, made the major decision to open up to the outside world. Later, the policy of opening up to the outside world was incorporated into the “Constitution of the People’s Republic of China”, which was enacted at the Fifth Session of the Fifth National People’s Congress held in December 1982. At this point, opening up to the outside world as the basic state policy of China was finally established. Direct utilization of foreign capital is one of the most important elements in carrying out the policy of opening up to the outside world. It is very important

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for introducing capital, equipment, technology and management, achieving structural optimization and technological upgrading, increasing employment, import and export trade and fiscal revenue, and promoting market-oriented economic reforms. The state has adopted a series of policy measures to promote the development of “three-funded” enterprises,6 which is an important form of direct foreign capital utilization. In addition to removing the influence of the “leftist” line on the direct utilization of foreign investment and strengthening infrastructure construction, foreign-related legislation was enacted to create the necessary public opinion, material conditions and legal guarantees for foreign investment. Important legislation enacted in this regard included the “Law of the People’s Republic of China on Chinese-Foreign Equity Joint Ventures” (1979). These legislation clearly defined the rights, responsibilities and obligations of both Chinese and foreign parties, regulated the behavior of both parties, enhanced the confidence of foreign investors, and stimulated their enthusiasm for investment. Special Economic Zones (SEZs) and open cities were established to take full advantage of the favorable conditions in the coastal regions and to promote the opening up of the country, including the direct use of foreign capital. In July 1979, the Party Central Committee and the State Council decided to implement special policies and flexible measures for foreign economic activities in Guangdong and Fujian provinces, and decided to set up SEZs in Shenzhen, Zhuhai, Shantou and Xiamen on a trial basis. According to the relevant regulations at that time, SEZs are areas in which socialist China implements special policies for foreign countries under the guidance of a unified policy. In the special zones, the main focus is on attracting foreign investment, developing an export-oriented economy, and market regulation. Special preferential policies are given to foreign investors who come to invest. The special zones themselves also have greater autonomy. In April 1984, on the basis of the practical experience of opening up to the outside world, the Party Central Committee and the State Council decided to further open up 14 coastal cities, namely Tianjin, Shanghai, Dalian, Qinhuangdao, Yantai, Qingdao, Lianyungang, Nantong, Ningbo, Wenzhou, Fuzhou, Guangzhou, Zhanjiang and Beihai, as well as Hainan administrative region. The basic elements of opening up these cities and regions are twofold: ➀ expanding the autonomy of these places to conduct foreign related economic activities; ➁ giving preferential treatment to foreign investors. It was also decided to set up economic and technological development zones in the open coastal cities, which would introduce high-tech industrial projects, knowledgeintensive projects and scientific research projects, and at the same time develop cooperative production, cooperative research and cooperative design to become a base for developing new technologies and products. In order to strengthen the direct utilization of foreign capital and give full play to the enthusiasm of local governments and departments in this regard, the 6

“Three-funded” enterprise is the abbreviation of Sino-foreign joint venture, Sino-foreign cooperative enterprise and wholly foreign-owned enterprise. These three types of business enterprises are the main forms of foreign direct investment.

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State Council set up specialized administrative organs and delegated administrative powers to lower levels. In August 1979, the State Council established the Foreign Investment Management Committee as the centralized management agency for the national foreign investment utilization work. Since 1983, the State Council also delegated the approval authority of foreign investment projects several times. According to the relevant provisions: for projects above the limit, or projects requiring a comprehensive national balance of supply, production and marketing, the State Planning Commission and the Ministry of Economic and Trade, together with relevant departments, shall approve project proposals, feasibility studies, contracts and charters; for projects below the limit, they shall be approved by the people’s governments of provinces, autonomous regions and municipalities directly under the central government, people’s governments of municipalities with independent planning status, Special Economic Zones and open coastal cities, or relevant departments of the State Council. These policies and measures have promoted the development of the utilization of foreign capital. From 1979 to 1984, the actual utilization of foreign investment was 17.143 billion U.S. dollars, of which FDI accounted for 3.06 billion U.S. dollars. Of the FDI, 427 million U.S. dollars was in joint ventures, 1.224 billion U.S. dollars in cooperative ventures, and 98 million U.S. dollars in solely foreign-owned enterprises. However, the period from 1979 to 1984 was after all the initial stage of utilizing foreign direct investment after the founding of New China. Therefore, the infrastructure was incomplete, the legislation on foreign-related economy was unsound, and foreign-related management personnel were also in short supply. The impact of the long-standing “leftist” policy in the past had yet to be cleared away. Therefore, although the rate of direct foreign capital utilization was high (the actual amount of foreign capital utilization in 1984 took up 70% of that in the five years from 1979 to 1983), the scale was not large (the average annual amount of foreign capital utilization in the six years from 1979 to 1984 was only 510 million USD). This was only the initial stage of direct utilization of foreign capital in its main form of “three-funded” enterprises. Along with the use of foreign capital, a series of measures were taken to develop foreign trade. Among them, the most important measure was to start reforming the foreign trade system, which was an important part of the planned economic system, the main contents of which are as follows. ➀ The state decentralized import and export trade, allowing some industrial sectors and enterprises to operate import and export trade, breaking the original situation of monopoly of several foreign trade companies led by the Ministry of Foreign Trade. ➁ Aiming at the existing defects of separation of industry and trade, pilot projects of integration of industry and trade were implemented. ➂ The scope of the original directive was narrowed down to two areas: total amount of imports and exports, and a small number of bulk commodities that matter to the national economy and people’s livelihood. Guiding plans and market regulation would be implemented in other areas. ➃ Under the premise of unified foreign trade, the administrative management system of foreign trade at two

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levels, namely the Ministry of Economic and Trade and the provinces, autonomous regions and municipalities directly under the central government was implemented, gradually changing the situation of highly centralized management by the central government. ➄ The foreign exchange retention system was introduced, whereby a certain percentage (generally 25%) of export earnings was set aside for local use, and the localities set aside part of it for export enterprises. ➅ The macro management of foreign trade began to shift from relying only on administrative instructions to using economic instruments (e.g., differential tax rates for import and export commodities) and legal means (e.g., comprehensive revision of the tariff law). These measures promoted the rapid growth of foreign trade: the total amount of import and export increased from 35.5 billion yuan in 1978 to 120.1 billion yuan in 1984, of which the total amount of export increased from 16.76 billion yuan to 58.05 billion yuan and the total amount of import increased from 18.74 billion yuan to 62.05 billion yuan, increases by 2.38 times, 2.46 times and 2.31 times respectively. Under the promotion of the policy of opening up to the outside world, foreign contracting and labor cooperation also developed rapidly: the completed turnover of overseas contracting projects increased from 170 million U.S. dollars in 1980 to 623 million U.S. dollars in 1984, and the turnover of foreign labor cooperation increased from 47 million U.S. dollars to 129 million U.S. dollars, increases by 2.66 times and 1.74 times respectively. The above shows that there had been initial development of opening up to the outside world during this period.

1.9 Concluding Remarks Although this period is the initial stage of reform, the achievements are remarkable. First, the pattern of socialist public ownership as the mainstay and multiple forms of ownership developing together began to come into shape. For total industrial output value, in 1978, the output value of state-owned industry and collective industry accounted for 77.6% and 22.4% respectively, while the output value of other economic types such as individual entrepreneurship and “three-funded” economy was zero. By 1984, the proportion of state-owned industry dropped to 69.1%, the proportion of collective industry rose to 29.7%, and the proportion of other economic types rose to 1.2%. In 1978, state-owned enterprises accounted for 54.6% of total retail sales of consumer goods, collective enterprises accounted for 43.3%, and other economic types accounted for 2.1%. By 1984, the proportion of the state-owned enterprises in the total retail sales of consumer goods fell to 45.5%, collective enterprises, 39.6%, and other economic types rose to 14.9%. Township enterprises began to develop. The proportion of added value of township enterprises in GDP increased from 5.7% in 1978 to 8.6% in 1985. Secondly, the reform first achieved a breakthrough in rural areas by establishing a two-tier management system

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based on household contracting and combined with collective management, and the state-owned economy implemented economic reforms characterized by expanding the autonomy of enterprises. Thirdly, the reform of the market system and macroeconomic management system, especially the opening up to the outside world gained initial development.

Chapter 2

Full Speed Ahead, 1985–1992

2.1 Introduction The Third Plenary Session of the Twelfth Central Committee of the CPC held in October 1984 made the “Decision on Economic System Reform”, which comprehensively expounded the direction, principles and steps of economic restructuring, and a blueprint was drawn up for the overall reform. The Report of the 13th Party Congress held in October 1987 put forward for the first time the idea that the system of socialist planned commodity economy should be an inherently unified system of planning and market. The new economic operation mechanism, in general, should be one in which “the state regulates the market and the market guides the enterprises”. The current task of deepening the reform is to focus on the central link of converting the business mechanism of enterprises, and to carry out in stages complementary reforms in the systems of planning, investment, materials, public finance, finance and foreign trade, so as to gradually establish the basic framework of the new system of planned commodity economy. Under the guidance of the above-mentioned documents, the reform of China’s economic system stepped into a comprehensive stage during this period.

© Social Sciences Academic Press 2024 H. Wang, China’s Economic System Reform (1978–2018), Research Series on the Chinese Dream and China’s Development Path, https://doi.org/10.1007/978-981-99-9267-6_2

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2.2 State-Owned Economy Implements Reforms Characterized by the Contract Management Responsibility System in Enterprises 2.2.1 State-Owned Enterprises Mainly Implement the Contract Management Responsibility System 2.2.1.1

Contract System for Large and Medium-Sized Enterprises

After the reforms from 1979 to 1984 (including the expansion of enterprise autonomy, the implementation of the economic responsibility system and the substitution of tax payment for profit delivery), the vitality of state-owned enterprises was, on the whole, enhanced to a certain extent. However, due to the limitations of these reforms, state-owned enterprises, especially large and medium-sized state-owned enterprises, did not really come to life. According to statistics, in 1984, there were 5837 independently-accounted large and medium-sized industrial enterprises, accounting for less than 2% of the total number of industrial enterprises, and they were responsible for 66% of the total value of fixed assets, 47% of the total industrial output value, and 66% of the profits and taxes paid respectively. Among these enterprises, only about 15% were relatively dynamic, about 65% were in the process of becoming dynamic, and about 20% were basically not dynamic. The main reasons why state-owned enterprises were not really dynamic are: ➀ A series of autonomy delegated to enterprises by national regulations had been withheld by some departments and regions and was not implemented by enterprises; ➁ The integration of power, responsibility, and benefits was not realized for the power expansion of enterprises. Therefore, to deepen the reform aimed at enhancing the vitality of enterprises, especially large and medium-sized enterprises, in addition to firmly implementing the autonomy delegated to enterprises by the state, the focus should also be on transforming the business mechanism of enterprises. That is, based on the principle of separation of ownership and management, various forms of contract management responsibility system should be implemented, so that enterprises could really become self-operated, self-sustaining economic entities. Therefore, on the basis of the pilot contract management responsibility system in 1986, the State Council decided in May 1987 to promote the contract management responsibility system throughout the country. Through promotion, by the end of 1987, among 11,402 state-owned large and medium-sized industrial enterprises, 8843 had implemented the contract management responsibility system, accounting for 77.6% of the total number of enterprises. There were 1364 enterprises, or 15.4% of the total number of contracted enterprises, implemented the policy of “two guarantees and one linkage” (i.e., the payment of profits and taxes and technological transformation are guaranteed, and the payment of profits and taxes is linked to total wages). There were 2029 enterprises, accounting

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for 22.9%, implemented incremental contracting of profit payment; and 3337 enterprises, or 37.7%, implemented the practice of lump-sum base payment and sharing of the excess income. Another 580 enterprises, or 6.6%, carried out the enterprise asset management responsibility system (that is, only 3.5% income tax is levied on corporate profit growth and pre-tax loan repayment would be changed to post-tax loan repayment). And 683 enterprises, accounting for 7.7%, implemented deficit reduction contracting. Those whose contract period is more than three years accounted for 64% of the total number of contracted enterprises. The implementation of the contract management responsibility system enhanced the vitality of enterprises, so that the economic performance of contracted enterprises were generally better than those of non-contracted enterprises. Compared with the situation in 1986, in 1987, the contracted state-owned large and medium-sized industrial enterprises completed output value of 245.21 billion yuan, an increase of 11%, 0.5 percentage points higher than the increase in non-contracted enterprises. Sales revenue totaled 279.72 billion yuan, an increase of 18.2%, 2.3 percentage points higher than that of non-contracted enterprises. The realized profit was 29.11 billion yuan, an increase of 14.8%, 10.2 percentage points higher than that of the enterprises without contracting. The revenue handed over to the state increased by 4.7%, while that of the non-contracting-enterprises decreased by 21.8%. Thus, the implementation of the contract management responsibility system greatly alleviated the problems brought about by the implementation of substitution of tax payment for profit delivery: on the one hand, it enhanced the vitality of enterprises, and on the other hand, it ensured the state revenue. However, the contract management responsibility system promoted in 1987 also had many imperfections. In order to improve and develop the contract management responsibility system of state-owned industrial enterprises, the State Council issued the “Provisional Regulations on the contract management responsibility system of State-owned Industrial Enterprises” (hereinafter referred to as the Provisional Regulations) in February 1988, which provided for a series of basic problems. ➀ The concept and principle of contract management responsibility system. The contract management responsibility system is an operation and management system whereby, on the basis of adhering to the socialist ownership of enterprises by the whole people and following the principle of separating ownership from management, the relationship of responsibility, rights and interests between the state and enterprises is determined in the form of management contracts, so that enterprises can operate independently and be responsible for their own profits and losses. To implement the contract management responsibility system, enterprises shall, in accordance with the principle of combining responsibility, power and profit, effectively implement their right to autonomy in operation and protect their legitimate rights and interests. The distributive relationship between the state and enterprises shall be determined in accordance with the principles of guaranteeing the base rate of payment, ensuring the handing over of the tax, retaining more of the surplus and compensating for the failure of the base payment by the enterprises. ➁ The main contents of the contract management responsibility system are: turning over profits to the state, completing the task of technological transformation, and linking total wages with economic

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benefits. ➂ Management contract, which specifies the principle, content, term of the contract (generally no less than 3 years), rights and obligations of both parties. ➃ Business operators. In the implementation of the contract management responsibility system, public bidding shall be generally adopted, and the operators of enterprises shall be determined through competition. The annual income of the operator of an enterprise, depending on the completion of the contract, may be 1–3 times higher than the average annual income of the staff and workers of the enterprise, and may even be moderately higher if the contribution is outstanding. If the contract cannot be completed, the income of the business operator shall be deducted until only half of his basic salary is retained. ➄ Management of contracted enterprises. Enterprises under the contract management responsibility system shall try out a separate accounting system for funds, dividing state funds and enterprise funds into separate accounts. The proportion of production development funds, welfare funds and reward funds to be allocated from retained profits shall be determined rationally. The state’s price policy shall be strictly complied with. The factory director responsibility system shall be practiced, and the internal economic responsibility system and distribution system shall be established and improved. Thus, within the scope of the contract management responsibility system, the “Provisional Regulations” could better introduce the profit and loss mechanism, risk mechanism, competition mechanism and reward and punishment mechanism of enterprise managers into the enterprises that practice the contract management responsibility system. This is conducive to giving full play to the advantages of the contract management responsibility system and overcoming its limitations, thus promoting the healthy development of the contract management responsibility system. Under the regulation and guidance of the above “Provisional Regulations”, the contract management responsibility system was further promoted after 1988, and gained better economic results. According to a survey of 9937 state-owned large and medium-sized industrial enterprises, 9024 had implemented various forms of contract management responsibility system in 1988, accounting for 90.8% of the total number of enterprises surveyed. The industrial output value increased by 12.5% from 1987, 0.5 percentage points higher than the increase of all large and medium-sized industrial enterprises. The realized profits and taxes increased by 20.8% compared with those in 1987, and the growth rate is also 2 percentage points higher. By 1990, the first round of contracting periods for most enterprises implementing the contract management responsibility system had expired. However, during the “Eighth Five-Year Plan” period (1991–1995), it was still necessary to “continue to adhere to and improve the contract management responsibility system of enterprises”. Accordingly, in 1990, the second round of contracting work was carried out. By the beginning of 1991, 95% of the enterprises had signed a new round of contracts. At the time of signing the second round of contract, the contract management responsibility system was further improved in response to the problems existing at that time. A comprehensive and matching contracting index system including the economic efficiency index, development potential index and management index of the enterprise was formed; the base quota of the contract and ratio of profits and taxes

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paid to the government were adjusted; the profit and loss mechanism of the enterprise and the competition mechanism of the business operators were strengthened. Generally speaking, the vitality of state-owned large and medium-sized enterprises got enhanced since the general promotion of the contract management responsibility system in 1987. According to the survey and statistics of 710 large and medium-sized state-owned industrial enterprises, there were 113 enterprises with strong vitality in 1987, accounting for 15.92% of the total; 376 enterprises with medium vitality, accounting for 52.96%; and 221 enterprises with weak vitality, accounting for 31.13%. However, by 1991, the number of enterprises with strong vitality increased to 157, and the proportion increased to 22.11%; the number of enterprises with medium vitality decreased to 358, with the proportion decreased to 50.42%; the number of enterprises with weak vitality decreased to 195, with the proportion decreased to 27.47%. The enhancement of enterprise vitality was mainly due to the implementation of the contract management responsibility system. Among the 710 enterprises surveyed, there were 18 enterprises that were under state responsibility system for profit and loss, and their vitality degree dropped from 61.3% in 1987 to 61.0% in 1991; while 600 enterprises were under contracted management, and their vitality degree rose from 62.7 to 64.1%. These data show that the contract management responsibility system played a positive role in the reform process. However, the contract management responsibility system still had major flaws. The most obvious was that the integration of tax and profit confused the different functions of tax and profit; the repayment of loans before tax was also inappropriate and weakened the restraining function for enterprises. In order to overcome these shortcomings, in the process of implementing the contract management responsibility system, a pilot project of “splitting tax and profit, repaying loans after tax, and contracting after tax” was also carried out. By 1992, more than 2500 enterprises were engaged in such pilot projects. However, these pilot projects did not fundamentally overcome the shortcomings of the contract management responsibility system. The problem was that, under the conditions of the contract management responsibility system, the determination of indicators such as contracting base and share ratio depended on the one-to-one negotiation between the government contracting department and the contracted enterprises, which lacked scientific, uniform and equal standards and could not adapt to the ever-changing market, so it was difficult to avoid the tendency of wage erosion of profits, the unfairness among enterprises, spontaneous price increase and the tendency of incentives and welfare funds eroding development funds. Of course, fundamentally, the limitation of the contract management responsibility system was that it could not really separate the government and enterprises and make them become self-operated, self-sustaining market players. It was impossible to make a fundamental change in the enterprise management mechanism, so the system could not fundamentally increase the vitality of the enterprise. According to the statistical analysis of 31 provinces, autonomous regions, municipalities directly under the central government and municipalities with independent planning status in the early 1990s, among the state-owned large and medium-sized industrial enterprises, only 20% had vitality, 50% had the potential to revitalize, and

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30% had no vitality. Of course, there were many reasons for this lack of vitality situation, but it also proved that the contract management responsibility system couldn’t fundamentally solve the problem of enterprise vitality.

2.2.1.2

Lease System for Small Businesses

Both the contract management responsibility system and the contract management responsibility system could achieve a certain degree of separation of ownership and management rights. But separation degree of the former is greater, so the contract management responsibility system allows greater autonomy for enterprises and has greater effect on enhancing enterprise vitality of small state-owned enterprises to which it applies. Therefore, before the general implementation of the contract management responsibility system in 1987, the contract management responsibility system was piloted in some small enterprises. After that, in addition to the implementation of the contract management responsibility system for some of the small state-owned industrial enterprises and the transfer to collectives and individuals for a fee, the focus was on the implementation of the contract management responsibility system, and progress was made. By the end of 1987, of the 88,000 small state-owned industrial enterprises, 40,000, or 46% of the total, had been leased, contracted or transferred. In order to regulate and promote the development of the contract management responsibility system, the State Council issued the “Provisional Regulations on Lease Management of Small Industrial Enterprises under National Ownership” in June 1988, which clearly provides for a series of important issues for the implementation of the contract management responsibility system. ➀ The term “lease management” refers to a practice of separating ownership from management without changing the socialist ownership by the whole people. The state authorized the lessor to hand over the enterprise to the lessee for operation for a fixed period of time, and the lessee pays the lease payment to the lessor, and implements independent operation of the enterprise in accordance with the contract. ➁ In the implementation of the lease management, interests of the state, the enterprise, the employees and lessee must be all taken into account. The lessee may adopt the form of one-person leasing, partnership leasing, full personnel leasing, one enterprise leasing another enterprise, etc. ➂ The lease term is 3–5 years per term. ➃ The lessee is the legal representative of the enterprise during the lease period, exercising the authority of the factory director, fully responsible for the enterprise, and is required to provide property or financial guarantees. ➄ On the basis of asset evaluation, the lessor determines the base price according to the capital and profit rate of the industry and the enterprise, and conducts leasing bidding. A lease management contract should be entered into, which stipulates the rights and obligations of the lessor and the lessee. ➅ After paying taxes according to law, the profits realized by the leasing enterprise shall be divided into four parts: the lessee’s income (including lease payment), the enterprise’s production and development fund, the collective welfare fund for the staff and workers, and the staff and workers’ reward fund, and shall be distributed according to the prescribed

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proportion. The enterprises can also independently determine the internal distribution within the scope of the prescribed total salary (including bonus). The implementation of the Regulations has promoted further development of leasing operations of small state-owned industrial enterprises. In addition, during this period joint-stock enterprise pilot and enterprise group pilot were also implemented.

2.2.2 Start of the State-Owned Asset Management Reform From 1985 to 1992, under the guidance of the theory of planned commodity economy, the reform of the state-owned asset management system formally started. With the expansion of enterprise autonomy, the vitality of enterprises was further enhanced. However, the problem that the reform of the state-owned asset management system lagged behind the reform of state-owned enterprises tended to be more serious. As a result, wage erosion of state profits by state-owned enterprises became more serious and the loss of state-owned assets became widespread. It is this reality that calls for strengthening the supervision of state-owned assets and establishing a state-owned assets administration agency. To meet this requirement, in January 1988, the State Council formally decided to establish the State Administration of State-owned Assets (SASOA), separating the property rights management function of state-owned assets from the administrative and general economic management function of the government and placing the former under the unified management of the Administration. The State Administration of State-owned Assets, as the representative of state-owned assets, is a functional agency of the State Council specializing in the management of state-owned assets. In accordance with the principle of “unified leadership and hierarchical management” (the original term in the formulation of the plan was “unified policy and hierarchical management”, which was changed in later documents), a state-owned assets management system from the central to local governments was gradually established. Its mission is to exercise management functions over all state-owned assets (including fixed assets, liquid assets and other state-owned assets) in the People’s Republic of China and abroad, with emphasis on the management of state-owned assets invested by the state in various enterprises (including Sino-foreign joint ventures and cooperative enterprises). In order to safeguard property owned by the whole people and protect the interests of the owners, the state entrusts it with the right to exercise the representation of the owners of state-owned assets, the right to supervise and administrate state-owned assets, the right to state investment and earnings, and the right to dispose of assets. The main responsibilities of SASOA are as follows: first, it shall, together with relevant departments, formulate policies, regulations and rules on the management of state-owned assets and organize their implementation. Second, it is responsible for the basic management of state-owned assets such as property verification, property rights definition, property rights registration, property rights disputes settlement, and

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the establishment and improvement of state-owned assets management information system. Third, it shall, in conjunction with relevant departments, decide or approve, in accordance with the hierarchical supervision system, the forms of operation of state-owned assets of enterprises, the establishment, merger, division, termination, auction and sale of state-owned enterprises, the examination and approval of major issues concerning changes in property rights and financial settlement. It shall organize liquidation and supervision of state-owned assets of revoked or dissolved enterprises. Fourth, it shall put forward opinions and suggestions on the allocation of state investment and major investment projects of state-owned assets, and focus on tracking and monitoring the investment performance. Fifth, it shall participate in the research of the distribution plan of the after-tax profits of state-owned enterprises and the state equity income, and supervise the income of the property rights of state-owned assets. Sixth, work with relevant departments to develop an indicator system for assessing the preservation and appreciation of state-owned assets, as well as supervise, assess and evaluate the financial status of assets and liabilities, operating profit and loss of state-owned assets of enterprises. Seventh, work with relevant departments to study and formulate systems and methods for the management of resource based stateowned assets and state-owned assets of administrative institutions, and participate in the handling of major property rights disputes. Eighth, formulate regulations and management systems for the evaluation of state-owned assets and to supervise and inspect their implementation. After the establishment of the SASOA, the following work were carried out. Firstly, investigation and research were conducted to identify the situation of state assets. Secondly, preparatory work for the liquidation of assets was carried out. Thirdly, evaluation of state-owned assets was carried out in the process of property rights change. Fourthly, participation in rectifying the company’s work to prevent the loss of state-owned assets during the process of “withdrawing, merging, and transferring” the companies. Fifth, sorting out the property rights of overseas stateowned assets. Sixth, participation in the improvement of the contracting system. Seventh, the annual report system of state-owned assets was initially established. Eighth, the pilot work of the reform of state-owned assets management system was carried out. The above shows that the establishment of the State Administration of State-owned Assets was the hallmark of the official start of the reform of China’s state-owned assets management system, and promoted the management of property rights of state-owned assets. However, just as the planned commodity economy had the transitional characteristics, so had the State Administration of State-owned Assets established in 1988. Even after the establishment of State Administration of State-owned Assets as the specialized agency responsible for state-owned assets administration, the state-owned assets administration functions assumed by the original government functional departments were still retained. This is the fundamental reason why the State Administration of State-owned Assets could not really play its proper role. In the absence of fundamental changes in the functions of other government departments, the professionalization of the functions of the state-owned assets owner was bound to be constrained by the original established pattern of power and interests. This chaotic situation of

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state-owned assets management not only made it difficult for the newly established State Administration of State-owned Assets to play its role, but also objectively aggravated the serious loss of state-owned assets. Moreover, this situation also made it impossible to fundamentally achieve the separation of government and enterprise, and state-owned enterprises could not really become market players. Therefore, to deepen the reform of state management system has become an urgent task.

2.3 Continue to Promote the Reform of Collective Economy 2.3.1 Continue to Promote the Reform of Urban Collective Economy After the Third Plenary Session of the Eleventh Central Committee of the CPC, the long-standing “leftist” mistake was corrected, that is, denying collective ownership and managing collective enterprises in the same way as state-run enterprises, and significant progress was made, such as returning operational autonomy to collective enterprises and changing unified responsibility for profits and losses to self responsibility for profits and losses. However, due to the constraints of various factors, the correct policies in this regard had not been effectively implemented; moreover, the reform achievements that had been made were not consolidated and there existed relapses. In some places, the competent authorities of urban collective enterprises took back the autonomy which had been delegated to the enterprises. This is one aspect of the problem. For another aspect, the form of collective ownership established in the 1950s itself needed to adapt to the development of the productive forces and reforms based on past experience should be carried out. To this end, in October 1984, the Ministry of Light Industry and the National Cooperative Society of Handicrafts made the “Provisional Regulations on Certain Issues Concerning Collective Enterprises in Light Industry” in accordance with the “Decision on Economic System Reform” of the Third Plenary Session of the Twelfth Central Committee of the CPC. In November of the same year, the State Council approved these regulations. Accordingly, the following reforms were carried out in the urban collective economy during this period. (1) Further maintain the collective ownership system and return all the rights that collective enterprises should enjoy back to the enterprises. (2) Widely promote a variety of forms of management responsibility system with emphasis on contracting. By the end of 1985, 85% of the total number of urban collective enterprises had implemented such a responsibility system. While urban collective enterprises generally implemented the contract management responsibility system, some small collective enterprises also implemented the contract management responsibility system. (3) The implementation of the joint-stock cooperative system and the joint-stock system. According to the incomplete statistics of 34 provinces, autonomous regions, municipalities directly under the central government and municipalities with independent

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planning status, by the end of 1991, there were 3220 joint-stock enterprises of various types nationwide, of which 63% were urban collective enterprises. (4) On the basis of developing horizontal alliances, enterprise groups were formed. (5) Implementing the factory directors’ responsibility system. (6) Implementing the employees’ retirement expenses pooling. By the early 1990s, the problem of providing for the old age of workers in urban collective enterprises was initially solved. All the above reforms were preliminary, non-standardized and not consolidated. In order to consolidate and standardize the existing reforms, push them forward, and also to standardize and strengthen the internal management of urban collective enterprises, based on the reform experience, the State Council issued the “Regulations on Urban Collective Ownership Enterprises” in September 1991. The main contents of the “Regulations” are as follows. The nature of urban collective enterprises is socialist economic organizations whose property ownership belongs to the working people, who practice joint labor, and the distribution is mainly based on labor contribution. Collective enterprises should adhere to the following principles: voluntary association, self-financing, independent accounting, sole responsibility for profits and losses, independent operation, democratic management, collective accumulation, independent disposal, distribution according to labor contribution and employees shall enjoy share dividends. Collective enterprises, congress of workers and staff and factory directors (managers) enjoy rights (powers) within the scope of national laws and regulations. Collective enterprises and factory directors (managers) also have to assume corresponding obligations (duties) in accordance with national laws and regulations. Property management of collective enterprises should adhere to the following principles: the public accumulation of a collective enterprise shall be collectively owned by the working people of the enterprise; the investment of a joint economic organization in a collective enterprise shall be owned collectively by the working masses within the scope of the organization; the employee’s share capital belongs to the individual employee; the investment of organizations and individuals outside the collective enterprise belongs to the investor. The distribution of earnings of collective enterprises should follow these principles: the after-tax profits of collective enterprises shall be independently allocated by the enterprises according to law, and the proportions of the public reserve fund, public welfare fund, labor dividend and share dividend shall be determined according to regulations; enterprise employees’ labor remuneration must be based on work contribution; the dividend should be based on the profit and loss of the enterprise: if the enterprise makes a profit, it will pay dividends according to the share; if the enterprise loses money, it will not pay dividends; enterprises must draw insurance funds for employees’ pension and unemployment. Obviously, this regulation was not fully developed yet, and retains certain vestige of a planned economy system, but at that time it served to consolidate and promote the reform of urban collective enterprises, strengthen their management, and consequently promote the development of their production. From 1984 to 1992, the output value of collective industries, including urban collective industries, increased from

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226.31 billion yuan to 1.2135 trillion yuan, and the proportion in the total industrial output value in the country rose from 29.7 to 35.1%.

2.3.2 Continue to Promote the Reform of the Township Collective Economy After the Third Plenary Session of the Eleventh Central Committee of the CPC, the township collective economy made remarkable achievements in reform. However, the task of continuing the reform still left to be taken. The main task of the township collective economy reform was: further improving the operating mechanisms of township enterprises that adapted to the development of the socialist planned commodity economy, such as the market-oriented operation mechanism, the risk mechanism of self-sustainability, the competition mechanism of the elimination of losers, the distribution mechanism based on work contribution, the labor mechanism of contract employment, the talent mechanism of external introduction and internal cultivation, the development mechanism of self-accumulation, and the restraint mechanism of self-monitoring, so that township enterprises could further adapt to the external environment and market changes, and continuously enhance their vitality. The main contents of the township collective economy reform are: under the premise of consolidating and developing collective ownership, establish and improve various forms of management responsibility system with the focus on contracting system, as well as to establish and improve the reform of the enterprise internal system with the focus on factory director responsibility system. At the same time, joint-stock cooperative system and joint-stock system were tried out, and enterprise groups were established based on the development of horizontal economic alliance. By 1988, the contract management responsibility system had been widely implemented in township collective enterprises. After the expiration of the first round of contracting, by the end of 1990, another 95% of the township collective enterprises had started the second round of contracting. In this process, public bidding was gradually implemented to determine contractors, mortgaged contract with risks was practiced, and the contract index system and contract term was reasonably determined. On the basis of the general implementation of the factory director responsibility system, the contracting system was combined with the factory director target responsibility system. Through the decomposition of the contracting index at different levels, the contracting system was linked with various economic responsibility systems within the enterprises. In this way, the competition mechanism, risk mechanism, restraint mechanism and incentive mechanism were initially incorporated into the contracting system and factory director responsibility system, so that they gradually tend to be perfected.

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In order to consolidate and regulate the reform of the township collective economy, in July 1990, the State Council issued the “Regulations on Township Collective Ownership Enterprises”, the main contents of which are as follows. About the nature of township collective enterprises and the state’s policy. Township collective enterprises are part of China’s socialist public ownership economy. Township collective-owned enterprises implement independent operation, separate accounting, and assume full responsibility for profits and losses. The State protects the legitimate rights and interests of township collective enterprises and prohibits any organization or individual from infringing on their property. The State implements the policy of actively supporting, reasonably planning, correctly guiding and strengthening management of township collective enterprises. About the owners and operators of township collective enterprises. The property of an enterprise shall be owned collectively by all the farmers within the township or village where the enterprise is held, and the ownership of the enterprise property shall be exercised by the township or village farmers’ congress (farmers’ delegation) or the collective economic organization representing all the farmers. Where an enterprise practices a contract or lease system or jointly operates with an enterprise of other ownership, the ownership of the property of the enterprise shall remain unchanged. The owner of the enterprise decides the direction of business, the form of operation and the director (manager) of the enterprise in accordance with the law. For the enterprise under the contracting or leasing system, the owner of the enterprise shall determine the operator by means of public bidding, recruitment and recommendation. The enterprise operator is the enterprise director (manager). Enterprises implement a system of factory director responsibility, where the factory director (manager) is fully responsible for the enterprise and exercises authority on behalf of the enterprise. On the management of township collective enterprises. The workers of the enterprise (or congress of workers and staff) have the right to participate in the democratic management of the enterprise and to criticize and accuse the factory director (manager) and other management personnel. Enterprises employing staff and workers shall sign labor contracts in accordance with the law and practice flexible forms of employment. Enterprises shall implement the principle of work-based distribution. Enterprises with qualified conditions shall carry out social insurance for their staff and workers in reference to the relevant provisions of the State. The portion of after-tax profits retained by enterprises shall not be less than 60%, which shall be arranged independently by enterprises and used mainly for increasing production development funds, technological transformation and expansion of reproduction, and increasing welfare funds and incentive funds as appropriate. The part of an enterprise’s after-tax profits that is handed over to its owners shall be used mainly to support agricultural infrastructure, agricultural technical services, rural public welfare undertakings, renovation and transformation of enterprises or the development of new enterprises. Although there are still many imperfections in this regulation, it played a positive role in promoting the production of township collective enterprises at that time.

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During this period, township collective enterprises were in a stage of rapid growth. From 1985 to 1992, the added value of township enterprises increased from 77.231 billion yuan to 448.534 billion yuan, of which the added value of collective enterprises increased from 56.267 billion yuan to 300.794 billion yuan; the proportion in GDP of both increased from 8.6% to 16.7% and from 8.6% to 11.2% respectively. From 1985 to 1992, the growth rate of township enterprises not only significantly exceeded its own growth rate from 1979 to 1984, but also far exceeded the growth rate of the national economy during this period, fully demonstrating the huge potential of township enterprises.

2.4 Development of Non-public Economy 2.4.1 Development of Individual Entrepreneurship The Third Plenary Session of the Twelfth Central Committee of the CPC, held in October 1984, put forward that “it is our long-term policy to insist on the joint development of multiple economic forms and modes of operation”. Under the guidance of this proposal, the individual entrepreneurship has gained rapid development. However, problems in the development of the individual entrepreneurship also emerged. In addition to the continued existence of the “leftist” thinking and arbitrary charges that hindered the smooth development of the individual entrepreneurship in urban and rural areas, there were also the following problems. ➀ There were illegal activities in the production and operation of some individual businesses, including cutting corners, shoddy goods, false scales, adulteration, production and operation of food harmful to human health, counterfeit and shoddy products, drugs, and reactionary, absurd, and obscene cultural products. ➁ Due to tax evasion, lax tax collection and other factors, some individual businesses had excessively high incomes. ➂ The laws and regulations governing the management of individual businesses were not sound, and the industrial and commercial administrative departments were understaffed, with some personnel of poor qualifications. The administration of industry and commerce, as well as departments of taxation, banking, urban construction, price, labor, health, public security, transportation, commerce, etc., all implement management on individual businesses, which were uncoordinated, and even offset the management efforts. In order to solve these problems, the government took the following important measures during this period. (1) In order to strengthen the supervision and management of individual industrial and commercial businesses and protect their legitimate rights and interests, the State Council issued the “Regulations on the Administration of Individual Industrial and Commercial Businesses in Urban and Rural Areas” in August 1987, which further provided for a series of problems in the production and operation of individual businesses. (2) In order to strengthen the state’s administration

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of individual businesses, the individual businesses were rectified and straightened out. (3) Strengthen the self-regulation of individual businesses. With the implementation of the above-mentioned work, the individual entrepreneurship entered a phase of rapid development. From 1984 to 1992, the number of individual businesses grew from 9.33 million to 15.34 million, an increase of 64.4%; the number of employees grew from 13.04 million to 24.68 million, an increase of 89.3%; the registered capital grew from 10 billion yuan to 60.1 billion yuan, an increase of 501%.

2.4.2 Initial Development of the Private Economy Practice has proved that in the primary stage of socialism in China, the existence and development of the private economy with capitalist nature within a certain scope is in line with the needs of the development of social productive forces. However, the upsurge of socialist transformation of private ownership of the means of production in the second half of 1955, while obtaining great achievements, also had serious defects of being too hasty and too wide-scoped of transformation, so that the private economy was basically transformed into socialist public ownership in the first half of 1956. The “Great Leap Forward” that started in 1958 and the “Cultural Revolution” that started in 1966 further swept away the remaining private economy. However, under the guidance of the spirit of the Third Plenary Session of the Eleventh Central Committee of the CPC held at the end of 1978, the private economy, which was adapted to the needs of the development of social productive forces, came back to life. At that time, private enterprises had not yet obtained legal status and had to exist under the name of individual entrepreneurship and collective enterprises. According to the estimates of the relevant departments, with the development since the early 1980s, by the end of 1987, the total number of private enterprises existing under the name of individual entrepreneurship and collective enterprises had reached 225,000 nationwide, and the total number of employees was 3.6 million. For this reason, it was necessary to fundamentally remove the long-standing “leftist” ideology that radically denied the status and role of the private economy in the primary stage of socialism in China, and restore the private economy its rightful place. In response to this objective requirement, and guided by the spirit of the 13th Party Congress held in October 1987, the provisions adopted at the first session of the 7th National People’s Congress held in April 1988 stipulate: “The State allows the existence and development of private economy within the scope stipulated by law. The State protects the legitimate rights and interests of the private economy, and exercises guidance, supervision and management over the private economy.” Since then, the legal status of the private economy in the primary stage of socialism in China has been established in the Constitution, which is the fundamental law. However, there were still many important issues to be resolved in the development of the private economy at that time, such as the protection of the rights and interests of private enterprises, the administration of illegal operations of private enterprises,

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and the treatment of taxation on private enterprises, which all needed to be addressed by regulations. To this end, the State Council issued the “Provisional Regulations on Private Enterprises”, the “Provisional Regulations on Income Tax of Private Enterprises” and the “Regulations on the Collection of Personal Income Adjustment Tax of Private Enterprise Investors” in June 1988. According to the “Provisional Regulations on Private Enterprises”, a private enterprise is a profit-making economic organization whose enterprise assets are privately owned and which employs more than 8 people. Private economy is a supplement to the socialist public economy. The state protects the legitimate rights and interests of private enterprises. Private enterprises must engage in business activities within the scope of state laws, regulations and policies. The “Regulations” make clear provisions on the types of private enterprises, business opening and closing, rights and obligations, labor management, finance and taxation, supervision, punishment and other important issues. According to the above tax regulations, private enterprise income tax shall be calculated and levied at a proportional tax rate of 35%; the part of the after-tax profits used for production development fund shall be exempted from personal income adjustment tax. Compared with the taxation of individual entrepreneurship at that time, these tax policies were relatively favorable. Under the prevailing conditions, the enactment and implementation of these laws and regulations created favorable conditions for the development of the private economy in terms of creating the necessary legal environment, eliminating discrimination against private enterprises and personal concerns of private entrepreneurs, confirming the production and operation rights of private enterprises, and providing more favorable tax policies, thus promoting the development of the private economy. Since 1984, the private economy has grown relatively rapidly. The important features of this development are as follows. ➀ High speed. After the reform, the development of private enterprises started from scratch. However, from 1989 to 1992, the number of private enterprises increased from 90,581 to 139,633, an increase of 54.2%; the number of employees increased from 1.64 million to 2.32 million, an increase of 41.5%; the registered capital increased from 8.4 billion yuan to 22.1 billion yuan, an increase of 163.1%; the output value increased from 9.7 billion yuan to 20.5 billion yuan, an increase of 111.3%; the retail sales of consumer goods, from 3.4 billion yuan to 9.1 billion yuan, an increase of 167.6%. In addition, there were a large number of private enterprises existed in the name of individual enterprises and collective enterprises. ➁ Private enterprises were dominated by sole proprietorship and partnership, but limited liability companies were growing rapidly. In 1991, in the private economy, sole proprietorship, partnership and limited liability companies accounted for 56.8%, 40.5% and 2.7% of the total number of enterprises respectively. However, in 1992, the number of limited liability companies rose to 17,673, an increase of 165% over the previous year, and the growth speed far exceeded that of sole proprietorship and partnership, with the proportion also increased significantly. ➂ Private enterprises were mostly small, but their scale was expanding. The average registered capital was only 97,000 yuan in 1991, but increased to 158,000 yuan in 1992, an increase of 62.9%. ➃ Technological and export oriented private enterprises

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grew rapidly. In 1992, the number of technological private enterprises grew to 2348, an increase of 151% over the previous year; the number of export-oriented private enterprises reached 2230, an increase of 78% over the previous year; and the amount of foreign exchange generated was 960 million yuan, an increase of 77% over the previous year. According to incomplete statistics, there were more than 500 private enterprises running joint ventures and cooperative ventures with foreign investors nationwide. Some private enterprises also invested overseas.

2.5 Continue to Develop Modern Market System Along with the development of various types of ownership enterprises and macroeconomic management system reform, the market system were further developed. In 1992, the total retail sales of consumer goods increased from 337.64 billion yuan in 1984 to 1099.37 billion yuan, and the total sales of social production materials increased from 450 billion yuan to 1476.9 billion yuan. This rapid growth of the product market has further changed the original market situation of supply shortage. With the significant growth of contract workers in state-owned enterprises and organizations, as well as the rapid growth of private enterprises and “three-funded” enterprises, the labor force that was becoming or had become a commodity also increased significantly, resulting in a rapid expansion of the labor market. The financial market also expanded rapidly. In terms of the bank credit market, the balance of deposits and loans of financial institutions nationwide increased from 373.53 billion yuan in 1984 to 2314.38 billion yuan in 1992, and from 474.68 billion yuan to 2574.28 billion yuan respectively. As far as the money market is concerned, the interbank market, which started to develop in 1984, expanded rapidly after 1986 and became the largest sector in the financial market. In 1985, the commercial paper acceptance and discounting business was introduced nationwide. From 1986, the Central Bank also officially launched the rediscount business of discounted bills of commercial banks. As for the capital market, treasury bonds, first issued in 1981, developed quickly, and since 1985, financial bonds and corporate bonds were also issued. Beginning in the mid-1980s, the pilot shareholding system reform was launched, and the number of shares publicly issued to the public also increased significantly. As far as the securities circulation market is concerned, in 1986, Shenyang Trust and Investment Company started the counter transfer business of corporate bonds in China, and in 1988, the transfer business of government bonds in 54 large and medium-sized cities, including Shenyang, Shanghai, Guangzhou and Shenzhen was launched. From then on, China began to form a securities circulation market dominated by treasury bond transactions. From 1990 to 1991, the Shanghai Stock Exchange and Shenzhen Stock Exchange were established, and in 1992, the amount of securities issued reached 128 billion yuan, which included 41 billion yuan in treasury bonds, 12.7 billion yuan in state key construction bonds, 25.5 billion yuan in financial bonds, 37.9 billion yuan in corporate bonds and 10.9 billion yuan in

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stocks. In 1992, the Securities Commission of the State Council and the Securities Supervisory Committee were established, and a series of regulations were issued to initially regulate the securities market, and a combination of centralized and decentralized trading was initially formed. In other words, the Shanghai Stock Exchange and Shenzhen Stock Exchange traded individual shares of listed companies; the National Securities Trading Automatic Quotation System in Beijing carried out treasury bonds trading and outstanding shares of legal person on a pilot basis; the trading centers in Tianjin, Wuhan and Shenyang mainly traded treasury bonds and investment fund bonds; and more than 3000 securities business outlets scattered throughout the country carried out over-the-counter trading of bonds. By 1992, there were 71 domestic and foreign listed companies with a total stock market value of 104.81 billion yuan. In the insurance market, an important feature was that the exclusive monopoly of the People’s Insurance Company of China was broken and a number of insurance companies were established. In the foreign exchange market, after 1986, foreign exchange transfer business was transferred from the Bank of China to the State Administration of Foreign Exchange, and foreign exchange transfer centers were established in each province, autonomous region and municipality directly under the central government, and a national transfer center was established in Beijing. At the same time, the scope of the transfer was expanded to allow foreign exchange transfers between foreign-invested enterprises and between foreign-invested enterprises and domestic enterprises, and foreign exchange retained by local governments could also enter the transfer market. The real estate market, technology market and tourism market have all developed greatly. From 1987 to 1992, the floor space of commercial buildings sold increased from 26,972,400 to 42,888,600 m2 and the sales volume increased from 11.00967 billion yuan to 42.65938 billion yuan. In 1992, the business volume of technology market totaled 14.16182 billion yuan. From 1985 to 1992, the revenue of international tourism increased from 1.25 billion dollars to 3.94687 billion dollars. The above data show that China’s modern market system has also been developed along with the full-scale reform.

2.6 Deepen the Reform of Macroeconomic Management System In terms of deepening the reform of the planning and investment system, in general, the main objectives were to continue to narrow the scope of the state’s mandatory plans for important products and to expand the scope of guiding plans and market regulation; to expand the authority of localities, departments and enterprises in the management of fixed-asset investment plans; and to implement various forms of contract responsibility systems and use various economic instruments. In order to enhance the vitality of enterprises and strengthen the state’s macro-control ability, the State Planning Commission made special arrangements for large-scale capital

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construction group projects from 1987 to 1991, and implemented a pilot program for 55 large enterprise groups on a separate basis. From 1984 to 1992, the proportion of the output value of industrial products under the state mandatory plan decreased from about 40–11.7%, and the number of kinds of materials distributed by the state was reduced from more than 60 to 19. As far as the investment system is concerned, some important reforms were launched as follows. ➀ Hierarchical management of long-term, major construction: national key construction projects should be undertaken by the central government or mainly by the central government; regional key projects and general projects by local governments. At the same time the investment decision-making power of enterprises were expanded, so that they became the subjects of investment in general construction. ➁ In order to ensure a stable source of funds for key construction, the capital construction fund system was established. ➂ In order to manage investment by economic means, investment companies were established. ➃ In order to enhance the investment capacity of enterprises and improve investment efficiency, a series of reforms had also been implemented in project construction management, investment decision-making, and broadening investment channels, which mainly include: fully implementing the responsibility system of investment contracting, engineering target contracting, technical and economic contracting and equipment contracting for capital construction projects; establishing the system of investment project evaluation and review; promoting the system of “allocation of funds replaced by loan grants” for capital construction, developing the financial market and encouraging foreign investment. The price reform adopted a policy of combining regulation with deregulation and focusing on deregulation. From 1984 to 1992, the proportion of state-priced agricultural and sideline products fell from more than 40–12.5%, the proportion of state-priced retail goods fell from more than 50–5.9%, and the proportion of statepriced production materials fell from more than 60–18.7%. Correspondingly, the proportion of government-guided and market-regulated prices increased. At the same time, the scope of the double track price system for important industrial production materials and the difference between planned and market prices tended to narrow. So, in terms of the prices of the most important products, the pattern of administrative mandatory pricing that existed before the reform has shifted to being mainly regulated by the market. In deepening the reform of the fiscal and taxation system, various explorations have been made. In terms of the financial relationship between the government and enterprises, the aforementioned contract management system prevailed, while the “allocation of funds replaced by loan grants” system for capital investment were continually promoted. In terms of the financial relationship between the central government and local governments, after the expiration of the “separate meals” system that was introduced in 1980, in order to change the situation of unfairness that existed among local governments and the excessive decrease in the proportion of the central government’s fiscal revenue, the “separate meals” system was reformed in 1985 and 1986, but the main element of the lump-sum contract system was not fundamentally changed. In terms of the financial relationship between the central

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government’s financial departments and the economic departments, the lump-sum system and the fund system were further implemented, i.e., part of the financial revenues and expenditures that were originally included in the state budget were transferred to the economic departments concerned, which were allowed to manage their own revenues and expenditures. In terms of taxation, after 1985, four types of local taxes, namely, urban maintenance and construction tax, property tax, vehicle and vessel usage tax and urban land use tax, were introduced. Some new taxes were also introduced, including bonus tax for collective enterprises and public institutions, investment direction adjustment tax for fixed assets, stamp duty and special consumption tax, etc. Personal income tax was further improved, including the introduction of personal income tax for citizens and the tax on the income of collective enterprises, individual businesses and private enterprises. It should also be mentioned that although the contract management responsibility system and “substitution of tax payment for profit delivery” should have their own different functions, they both confused the two different functions of tax and profit and therefore needed to be changed. For this reason, from 1989, a pilot project of separation of profit from tax was carried out to prepare for the tax reform in 1994. The main elements of the deepening financial reform are as follows. ➀ Further build up the financial system. The Bank of Communications was re-established in 1986. Since then, CITIC Industrial Bank, Everbright Bank, Huaxia Bank, Minsheng Bank, China Merchants Bank, Shenzhen Development Bank, Pudong Development Bank and Guangdong Development Bank, a large number of urban credit cooperatives, credit investment companies and securities companies, as well as the Shanghai Stock Exchange and Shenzhen Stock Exchange were established one after another. After the People’s Insurance Company of China became an independent economic entity in 1983, the Xinjiang Construction Corps Agricultural and Animal Husbandry Insurance Company was established in 1986, followed by the resumption of the domestic business of China Life Insurance Company, the establishment of Ping An Insurance Company and Sichuan Life Insurance Company, and the resumption of pawn business. ➁ Further improve the credit fund management system. In 1985, in order to strengthen macroeconomic regulation and control, the Central Bank changed the management of deposit and loan balance indicators to the management of actual deposits and actual loans. In 1989, in the face of severe inflation, the Central Bank again changed its management of actual deposits and actual loans to quota management. During this period, economic instruments were further used to develop sources of credit funds and loan channels. For example, in 1988, when prices rose sharply, inflation-proof saving deposits were once practiced. ➂ Further development of the financial market, which has already been mentioned and will not be repeated here. ➃ Reform the foreign-related financial system. There are two main aspects. The first is gradual liberalization of domestic financial institutions to operate foreign exchange business. After the State Administration of Foreign Exchange became an independent economic entity in 1982, the China International Trust and Investment Corporation (CITIC) was established to absorb foreign capital and operate foreign exchange. Later, the state-owned commercial banks and the Bank of Communications and other financial institutions also began to operate foreign exchange business,

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which broke the original pattern of exclusive foreign exchange business conducted by the Bank of China, and began to form an oligopoly competition situation in the field of foreign exchange business. Second, a number of foreign financial institutions were introduced one after another. By the end of 1992, financial institutions from 29 countries and regions had established 231 representative offices in 15 cities in China. Along with the deepening of the above financial reforms, the role of the Central Bank in macroeconomic regulation and control has been gradually enhanced. The commercial management system was further reformed with the following main measures. ➀ The commodity purchasing and marketing system was further reformed. First, in 1985, the system of unified purchase of grain, cooking oil and cotton and the hog purchasing system were abolished, and the vegetable markets in most cities were also liberalized. Second, the number of commodities under the Ministry of Commerce’s plan was reduced from 26 in 1984 to 12 in 1991, expanding the scope of market regulation. The planned supply of cotton cloth, which had been in force for 30 years, also came to an end after 1984. Except for the planned supply of refined oil, all other industrial products are open for supply. ➁ Further reform on the multi-level wholesale system, so that the closed operation of “three fixed” (fixed objects of supply, sources of goods, and prices) and “primary, secondary, and tertiary” (primary, secondary, and tertiary wholesale and retail enterprises), which had been in practice for more than 30 years, and the operating mechanism of allocating goods by means of administrative instructions, were transformed into an open operation of “three multiples and one reduced” (multiple economic components, circulation channels, business methods, and reduced circulation links), and operating mechanism of market allocation of goods. ➂ Further reform the enterprise management system. First, The Ministry of Commerce further decentralized directly affiliated enterprises and expanded their operational autonomy. Second, continue to fully implement the contract management responsibility system in state-owned large and medium-sized commercial enterprises, and by the end of 1987, there were 13,324 such enterprises, accounting for 61.2% of the total. Third, continue to implement the policy of “transforming, transferring, leasing, and selling” in small state-owned enterprises. By the end of 1987, there were 87,880 such enterprises, accounting for 81.9% of the total. Among them, 55.6% were transformed to collective operation, 4.2% were transferred to collective ownership, 39.8% were leased, and 0.45% were sold. The reform of the labor, wage and social security systems was also promoted. In 1992, the number of contract workers in state-owned economic units increased from 1.74 million in 1984 to 20.585 million, accounting for 18.9% of the total number of workers, up from 2%. The number of enterprises with variable total wages linked to economic efficiency reached 95,544, and the number of employees totaled 32.232 million. There were 94.562 million employees participating in basic endowment insurance. By 1992, the county (city) coordination of pension insurance premiums was basically realized, and 11 provinces (autonomous regions and municipalities directly under the central government) had transitioned to provincial

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(autonomous regions and municipalities directly under the central government) coordination. Railroad, water conservancy, electric power, post and telecommunications, construction and other systems had implemented industry coordination. There were 476,000 enterprises participating in unemployment insurance, with 74.43 million employees. Another reform of government institutions was carried out. The reform of government institutions in 1982 had not and could not have been fully implemented, and since then the administrative institutions and personnel expanded again, resulting in the acute contradiction with economic reform and development. So, starting from 1988, the State Council carried out another institutional reform in accordance with the principles of transforming functions, streamlining institutions, downsizing, improving efficiency, and gradually rationalizing the relationship between government and enterprises and institutions, streamlining the State Council’s institutions from 76 to 66. However, this institutional reform was not really in place, and redundant agencies and personnel relapsed. However, the reform’s goal of transforming government functions has had far-reaching implications for future government agency reforms. The above shows that all aspects of macroeconomic management system reform had been deepened during this period.

2.7 Further Development of Opening up to the Outside World The further development of opening up to the outside world was firstly manifested in the further development of “three-funded” enterprises from 1985 to 1992 on the basis of the initial development from 1979 to 1984. In order to promote the development of “three-funded” enterprises, the government further adopted a series of policy measures. Further establish and improve foreign-related legislation. The important laws and regulations promulgated include the “Law of the People’s Republic of China on Foreign Investment Enterprises” (1986), the “Law of the People’s Republic of China on Chinese-Foreign Cooperative Enterprises” (1988), the “Law of the People’s Republic of China on Chinese-Foreign Joint Ventures”, and the “Regulations of the State Council on Encouraging Investment by Overseas Chinese, Hong Kong and Macao Compatriots” (1990). These laws and regulations not only covered all “three-funded” enterprises, but also included investments by foreign businessmen and businessmen from Hong Kong, Macao, and Taiwan, as well as relaxed policies. For example, the revised “Law of the People’s Republic of China on Chinese-Foreign Joint Ventures” in 1990 clearly stipulates that: nationalization will not be applied to joint ventures; foreign parties may also serve as the chairman of the joint venture; and joint ventures may or may not specify the term of the joint venture, etc.

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Further expand the open areas. In February 1985, the State Council decided to open up the Yangtze River Delta, the Pearl River Delta and the triangle of Xiamen, Zhangzhou and Quanzhou in southern Fujian as open coastal economic regions. In the first half of 1988, the Shandong Peninsula and Liaodong Peninsula Open Economic Regions were established successively, as well as the largest special economic region in China—Hainan Special Economic Region. In June 1990, it was decided to develop and open up Shanghai Pudong. This is of great significance for the national reform and opening up. Since 1992, significant steps have been taken in this regard. ➀ Opening along the border. Heihe, Suifenhe, Manzhouli, Huichun, Pingxiang, Weixing County, Hekou County, Wanding, Ruili, Yining, Tacheng, Bole and Erlianhot were opened up as open border cities. ➁ Further expand the opening up of inland provinces and cities. The policy of coastal open cities would be implemented in five cities along the Yangtze River, namely Chongqing, Yueyang, Wuhan, Jiujiang, and Wuhu, four border and coastal provincial capitals of Harbin, Changchun, Huhehaote, and Shijiazhuang, and eleven inland provincial capitals of Taiyuan, Hefei, Nanchang, Zhengzhou, Changsha, Chengdu, Guiyang, Xi’an, Lanzhou, Xining, and Yinchuan. Thus, China’s opening up to the outside world has formed a gradient pattern of Special Economic Zones, open coastal cities, open coastal economic regions, and open inland cities, with different levels of opening up and different opening functions. Further broaden the field of foreign investment. Since the reform, foreign investment in China has spread to the primary, secondary and tertiary industries, but mostly to the light industry in the secondary industry. This is related to the government’s policy of encouraging, restricting and prohibiting foreign investment in certain fields. To this end, in 1992, the government relaxed the restrictions on investment areas. Commerce, foreign trade, finance, insurance, aviation, legal services, accounting, etc., which were prohibited in the past, were allowed to carry out pilot investments; land development, real estate, hotels, restaurants, information consulting, etc., which were restricted in the past, were gradually liberalized. Further open up the domestic market. Since the reform, the domestic sales of foreign-invested enterprises were strictly controlled, which prevented large foreign multinational companies from investing in large-scale production projects. From 1992 onwards, the emphasis was placed on exchanging market for technology, allowing the products of some eligible projects to be mainly or even entirely sold in China. These projects were: high-tech projects; projects that could replace imports, mostly raw materials industry; large production projects. As for those general products that already could be domestically produced but were not advanced in technology, they were not included in the open market. Further expand tax exemptions. Since the reform, tax cuts and relief policies have been implemented for foreign-invested enterprises, but the preferential treatments were limited, as shown in: ➀ The income tax rate for joint ventures is generally 33%, with the preferential policy of exemption from income tax for one year and halving for two years; ➁ No reduction or exemption of unified business tax; ➂ Foreign investors also pay duties on machinery and equipment imported as investment. From 1991 onwards, tax relief has been further expanded, the main contents of which are as follows: ➀ The income tax rate of foreign-invested enterprises is uniformly

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33%. However, enterprises with foreign investment established in Special Economic Zones and productive enterprises with foreign investment established in economic and technological open zones shall be subject to enterprise income tax at a reduced rate of 15%. For enterprises with foreign investment for production purposes, with an operation term of more than 10 years, the enterprise income tax shall be exempted in the first and second years, and halved in the third, fourth and fifth years, starting from the year in which profits are made. ➁ Machinery, equipment and materials imported by foreign investors as investment were exempt from duty. ➂ Some tax concessions were also implemented for the unified business tax of foreign-invested enterprises. Measures to achieve foreign exchange balance. In order to solve the foreign exchange balance problem of foreign-invested enterprises, the government set up national and provincial foreign exchange adjustment centers in 1988, in which foreign-invested enterprises can adjust foreign exchange surplus or deficit at the foreign exchange adjustment price. Develop joint-stock foreign-invested enterprises. In 1992, in order to adapt to international conventions and meet the needs of expanding openness, the government began to expand the trial of joint-stock foreign-invested enterprises. About 20 joint ventures between Chinese and foreign investors were approved to establish limited liability companies in Shanghai and Shenzhen, and some enterprises were approved to raise funds by issuing B shares. Establish association of foreign-invested enterprises. In order to communicate information between the government and foreign-invested enterprises, the National Association of Foreign-Invested Enterprises was established in 1987, and branches were set up in 44 provinces, autonomous regions, municipalities directly under the Central Government and municipalities with independent planning status. The above policies and measures have greatly promoted the development of “three-funded” enterprises. From 1985 to 1992, the actual utilization of foreign capital was 81.502 billion U.S. dollars, of which 31.292 billion U.S. dollars was from foreign direct investment. Among the foreign direct investment, joint ventures accounted for 17.182 billion U.S. dollars, cooperative enterprises accounted for 7.090 billion U.S. dollars, and wholly-owned foreign enterprises accounted for 4.989 billion U.S. dollars. The important characteristics of the development of “three funded” enterprises include a significant increase in the proportion of joint ventures and wholly foreignowned enterprises, and a significant decrease in the proportion of cooperative enterprises. From 1985 to 1992, the proportion of joint ventures in the total number of projects, agreed investment amount and actual use of investment rose from 13.4% to 64.9%, from 34.2% to 47.7%, and from 35% to 57.2% respectively; the corresponding proportion of cooperative enterprises fell from 52.4% to 18.6%, from 58.9% to 29.7%, and from 35.2% to 29.7% respectively. And the corresponding proportion of wholly foreign-owned enterprises rose from 1.5% to 16.5%, from 0.8% to 22.6%, and from 0.8% to 16.2% respectively.

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Further opening up to the outside world was also manifested in the growth of import and export trade. The most important measure taken in this regard is to deepen the reform of the foreign trade system. Since 1985, the state-owned economy had been implementing a reform characterized by a contracted management system. This reform was also implemented in the foreign trade system. Since 1987, the State Council implemented a foreign trade contract responsibility system in the specialized foreign trade headquarters and their subordinate local branches under the Ministry of Foreign Trade and Economic Cooperation. The Ministry of Foreign Trade and Economic Cooperation only assigned three planning indicators to foreign trade companies, namely, export volume, export revenue, and total profit and loss. As for how to achieve these indicators, it was up to each foreign trade company to independently determine based on its own actual situation. The Ministry of Foreign Trade and Economic Cooperation would give certain rewards to foreign trade companies that completed the above three indicators, otherwise, the bonus would be deducted or even the foreign trade operation right would be abolished. Later, the State Council decided to implement a foreign trade contract responsibility system based on local contracting throughout the country from 1988. This reform plan brought about significant changes in the subjects of the contracting system (from the original foreign trade company as the contractor to the local government as the contractor), and also made some new progress in many aspects of the foreign trade system reform. ➀ In terms of the planning system, the central government directly assigns three targets to provinces, autonomous regions, municipalities directly under the central government, and municipalities with independent planning status, namely, export volume, foreign exchange to be handed in to the government, and total import and export profits. Each local government assumes full responsibility for completing the three targets, and accordingly enjoys the power to decide the types, quantities, prices, and business methods of export commodities on their own. ➁ In terms of the financial system, the central finance is responsible for the profits and losses of planned imports and exports, while local finance is responsible for the profits and losses of imports and exports that are beyond the plan; branches of specialized foreign trade headquarters in various localities are financially decoupled from central finance and linked to local finance. ➂ In terms of operation system, operation division is further clarified, and import and export commodities are divided into three categories according to their nature: a few bulk resource products operated by specialized foreign trade headquarters; licensed and quota commodities mainly operated by local foreign trade companies; commodities subject to deregulation. ➃ In terms of price system, except for a few imported bulk commodities such as grain and chemical fertilizer, which have a bearing on the national economy and people’s livelihood, all imported goods are in principle priced by agents, and the state treasury no longer gives subsidies for price difference. ➄ In terms of foreign exchange allocation, the proportion of local foreign exchange reserves was increased, and it is stipulated that 80% of foreign exchange collected by local governments in excess of

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their export plans can be retained for local use. Open the foreign exchange adjustment market and allow foreign trade companies and export production enterprises to freely adjust their foreign exchange with the retained foreign exchange at market prices. In addition, three industries, namely, light industry, craft, and clothing, in the specialized foreign trade headquarters system, were selected for pilot projects in which enterprises were responsible for their own profits and losses. In other words, foreign trade companies in these three industries were allowed to keep most of the foreign exchange generated from exports for their own use, and to achieve selffinancing through flexible operations. The deepening of the foreign trade system reform had promoted the development of import and export trade. In 1992 the total import and export trade increased from 120.1 billion yuan in 1984 to 911.96 billion yuan, of which total exports increased from 58.05 billion yuan to 467.63 billion yuan and total imports increased from 62.05 billion yuan to 444.33 billion yuan. Overseas contracting projects and labor cooperation also developed further under the impetus of deepening reform and expanding opening-up. The business volume of overseas contracting projects increased from 494 million U.S. dollars in 1984 to 2.403 billion U.S. dollars in 1992, and the business volume of foreign labor cooperation increased from 129 million U.S. dollars to 646 million U.S. dollars.1 The above shows that further development had been achieved in opening up to the outside world during this period.

2.8 Concluding Remarks During this period, comprehensive progress had been made in the market-oriented reform. First, the pattern of multiple forms of ownership developing together, with socialist public ownership as the mainstay became more apparent. From 1984 to 1992, the proportion of state-owned industries in total industrial output value decreased from 69.1 to 51.5%, while that of collective industries increased from 29.7 to 35.1%, and that of other economic types increased from 1.2 to 13.4%. In the total retail sales of consumer goods, the proportion of state-owned commerce fell from 45.5 to 41.3%, that of the collective commerce fell from 39.6 to 27.9%, and the proportion of other economic types rose from 14.9 to 30.8%. Second, the state-owned economy carried out the reform characterized by the practice of contract management system. Third, the modern market system, macroeconomic management system reform and opening up to the outside world had all been further developed.

1

Department of Integrated Statistics of the National Economy, International Bureau of Statistics. (1999). Compilation of Statistical Data for the Fifty Years of New China (pp. 59–60). Beijing: China Statistical Publishing House.

Chapter 3

Market Institutions Beginning to Take Shape, 1993–2000

3.1 Introduction Guided by Xiaoping Deng’s theory of building socialism with Chinese characteristics, the report of the 14th National Congress of the Communist Party of China in 1992 put forward that the goal of China’s economic system reform is to establish a socialist market economy. In November 1993, the Third Plenary Session of the 14th CPC Central Committee adopted the “Decision on Several Issues Concerning the Establishment of a Socialist Market Economy”. This decision, which systematizes and concretizes the goals and basic principles set forth at the Party’s 14th National Congress on economic restructuring, is China’s overall plan and program of action for establishing a socialist market economy. The Fifth Plenary Session of the 14th CPC Central Committee moved to establish a socialist market economy by the year 2000. The above guiding ideology directed the economic reform during this period (1993–2000).

3.2 State-Owned Economy Implements Reforms Characterized by the Establishment of a Modern Enterprise System and Strategic Restructuring 3.2.1 The Primary Focus of the Reform is to Establish a Modern Enterprise System in State-Owned Enterprises In general, since the Third Plenary Session of the Eleventh Central Committee of the CPC in 1978, China’s economic system reform has followed a path centered on the reform of state-owned enterprises, which was also clearly articulated at the Third © Social Sciences Academic Press 2024 H. Wang, China’s Economic System Reform (1978–2018), Research Series on the Chinese Dream and China’s Development Path, https://doi.org/10.1007/978-981-99-9267-6_3

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Plenary Session of the Twelfth Central Committee of the CPC in 1984. However, due to the lack of experience, the reform of state-owned enterprises had not actually become the focus of economic system reform for various reasons. However, since the 1990s, market competition has become extremely fierce due to the progress of various reforms. Under such circumstances, the lagging behind of state-owned enterprises’ reform became a very prominent economic and political issue, so the reform of stateowned enterprises became the primary focus of economic reform due to an urgent need from both economic and political perspectives.

3.2.1.1

Reform of Large and Medium-Sized State-Owned Enterprises

1. The Basis for the “Focusing on the Big Problems and Easing Control on the Small Ones” Policy According to the development level of social productive forces at the primary stage of socialism in China, the history and current situation of the development of stateowned enterprises and the experience of economic system reform, in order to consolidate and strengthen the dominant position of the state-owned economy, the reform of state-owned enterprises must focus on revitalizing the overall state-owned economy, and implement the policy of “focusing on the big problems and easing control on the small ones”. According to the Third National Industrial Census, in 1995, there were 15,668 large and medium-sized state-owned industrial enterprises, accounting for only 0.2% of the number of industrial enterprises. Their total assets were 3934.64 billion yuan, accounting for 44.5% of those of industrial enterprises; industrial added value was 712.21 billion yuan, accounting for 29.2%; product sales revenue was 2151.88 billion yuan, accounting for 27.9%; tax delivery was 226.55 billion yuan, accounting for 48.8%; the profit achieved was 70.5 billion yuan, accounting for 43.1% of the industries at and above the township level. The corresponding figures were those of state-owned small industrial enterprises. 2. Promulgation of the Company Law of the People’s Republic of China The direction of reform for state-owned enterprises, particularly large and mediumsized ones, is to establish a modern enterprise system with companies as the primary form of organization. In order to meet the needs of establishing a modern enterprise system and to regulate the organization and behavior of companies, the Chinese government promulgated the “Company Law of the People’s Republic of China” (abbreviated as the “Company Law”) on December 29, 1993, which came into effect on July 1, 1994. In Chapter I “General Provisions”, the Company Law states that the term “company” as used in this Law refers to a limited liability company or a company limited by shares established within the territory of China in accordance with this Law. Limited liability companies and companies limited by shares are both types of legal entities recognized under company law. In a limited liability company, shareholders are liable to the company to the extent of their capital contributions, and the company

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is liable for its debts with all its assets. In the case of a company limited by shares, the entire capital is divided into equal shares, and the shareholders are liable for the company to the extent of their shares, and the company is liable for the its debts with all its assets. The shareholders of the company, as contributors, enjoy the rights of owners such as income from assets, major decisions, and selection of managers based on the amount of capital invested in the company. The company enjoys all the legal property rights of the shareholders’ investment, enjoys civil rights and bears civil liabilities according to the law. The ownership of state-owned assets in the company belongs to the state. Chapters II to X of the Company Law provide for the establishment and organization of limited liability companies, the establishment and organization of joint stock companies, the issuance and transfer of shares of joint stock companies, corporate bonds, corporate finance and accounting, corporate mergers and demergers, corporate bankruptcy, dissolution and liquidation, branches of foreign companies, and legal liability, respectively. The enactment and implementation of the Company Law provided a legal basis for the pilot project of modern enterprise system, for the regulation of the organization and conduct of established companies, and for the regulation of government administration of companies. 3. The Establishment of Pilot Project of Modern Enterprise System and the Development of Joint-Stock Enterprises By the early 1990s, China’s corporate enterprises had developed to a large scale, but were not standardized. In order to actively and steadily promote the establishment of a modern enterprise system for state-owned enterprises, a pilot project in this regard was also needed. In December 1993, the State Council established a coordination meeting system for the pilot project of the modern enterprise system. This system included the participation of 14 ministries, commissions, and bureaus, such as the State Economic and Trade Commission and the National Commission for Structural Reform. The relevant ministries were responsible for drafting a pilot program. By early November 1994, the “Draft Program on Selecting a Group of Large and Medium-Sized State-owned Enterprises for Piloting the Modern Enterprise System”, which was based on the resolution of the Third Plenary Session of the 14th CPC Central Committee and the Company Law and agreed in principle by the State Council, was formed. The program provided for a series of basic issues of the pilot, including the purpose and principles, the content, the supporting measures and the steps of the pilot. The 100 pilot enterprises that had established a modern enterprise system made significant progress in terms of institutional innovation and economic efficiency. By the end of 1996, the reform programs of the 100 pilot enterprises had been approved and started to be implemented. Out of the 100 pilot enterprises, 98 were restructured in the following four forms. ➀ There were 17 companies directly restructured from the factory system to a multi-shareholder corporate system, of which 11 were joint stock companies and 6 were limited liability companies. ➁ There were 69 enterprises that

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transformed from factory-based systems to state-owned sole proprietorships. Among them, 29 started as state-owned sole proprietorships and then restructured part of their production entities into joint-stock limited liability companies or limited liability companies, with the state-owned sole proprietorship serving as the primary investor. ➂ 10 of the companies were formerly administrative departments in their respective industries, but had since transformed into wholly state-owned holding companies. ➃ In accordance with the principle of reorganization before restructuring, two carried out restructuring and reorganization of assets. Out of the 100 pilot enterprises, 84 established their boards of directors, while 72 set up supervisory boards. Significant progress had also been made in the 2343 modern enterprise pilot projects held by local governments. In 1996, the asset-liability ratio of the central and local pilot enterprises was 65.8%, 2.4 percentage points down from the previous year; the asset appreciation rate was 26.5%; 2265 social service organizations and 117,000 employees were diverted; 611,000 surplus employees of the enterprises were diverted, accounting for about 6% of the total number of employees of the pilot enterprises. Among them, 131,000 were arranged to other workplaces, 115,000 were laid off for training, 154,000 retired early, and 211,000 were unemployed. The progress of China’s reform of large and medium-sized state-owned enterprises was not limited to the 100 pilot projects aimed at establishing a modern enterprise system, but also manifested in the development of a large number of joint-stock companies (including limited liability companies and stock corporations). According to incomplete statistics, by the end of 1996, there were 36,000 joint-stock companies in China. Among them, there were 26,800 limited liability companies, and more than 9200 joint stock limited companies that had been rebuilt or newly established mainly by state-owned enterprises. The total share capital was about 600 billion yuan, and there were about 7.5 million employees. The average balance of fixed assets of more than 9200 joint-stock companies was about 530 billion yuan, accounting for 13.6% of the average balance of net fixed assets of industrial enterprises nationwide, 20.6% of state-owned industrial enterprises nationwide, and 24.9% of national state-owned large and medium-sized enterprises. Significant progress had also been made in the regulation work based on the Company Law. It was estimated that more than 6000 of the above-mentioned 9200 joint-stock companies had been regulated and incorporated into the “Company Law” track, and therefore registered in accordance with the law. The development of joint-stock enterprises has played an important role in the reform and development of Chinese enterprises. (1) Similar to the 100 pilot projects for establishing modern enterprise system (of course, on a larger scale), it has explored and accumulated experience for establishing modern enterprise system in terms of rationalizing property rights, establishing corporate governance structure, and realizing scientific management. (2) It has opened up direct financing channels for stateowned enterprises, established capital replenishment mechanisms for enterprises, and lowered their asset and liability ratios. (3) It has enhanced value preservation and increase of state-owned assets. (4) The scale of the enterprises has been expanded and economic efficiency improved. In 1995, the average sales profit of state-owned

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industrial enterprises was 5.62 million yuan, while the average sales profit of the more than 2000 joint-stock companies was 18.16 million yuan; the average sales profit of state-owned large and medium-sized enterprises was 22.99 million yuan, while the average after-tax profit of joint-stock companies listed in Shenzhen and Shanghai in the same period was 63.38 million yuan. 4. The Initial Establishment of the Modern Enterprise System At the Fifteenth Party Congress in 1997, it was announced that, “we should strive to initially establish a modern enterprise system for most large and medium-sized state-owned backbone enterprises by the end of this century, significantly improve their operating conditions, and create a new situation for the reform and development of state-owned enterprises.”1 This is the task of three-year restructuring and poverty eradication. Since 1997, the Party and the government have promoted the separation of government and enterprises, encouraged mergers and acquisitions, regulated bankruptcy procedures, layoffs, diversions, staff reduction, and efficiency improvement and reemployment projects. Additionally, they have accelerated the construction of the social security system, increased capital investment, lowered asset and liability ratios, prohibited “three disorders”, and reduced the burden on enterprises. A series of measures were taken to speed up the reform of large and medium-sized state-owned enterprises and to take the basic framework of modern enterprise system into shape. By the end of 2000, among the 2919 large and medium-sized state-owned enterprises, 2005 had undergone corporate reform in accordance with the Company Law, with a restructuring coverage of 68.7%. This indicated that most of the stateowned large and medium-sized backbone enterprises had implemented corporate reform. In the restructured enterprises, 1414 companies had their board of directors appoint general managers according to legal procedures, accounting for 70.5% of the restructured enterprises. Of the restructured enterprises, 922 had chairmen who did not also serve as general managers, accounting for 46%. There were 793 enterprises in which more than 1/3 of the board members did not hold positions at the management level, accounting for 39.6% of the restructured enterprises. There were 599 enterprises, 29.9% of the restructured ones, in which the board of supervisors was externally dispatched or invited. This suggested that the corporate governance structure of restructured enterprises was moving towards standardization. In addition, significant progress was made during this period in both piloting the establishment of enterprise groups and their development.

3.2.1.2

Reform of Small State-Owned Enterprises

Small enterprises are an important part of the national economy, an important source of local revenue, and play an important role in promoting economic development, providing employment opportunities, improving people’s lives, and ensuring social 1

A Compilation of Documents of the 15th National Congress of the Communist Party of China, People’s Publishing House, 1997, pp. 24–25.

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stability. The reform of state-owned small enterprises is an important part of enterprise reform. In order to give full play to the positive role of small enterprises in the national economy and social development, it is necessary to increase reform efforts to accelerate liberalization and activation of small enterprises. To this end, the State Economic and Trade Commission issued in July 1996 “Opinions on Liberalizing and Activating Small State-owned Enterprises” (hereinafter referred to as “Opinions”) to promote the healthy development of small state-owned enterprises. The Opinions stipulates that the direction of small enterprise reform is to separate government from enterprises, so that enterprises can independently enter the market. The management mechanism should be transformed to enable the enterprise to operate as a legal entity, with independent management, self-responsibility for profits and losses, and the ability to develop and restrain itself. The reform of small enterprises should be tailored to local conditions, industries, and enterprises. Enterprises should be allowed to choose restructuring forms that are suitable for their productivity levels based on their own characteristics. They should be treated differently, guided by classification, and various forms should be taken. One single model and “one size fits all” are not applicable. Compared with the restructuring of large and medium-sized state-owned enterprises, the restructuring of small enterprises was less difficult and thus made greater progress. By the end of 2000, 51,698 small state-owned enterprises had been restructured, accounting for more than 81.4% of the total number.

3.2.2 Strategic Restructuring of State-Owned Enterprises In May 1996, the Party Central Committee announced: “It is necessary to combine the reform of state-owned enterprises with restructuring, transformation and strengthening management in order to construct a micro foundation for the optimization of industrial structure and efficient operation of the economy.” This is a very important guideline for the reform and development of state-owned enterprises introduced by the Party Central Committee after the 14th Party Congress in 1992. The technical transformation and management of state-owned enterprises do not fall under the scope of reform, so only the strategic restructuring of state-owned enterprises is discussed below. The “big and comprehensive” and “small and comprehensive” corporate organizational forms, as well as the social functions undertaken by enterprises, were characteristic of the traditional planned economic system. The prominent problems were: (1) The overall and average size of small, medium, and large enterprises was relatively small, with a low proportion of large enterprises. This resulted in an uneconomical scale of operation and an unreasonable scale structure. (2) Enterprises were either “large and comprehensive” or “small and comprehensive”, and the industrial structure of regions tended to be similar, with low levels of specialization and cooperation among enterprises and regions. (3) Low level of industrial concentration. (4) Relative overcapacity in many industrial sectors. (5)

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The distribution of state-owned assets across industries did not reflect the dominant position of the state-owned economy. About 60% of the state-owned assets stock was distributed in the more competitive fields such as industry and construction, while less than 20% was distributed in the more monopolistic fields of basic industries and infrastructure such as transportation, post and telecommunications. (6) Many stateowned enterprises suffered from poor asset quality, low economic efficiency and serious losses. These situations indicated that strategic restructuring became a very important and urgent task for the reform and development of state-owned enterprises. It is true that the restructuring of state-owned enterprises had made some progress since the reform. However, in order to promote the reform and development of stateowned enterprises, it is necessary to vigorously promote their strategic restructuring. In February 1994, Vice Premier Rongji Zhu first put forward a solution to the difficult problems of state-owned enterprises: merging and bankruptcy for downsizing and increased efficiency. He urged efforts to be made towards this goal. This idea captures two basic ways to achieve the restructuring of state-owned enterprises. Painstaking efforts were made under the guidance of this idea, resulting in phased achievements. An outstanding achievement during the last three years of the twentieth century was the successful resolution of difficulties faced by state-owned enterprises. In 1997, when the three-year goal of poverty alleviation was put forward, state-owned and state-holding industries had profits of only 80.65 billion yuan. At that time, there were 6599 large and medium-sized loss-making enterprises, and 12 provinces, autonomous regions, and municipalities were suffering financial losses. By 2000, the profit of state-owned and state-controlled industries rose to 239.19 billion yuan, a year-on-year growth of 1.4 times. All 31 provinces, autonomous regions and municipalities made profits. The 6599 large and medium-sized state-owned loss-making enterprises decreased by 4800, or 72.7%. Some of these enterprises turned losses into profits, some withdrew from the market through bankruptcy and closure, and still others were merged or restructured. In 2000, the state-owned small enterprises also made a profit of 4.81 billion yuan, thus ending six consecutive years of net losses.

3.2.3 The Reform of State-Owned Asset Management System Zigzagged Forward in Exploration In 1992, the 14th Party Congress made it clear that the goal of China’s economic system reform was to establish a socialist market economy system. It also emphasized that by rationalizing property rights and separating government and enterprises, enterprises should truly become legal entities and subjects of market competition, and assume responsibility for preserving and increasing the value of state-owned assets. In this way, it is even more important to promote the reform of state-owned assets management.

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In accordance with the spirit of the 14th Party Congress and the actual needs of China’s deepening reform, the 3rd Plenary Session of the 14th Party Congress clearly put forward: “The management of state-owned assets in enterprises shall be strengthened. The system of unified state ownership, graded government supervision, and independent enterprise management of state-owned assets shall be implemented. Following the principle of separating the government’s social and economic management functions from its role as the owner of state-owned assets, efforts shall be made to actively explore new forms and methods for managing and operating these assets. Strengthen the institutions dedicated to the management of state-owned assets at the central and provincial, autonomous regional and municipal government levels. The relevant departments should take responsibility for supervising the state-owned assets of the enterprises under their purview. Supervisory boards may be dispatched as needed to exercise supervision over the value-keeping and appreciation of state-owned assets of enterprises.”2 The Party Central Committee and the State Council also suggested allowing local pilot projects to explore specific methods for establishing state-owned asset management. Based on these spirits, the following three aspects had been explored and practiced in the issue of reforming the management system of state-owned assets. First, the exploration and practice in building a system of management, supervision and operation of state-owned assets. In this regard, the practices of Shanghai, Shenzhen and other places had provided good experience. Drawing on these experience, a system of management, supervision and operation of state-owned assets was established, which included the following three levels. (1) Establish State Administration of State-owned Assets, which assumes the administration and supervision functions of state-owned assets, but not the operation functions of state-owned capital. (2) Establish departments to undertake the operation of state-owned capital and ensure the preservation and appreciation of state-owned assets. Based on existing practices at that time, there were three potential paths to explore: establishing a new company dedicated to managing state-owned capital; authorizing qualified large-scale enterprises or enterprise groups to act as investment subjects for state-owned capital; and transforming the enterprise supervisory department into an authorized state-owned capital investment entity. (3) Based on the principle of separating the investor ownership from the corporate property rights required by the modern enterprise system, the original state-owned enterprises were transformed into modern enterprise systems that operate in the competitive market under the state-owned capital investment subject. Second, the exploration and practice in strengthening the supervision of stateowned assets. In accordance with the spirit of the Third Plenary Session of the 14th CPC Central Committee, the State Council issued the “Regulations on Supervision and Management of State-owned Enterprises’ Assets” in 1994. As a result of the implementation of these Regulations by relevant regions, departments, and enterprises, progress has been made in the following areas: (i) the establishment 2

Decision of the Central Committee of the Communist Party of China on Several Issues Concerning the Establishment of a Socialist Market Economy System, People’s Publishing House, 1993, p. 9.

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of a preliminary system for supervising the assets of state-owned enterprises; (ii) increased awareness among enterprises regarding the management of state-owned assets, leading to improved asset management practices; and (iii) objective evaluation of business performance from an asset management perspective, as well as the strengthening of operator supervision. With the development of reform, the problem of ineffective government supervision of state-owned enterprises was sharply exposed. Under such circumstances, the State Council issued the “Notice on Sending Special Inspection Commissioners to Key State-owned Large Enterprises” on May 7, 1998, which was then put into practice. The establishment of the inspection commissioner system was a major step towards the separation of government and enterprises, a major change in the way the state manages state-owned enterprises, and a major reform of the management system of enterprise leaders. Since then, especially since 2000, a series of major initiatives have been taken to strengthen the supervision of state-owned enterprises in response to the unsound corporate governance structure and serious insider control of enterprises. ➀ Establish a sound system of supervisory boards of state-owned enterprises. To further strengthen institutional supervision of state-owned enterprises and protect the rights and interests of state-owned assets, the State Council issued the Interim Regulations on Supervisory Boards of State-owned Enterprises on March 15, 2000. These regulations authorized the State Council to establish supervisory boards for major stateowned enterprises, and empowered provincial, autonomous regional, and municipal governments to establish supervisory boards for their subordinate enterprises in accordance with the regulations. This is a further improvement of the system of inspection commissioners, with the aim of regulating and strengthening the supervision of state-owned enterprises from a systemic perspective, transforming external supervision into internal supervision, and temporary supervision into daily supervision. ➁ Actively promote the delegation and appointment system of financial directors, and further strengthen the supervision mechanism of financial directors in state-owned enterprises. ➂ Continue to implement the pilot accounting delegation system for state-owned enterprises. The implementation of the accounting delegation system would help improve the authenticity of accounting information and enable the government to further increase its financial supervision of state-owned enterprises. All these measures strongly contributed to the supervision of state-owned enterprises, but the task in this regard was still arduous. Third, the establishment of a state-owned assets management agency through reform has been a challenging and complex process, marked by many twists and turns. As mentioned earlier, the establishment of the State Administration of Stateowned Assets in 1988 was transitional in nature and its role was not fully played. Nevertheless, it is widely acknowledged that the reform’s focus on separating national social and economic management from state-owned asset ownership was a correct direction. But in the State Council’s institutional reform in 1998, the independent State Administration of State-owned Assets was merged into the Ministry of Finance. This was certainly due to the need to streamline the bloated government institutions, but it also reflected a lack of clear understanding of the problems and reform direction

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of the original state-owned asset administration system. The reintegration of state socio-economic management functions and state-owned asset ownership functions represents a regression in the reform of the state-owned asset administration system. The abolition of independent state assets administration institution was not in line with the reform direction of the state asset management system. The problem was that, following the abolition of the independent state assets administration institution, the management of state-owned assets was fragmented across various government departments. Personnel power was vested in the Ministry of Personnel, Department of Organization, or Large Enterprise Work Committee; investment power was held by the Planning Commission; macro-control and asset disposal power of state-owned enterprises lay with the Economic and Trade Commission; while asset income was controlled by the Ministry of Finance. These issues were direct consequences of the abolition of the State Administration of State-owned Assets. Specifically, there were two aspects. First, the functions of state-owned enterprise investors were divided among different departments, creating a situation of “nine dragons governing the waters”, where everyone was nominally responsible but no one was actually responsible, and a real “accountability” system could not be formed; Second, there was no clear separation between government and capital. As government departments took on the dual role of social and economic managers as well as managers of stateowned assets, their interference in the normal business operations of enterprises became inevitable.

3.3 Deepening the Reform of Collective Economy 3.3.1 Deepening the Reform of Urban Collective Economy In 1993, the “Decision of the Central Committee of the Communist Party of China on Several Issues Concerning the Establishment of a Socialist Market Economy System” called for the clarification of property rights within urban collective enterprises. Depending on their specific circumstances, these enterprises could be restructured as joint-stock cooperative enterprises, partnership enterprises, or limited liability companies. For larger and more profitable enterprises, joint-stock limited companies or enterprise groups were also viable options. Under the guidance of this “Decision”, the reform of urban collective economy has been further deepened. Initially, two fundamental tasks were undertaken in this regard: the clearance of assets and the definition of property rights. Significant progress was made on both fronts. At the same time, there was significant progress in the reform of small enterprises, which played an important role in urban collective enterprises. Since the mid1990s, many regions have pursued a range of strategies in reforming such enterprises, including “merger, lease, conversion, adjustment, support, auction, bankruptcy”, among others. Policies tailored to specific enterprises in different categories were

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also implemented based on their particular circumstances. The joint-stock cooperative enterprises, which had played an important role in deepening the reform of urban collective enterprises, developed rapidly. Large-scale enterprises with high economic efficiency were restructured as joint-stock companies or enterprise groups. A survey conducted in the first half of 1996 on the reform of small enterprises (primarily small urban collective enterprises) in pilot counties (cities) of the national comprehensive reform found that joint-stock cooperative enterprises accounted for 35.13%, contract leasing for 15.70%, entrusted management for 15.24%, sale and transfer for 11.02%, formation of companies for 7.80%, mergers for 5.47%, formation of groups for 1.69%, joint ventures for 3.42%, bankruptcy for 1.03%, and other methods accounted for 3.81%. However, the reform of urban collective enterprises faced numerous challenges. The main difficulties included encountering resistance from administrative organs, which made it challenging to achieve a clear separation of government and enterprises; and repeated incidents of violating the property and rights of collective enterprises, resulting in the loss of collective assets. As a result, the total output value of collective industries, including urban collective industries, fell from 1213.5 billion yuan in 1992 to 1190.79 billion yuan in 2000, and its share in the total industrial output value fell from 35.1 to 13.8%.

3.3.2 Deepening the Reform of Township Collective Economy In October 1996, the Chinese government passed the “Law of the People’s Republic of China on Township Enterprises” (abbreviated as the “Township Enterprise Law”). The promulgation and implementation of the “Township Enterprise Law” established the legal status of township enterprises within the national economy, formalized a series of guidelines and policies put forth by the Party Central Committee and the State Council, clarified basic policies, important principles, and main tasks for the development of township enterprises, settled property rights issues related to township enterprises, and rationalized their management systems. The “Township Enterprise Law” also introduced many specific measures for the state to promote and support the development of township and village enterprises, and affirmed in legal form some of the policy measures and successful experience of township enterprises over the years. The “Township Enterprise Law” specified legal consequences for infringing upon the lawful rights and interests of township enterprises, failing to fulfill obligations by township enterprises, or violating relevant laws and administrative regulations. The promulgation and implementation of the “Township Enterprises Law” provided a robust legal guarantee for the reform and development of these enterprises.

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In March 1997, in response to the growing demand for deepening reform and promoting healthy development within township enterprises, the CPC Central Committee and the State Council endorsed the Ministry of Agriculture’s “Report on the Status, Reform, and Development of Township Enterprises in China”, which offered a systematic overview of the main measures for advancing the reform and development of township enterprises over the next 15 years based on new experience. In these documents, the government argues that, in order to deepen the reform of township enterprises, we must adhere to the “three favorable conditions”, conscientiously implement the principles of actively supporting, correctly guiding, summarizing experience, and gradually standardizing put forth by the Party Central Committee and the State Council, respect the practices of farmers, actively explore and innovate, and prioritize practical results. Enterprises with favorable conditions may establish limited liability companies, joint-stock limited companies, or enterprise groups. General collective enterprises can improve their contracting system or implement a stock cooperative system. Small enterprises that are marginally profitable or loss-making can be reorganized via leasing, auction, joint ventures, mergers, bankruptcy, or other methods. Regardless of the chosen form, adherence to the following points is crucial: ➀ Separation of government and enterprise responsibilities, whereby the government shifts from direct management of production and operation to macro planning, guidance, management, supervision, coordination, and service. This enables enterprises to become independent market entities that operate, bear risks, self-regulate, and self-develop. ➁ Improve the internal management and incentive systems of the enterprise to encourage full engagement and active contribution from owners, operators, and employees to the company’s development. ➂ It is essential to protect the collective assets of the enterprise, ensuring that they maintain and increase in value, and are not lost. The development of township enterprises is supported by a series of measures outlined in these documents, including: promoting scientific and technological progress; strengthening operational management; optimizing industrial and product structures; developing large, medium, and small enterprises simultaneously; guiding concentrated and contiguous development; promoting East–West cooperation; and prioritizing resource and environmental protection. These documents propose a policy of ‘actively supporting, rational planning, classified guidance, and lawful management’ for township enterprises, aimed at creating a favorable policy environment for their reform and development. These policy measures, together with the overall high growth of China’s national economy, led to significant growth in collective enterprises in townships. From 1992 to 2000, the added value of township enterprises increased from 448.534 billion yuan to 2715.623 billion yuan, with the added output value of collective enterprises rising from 300.794 billion yuan to 942.487 billion yuan.

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3.4 Continued Development of the Non-public Economy 3.4.1 Continued Rapid Development of the Individual Entrepreneurship Between 1993 and 2000, the development of the individual entrepreneurship benefited from unprecedented favorable social conditions.. The State Administration for Industry and Commerce issued the “Opinions on Promoting the Development of Individual Entrepreneurship and Private Economy” in 1993, which relaxed regulations to varying degrees on factors such as number of employees, business scope, operation methods, and approval procedures. It is worth noting that the 15th National Congress of the Communist Party of China emphasized the importance of the public sector as the mainstay of the economy, while also encouraging the development of various forms of ownership. “The non-public economy is an important part of China’s socialist market economy”. This was identified as the basic economic system for the primary stage of socialism in China. This classification and positioning has correctly identified the non-public economy, including the self-employed sector, and expanded its potential for development. From 1992 to 2000, the number of individual businesses increased from 15.34 million to 25.71 million, representing a growth of 67.6%. The number of employees increased from 24.68 million to 50.7 million, an increase of 105.4%. The registered capital increased from 60.1 billion yuan to 331.5 billion yuan, indicating a significant rise of 451.6%.

3.4.2 High Growth of Private Economy Since the reform, private enterprises have benefited from unprecedented favorable conditions. Following the 15th Party Congress, the private economy and other nonpublic economies were recognized not only as necessary supplements to the socialist economy, but also as important components of the socialist market economy. This created a favorable policy environment for the development of private enterprises, which facilitated both rapid growth and enabled formerly existing collective enterprises with private ownership to restore their true nature. The development of private enterprises exhibited the following characteristics. ➀ Rapid growth. From 1992 to 2000, the number of private enterprises increased from 139,633 to 1,761,769, an increase of 11.62 times; the number of employees increased from 2.32 million to 24.06 million, an increase of 9.4 times; the registered capital increased from 22.1 billion yuan to 1330.7 billion yuan, an increase of 59.2 times; the output value increased from 20.5 billion yuan to 1073.9 billion yuan, an increase of 51.4 times; the retail sales of consumer goods increased from 9.1 billion yuan to 581.3 billion yuan, an increase of 62.9 times. ➁ The proportion of limited liability companies in private enterprises rose rapidly and held a dominant position. In 2000, of the 1,761,769

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private enterprises, sole proprietorships accounted for 28.4%, partnerships for 9.9%, and limited liability companies for 61.7%. ➂ Despite being dominated by small businesses, private enterprises expanded rapidly in scale, with large enterprises experiencing particularly fast growth rates. From 1992 to 2000, the average registered capital of private enterprises increased from 157,000 yuan to 756,000 yuan.

3.5 The Modern Market System in Its Initial Stage of Formation As market-oriented reforms deepened and socialist modernization progressed, the modern market system was beginning to take shape. Development of commodity markets. In 2000, the total retail sales of social consumer goods increased from 1099.37 billion yuan in 1992 to 3910.57 billion yuan. Total sales of social production materials increased from 1476.9 billion yuan to 5200 billion yuan, which fundamentally transformed the seller’s market created under the planned economic system and initiated the formation of a buyer’s market. An analysis of 613 major commodities revealed that in the first half of 1997, 89.4% of commodities were in basic balance of supply and demand, while 5.5% of commodities experienced shortages or oversupply. During this period, commodity prices were increasingly market-driven. Between 1992 and 2000, the proportion of marketregulated prices in the total retail sales of social commodities increased from 93 to 95.8%. The proportion of market-regulated prices in the total purchases of agricultural and sideline products rose from 81.8 to 92.5%, while in total sales of production materials, the proportion of market-regulated price increased from 73.8 to 87.4%. These developments led to the initial establishment of a commodity market system. The labor market underwent significant development, with a total of 112.57 million workers in society by the year 2000. Of these, 81 million were employees of state-owned economic units. As labor and wage systems underwent reform, employment and wages were gradually marketized to varying degrees. The remaining 31.57 million workers were employed by non-state-owned units, and their employment and wages had essentially been marketized. The financial market experienced significant development in five areas. First, in the bank credit market, the balance of RMB deposits and loans of financial institutions nationwide increased from 2314.38 billion yuan in 1992 to 13,380.44 billion yuan in 2000, and from 2574.28 billion yuan to 9937.11 billion yuan, respectively. Second, the money market developed rapidly. In 2000, the interbank lending market saw transactions worth 672.8 billion yuan, while the volume of repo transactions in the interbank bond market reached 1.57 trillion yuan. The cumulative amount of commercial bills of exchange reached 744.5 billion yuan, and the cumulative amount of discounting reached 644.7 billion yuan. Third, the securities market flourished. Between 1993 and 2000, the total number of listed companies (both domestic and foreign) increased from 229 to 1254, and the total market value of stocks rose from

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353.101 billion yuan to 4809.094 billion yuan. Treasury bond issuance increased from 38.131 billion yuan to 465.7 billion yuan, and the total trading volume of futures increased from 552.199 billion yuan to 1608.229 billion yuan. In 2000, the volume of corporate bonds and securities investment funds reached 8.3 billion yuan and 56.2 billion yuan respectively. Fourth, the cumulative turnover of various currencies in the foreign exchange market was equivalent to 42.2 billion U.S. dollars in the year 2000. Fifth, in the year 2000, insurance premium income reached 159.59 billion yuan, with property insurance accounting for 59.84 billion yuan and life insurance accounting for 99.75 billion yuan. During the same year, property insurance claims amounted to 30.59 billion yuan, while life insurance claims reached 22.15 billion yuan. Significant growth was observed in the real estate, technology, and tourism markets. From 1992 to 2000, the actual sales of commercial housing increased from 42.8886 million square meters to 186.371 million square meters, with sales value increasing from 42.65938 billion yuan to 393.54423 billion yuan; the turnover of technology market increased from 14.16182 billion yuan to 65.07519 billion yuan; The international tourism revenue increased from 3.94687 billion U.S. dollars to 16.2246 billion U.S. dollars. Domestic tourism revenue reached 317.58 billion yuan in 2000. By the year 2000, China’s modern market system had taken initial shape, as evidenced by the basic information on commodity and factor markets scale and price formation mechanisms mentioned above.

3.6 Initial Establishment of the Institutional Framework for Macroeconomic Management Significant progress had been made in reforming the macroeconomic management system, with breakthroughs in some areas. The reform of the planning system has made significant progress. The mandatory plan was greatly reduced, and the guiding plan has increasingly become the main form of planning. Furthermore, the market has gradually become the primary means of allocating social production resources. In terms of production, before 1979, the State Planning Commission implemented mandatory plans for the production of 25 major agricultural products, but by the end of the 1990s, all of them had been abolished. Prior to the reform, over 120 industrial products were under mandatory plans issued by the State Planning Commission. By the late 1990s, this number had decreased to less than 5, resulting in a drop of the proportion in national industry’s total output value from 70% to under 4%. In terms of circulation, the State Planning Commission was responsible for balancing and distributing centrally planned materials, including 256 types of materials in 1979. Additionally, the Commission had plans for the purchase and allocation of 65 types of agricultural products, industrial consumer goods, and

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agricultural production materials. By the late 1990s, both numbers had decreased to under 5 and under 10, respectively. Despite lagging behind, the reform of the investment system did make significant progress. Prior to the reform, the investment system was a crucial component of the planned economic system and was largely unitary on five dimensions: there was a single body making investments (primarily the central government), all investment decisions were made by a single government body (mostly the central government), there was a single investment model (fiscal appropriations by the central government), a single source of funds (mainly fiscal funds from the central government), and a singular management model (mostly through executive orders by the central government). After more than 20 years of reform, significant changes were made to these five aspects by the end of the 1990s. Firstly, investment subjects diversified, and a diverse pattern of central and local governments, domestic and foreign enterprises, and private investors had emerged. Secondly, investment decisions became multi-level, involving various parties such as central government, local government, industry departments, enterprises, and individuals. Thirdly, investment methods diversified, including government investment, joint ventures, cooperation, joint stock cooperation, project financing (BOT, TOT, etc.), contracting, leasing, and other forms. Fourthly, multiple sources of financing were available, including fiscal appropriations, domestic bank loans, self-financing, bond issuance, foreign loans, foreign direct investment, and other funding channels. Finally, indirect management was adopted. The state gradually replaced mandatory plans with guidance plans in investment management and increasingly relied on market mechanisms and economic leverage instead of administrative orders. The price reform continued to make significant progress. ➀ The method of first adjusting prices and then releasing them was used to gradually liberalize the prices of grain and edible oil in various regions. This led to the end of the low-price supply system for urban residents’ grain and oil that had been implemented for around 40 years, and more effectively addressed the issue of inverted prices for grain and oil sales. ➁ To further liberalize product prices, the reform continued to remove price controls on industrial consumer goods that had not yet been released. ➂ Additionally, most industrial means of production were subjected to a single market price. ➃ The purchase prices of agricultural products, as well as energy and raw materials prices, were significantly raised. As a result, the share of government pricing in total retail sales of social commodities fell from 5.9% in 1992 to 3.2% by 2000. Similarly, in total purchases of agricultural products, the share of government pricing dropped from 12.5 to 4.7%, and in total sales of production materials, it declined from 18.7 to 8.4%.3 These figures suggest that the product price reform was essentially completed. Significant progress was also made in reforming the fiscal and taxation system. First, in the reform of the fiscal system, a hierarchical fiscal management system based on the central and local taxation system was established. The reform put an end to financial overdrafts to banks, and the central fiscal deficit was financed through issuing treasury bonds. Furthermore, local finances were prohibited from running 3

China Price Yearbook, China Price Yearbook Press.

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deficits. The reform included a shift from a single budget to a compound budget, the introduction of a transfer payment system from central to local finances, and the trial implementation of a zero-based budget and a centralized and unified payment system from the treasury. Thus, a framework of public finance system was initially formed. Second, the reform of the taxation system included the abolition of the former unified business tax and the establishment of a new turnover tax system with a standardized value-added tax as the core, supplemented by consumption tax and business tax, and the replacement of the product tax levied on agriculture, forestry, animal husbandry and aquaculture with a special agricultural and forestry tax. In terms of income tax, the previous practice of levying different income taxes on enterprises with different ownership was replaced by a unified domestic enterprise income tax, and a unified personal income tax applicable to both Chinese and foreign individuals as well as urban and rural self-employed individuals was established. The reform also involved expanding the scope of resource tax, introducing an increment tax on land value, and abolishing and merging some minor taxes in other industrial and commercial tax systems. In addition, the tax collection and administration systems were restructured by dividing local taxation agencies into national taxation bureaus and local taxation bureaus. These measures laid the foundation for the new taxation system. During the reform, significant progress was made in establishing a financial system framework that could adapt to the needs of the socialist market economy. Specifically, the initial focus was on establishing the basic framework of the financial organizational system. China’s financial organization system consists of four types of financial institutions. ➀ The national financial regulatory agency is the central bank, namely the People’s Bank of China. The Central Bank enjoys the monopoly of currency issuance and is the only currency issuing bank; it supervises the nation’s financial activities and financial institutions on behalf of the government in accordance with the law, maintains the normal operation of the payment and clearing system, holds, manages and operates the national foreign exchange reserves and gold reserves, acts as an agent for the state treasury and related financial operations, and engages in relevant international financial activities on behalf of the government, thus it is called the government’s bank. As the lender of last resort, it can provide loans or rediscounts to commercial banks when their funds are insufficient, hence it is also known as the bank’s bank. It is responsible for formulating and implementing monetary policy, regulating the social money supply to maintain the stability of the currency value, and is an important macroeconomic control agency of the state. ➁ Commercial banks, including wholly state-owned banks and joint-stock commercial banks, are financial enterprises that mainly engage in deposits, loans and transfer services, with profit as their primary goal. ➂ Policy banks are financial institutions that are established by the government to implement national industrial, regional, and foreign economic policies. In China, there are three policy banks: the China Development Bank, the Export–Import Bank of China, and the Agricultural Development Bank of China. These banks are primarily financed through financial allocations, policy bond issuance, and loan recoveries; they do not take deposits from the public. Policy banks have specific service areas and often provide preferential loans with financial subsidies. However, it is important to note that the funds of policy banks differ from

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traditional financial funds, and their loans must be repaid while also considering profitability. As such, these banks strive to operate with a small profit margin. ➃ In addition to commercial banks, China’s financial system includes non-bank financial institutions such as insurance companies, urban and rural credit cooperatives, trust and investment companies, finance companies, securities companies, securities trading centers, fund management companies, financial leasing companies, postal savings, remittance bureaus, and pawnshops. Second, the Central Bank established a financial macro-control system with the objective of maintaining the stability of the RMB and promoting economic development. To achieve this, the People’s Bank of China introduced the money supply indicator system and made money supply the intermediary objective of monetary policy. Moreover, regulatory methods have evolved from direct regulation, such as credit scale management, to indirect regulation through monetary policy tools, including deposit reserves, rediscounts, interest rates, open market operations, Central Bank loans, and more. This approach enables the Central Bank to control the money supply and adjust the credit structure. During the reform of commercial circulation system, significant progress was made on several fronts. Firstly, the reform of the state-owned commercial enterprise system was deepened: large enterprises underwent a transformation to a company system and small enterprises adopted the share cooperative system on a trial basis. Secondly, there was further progress in the non-public commercial sector. Thirdly, an indirect regulation system for commodity circulation was established. During the labor and wage system reform, significant progress was made on several fronts. Firstly, the labor system underwent a transformation towards marketoriented employment, primarily guided by national policy, enterprise autonomy in employment, individual autonomy in career choice, market regulation of supply and demand, and social provision of employment services. Secondly, the salary system also underwent reform: by the end of the 1990s, wages had become market-oriented due to the marketization of labor employment. Significant progress was also made in the reform of social security system. First, the pension insurance system underwent reform: in 1997, a unified basic pension insurance system for urban employees was established nationwide, adopting a model that combines social pooling and individual accounts. The proportion of enterprise contributions is about 20% of total wages, and the proportion of individual contributions is 8% of one’s wage. A portion of the basic pension insurance premiums paid by enterprises is used to establish a pooling fund, while another portion is allocated to individual accounts. Basic pension insurance premiums paid by individuals are credited to their individual accounts. The basic pension system consists of the basic pension and the individual account pension. Basic pension is paid from the social pooling fund, with a monthly amount equal to 20% of the average monthly salary of social employees. Monthly personal account pension is calculated as 1/ 12 of the accumulated amount in the personal account fund. After several years of promotion, the number of employees covered by basic pension insurance increased from 94.562 million in 1992 to 136.174 million in 2000. However, employees and retirees of government institutions and public organizations are still under the old pension security system. In addition, in 1991, a pilot pension insurance system was

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introduced in some rural areas of China. The rural pension insurance system follows the basic principle of “individual contributions, supplemented by collective subsidies, and supported by government policies”. It is based on the individual account model for fund accumulation. The second significant reform was the establishment of a nationwide basic medical insurance system for urban workers in 1998. This system also adopts a model that combines social pooling and individual accounts. All enterprises, state administrative organs, institutions and other units and their employees must fulfill the obligation of paying basic medical insurance premiums. The employer’s contribution is about 6% of the total salary, and the individual’s contribution is 2% of his or her salary. The basic medical insurance premiums paid by the employers are partly used to establish the pooling fund and partly transferred to the individual account; the basic medical insurance premiums paid by the individual are credited to the individual account. The pooling fund is mainly used to pay for hospitalization and outpatient treatment of some chronic diseases; the personal account is mainly used to pay for general outpatient expenses. From 1994 to 2000, the number of employees participating in basic medical insurance increased from 3.746 million to 28.628 million. The third significant reform was the establishment of an unemployment insurance system. Starting from 1986, this system provided basic living security for workers who became unemployed. In 1999, China took further steps to push the unemployment insurance system towards a new stage. All urban enterprises and institutions, along with their employees, are covered by unemployment insurance, which is funded by premiums paid by these entities and their employees. The contribution rate of the employer is 2% of the total salary, and the contribution rate of the individual is 1% of his or her salary. Unemployment insurance benefits are paid on a monthly basis which are lower than the minimum wage and higher than the minimum living standard for urban residents. From 1992 to 2000, the number of enrollees in unemployment insurance grew from 74.43 million to 104.084 million. The fourth significant reform was the establishment of a minimum living guarantee system through reforming the social relief system. China launched the reform of the urban social assistance system in 1993 and attempted to establish a minimum subsistence guarantee system. By 1999, all cities and county towns across the country had established such a system. The local governments set the minimum subsistence guarantee standard based on the costs required to maintain basic living standards for urban residents. Those whose per capita household income fell below the standard were eligible for minimum subsistence allowance. By 2001, the program had provided these benefits to 11.7 million urban residents. To sum up, China has made significant progress in developing a guaranteed minimum income system that places emphasis on the basic pension insurance for state-owned enterprise employees, unemployment insurance, medical insurance, and minimum subsistence security for urban residents. These programs have taken initial shape and are playing an important role in providing social welfare to Chinese citizens. Two government agency reforms were carried out to meet the needs of China’s economic reform and development. The first reform took place in 1993 and differed from previous reforms in 1982 and 1988 in two key ways. Firstly, it was aimed at

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establishing a socialist market economy system, and secondly, the focus was on transforming government functions. The specific requirements of the 1993 government agency reform were as follows: to strengthen macroeconomic regulation and social management departments in accordance with market-oriented reform; reduce administrative affairs and direct management of enterprises; avoid overlap and duplication in the responsibilities and powers of various departments; adjust institutional establishment and streamline internal organizations. The 1993 government agency reform was gradually implemented on a pilot basis, starting from the central government and extending to local governments over three years. This reform produced positive results, streamlining State Council agencies from 70 to 59 and reducing internal agencies. The second government agency reform took place in 1998. Aligned with the needs of developing a socialist market economy, this reform transformed government functions by separating government and enterprises, establishing an efficient, coordinated, and standardized administrative management system, improving the national civil service system, and building a high-quality professional administrative cadre. The principles of streamlining, unification, and efficiency guided this reform. The reform of State Council institutions focused on adjusting and abolishing full-time departments that directly managed the economy, strengthening macro-control and law enforcement supervision, aligning the responsibilities and powers of departments to promote consistent authority and responsibility, clearly delineating responsibilities among departments, and improving administrative operations. The 1998 government agency reform yielded significant results in both central and local governments. The number of State Council components, excluding the General Office, decreased from 40 to 29, and related agencies and offices underwent adjustment and reform. To transform government functions and separate government and enterprises, the State Council transferred over 200 functions to enterprises, social intermediary organizations, and localities; more than 100 functions were transferred among departments; over 200 departmental agencies were reduced, accounting for one-fourth; and total staff was reduced by 47.5%. In short, the framework of modern macroeconomic management system had been initially established during this period.

3.7 Initial Formation of the Overall Pattern of Opening up to the Outside World From 1993 to 2000, the “three-funded” enterprises enjoyed continuous high growth. (1) After the 15th Party Congress, “three-funded” enterprises were no longer viewed as a mere supplement to the socialist economy but recognized as an integral component of it. This shift created ample opportunities for the development of these enterprises. (2) China’s economy entered a phase of rapid growth in the 1990s, providing a favorable macroeconomic environment for the high growth of “three-funded” enterprises.

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(3) In the mid-1990s, the Central Committee of the Communist Party of China and the State Council called for “restructuring, reorganization, transformation and strengthening the management” for state-owned enterprises, which relied on “three-funded” enterprises to varying degrees. This policy also contributed to the development of “three-funded” enterprises. (4) Since the mid-1990s, China has continuously adjusted policies on foreign investment and improved regulations, which has facilitated the development of “three-funded” enterprises. In the early stages of reform and opening up, China formulated various preferential policies to attract foreign investment. However, after over a decade of successful economic development and increased foreign investment, the changing situation necessitated adjustments to China’s foreign investment policies. To align foreign investment with China’s industrial policy, the State Planning Commission, the State Economic and Trade Commission, and the Ministry of Foreign Trade and Economic Cooperation jointly issued the “Interim Provisions for the Guidance of Foreign Investment” on June 20, 1995. Along with this document, they also published the “Guidance Catalogue of Foreign Investment Industries”, which outlined important details. ➀ Encourage expansion of foreign investment areas. In accordance with the “Outline of National Industrial Policy in the 1990s” and taking into account the characteristics of foreign investment, the Interim Provisions clearly stipulate that projects belonging to new agricultural technology, comprehensive agricultural development and construction of energy, transportation and important raw material industries, as well as projects in five other areas, are classified as encouraged foreign investment projects. The “Guiding Catalogue” identifies 172 industries and projects from 18 categories that are encouraged for foreign investment, thereby expanding the scope of encouragement. ➁ Encourage expansion of opening-up areas for foreign investment. The relaxation of areas open to foreign investment has allowed a number of previously restricted areas (such as aviation transportation, civil aviation, commerce, material supply and marketing, foreign trade, finance, insurance, securities, accounting, auditing, legal consulting services, precious metal mining and processing, as well as exploration, mining, and processing of non-metallic minerals such as diamonds) to undergo pilot programs of gradual absorption of foreign investment within a certain range. ➂ Attract foreign investors to the central and western regions with preferential provisions. To expedite the economic development of central and western regions by attracting foreign investors, the “Interim Provisions” encourages projects that leverage the human and resource advantages of these regions and align with national industrial policies. Restrictions on foreign investment may be relaxed for domestically developed projects that have already met the domestic market demand but can take advantage of the resource advantages in the central and western regions, provided that they align with national industrial policies. Starting from April 1, 1996, China began to phase out preferential tax policies for capital goods imported by foreign-invested enterprises in order to promote fair competition between domestic firms and foreign-invested enterprises. In October 2000, the “Law of the People’s Republic of China on

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Cooperative Enterprises” and the “Law of the People’s Republic of China on Foreign Investment Enterprises” were amended to facilitate the use of foreign investment. The aforementioned factors have been the driving force behind the sustained high-speed growth of “three-funded” enterprises. By the year 2000, actual foreign investment utilization had increased from US$19.202 billion in 1992 to US$59.356 billion. In particular, foreign direct investment had risen from US$11.007 billion to US$40.715 billion. Joint ventures had increased from US$6.115 billion to US$14.343 billion, cooperative enterprises had grown from US$2.122 billion to US$6.596 billion, and wholly-owned enterprises had expanded from US$2.502 billion to US$19.264 billion. From 1993 to 2000, the total amount of actual utilized foreign investment was equivalent to 24.5 times of that in the period from 1979 to 1984, and 5.2 times of that in the period from 1985 to 1992, respectively. Since 1993, China has ranked second in the world (after the U.S.) and first in the developing countries in terms of foreign investment for many years. The development of “three-funded” enterprises is characterized by the following important factors. Firstly, in terms of foreign investment sources, while progress has been made in diversifying investment sources, Hong Kong, Macao, and Taiwan still accounted for more than half of the investment. Specifically, by the end of 2000, enterprises from these regions accounted for 63.3% of the total number of foreignfunded enterprises, and 53.3% of the subscribed capital. Second, the development of “three-funded” enterprises is also characterized by significant changes in the forms of foreign-invested enterprises. In 1984, Sino-foreign cooperative enterprises ranked first in foreign direct investment, followed by Sino-foreign joint ventures and wholly foreign-owned enterprises. By 1992, Sino-foreign joint ventures had taken the lead, followed by wholly foreign-owned enterprises and Sino-foreign cooperative enterprises. By 2000, wholly foreign-owned enterprises topped the list, followed by Sinoforeign joint ventures and Sino-foreign cooperative enterprises. Third, small enterprises dominated the scale of foreign-invested firms. In 2000, out of 20,727 new foreign-invested enterprises, only 118 were valued at US$30 million or more, while 1,354 were valued between US$10 to 30 million, and the remaining 19,255 were valued at US$1 million or less. These figures demonstrate that China’s “three-funded” enterprises had entered a stage of sustained and rapid development. The growing significance of “three-funded” enterprises in China’s social and economic landscape is evident from their increasing investment, employment, export revenues, tax contributions, as well as technological advancements and managerial improvements. For instance, in 2000, foreign investment accounted for approximately 10.3% of China’s total fixed asset investments. The rapid and sustained development of China’s opening-up policy is also reflected in its foreign trade. In order to facilitate the development of foreign trade and to meet the requirements of modern enterprise systems and re-entry into GATT negotiations, a comprehensive reform of the foreign trade system was initiated. ➀ The government abolished mandatory planning for imports and exports, and formulated guiding plans for total import and export volume, export receipts, and import

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payments. The government guided foreign trade enterprises to achieve these plan targets through economic, legal, and other means. To maintain balance in trade and international payments, China adopted commonly used practices of macroeconomic regulation in international trade. ➁ China took steps to further liberalize foreign trade operations and accelerate the granting of foreign trade operation rights to qualified state-owned industrial and commercial enterprises, as well as scientific research institutes. ➂ The state intensified its efforts to reform the foreign trade management system and relaxed management of export and import commodities. ➃ China followed the principles of “clear property rights, defined rights and responsibilities, separation of government and enterprise, and scientific management” to guide foreign trade enterprises towards step-by-step implementation and promote the establishment of modern enterprise systems. This has accelerated the pace of transformation towards a corporate structure. ➄ From January 1, 1994, China implemented a major reform of its foreign exchange system. First, the existing exchange rate system was reformed to converge planned and market-adjusted exchange rates, establishing a single, managed floating exchange rate system based on market supply and demand. The new system set the RMB exchange rate based on the previous day’s foreign exchange market trading price with reference to changes in major international currencies. To regulate the supply and demand of foreign exchange and maintain exchange rate stability, China mainly uses economic measures such as monetary and interest rate policies. The new exchange rate system laid the foundation for the renminbi to become a convertible currency in the future. Starting April 1, 1994, the People’s Bank of China began posting the central parity rate for renminbi against currencies such as the US dollar on a daily basis. This rate served as the benchmark exchange rate for foreign exchange and renminbi trading in the interbank foreign exchange market for that day. Second, the foreign exchange reform focused on the management system. It implemented conditional convertibility of RMB under current account, abolished the original foreign exchange retention and handover system, and established a bank settlement and sale system. The mandatory foreign exchange plan was also abolished. Currently, China mainly relies on economic and legal measures to maintain macro-control over foreign exchange and international balance of payments. The conditional convertibility of the RMB under the current account mainly involved implementing a bank settlement and sale system. This system canceled plan approvals for normal foreign exchange payments under the current account, allowing domestic enterprises, institutions, and social organizations to use renminbi to exchange for foreign currency at designated foreign exchange banks with valid foreign payment certificates. Although the approval system for normal foreign exchange payments under the current account was terminated, it remains in place for remittances of foreign investors’ profits. Moreover, the approval system continues to be implemented for remittances of overseas investments, loans, and donations. These reforms have greatly contributed to the rapid growth of import and export trade in China. The total import and export trade volume increased from 911.96 billion yuan in 1992 to 3927.32 billion yuan in 2000. During this period, exports rose from 467.63 billion yuan to 2063.44 billion yuan, while imports increased from

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444.33 billion yuan to 1863.88 billion yuan. By 2000, China’s dependence on foreign trade had reached a high of 43.9%. With the deepening of reform and expansion of opening up, China’s overseas contracting projects and labor cooperation also made significant progress. The completed turnover of overseas contracting projects increased from 2.403 billion U.S. dollars in 1992 to 8.379 billion U.S. dollars in 2000. Similarly, the completed turnover of foreign labor cooperation grew from 646 million U.S. dollars to 2.813 billion U.S. dollars during the same period. The above data suggests that by 2000, after more than 20 years of development, China’s opening up to the outside world had taken an initial shape and established an overall pattern.

3.8 Concluding Remarks During this period, China’s socialist market economy system was initially established, marked by three main developments. First, the pattern of socialist public ownership as the mainstay and diverse forms of ownership co-existing had taken shape. By 2000, state-owned industry accounted for only 47.3% of the total industrial output value, while collective industry accounted for 13.8%, and other forms of economic ownership accounted for 38.9%. In 1998, state-owned enterprises accounted for 20.7% of the total retail sales of social consumption, while collective enterprises accounted for 16.6%, and other forms of economic ownership accounted for 62.7%. Additionally, in 2000, the state-owned economy only accounted for 40.4% of the construction industry’s output value, whereas the collective economy accounted for 32.3%, and other forms of economic ownership accounted for 27.3%. Second, China had established the foundations for modern corporate, market and macroeconomic regulatory systems. Third, the country’s opening up to the outside world had also taken shape.

Chapter 4

Market Institutions Nearing Maturity, 2001–2011

4.1 Introduction The 16th Party Congress held in 2002 put forward to build a sound socialist market economy system and a more dynamic and open economic system in the first two decades of this century. In order to implement the spirit of the 16th Party Congress, the Third Plenary Session of the 16th Party Central Committee held in 2003 adopted the “Decision on Several Issues Concerning Improving the Socialist Market Economy”, which set out the objectives, tasks, guiding ideology and principles for the improvement of the socialist market economy system and made systematic provisions on various major aspects of the reform. These initiatives guided the historical process of economic reform during the period of 2001–2011.

4.2 Reform of the State-Owned Economy Characterized by Continued Strategic Adjustment and Establishment of a Modern Enterprise System 4.2.1 Continue to Promote the Strategic Adjustment of the Layout of the State-Owned Economy Since the beginning of China’s economic reform, particularly since the implementation of the Ninth Five-Year Plan, significant progress has been achieved in optimizing the layout and adjusting the structure of the state-owned economy. One of the main achievements is the concentration of state-owned assets in basic industries and large enterprises, leading to a more optimized state-owned economy. In 2001, the assets of state-owned basic industries accounted for 62.2% of the total assets of state-owned industrial and commercial enterprises, an increase of 7.3 percentage points from © Social Sciences Academic Press 2024 H. Wang, China’s Economic System Reform (1978–2018), Research Series on the Chinese Dream and China’s Development Path, https://doi.org/10.1007/978-981-99-9267-6_4

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1995; the assets of large-scale state-owned industrial and commercial enterprises accounted for 76.9% of the total assets of state-owned industrial and commercial enterprises, an increase of 16.6 percentage points from 1995. Despite China’s efforts to reform the state-owned economy, its contribution to GDP gradually decreased from 56% in 1978 to 42% in 1997. One of the main reasons for this is that fundamental flaws within the sector had not been fixed. There are four indication of this. Firstly, since the reform, the state-owned economy has continued to account for a significant portion of the national economy, with an unreasonable layout and structure. There was a disproportionately large proportion of assets and added value. In 2000, the total assets of state-owned and statecontrolled industrial enterprises amounted to 8401.494 billion yuan, accounting for 66.6% of the total assets of national industrial enterprises above designated size. Additionally, if we consider the operating assets, resource assets, land assets, and intangible assets in other areas (such as the financial sector), the proportion of state-owned economic assets was even larger. The total industrial output value was 4055.437 billion yuan, accounting for 47.3%. Moreover, the state-owned economy was too widely distributed, with a disproportionately large share not only in competitive industries, but also in monopolistic industries. Among the 608 industrial categories, 604 were state-owned enterprises, of which 533 were large and mediumsized state-owned enterprises, accounting for 87.7% of all categories. Secondly, the state-owned economy also faced challenges in terms of the relatively small scale of enterprises. As of the end of 2002, there were only 9436 large-scale state-owned and state-holding enterprises, with a combined net asset value of 5263.72 billion yuan and sales revenue of 5686.85 billion yuan. This meant that on average, each enterprise had a net asset value of only 558 million yuan and sales revenue of 603 million yuan, indicating overall small scale. Thirdly, state-owned enterprises faced challenges such as non-core businesses that had not been separated, social functions that were being undertaken, and a large number of redundant employees. In addition, many enterprises that needed to be closed or bankrupted had not yet exited the market. According to statistics, by the end of 2002, there were over 28,000 social institutions nationwide operated by state-owned enterprises, including more than 11,000 primary and secondary schools, over 3000 public prosecution and law enforcement agencies, and over 6000 medical institutions. Central enterprises managed 12,200 social institutions, accounting for 43.6% of all social institutions. State-owned enterprises paid a total of 45.6 billion yuan in subsidies to these social institutions, with 77.2% (35.2 billion yuan) paid by central enterprises. By 2002, the number of employees in state-owned enterprises nationwide had been reduced from 69.756 million in 1997 to just over 46.805 million, with more than 25 million being laid off or transferred to other positions. Despite these efforts, however, there were still a significant number of surplus employees within state-owned enterprises. At that time, the number of depleted coal mines, as well as large and medium-sized state-owned enterprises that met the criteria for bankruptcy or closure totaled more than 2500. These enterprises involved nearly 5.1 million employees and over 240 billion yuan in financial claims. Finally, the issues outlined above inevitably led to low overall quality of state-owned enterprises, resulting in low international competitiveness and economic efficiency.

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At the beginning of the twenty-first century, state-owned enterprises accounted for roughly 60% of total assets in society and received a disproportionately high proportion (70–80%) of new working capital loans from banks. However, their contribution to economic growth was not proportional to the size of their assets, accounting for only around one-third. In 2002, the return on net assets of all state-owned industrial enterprises was 2.9%, which was two percentage points lower than that of non-stateowned industrial enterprises above designated size. Furthermore, the return on net assets of state-owned enterprises in general competitive industries was just 1.2%, which was 1.7 percentage points lower than the average of all state-owned enterprises. At the end of 2002, the proportion of non-performing assets in state-owned enterprises nationwide reached 11.5% of total assets. These problems have significantly impacted the leading role of the state-owned economy, hindered the optimal allocation of resources, and prevented improvement of international competitiveness. Thus, continuing to emphasize strategic adjustment of the layout and structure of the state-owned economy remains a crucial task for deepening economic reform in the twenty-first century. To achieve this goal, a number of key measures are required. Firstly, there is a need to gradually reduce the scope of state-owned enterprises while increasing their focus. This will help to improve the efficiency of utilizing state-owned capital, tackle problems such as long decision-making processes and low operational efficiency. Through optimal allocation of state-owned capital, we aim to ensure that state-owned enterprises play an instrumental role in the national economy. All measures should be taken in accordance with the principle of “progress coexisting with retreats, actions balanced with inaction”. Specifically, in the core areas of national defense and military industries, absolute control by state-owned capital is necessary. For wholly state-owned military enterprises that must be retained, streamlining the main body, separating auxiliary businesses, increasing restructuring efforts, and transforming mechanisms are needed; other military enterprises should develop in the direction of operating both military and civilian products, and be gradually reorganized into state-controlled and shareholding enterprises. At present, state-owned capital should hold a dominant position in the field of providing essential public products and services as well as natural monopolies. In the power grid, heating, water, gas and other industries, as well as timber harvesting and transportation, onshore oil and gas, precious metals, rare earth metal mines, and other key areas, state-owned capital should control a majority share of the leading enterprises while also actively attracting private investment. The salt, tobacco production, and wholesale industries should continue to be subject to state monopoly. In the petrochemicals, automobiles, information technology, machinery and equipment, and high-tech industries that reflect comprehensive national power, a small number of key state-owned backbone enterprises should maintain their dominant position while also encouraging collaboration among various economic entities. In the key and core areas of high technology, state-owned capital should take a leading role. The state generally no longer invests in and establishes factories as a means of market entry, but instead focuses on supporting project capital financing, basic research, applied research,

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and other aspects. This approach aims to attract both public investment and international capital. In the general competitive field, the main approach is to use market mechanisms to improve the operational efficiency and overall quality of state-owned capital. We should increase efforts to handle bankruptcies in accordance with the law, explore ways to dispose of non-performing debts, and actively smooth and regulate the channels for enterprises to exit the market. Second, the policy of “focusing on the major issues and relaxing control over minor ones” will continue to be the main strategic adjustment policy for the stateowned economy. In the early twenty-first century, it is of great significance to implement this policy. In 2001, the total assets of 9000 large and very large state-owned enterprises in China amounted to 10,964.38 billion yuan, with an average asset size of 1.22 billion yuan per enterprise, accounting for 65.8% of the total assets of all state-owned enterprises. The realized profits were 273.1 billion yuan, accounting for 97.1% of the total profits of all state-owned enterprises. In 2000, there were 181,000 small and medium-sized state-owned enterprises, accounting for 94.8% of the total number of state-owned enterprises, of which 94,000 were loss-making enterprises, accounting for 52% of the total. State-owned small and medium-sized loss-making enterprises accounted for 96.9% of all state-owned loss-making industrial and commercial enterprises, with a loss of 108.68 billion yuan, accounting for 58.9% of the total loss of state-owned industrial and commercial enterprises. Out of all state-owned enterprises, 85,000 were insolvent (i.e., liabilities exceeding assets) and shell enterprises (i.e., losses greater than owners’ equity), which accounted for 44.5% of the total number of state-owned enterprises. The majority of these enterprises were also small and medium-sized state-owned enterprises. This shows that “focusing on the major issues and relaxing control over minor ones” was of great significance for the strategic adjustment of the state-owned economy. By “focusing on the major issues”, we mean focusing on developing large companies and enterprise groups that possess core competitiveness, independent intellectual property rights, and well-known brands. To achieve this goal, it is necessary to adhere to the laws of the market economy, take enterprises as the main body, and form groups through market-oriented approaches, rather than engaging in “matchmaking”. Second, we will accelerate the pace of shareholding reform, improve our modern enterprise system, establish a standardized property rights structure, corporate governance structure, and parent-subsidiary system, and deepen internal reforms by strengthening internal control. We will establish strong mechanisms for checks and balances, constraints, incentives, and supervision. Third, continue to promote the restructuring of enterprises and optimize their structures to achieve complementary advantages. Fourth, reduce the levels of group management and promote a more flattened management structure. Fifth, strengthen and expand the core business, while separating it from auxiliary businesses. Sixth, we will improve our technological innovation mechanisms, implement a talent-strengthening strategy, increase our R&D investment, and accelerate technological innovation to cultivate brand-name products with independent intellectual property rights. Seventh, we will leverage our advantages in capital, technology, and management to enhance our international competitiveness and implement the “going global” strategy. Over the years, these

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measures have resulted in significant progress in the cultivation of large companies and enterprise groups. In terms of “relaxing control over minor ones”, we will continue to implement and improve measures that promote the liberalization and activation of small enterprises. To reform state-owned small enterprises, all localities had intensified their efforts through various means such as restructuring, joint ventures, mergers, leasing, contracting, equity cooperation, and sales. From 2000 to 2008, the scope of restructuring expanded from 81.4% to over 90%. By then, the goal of relaxing control over small enterprises had been largely achieved. Third, to achieve the strategic restructuring of the state-owned economy, mergers and acquisitions should be the primary form adopted. The following measures should be taken: focus on mergers and acquisitions in competitive industries; allow conditional mergers and acquisitions of foreign and private enterprises; limit corporate management buyouts to small and medium-sized enterprises; adopt market-oriented operations to ensure openness, fairness, and justice; strictly prevent the loss of stateowned assets; and protect the interests of contributors, creditors, and employees in accordance with the law. Fourth, continue to formulate regulations that provide legal safeguards to facilitate the strategic adjustment of state-owned assets. Formulating regulations on the transfer of state-owned property rights of enterprises is a particularly important task. It is conducive to ensuring the orderly flow of state-owned property rights of enterprises, promoting the strategic adjustment of the state-owned economy, and preventing the loss of state-owned assets. Fifth, we will continue to promote policy-based bankruptcy. As we transition from a planned economy to a socialist market economy, it is increasingly important to rely on market mechanisms to achieve enterprise bankruptcy. However, during this period, it is also necessary to implement policy-based bankruptcies to allow long-term loss-making enterprises and resource-depleted mines to exit the market. Thanks to the implementation of the principles and measures mentioned above, significant progress has been made in the strategic adjustment of the state-owned economy. State-owned capital has been concentrated in large enterprises, resulting in increased strength. From 2000 to 2011, the number of state-owned and statecontrolled industrial enterprises decreased from 53,489 to 17,051, a decline of 68.1%, while the average asset size of each enterprise increased from 157 million yuan to 1.651 billion yuan, an increase of 9.52 times. It should be noted that the reduced enterprises were mainly small state-owned enterprises and companies with operating losses in competitive fields. When the State-owned Assets Supervision and Administration Commission was established in 2003, there were 196 central enterprises under its supervision. After multiple reorganizations, the number was reduced to 117 in 2011. However, the number of central enterprises in important industries and key areas of the national economy accounted for 25% of all central enterprises, while total assets accounted for 75% and profits for 80%. Moreover, state-owned capital remained concentrated in crucial industries and key areas of the national security sector, as well as the lifeblood of the national economy. As of 2011, 80% of

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central enterprises’ assets were focused on industries such as petroleum and petrochemicals, electric power, national defense, communications, transportation, mining, metallurgy, and machinery.

4.2.2 Continuing to Build a Modern Enterprise System As previously mentioned, the basic framework of a modern enterprise system was initially established in large and medium-sized state-owned backbone enterprises in 2000. However, it still fell short of the requirements for a well-developed modern enterprise system. To achieve the goal of improving the modern enterprise system, the following initiatives have been implemented since the turn of the twenty-first century. First, efforts have been made to expand the scope of shareholding system reform in order to achieve equity diversification and clarify property rights relationships. On the one hand, both state-owned central enterprises and local enterprises expanded their scope of shareholding reform, and by 2011, the proportion of state-owned enterprises which carried out shareholding system reform increased to 80%. On the other hand, breakthroughs have been made in the shareholding system reform not only in monopolistic industries such as electric power, telecommunications and civil aviation, but also in the banking industry, which plays a pivotal role in the national economy. For instance, all four major commercial banks in China—Industrial and Commercial Bank of China, Bank of China, Construction Bank, and Agricultural Bank of China—underwent shareholding reform, with the first three becoming listed companies. Moreover, China Development Bank, originally a policy bank, established a joint-stock limited company. Moreover, along with the development of China’s institution reforms and the industrialization of cultural undertakings, many former stateowned institutions were also transformed into corporate enterprises. Furthermore, the issue of equity division that had been left unresolved from past shareholding reforms was addressed. Starting in 2006, 98% of state-controlled listed companies (excluding those held by financial institutions)—a total of 785 out of 801—either completed or initiated their shareholding reform process. This task was essentially completed by 2007. Second, a standardized corporate governance structure has been established, with emphasis on the following initiatives: Establishing a robust national state-owned asset supervision agency to ensure appropriate investor representation. This ensures effective functioning of the board of directors, management, and supervisory board, prevents insider control, and safeguards the appreciation of state-owned capital. Empower the board of directors to play a core role in corporate governance structure. To achieve this, the following actions were taken: optimizing the composition of the board of directors by appointing external and independent directors who can truly contribute; establishing audit, nomination, and compensation committees mainly composed of these external and independent directors; avoiding cross-appointment of board members and general managers; implementing collective decision-making

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and individual responsibility mechanisms for the board of directors; and designing a remuneration system for managers with a focus on long-term incentives. By 2011, 42 central enterprises under the supervision of the State-owned Assets Supervision and Administration Commission (hereinafter referred to as SASAC) had established standardized boards of directors. To strengthen the supervisory role of the supervisory board and shareholders, a truthful, open, and effective information disclosure system should be established. This includes establishing sound stock markets to facilitate information dissemination. Third, the labor, personnel, and wage systems formed under the planned economy system were fundamentally reformed to establish business mechanisms compatible with modern enterprise systems. The labor system was marketized and useful practices were implemented in reforming the personnel system, such as appointing property rights representatives and company managers for leading personnel in state-owned enterprises, implementing annual and tenure appraisals, establishing and improving the annual salary system and equity-based distribution methods, and strengthening supervision and restraint mechanisms. Various practices were implemented in reforming the wage system and establishing a modern remuneration system. ➀ The government transformed its management approach to the distribution of wages and income in enterprises. This involved shifting from direct to indirect regulation methods, from quantity regulation to horizontal regulation objectives, and from administrative means as the primary method to legal and economic means. By changing its management mode, the government created a favorable external environment to facilitate the deepening of enterprise wage and income distribution system reform. ➁ To further improve the macro-control system of enterprise wage and income distribution, the government followed the principles of legal regulation, strengthened guidance, service provision, and supervision. The focus was on improving the macroeconomic regulation system for enterprise wage income distribution with a specific emphasis on “three guidelines, two pieces of legislation, and supervision”. The three guidelines established to guide the distribution of wages in enterprises included the wage guidance line system, the labor market wage guidance price system, and the labor cost prediction and warning system. The two pieces of legislation included the minimum wage guarantee for enterprises and wage payment legislation. In terms of supervision, the government monitored enterprises’ compliance with national laws, regulations, and policies regarding wage and income distribution, and legally punished any violations. ➂ To deepen the reform of internal distribution systems in enterprises, the government vigorously promoted a basic salary system mainly based on post wages and implemented competition for positions. Salaries were determined based on positions, salary changes were based on job changes, post wages were based on labor market prices, and employees’ salaries were mainly based on their positions and work performance. This effectively solved the problem of insufficient incentive and weak restraint in enterprise wage distribution. ➃ The promotion of the reform of income distribution systems for enterprise operators involved implementing job performance wages that link their income to responsibility, performance, and risk. Additionally, the government explored incentive and restraint mechanisms that combine various forms of incentives, including long-term

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and short-term incentives, such as the implementation of an annual salary system and equity incentives. ➄ The government explored the establishment of market-oriented and diverse wage determination mechanisms. For state-owned enterprises that had not been restructured and wholly state-owned companies that had been restructured, the staff council’s role in wage distribution was fully utilized, and a democratic decision-making mechanism for wage distribution was established by improving the system of making enterprise affairs public; The government vigorously promoted the pilot of collective wage bargaining for some state-owned holding or participating companies that had been restructured in accordance with the Company Law. Additionally, the establishment of a wage determination mechanism suitable for the characteristics of state-owned holding or participating companies was explored. Fourth, to strengthen scientific management of enterprises, the government took several measures. Firstly, it implemented a strategy to promote enterprise development through talent and explored the establishment of mechanisms to attract, retain and utilize talent, effectively unleashing the potential of human capital in enterprise development. Secondly, it continued to promote the informationization of enterprise management. Thirdly, it implemented transparency in factory affairs and strengthened democratic management. Fourthly, it strengthened the construction of enterprise culture by inheriting the ideological and political work of the CPC and the traditional morality of our country while also absorbing the essence of modern enterprise management theory to promote a people-oriented corporate culture. The above four measures promoted the improvement of the modern enterprise system. In addition, the reform of state-owned institutions and surviving enterprises and the reform of state-owned surviving enterprises were promoted during this period.

4.2.3 Continuing the Establishment of a State-Owned Asset Management System China has made some progress in the reform of state-owned asset management system since the beginning of the reform era. However, by the end of the twentieth century, the establishment of a basic framework for the state-owned asset management system that was adaptable to the requirements of the socialist market economy had not yet been achieved, and institutional barriers to effective state-owned asset management had not yet been fundamentally resolved. The lagging reform of the state-owned asset management system is one of the fundamental reasons for the problems of low asset quality, low operational efficiency, irregular property rights transfer, and asset loss. This was exacerbated by the lack of clear roles and responsibilities among contributors and the multiple management of state-owned assets. Specifically, the government’s public management function and the function of state-owned assets contributor were not clearly separated, resulting in the government exercising both functions within the internal organization and division of labor. Additionally, the

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function of supervising state-owned assets was scattered across several departments, resulting in a lack of unified rights, obligations, and responsibilities and a disconnect between asset management and personnel/affairs management. This often led to unclear responsibilities and a disconnect between power and responsibility. In order to fundamentally solve the above problems, the 16th Party Congress in 2002 put forward that the state should enact laws and regulations to establish a system for managing state-owned assets in which the central government and local governments perform the duties of capital contributors on behalf of the state, enjoy the rights and interests of owners, and have unified rights, obligations and responsibilities, and combine the management of assets with the management of personnel and affairs. The Second Plenary Session of the Sixteenth Central Committee clarified important issues related to the supervisory body of state-owned assets, such as its nature, functions, scope of supervision, and relationship with enterprises. At the Third Plenary Session of the Sixteenth Central Committee, it was further emphasized that the government must adhere to the separation of public administration function and the contributor function in managing state-owned assets. The supervisory body of state-owned assets should perform the duties of the state-authorized contributor of state-owned capital. At the Third Plenary Session, decision was announced to establish a state-owned operating budget system and an assessment system for enterprise performance, actively explore effective forms of supervision and administration of state-owned assets, and improve the system of authorized operation. In accordance with the 16th CPC National Congress and the 3rd Plenary Session of the 16th CPC Central Committee, and in order to improve the socialist market economy, a basic framework for the state-owned asset management system was supposed to be established within three years or more. Under this framework, both the central and local governments would perform the duties of capital contributors on behalf of the state and enjoy the rights and interests of owners with unified rights, obligations and responsibilities. The management of assets would be combined with the management of personnel and affairs in order to achieve preservation and appreciation of state-owned assets. Building on this foundation, our aim by 2010 was to establish a comprehensive system and mechanism for managing, supervising, and operating state-owned assets that could adapt to the requirements of the socialist market economy.1 In accordance with the spirit of the 16th Party Congress, the State Council established the SASAC in May 2003. This marked the first time that the government’s public administration function was truly separated from the contributor function at the central government level, and the management of assets was combined with the management of personnel and affairs. The establishment of the SASAC also indicated the presence of a contributor institution representing the state shareholders. After the establishment of SASAC, a series of measures were taken to construct a new basic framework for the management of state-owned assets in accordance with the spirit of the 16th Party Congress. ➀ See “Guidance Readings on the Decision of the CPC Central Committee on Several Issues of Improving the Socialist Market Economy System”, People’s Publishing House, 2003, pp. 68, 74.

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The first measure was to develop and improve the legal and regulatory system for supervising and administering state-owned assets. After the establishment of SASAC, it cooperated with the Legislative Affairs Office of the State Council to draft the “Interim Regulations on Supervision and Administration of State-owned Assets of Enterprises” (the “Regulations”), which were promulgated and implemented by the State Council in June 2003. The main provisions of these regulations establish a supervision and management system for state-owned assets of enterprises, stating that such assets belong to the state. The State Council represents the state and fulfills the responsibilities of capital contributors for large state-owned, statecontrolled, and state-participating enterprises in key areas that are related to national economy, national security, important infrastructure, and important natural resources. In addition to the State Council, provincial, autonomous region, and municipality governments, as well as prefecture-level city and autonomous prefecture governments, also represent the state in fulfilling the responsibilities of capital contributors for state-owned, state-controlled, or state-participated enterprises that are not under the purview of the State Council. Moreover, the “Regulations” clearly stipulated the establishment of state-owned assets administration institutions. As such, the State Council and the people’s governments of provinces, autonomous regions, municipalities directly under the Central Government, as well as prefecture-level cities and autonomous prefectures, respectively established state-owned assets supervision and administration institutions. The state-owned assets supervision and administration institutions, in accordance with the principle of “unifying rights, obligations, and responsibilities, and combining asset administration with personnel and affairs management”, are authorized to perform the duties of contributors and enforce legal supervision and administration over state-owned assets in enterprises. The “Regulations” also require that all levels of government must adhere to the principles of separating the government’s social and economic management functions from the state-owned asset contributor functions, maintaining separation between government and enterprises, and implementing the separation of ownership and operational rights. The state-owned assets supervision and administration institutions are not authorized to exercise the social and economic management functions of the government, and other government agencies and departments are not responsible for performing capital contribution duties related to state-owned assets in enterprises. The state-owned assets supervision and administration institutions are responsible for fulfilling the duties of the contributor and supervising and administering the stateowned assets of invested enterprises. The “Regulations” mainly cover three aspects: managing the leadership of the invested enterprises, overseeing major issues of the invested enterprises, and administering the state-owned assets of the enterprises. The “Regulations” stipulate that state-owned assets supervision and administration institutions should adopt different approaches to supervise the state-owned assets of enterprises. For state-owned sole proprietorship enterprises and companies, the state-owned assets supervision and administration agencies directly make decisions on major issues in accordance with legal procedures. For state-owned holding companies, the state-owned assets supervision and administration institutions shall participate in the shareholders’ meeting and board of directors by appointing shareholder

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representatives and directors in accordance with the Company Law. They should express opinions according to the instructions of the state-owned assets supervision and administration institutions, exercise voting rights, and supervise and administer the state-owned assets of the enterprise. In order to ensure the effective implementation of the “Regulations”, the Law on State-owned Assets of Enterprises, adopted at the fifth meeting of the Standing Committee of the Eleventh National People’s Congress on October 28, 2008, further improved the supervision and administration of state-owned assets. The second measure is to ensure that investors are present at all levels. To achieve this, it is important to establish robust and efficient state-owned asset supervision agencies with clear responsibilities, standardized management, coordinated operations, and high efficiency at central, provincial, and prefecture-level city government levels. To this end, after the establishment of the SASAC in 2003, efforts were made to establish provincial state-owned asset supervision institutions as well as at the levels of municipalities directly under the central government (Prefecturelevel cities). By 2005, 31 state-owned assets supervisory institutions at the levels of provinces, autonomous regions and municipalities directly under the central government had been set up. Out of 431 state-owned asset supervision institutions at the city (prefecture-level city) level, 282 had their basic establishment work completed. Moreover, it is necessary to standardize corporate governance and stock ownership reform, regulate legal person governance structure, rationalize the parent-subsidiary system, and implement the responsibility system for preserving and increasing the value of state-owned assets in grassroots enterprises. To this end, in December 2003, the General Office of the State Council forwarded the SASAC’s “Opinions on Regulating the Restructuring of State-owned Enterprises”, which reaffirmed or established rules for the restructuring process. These include program reporting and approval, assets liquidation and verification, financial audit, asset evaluation, transaction management, pricing management, transfer price management, protecting the lawful rights and interests of stakeholders, safeguarding the legitimate rights and interests of employees, and regulating management buyouts. Lastly, there is a need to continue exploring and improving the authorized operation of state-owned assets. The state-owned assets contributor may delegate some of its rights to qualified state-owned sole proprietorship enterprises or companies in which it has invested. The authorized enterprise shall legally operate, manage, and supervise state-owned assets formed by national investment in its wholly-owned, controlling, and participating enterprises. It shall also be responsible for preserving and increasing the value of state-owned assets in the enterprise. Authorized enterprises should establish a modern enterprise system and have sound internal management practices. These enterprises may include large companies or enterprise groups engaged in production and operation, as well as state-owned asset holding, management, investment, and financial asset management companies. Thirdly, establish a scientific system of responsibility for the operation of stateowned assets. This includes establishing a state-owned capital management budget system, which is a special budget obtained by state-owned asset supervisory institutions through government authorization to manage state-owned capital operational

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income and expenditures. It is an important component of the government budget, with incomes mainly from state-owned capital operation, state-owned asset sales, public finance budget transfers, governmental funds, and other sources, and expenditures mainly for investments, subsidies, and other expenses. Implementing the state-owned capital management budget is crucial for state-owned asset supervisory authorities to fulfill their responsibilities as contributors of state-owned assets, and is an important component in evaluating and assessing the management and operation of state-owned capital. The state-owned capital operation budget should balance income and expenditures, and follow a graded preparation principle by state-owned asset supervisory agencies of the central and local governments to preserve and increase the value of state-owned assets. Another aspect is to establish an enterprise performance assessment system, which consists of a series of indicators used by stateowned asset supervisory institutions to assess the business performance of funded enterprises in accordance with the law. This new assessment system combines annual and tenure appraisals, unified result assessments, process evaluations, and close links between assessment and rewards and punishments. It is an important means to evaluate the operational efficiency of state-owned assets, implement target management for state-owned assets, and establish responsibility for state-owned assets operations. To complement the business performance system, a statistical evaluation system of state-owned assets should be established for enterprises. This system evaluates enterprise performance based on annual operation results using input–output analysis as the core. It is also necessary to establish a selection, appointment, and incentive mechanism for leaders of state-owned enterprises that meets the requirements of the socialist market economy. To achieve this goal, it is important to establish a selection process for enterprise leaders that differs from that of government officials. This can be achieved through internal competition, public recruitment, and talent market selection to gradually realize a market-oriented allocation of operators. Performance-based compensation should be implemented. The SASAC also established and improved the system of accountability for the loss of state-owned assets. Fourthly, the work of supervisory boards in state-owned enterprises should be further promoted. Since the reform, progress has been made in establishing supervisory board systems and dispatching them to key state-owned enterprises, which was an important decision of the State Council to strengthen institutional supervision of state-owned assets. To adapt to the reform of state-owned asset management, supervisory boards would be appointed by the SASAC instead of the State Council, and their work in state-owned enterprises would continue to be promoted. Regarding the dispatching of supervisory boards, the system will continue for stateowned sole proprietorship enterprises and state-owned sole proprietorship companies in central enterprises. For state-owned joint-stock and state-controlled enterprises related to national economy, people’s livelihood, and national security, the system should continue with the State Council’s approval. For other state-owned holding and participating companies, supervisors will be appointed by the SASAC based on the national equity ratio to enter the board of supervisors. It is also necessary to further improve the supervisory board system, strengthen financial, audit supervision and

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disciplinary inspection of state-owned enterprises, establish and improve the supervision and administration system for property rights transactions of state-owned assets, and formulate management methods for major issues of invested enterprises. The above-mentioned strategic adjustment of the layout and structure of the stateowned economy, the establishment and improvement of a modern enterprise system, and the establishment and improvement of a state-owned asset management system not only led to a gradual concentration of state-owned capital in large enterprises, but also in important industries and key areas related to national security and the lifeblood of the national economy. As state-owned enterprises grow bigger and stronger, their ability to preserve and add value to their assets is enhanced, as is their control over social capital and the national economy. This has strengthened their leading role in the national economy, particularly evident in central enterprises managed by the SASAC. Since its establishment in 2003, the number of central enterprises entering the Fortune 500 list in the United States increased from 6 to 37 in 2011. Listed state-owned enterprises have also greatly improved their ability to control social capital and economic strength, raising 750.623 billion yuan through domestic and foreign stock markets in 2011 alone. The positive effects of the aforementioned factors have led to fruitful results in the expansion and strengthening efforts of central enterprises, as well as a positive overall development trend for national state-owned enterprises. Between 2000 and 2011, the number of state-owned and state-controlled industrial enterprises decreased from 53,489 to 17,052. However, during this period, total industrial output value, total assets, owner’s equity, operating income, taxes paid, and profits all increased significantly. Specifically, total industrial output value increased from 4055.437 billion yuan to 22,103.625 billion yuan, total assets increased from 8401.494 billion yuan to 28,167.387 billion yuan, owner’s equity increased from 3271.481 billion yuan to 10,923.321 billion yuan, operating income increased from 4220.312 billion yuan to 22,890.013 billion yuan, taxes paid increased from 110.528 billion yuan to 905.312 billion yuan, and profits increased from 240.833 billion yuan to 1645.757 billion yuan.

4.3 Comprehensively Deepening Rural Economic Reform During this period, the reform of the rural economic system was deepened in three key areas.

4.3.1 Enforcing the Strictest System for Protecting Farmland The implementation of the strictest farmland protection system is not only an essential response to China’s basic national situation of a large population and limited land resources, but also crucial to recognize the special and critical position of agriculture as the foundation of the national economy. It provides a necessary prerequisite for

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implementing the household contract operation system as the fundamental rural management system and securing the food security strategy as the core national policy. Unfortunately, due to various factors, a significant amount of arable land, the most crucial resource, has been occupied over the years. This makes it imperative to implement the strictest farmland protection system as a matter of great urgency. In addition to implementing special protection policies for basic farmland, such as designating specific plots for basic farmland protection and establishing a rigorous approval system for occupying basic farmland, it is crucial to urgently control the scale of land requisition to implement this system effectively. First, it is essential to strictly differentiate between land for public welfare and land for business and adopt different policies accordingly. The state has the administrative power to expropriate land, but this power can only be used for constructing key national public facilities like water conservancy, transportation, national defense, compulsory education, public health, and public security organ facilities. It cannot be used for commercial development or corporate actions. Land for enterprises can only be acquired through market-based methods in accordance with overall land use planning and urban construction planning. These methods may include purchasing from the state, buying from farmers, leasing, or participating in the market with land; the price should be determined by the market. Second, to improve the effectiveness of this system, it is vital to strengthen the binding force of land use planning. Local governments at all levels should develop and implement land use plans that limit the amount of land used within a designated range. Once land use is determined, it must be strictly adhered to, and no commercial development should be allowed. Third, it is essential to strictly control the number of national construction sites. Urban development should maximize the use of existing land stock and avoid blind expansion. Even key national projects should aim to minimize land use while still meeting project requirements. Fourth, to ensure the effectiveness of this system, it is crucial to improve the compensation process for land acquisition. Adequate and timely compensation must be provided to rural collective organizations and farmers, and issues related to employment, housing, and social security for those whose land has been expropriated should be addressed. Fifth, the “Law of the People’s Republic of China on Contracting Rural Land” should be resolutely implemented, and the rights in the use, income, transfer of operational rights and disposal of products of contracted land should be truly handed over to the farmers. Those who illegally requisition and occupy land shall be investigated and held accountable. These are crucial steps to improve the rural land system, which include improving the rights to operate contracted land and guaranteeing farmers’ legal rights to occupy, use, and earn income from contracted land. By doing so, we can establish a market entity that focuses on maintaining farmland and providing legal protection, ultimately implementing the strictest system for protecting farmland. As a result of implementing these measures, initial results have been seen in reducing the massive occupation of farmland.

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4.3.2 Improving Rural Land Management System The policy measures to improve the rural land management system include the following two main aspects. First, stabilize and improve the land contracting household responsibility system, which serves as the fundamental basis for the basic agricultural management system. Since the widespread implementation of the land contracting household responsibility system in rural areas in the early 1980s, the Party and the government have stressed the importance of ensuring the long-term stability of this system. It has been established as a fundamental policy in rural areas and is supported by specific legal guarantees. In the second session of the Ninth National People’s Congress in 1999, this basic rural policy was written into the Constitution. The “Law of the People’s Republic of China on Rural Land Contracting” was enacted in 2003, which included specific provisions for contracting rural land. The contracting period for farmland is 30 years, while for grassland it is 30–50 years, and for forest land it is 30–70 years. This has provided a strong legal foundation for China’s rural economic development and social stability. However, in some areas, infringements on farmers’ land contracting rights and interests have occurred over the years. Therefore, it is crucial to increase law enforcement efforts to protect the rights and interests of farmers. While stabilizing land contracting relationships is crucial, there is also a need to transfer land contracting operation rights and gradually develop moderate-scale operations in accordance with the requirements of the law of market economy development. The “Law of the People’s Republic of China on Rural Land Contracting” allows contracted land obtained through household contracting to be subcontracted, rented, exchanged, transferred, or circulated in other ways in accordance with the law. Contractors have the right to voluntarily and for compensation transfer their land contracting rights, which is protected by the state. This forms the legal basis for land transfer and how it should be carried out. With the development of the market economy, it is inevitable that some farmers will gradually expand their operation scale. However, the development of land scale operation should be adapted to the level of industrialization and urbanization of rural areas and synchronized with the transfer of rural labor under specific conditions. It is also necessary to consider our national population size and limited land resources. Therefore, the development of land scale operation must be gradual and moderate. In fact, until 2011, only 17.9% of the total area contracted by households-230 million mu-had been transferred. Second, the collective-level operation system has been improved as the basic agricultural operation system, with a focus on improving rural community-based collective economic organizations. Villagers’ committees, established as autonomous organizations of farmers at the grassroots level in rural areas, have become the owners of rural collective property and the main providers of various services within rural communities. Over the years, many rural collective economic organizations have provided production technology services to households operating under contracted

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land within the organization, while also strengthening the collective economy. Unfortunately, some rural collective economic organizations did not provide production technical services to rural households. Instead, they collected money from rural households under various pretexts, which increased the financial burden on rural households. This led to lagging economic development, strained relations between officials and the masses, and negatively impacted rural stability. We must promote institutional reforms of rural collective economic organizations, particularly by strengthening democratic management and internal supervision, implementing transparency in village affairs, and enhancing the cohesion of collective economic organizations. It is essential to clarify that the primary function of collective economic organizations is to provide various services for rural households’ production and daily life. These organizations must strive to manage what is impossible, difficult, or uneconomical for individual rural households to handle. Various forms of professional cooperative organizations for farmers have been developed after the start of reform, and in the early twenty-first century, these organizations entered into a new era of development under favorable policies and a legal environment. The Agricultural Law of the People’s Republic of China, implemented in 2003, encourages farmers to voluntarily form various professional cooperative economic organizations based on household contract operation. It also encourages and supports these organizations’ participation in agricultural industrialization, circulation and processing of agricultural products, as well as the promotion of agricultural technology. To regulate the development of farmers’ professional cooperatives, the “Law of the People’s Republic of China on farmers’ Professional Cooperatives” was implemented in 2007. This greatly accelerated the development of various types of farmers’ professional cooperatives. As of 2011, there were over 500,000 farmers’ professional cooperatives nationwide, with about 34.79 million members enrolled. However, despite these developments, overall, the establishment of farmers’ professional cooperatives was still in its initial stages.

4.3.3 Implementing Rural Tax and Fee Reform Despite the reform, until the late 1990s, the rural tax and fee system and collection methods remained unreasonable, placing a heavy burden on farmers. In 2000, experts estimated that in addition to providing funds for the state through the “scissors difference”, farmers bore a direct total of 177.8 billion yuan in taxes and fees. This resulted in an average burden of 199 yuan per farmer, which accounted for 8.8% of their net income per capita. This burden was 100 billion yuan more than the expenditure on agriculture. Given the circumstances outlined above, implementing reforms of rural taxes and fees is of great economic and political significance. It has been referred to as another major reform. At the establishment of new China, land reform was implemented, which realized “land to the tiller”. After the reform,

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household contract operation was implemented, which realized “rights to the tiller”. This reform of rural taxes and fees realized “benefits to the tiller”.2 Since 2000, Anhui and other regions have carried out pilot rural tax and fee reforms in accordance with the deployment of the CPC Central Committee and the State Council. After over two years of testing, significant phased achievements have been made. Firstly, it effectively curbed the “three disorders” in rural areas and significantly reduced the burden on farmers. Secondly, solutions were explored to address the necessary funding for rural compulsory education and the operation of township and village-level institutions. Lastly, rural tax and fee collection and management were preliminarily standardized. In accordance with the policy of “active, stable, and step-by-step implementation” put forward by the central government, the State Council decided to expand the scope of rural tax and fee reform in 2002. The provinces where the reform was expanded were mainly large agricultural and grain-producing provinces. The agricultural population in pilot areas (including partial pilot areas) amounted to 620 million, which accounted for over three-fourths of the country’s agricultural population. This marked a significant step forward in rural tax and fee reform. In 2003, in accordance with the spirit of the 16th Party Congress, the Central Economic Work Conference, and the Central Rural Work Conference, the State Council decided to comprehensively promote pilot rural tax and fee reform. On March 27, 2003, the “Opinions on Comprehensively Promoting Pilot Rural Tax and Fee Work” was passed, making all-round arrangements for this work and promoting its development. However, despite the reforms, farmers’ burden was still heavy at that time, especially for grain growers. The necessary supporting reforms were relatively slow to develop, resulting in an unstable foundation for reducing farmers’ burden, and even a rebound of the burden existed. In response, the Central Government’s No. 1 Document in 2004 called for further promoting rural tax and fee reform. Based on pilot reform experiences, a series of practical and effective measures were introduced. By 2006, the agricultural tax had been completely abolished nationwide, bringing an end to this ancient tax that had been in effect for 2600 years in China. This was an epoch-making and significant change. Rural tax and fee reform not only abolished the original agricultural tax of 33.6 billion yuan, but also eliminated more than 70 billion yuan in “three kinds of retention and five kinds of financial pooling”, rural education fundraising, and various unreasonable fees. This greatly benefited farmers. Since 2006, in order to support this reform and ensure the normal operation of grassroots government and the implementation of compulsory education in rural areas, the national finance has allocated more than 103 billion yuan annually for these expenditures. This allocation has promoted comprehensive rural reform. Consolidating the achievements of rural tax and fee reform requires full implementation of supporting reforms, as well as policy and financial support, and strengthened supervision and law enforcement. However, achieving this task is only the first step

2

Economic Daily, August 9, 2002, p. 2; Economic Daily, August 12, 2002, p. 2.

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in rural tax reform, and further implementation of a unified urban–rural tax system based on this foundation is needed. This will undoubtedly be a long-term task.

4.4 Deepening the Reform of Collective Economy After the beginning of the reform, collective enterprises were more dynamic compared to state-owned enterprises, while non-public enterprises had not yet developed. From the 1970s to the mid-1990s, the collective industry developed rapidly, and its proportion in the total industrial output value increased. However, due to the deepening of state-owned enterprise reform, the rapid growth of the non-public economy, and the intensification of market competition, the collective industry lagged behind in reform for various historical and realistic reasons. As a result, it faced many difficulties, including declining output value, high asset-liability ratios, low employee income, and the insecurity of laid-off workers’ livelihoods. Despite these challenges, collective enterprises still play an important role in China’s social and economic life, making it urgent to actively develop the collective economy. For many years, the primary reason for the decline of urban collective enterprises has been lagging reform, which has seriously hindered their development. One major issue was the unclear property rights relationship in these enterprises. Ownership was ambiguous, with every employee in the enterprise considered an owner, but no one actually owning the property rights and interests of the enterprise. The ownership, use, income, and distribution of urban collective assets were still subject to some extent to control by higher-level competent authorities. The higher-level competent authority exercised ownership, while the factory director and manager exercised operational and managerial authority, but no one assumed risk responsibility. Second, another issue was the unsound management structure of urban collective enterprises. At the time, there was no established and unified department to guide the reform of collective enterprises from the central to local levels. In many places, the traditional method of “secondary state-owned enterprises” was still used to manage collective enterprises. Third, furthermore, regulatory construction lagged behind for urban collective enterprises. For a long time, urban collective enterprises had been following the “Regulations on Urban Collective Ownership Enterprises” promulgated in September 1991. While this regulation once played an important role, it had not been able to adapt to the current needs of deepening reform of urban collective enterprises in many aspects. Fourth, policy support was lacking for urban collective enterprises. There were insufficient policies to support the reform of collective enterprises in terms of taxation, financing, and merger and bankruptcy, resulting in difficulties. Fifth, many collective enterprises faced difficulties in paying for the costs of reform, such as covering the cost of living, pension, unemployment insurance, and medical care needed to relocate employees and retirees. This situation also existed in many aspects of township collective enterprises. The fundamental solution to the difficulties faced by collective enterprises is to deepen the reform. In response to this situation, the Third Plenary Session of the

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16th Central Committee of the Communist Party of China called for “focusing on clarifying property rights, deepen the reform of collective enterprises, and develop various forms of collective economy”. During this period, the reform of urban collective enterprises achieved positive results. First, there was a clarification of enterprise property rights ownership. Many enterprises became a new type of collective economy, with assets owned by individual workers and collectively possessed by the enterprise, forming clear market entities with clear property rights. Second, there was diversification in the organizational form of enterprises, including the following new forms: ➀ collective capital jointly owned enterprises, including those run by joint economic organizations with full investment; ➁ joint stock cooperative enterprises in which employees hold shares, forming a community of shared destiny with the company; ➂ mixed ownership enterprises formed by collective assets, employee assets, state-owned and private assets jointly holding shares or controlling stakes; and ➃ Sino-foreign joint ventures with collective capital participation and holding. Third, there was a new breakthrough in enterprise management mechanism. Through reform, urban collective enterprises realized the separation of government and enterprises, becoming independent market entities. These reforms injected vitality into the new type of collective enterprises. In terms of township collective enterprises, since the twenty-first century, many measures have been taken to promote their growth through reform and development. First, reforms were deepened with various forms of property rights system reform being realized, including conversion into joint-stock and joint-stock cooperative enterprises as well as individual private enterprises. Second, industrial restructuring was promoted. Third, technological progress was accelerated while developing economies of scale. Fourth, there was further concentration of layout, showing agglomeration effects. Fifth, the quality of enterprise employees, management levels, product quality, and credit status were improved, which promoted the development of township collective economy. However, the difficulties affecting the development of urban and rural collective enterprises were not fundamentally resolved. It is these difficulties that caused the output value of collective industry above the designated scale to fall again from 1190.79 billion yuan in 2000 to 1105.9 billion yuan in 2011, and its share in the gross industrial product fell from 13.8 to 1.3%. This trend remained unchanged after 2012. From 2012 to 2018, the main business income of the collective industry decreased from 1114.8 billion yuan to 192.61 billion yuan. This decline was determined by important factors such as progress of reforms (e.g., transformation of collective ownership into mixed and private ownership, etc.) and structural adjustment (e.g., transformation from industry to tertiary sector, etc.). It also reflected difficulties in production and operation of collective industries, which resulted from both external environment (e.g., incomplete economic system reform) and internal conditions (e.g., problems in enterprise reform and management). Due to this changing trend in the collective economy, Chap. 5 of this book does not include a dedicated section describing the historical development process of the collective economy during this period.

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4.5 Non-public Economy Continuing to Develop Rapidly In 1997, during the 15th Party Congress, CPC leadership reiterated the idea that “the non-public economy is an important part of China’s socialist market economy.” This proposal was further developed during the 16th Party Congress in 2002, which emphasized the crucial role of the individual and private sectors in promoting economic growth, expanding employment, and invigorating the market. The congress also called for the liberalization of market access for domestic private capital, fair competition in areas such as investment and financing, taxation, land use, and foreign trade, and stronger supervision and management according to the law to nurture the healthy development of the non-public economy. Later on, the proposal to amend parts of the Constitution by the Central Committee of the Communist Party of China reiterated the state’s duty to protect the legitimate rights and interests of the nonpublic economy, including the individual and private economies. Additionally, the state will encourage, support, and guide the development of the non-public economy while regulating the non-public economy in accordance with the law. In March 2004, these proposals were adopted at the second session of the 10th National People’s Congress. Following the resolution and revised Constitution mentioned earlier, the State Council and its relevant departments have developed a range of policies to facilitate the growth of the individual private economy. One such policy was the “Opinions on Promoting and Guiding Private Investment”, released by the State Planning Commission in January 2002. Another key document was the “Conditions for Individual Businesses”, which the government issued in 2011, and has since served as an essential guide for fostering the development of individual businesses. In this way, a more liberal legal and policy environment has been created for the development of the individual and private economy, from the Constitution, which is the fundamental law of the country, to specific policies. This environment, coupled with the efforts of individual and private enterprises in strengthening management, achieving technological progress, adjusting product structure, and training human resources, has led to the rapid development of the individual and private economy in the first 11 years of the twenty-first century. Between 2000 and 2011, the number of self-employed individual businesses in China increased from 25.71 million to 37.5647 million, while the number of employees rose from 50.7 million to 79.4528 million. During this period, registered capital also surged from 331.5 billion yuan to 1617.757 billion yuan. During this time, China’s private economy experienced remarkable growth. From 2000 to 2011, the number of registered private enterprises surged from 1,761,700 to 9,676,800, while their registered capital skyrocketed from 1330.7 billion yuan to 25,790 billion yuan. This era also saw a significant increase in the number of employees, jumping from 24.06 million to 104 million, representing the fastest period of growth for private enterprise registrations. Several key features define the development of the private economy during this period. First, private enterprises expanded rapidly in terms of scale, with the average registered capital of such firms nationwide increasing from 1,174,700 yuan to 2,664,900 yuan by 2011. Second, private

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limited liability companies emerged as an increasingly popular organizational form, comprising 83.57% of the total number of registered private enterprises by 2011, with registered capital accounting for 87.16% of the total. As the individual and private economy has grown, their importance within China’s broader economy has increased significantly. This trend is evident in various indicators such as value-added, investment, employment, import and export activities, and tax contributions. These sectors now contribute a larger share of the national total across these metrics, underscoring their growing significance.

4.6 Improving the Modern Market System As China’s socialist market economy and modernization efforts have progressed, the country’s modern market system has also undergone significant development. For example, between 2000 and 2011, the retail sales of social consumer goods surged from 3.9 trillion yuan to 18.4 trillion yuan, while the total sales of social production materials expanded from 5.2 trillion yuan to 45.6 trillion yuan. This period also saw rapid growth in various sectors, including modern logistics, commercial business (including distribution centers in the commercial wholesale segment and chain operations in the retail segment), futures trading, and e-commerce. By 2011, total social logistics had reached 158.4 trillion yuan, with online shopping transactions totaling 756.6 billion yuan. Between 2000 and 2011, the size of China’s labor market grew significantly, with the number of employed individuals increasing from 720.85 million to 764.20 million—a difference of 43.35 million. Furthermore, the degree of labor marketization also increased during this period. Specifically, the number of stateowned and urban collective economic units decreased, while the number of nonpublic economic units increased. This suggests that non-public economic entities, which have a relatively high degree of labor marketization, were driving employment growth while public entities, which have a relatively low degree of labor marketization, were reducing their workforce. Within the public economy, labor marketization was also increasing due to reforms in the labor wage system. Additionally, employment forms became more diverse, with part-time, seasonal, multi-employer, and flexible work arrangements emerging rapidly. Finally, more job seekers entered the labor market through two-way market selection, indicating that the labor market was maturing, with workers and enterprises operating within a more market-based environment. From 2000 to 2011, China’s financial system underwent significant development. Within the RMB credit market of financial institutions, deposit balances grew from 12,380.44 billion yuan to 80,936.8 billion yuan, while loan balances rose from 9937.11 billion yuan to 54,794.7 billion yuan. During this period, sub-markets such as interbank lending, bond market, and open market operations gradually improved, with transactions in these markets reaching high levels by 2008. In 2011, China’s securities market comprised 2342 domestic listed companies, 108 domestic listed

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foreign share companies (B shares), and 171 overseas listed companies (H shares), with a total stock market value of 21.4758 trillion yuan. The launch of GEM in 2009 was an important milestone. During this period, treasury bonds and corporate bonds were issued more frequently, while the size of securities investment funds and futures turnover increased significantly. Additionally, insurance premium income grew to reach 1433.93 billion yuan by 2011. China’s financial system also witnessed growing activity in the spot and forward transactions of the foreign exchange and gold markets. Notably, the RMB foreign exchange forward market had a cumulative turnover of $214.6 billion in 2011. Together, these developments indicate that China’s financial system has taken shape, with banking, securities, and insurance industries playing key roles. Moreover, as prices become more market-oriented, the country’s financial landscape is likely to continue evolving. China’s land market has experienced rapid development and now holds a crucial position within the country’s factor market. It is estimated that there are at least 25 trillion yuan of state-owned land assets in China. However, prior to economic reform, land use was uncompensated, open-ended, and non-transferable under the planned economy system. Only after reforms did land use gradually become remunerative, limited in duration, and transferable, leading to the expansion of the land market. Between 1997 and 2007 alone, China’s revenue from land transfers exceeded 4280.5 billion yuan. The property rights market also saw further development. The year 2008 witnessed the total turnover of the national warrants market reach 6.97 trillion yuan. Between 2000 and 2011, China’s commercial housing sector grew significantly in terms of sales volume and area. Specifically, the sales area of commercial housing nationwide expanded from 186.371 million square meters to 1093.668 million square meters, while sales increased from 393.544 billion yuan to 5858.886 billion yuan. Additionally, the technology market turnover surged from 65.08 billion yuan to 476.36 billion yuan over this period. China’s tourism industry also experienced remarkable growth during this timeframe. International tourism revenue increased from 16.2 billion dollars to 48.5 billion dollars, while domestic tourism revenue climbed from 317.53 billion yuan to 1930.54 billion yuan.3 The cultural market also developed rapidly during this period. China’s modern market system, including product markets, service markets, and factor markets, has developed significantly. Nonetheless, there remains a considerable distance to go in terms of creating a unified, open, equal, and orderly modern market system that meets all the requirements.

3

China Statistical Yearbook (relevant years), China Statistical Press.

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4.7 Improving Macroeconomic Management System As an important part of the planned economic system, the investment system reform, which had been relatively lagging behind, began to take substantive steps. As mentioned earlier, since the reform, a series of reforms were carried out on the traditional investment system, breaking the highly centralized investment management system and initially forming a new pattern of diversified investment subjects, multi-channel funding sources, diversified investment methods, and market-oriented project construction. However, there were still many problems in the investment system, especially the incomplete implementation of corporate investment decisionmaking power, the need to further improve the scientific and democratic level of government investment decision-making, and the need to improve the macro-control and supervision effectiveness of investment. In July 2004, the State Council released the “Decision on Investment System Reform”, the first aim of which is to reform the investment management system and establish enterprises as investment subjects with autonomy over their investments. The guiding principle was that “the one who invests has the rights to make decisions and benefit from the investment, and also has to bear the risks”. For enterprise projects that do not use government investment, the approval system was eliminated, and reviewing and filing systems were implemented based on different situations. The investment decision-making power of large enterprises shall be further expanded, and the financing channels for enterprise investment projects shall be broadened. The state promotes social investment by enabling social capital to flow into industries and fields that are not restricted by laws or regulations. Financial institutions are expected to enhance and perfect their fixed asset loan systems, continually improve their independent loan review capabilities, and effectively mitigate financial risks. The second focus of the “Decision on Investment System Reform” was to improve the government investment system, enhancing its social effectiveness and efficiency. Government investment was primarily directed towards economic and social sectors that are related to national security and where the market is unable to allocate resources effectively. To achieve these goals, it was essential to enhance the scientific and democratic level of investment decision-making, establish accountability mechanisms for government investments, divide approval authority reasonably, simplify and standardize approval procedures, regulate investment fund management, and improve construction implementation methods. To facilitate non-commercial government investment projects, there was a need to expedite the implementation of an ‘agent construction system’. Additionally, governments at all levels should create favorable conditions to attract social capital investment in public welfare and infrastructure projects. The third point of the “Decision on Investment System Reform” emphasized the need to strengthen and improve macro-control of investment, promoting total balance and structural optimization. This involved a combination of economic, legal, and necessary administrative means, utilizing levers such as prices, interest rates, and taxation to indirectly regulate investment throughout society. Additionally, there was a need to guide social investment through planning and policies, information release, and standardized market access. The fourth priority

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of the ‘Decision on Investment System Reform’ was to strengthen and improve the supervision and management of investment, regulating and maintaining market order in investment and construction. This involved establishing and enhancing regulatory systems for enterprise investment, government investment, and investment intermediary services. Furthermore, there was a need to strengthen investment legislation, enforce law and supervision strictly, and regulate the behavior of various types of investment entities in accordance with the law. The release and implementation of this decision marked a significant reform of China’s investment system. These changes were particularly evident in the implementation of diversified investment entities. Between 2000 and 2011, there was a significant increase in the actual amount of investment in fixed assets, rising from 3311.03 billion yuan to 34,598.42 billion yuan. Over that period, the proportion of national budget funds decreased from 6.4 to 4.7%, while the proportion of domestic loans (including various loans to banks and non-bank financial institutions) decreased from 20.3 to 13.4%. Meanwhile, the proportion of self-raised funds (including funds raised by enterprises and institutions) and other funds (including social fundraising and personal funds) increased from 68.2 to 80.9%, indicating a greater emphasis on private enterprise investment and social capital. The trend of price reform was predominantly market-oriented, with a focus on reducing the scope of government-administered directive prices while expanding the scope of government-guided and market-regulated prices. Between 2000 and 2007, there was a decline in the proportion of government pricing in the total social retail sales from 3.2 to 2.6%, while the share of government-guided and market-adjusted prices rose from 96.8 to 97.4%. Similarly, the proportion of government pricing in the total amount of agricultural and sideline products procurement decreased from 4.7 to 1.1%, while the share of government-guided and market-adjusted prices increased from 95.3 to 98.9%. Additionally, the proportion of government pricing in the total sales of production materials fell from 8.4 to 5.4%, while the share of government-guided and market-regulated prices increased from 91.6 to 94.6%. With these changes, product price reform has made significant progress. Following the establishment of a public finance system in the late twentieth century, significant strides have been made in fiscal and tax reforms. Fiscal progress includes the elimination of agricultural taxes, increased investment towards addressing the ‘three rural issues’ and public goods, as well as improvements to the tax sharing and transfer payment systems. As a result, significant progress has been made towards achieving a unified urban and rural public service equalization and a public finance system in which central and local governments have matching authority and financial power. The progress in the budget area includes the gradual establishment of the sector budget system, the gradual implementation of the reform of the centralized treasury collection and payment system, the steady promotion of “separate budget of income and expenditure”. The reform of the government procurement system has basically achieved the transformation from pilot to full implementation. Significant strides have been made in taxation reform across several areas. Firstly, since January 1, 2002, there has been an emphasis on sharing income tax revenue proportionally between central and local governments, excluding specific industries

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or enterprises. Secondly, a successful rehabilitation of rural taxation reform has been achieved. Thirdly, the VAT system’s transformation from production-oriented to consumption-oriented between 2004 and 2008 is worth noting. Fourthly, the export tax rebate mechanism underwent improvements through the adjustment of the export tax rate. Furthermore, domestic and foreign enterprise income tax has been unified. Additionally, a combination of comprehensive and classified personal income tax has been implemented. Seventh, the consumption tax was adjusted and improved. Lastly, the implementation process aimed at promoting a unified and standardized property tax, also known as real estate tax, has been advocated for. The reform of the financial system has focused on four main aspects. Firstly, promoting the formation of a diversified financial enterprise system, with multiple ownership structures and various types of financial institutions co-existing. This system comprises state-controlled commercial banks, policy banks, postal savings banks, joint-stock commercial banks, urban commercial banks, urban credit cooperatives, rural credit cooperatives and rural commercial banks; securities companies and insurance companies, trust and investment companies, finance companies, financial leasing companies, fund management companies, futures brokerage companies, and asset management companies, as well as foreign financial institutions. Secondly, there is an emphasis on deepening the reforms of state-owned commercial banks to drive their development. In 2003, state-owned commercial banks held total assets worth 1.56 trillion yuan, accounting for 69.4% of the total funds held by financial institutions. However, despite this dominant position, the reforms aimed at establishing a modern enterprise system for state-owned commercial banks were far from complete. Therefore, it is essential to promote the reform of state-owned commercial banks to modernize their operations and improve their efficiency. China Construction Bank underwent a shareholding reform after which it was listed on the Hong Kong stock exchange in 2005. In 2006, both Bank of China and Industrial and Commercial Bank of China were listed on the Hong Kong stock exchange while the latter was also listed on the Shanghai stock exchange. In 2010, Agricultural Bank of China became publicly listed on the Shanghai and Hong Kong stock exchanges in May and July of that year, respectively. China Development Bank was also transformed into a statecontrolled commercial bank. Third, the financial regulatory system has undergone significant improvements. Since the reform, a comprehensive legal framework for financial regulation has been established, centered around key financial laws such as the Law of the People’s Republic of China on the People’s Bank of China, the Securities Law of the People’s Republic of China, and the Insurance Law of the People’s Republic of China. China Securities Regulatory Commission and China Insurance Regulatory Commission were established successively. In 2003, the establishment of the China Banking Regulatory Commission (CBRC) marked the full establishment of separate operation and regulation systems for China’s banking, securities, and insurance industries. The fourth objective is to enhance the mechanism for financial regulation and control. The Central Bank utilizes monetary policy to steer market interest rates and simultaneously enhances the interest rate formation mechanism based on market supply and demand, enabling the market mechanism to play a pivotal role in the allocation of financial resources. Since the reform, there has been

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a gradual liberalization of interest rates for interbank lending, bond repurchase, rediscounting, and the issuance of government bonds and policy financial bonds. Financial institutions have been granted expanded floating rights for loan interest rates. In October 2004, the People’s Bank of China further expanded the floating range of loan interest rates for financial institutions, allowing deposit interest rates to be lowered for the first time while implementing an increase in the benchmark interest rate for the RMB, marking an important step towards the marketization of RMB interest rates. However, China’s interest rates still do not fully reflect the supply and demand in the capital market. Given China’s national conditions, the overall idea of interest rate marketization reform prioritizes foreign currencies, loans, long-term and large amounts over domestic currency, deposits, short-term and small amounts, respectively. The reform of the labor system has made significant progress. China has long implemented policies promoting workers’ independent employment, market regulation, and government support for employment. This comprehensive policy meets the demands of a modern market economy and facilitates the reform of the labor system. As previously mentioned, workers have the freedom to choose their own employment and the labor market is regulated by market forces. Additionally, the government has implemented a range of measures to promote employment, resulting in significant progress in labor employment throughout the country. Over the past few years, deepening reforms in state-owned and collective enterprises, along with significant growth in the labor force, had led to tens of millions of layoffs, resulting in a challenging employment situation. Despite this, the government had been able to control the urban registered unemployment rate to maintain social stability. In 2011, the number of urban employed persons increased from 231.51 million in 2000 to 359.14 million. While the registered urban unemployment rate was 4.1%, which was 1 percentage point higher than that of 2000, it was still 9.1 percentage points lower than that of 1952 and 1.2 percentage points lower than that of 1978. Since the reform, the previously egalitarian wage system in the public economy has been largely dismantled. However, a wage system that is suitable for the requirements of China’s socialist market economy has yet to be established. A major issue that persists is the significant wage disparity between urban and rural areas, different regions, and monopolistic and non-monopolistic industries. This is primarily due to the dual system of urban and rural areas, incomplete reforms in state-owned enterprises (especially in monopoly industries), and inadequacies in the fiscal and taxation system. In order to narrow the income disparity, the government has taken a series of measures. These include accelerating the reform of the urban–rural dual system, strengthening the reform of monopolistic industries and regulating their income distribution, speeding up the construction of public finance and increasing transfer payments, establishing a sound method of monitoring personal income, and strengthening the collection and management of personal income tax. However, the trend of widening income disparity was not reversed. For instance, the ratio of urban and rural resident’ income (i.e. the ratio of urban residents’ per capita disposable income to rural residents’ per capita net income) rose from 2.79 in 2000 to 3.33 in

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2009, reaching a peak. Therefore, the reform task in this area remains extremely challenging. Various reforms of the social security system continued to be promoted and significant progress was made. From 2000 to 2011, the number of urban workers and residents covered by basic pension insurance increased from 140 to 620 million; the number of urban workers covered by unemployment insurance increased from 100 to 140 million; the number of people covered by basic medical insurance increased from 40 to 470 million; and the number of people covered by work injury insurance increased from 40 to 180 million, and the number of people participating in maternity insurance increased from 30 to 140 million. Significant efforts have been made to reform China’s administrative management system. This includes two government institutional reforms, with the State Council institutional reform in 2003 being aimed at enhancing the socialist market economy system and promoting political system reform. It adhered to the principles of separating government and enterprises, streamlining, unifying, improving efficiency, and administering according to law. The reform further transformed government functions, adjusted and improved government institutions, rationalized the division of labor among government departments, improved government administration level, and formed an administrative management system that is normative, coordinated, fair, transparent, incorruptible, and efficient. The State Council institutional reform included several main tasks: deepening the reform of the state-owned assets management system and establishing the State-owned Assets Supervision and Administration Commission (SASAC) under the State Council; improving the macro-control system and reorganizing the State Development Planning Commission into the National Development and Reform Commission; enhancing the financial regulatory system and establishing the China Banking Regulatory Commission; promoting the reform of the circulation management system and establishing the Ministry of Commerce; strengthening the supervision system construction of food safety and production safety and establishing the State Food and Drug Administration based on the State Drug Administration, and changing the State Administration of Work Safety under the administration of the State Economic and Trade Commission into an institution directly under the State Council; renaming the State Family Planning Commission as the National Population and Family Planning Commission; and abolishing the State Economic and Trade Commission and the Ministry of Foreign Trade and Economic Cooperation. Following the reform, the State Council established 53 departments, including 28 constituent departments, 18 directly affiliated institutions, and 7 executive agencies. In 2008, the Chinese government initiated another round of institutional reforms, which aimed to strengthen macro-control and promote scientific development, ensure and improve people’s livelihoods, strengthen social management, and streamline relationships between departments with similar functions based on the requirements of an organic and unified departmental system. As part of this reform, the State Council established several new ministries, including the Ministry of Industry and Information Technology, the Ministry of Transport, the Ministry of Human Resources and Social Security, the Ministry of Environmental Protection, and the Ministry of

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Housing and Urban–Rural Development. The reform involved the restructuring of nearly 20 institutions, with some being merged or dissolved to streamline operations and reduce redundancy. Ultimately, the number of ministerial-level institutions under the State Council was reduced by six. By 2008, the reform of the State Council’s institutions had been largely completed, and the government began promoting similar reforms at the local level. Another important aspect of the reform of the administrative management system is to cancel and adjust administrative approval projects in accordance with the requirements of developing a market economy, transforming government functions, and achieving public administration. By 2004, the State Council had canceled and adjusted 1806 administrative approval projects in three batches. By 2008, the State Council had canceled and adjusted 186 approval projects. Overall, significant progress has been made in improving the macroeconomic management system during this period.

4.8 Development of the Overall Opening-Up Pattern China officially joined the World Trade Organization on December 11, 2001. WTO accession is also an important impetus to promote the further development of the overall pattern of opening up to the outside world, which has greatly promoted the development of opening-up in terms of expanding the utilization of foreign capital, foreign trade and foreign technical and economic cooperation. The further development of foreign-invested enterprises during this period has also benefited from the following factors. First, since the reform, China has gradually developed a series of comparative advantages, such as the market with the highest global potential, huge human resources with high quality and low cost, socio-political stability and rapid economic growth, a competitive industrial base, good infrastructure, a constantly improving legal environment and an enhanced sense of openness. Secondly, we capitalized on the significant opportunity presented by a new wave of global industrial transfer. In the 1980s, China recognized and seized the opportunity presented by the international shift of labor-intensive industries towards developing countries, particularly in the production of light textile products. In the 1990s, China once again leveraged the opportunity arising from the global transfer of industries to bolster the growth of its electromechanical sectors. As we entered the new millennium, China capitalized on the fresh opportunity brought about by its accession to the World Trade Organization (WTO), establishing itself as the preferred destination for multinational investment worldwide. The production and manufacturing link of the high-tech industry, specifically the information industry, has been significantly shifted to China as part of a new wave of industry transfer. Consequently, the Yangtze River Delta, Pearl River Delta, Bohai Bay, and Fujian coastal regions have established their own distinctive information industry bases. Thirdly, new strategies for utilizing foreign investment were introduced. One such strategy involved attracting foreign investment to regions that offer favorable conditions and align with national

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industrial policies. The aim is to establish multiple economic growth hubs characterized by high levels of foreign investment, internal and external integration, and strong economic momentum. To enhance foreign investment attraction, the State Planning Commission, the State Economic and Trade Commission, and the Ministry of Foreign Trade and Economic Cooperation collaborated and introduced the “Catalogue for the Guidance of Foreign Investment Industries” in March 2002, which was approved by the State Council and included an accompanying appendix. The new catalogue is divided into four categories: items to be encouraged, permitted, restricted, and prohibited, with a total of 371 items listed. The Catalogue actively encourages foreign investment in China. The number of encouraged items increased from 186 to 262, while the number of restricted items decreased from 112 to 75. The restrictions on foreign investment in terms of shareholding ratios were relaxed, and the previously prohibited areas of telecommunications, urban utility networks such as gas, heating, water supply and drainage were opened up to foreign investment for the first time. In March 2003, the Ministry of Foreign Trade and Economic Cooperation, the State Administration of Taxation, the State Administration for Industry and Commerce, and the State Administration of Foreign Exchange jointly issued the “Interim Provisions on Foreign Investment in Mergers and Acquisitions of Domestic Enterprises.” These provisions aimed to regulate foreign investment in mergers and acquisitions of domestic enterprises by purchasing equity and assets, thereby establishing a comprehensive legal framework for foreign investment in mergers and acquisitions in China. Furthermore, to create a more favorable legal framework for attracting foreign investment, the People’s Republic of China revised and enacted three fundamental laws and their corresponding implementation rules on foreign direct investment in 2001. These include the “Law of the People’s Republic of China on Sino-foreign Joint Ventures”, the “Law of the People’s Republic of China on Sinoforeign Cooperative Enterprises”, and the “Law of the People’s Republic of China on Foreign Investment Enterprises”. These laws further reflect the principle of national treatment for foreign-funded enterprises. Fifth, in order to promote the attraction of foreign investment, significant efforts have been made since 2002. This includes the establishment of the Foreign Investment Enterprise Registration Bureau, revision of a new nationwide unified registration form for foreign-invested enterprises, the opening of the China Foreign Investment Registration Website, and improvements to the system of regulations on foreign investment registration and management. As part of these improvements, regulations such as the “Regulations on the Administration of Venture Capital Investment in Foreign-Invested Enterprises” and the “Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors” have been implemented. Sixth, to create conducive environment for attracting foreign capital, the reform of exchange rate and convertibility of RMB under the capital account was continued. The aforementioned factors have significantly contributed to the growth of foreign-invested enterprises. From 2000 to 2011, foreign direct investment in China increased from US$40.715 billion to US$116.011 billion. Specifically, the investment in Sino-foreign joint ventures increased from US$14.343 billion to US$21.415 billion, while investment in Sino-foreign cooperative enterprises

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decreased from US$6.596 billion to US$1.757 billion. However, investment in wholly foreign-owned enterprises experienced remarkable growth, surging from US$19.264 billion to US$91.205 billion. By 2011, China not only ranked first among developing countries in attracting foreign direct investment but also emerged as a prominent player in the global context. In 2011, the development of foreign-invested enterprises in China exhibited several notable characteristics. Firstly, in terms of the form of foreign enterprises, wholly-owned enterprises remained the most prevalent, followed by joint ventures and cooperative enterprises. Furthermore, the proportion of foreign direct investment in wholly-owned enterprises continued to increase, while the proportions of joint ventures and cooperative enterprises, particularly the latter, experienced a further decline. Secondly, concerning the scale of foreign investment, there was an increase in the average amount of investments made by enterprises, indicating a rise in the proportion of large enterprises. At that time, a significant number of the world’s top 500 multinational companies had made investments in China, highlighting the attractiveness of the Chinese market for foreign investors. With the rapid growth of foreign-invested enterprises, their significance in China’s economy has been expanding. This is evident in various indicators such as the share of industrial output value contributed by foreign-funded enterprises compared to the national total, the proportion of import and export volume accounted for by foreign-funded enterprises in relation to the national import and export volume, the percentage of tax payments made by foreign-funded enterprises as a portion of the national total tax revenue, and the ratio of employment provided by foreign-funded enterprises to the overall national employment. The further development of the opening-up pattern also led to significant growth in import and export trade. Several measures were implemented to promote this growth. Firstly, the World Trade Organization’s principles of most-favored-nation treatment and national treatment were adopted. These principles embody the basic requirements of a modern market economy and serve as effective mechanisms for achieving optimal resource allocation worldwide. They also act as powerful tools for breaking down barriers to international trade, including the trade of goods and services. Therefore, China’s accession to the World Trade Organization on December 11, 2001 has proven to be the most effective measure in expanding foreign trade. Second, in order to meet the requirements of WTO accession, China made amendments to over 2500 foreign-related laws and regulations between 2002 and 2004, including the “Foreign Trade Law of the People’s Republic of China”, which was promulgated and implemented after its revision in April 2004, providing a stronger legal environment for the expansion of foreign trade. Third, the reform of the foreign trade system was further promoted, which includes the speeding up of the reform of state-owned foreign trade enterprises with the aim to establish a modern enterprise system, liberalizing non-public enterprises to operate foreign trade, and the pattern of equal competition and common development of multiple ownership in foreign trade took initial shape. This is the most important impetus to promote the development of foreign trade. Fourth, in terms of imports, the country has made efforts to adhere to its commitments under the World Trade Organization (WTO) by

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gradually reducing tariffs, reducing the number of goods requiring import licenses, and liberalizing investment areas. Additionally, various positive measures have been implemented to promote exports, such as tax rebates, financing opportunities, and insurance support. Fifth, the country continued to promote the export diversification strategy, consolidate and expand traditional markets, open up new markets, and promote the economic and trade relations among different regions. Sixth, the country continued to implement the strategy of promoting trade through science and technology, focusing on improving the technological content and added value of our export products. Seventh, several measures were implemented in the areas of development, reform, and management to encourage enterprises to enhance the international competitiveness of their products. Eighth, the two major advantages of abundant human resources and low labor cost were further exploited, which were the basic factors for the substantial growth of foreign trade in successive years. China’s total import and export volume achieved rapid growth. From 2000 to 2011, China’s total imports and exports increased from US$474.29 billion to US$3691.86 billion. Specifically, total exports increased from US$249.2 billion to US$1898.38 billion and total imports increased from US$225.09 billion to US$1793.48 billion. Thus China’s total import and export trade ranking in the world rose sharply. In 1980, China was ranked 32nd in the world. However, after 2009, not only did China maintain the second place in the world in terms of total import and export volume, but its total exports rose to the first place globally. Simultaneously, further improvements were made in optimizing the export commodity structure. Since the reform, China has undergone two transformations in its export commodity structure. The first transformation took place in 1986 when the export of primary products was replaced by industrial manufactured goods. This marked a shift from resource-intensive to labor-intensive exports. From 1978 to 1986, the proportion of primary product exports decreased from 53.5 to 36.4%, while the proportion of industrial manufactured goods exports increased from 46.5 to 63.6%. The other transformation occurred in 1995 when mechanical and electrical products replaced textiles and garments as the top export commodities, which marked the beginning of the shift from labor-intensive to capital-and-technology-intensive export commodities. By 2009, electromechanical products had accounted for 59.3% of total exports. The remarkable increase in the export of high-tech products, particularly within the electromechanical sector, is a prominent characteristic of the 21st-century export landscape. In 2009, the proportion of high-tech product exports in China’s overall exports of electromechanical products increased to 52.9%. It is worth mentioning that service trade has emerged as a significant growth area for foreign trade in the twenty-first century. In 2011, the import and export volume of service trade reached US$419.1 billion, accounting for 11.5% of the total import and export volume. The proportion of China’s exports in GDP, which was only 4.6% in 1978, reached 25.2% in 2011. However, China can be considered a major trading country, but it still has room to become a trading powerhouse. It has achieved extensive growth in trade, but it needs to transition from a reliance on low labor costs and high material consumption to a more sustainable growth model. Additionally, China should focus on developing its

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own brands, marketing networks, and products with independent intellectual property rights and core technology. Many of China’s export products are still at a low level and have low added value, indicating a need to move up the value chain in the international division of labor. The dominance of processing trade by foreign-invested enterprises in China’s foreign trade is a challenge, with processing trade accounting for 53.8% of total foreign trade in 2010. The development of the opening-up pattern has also been evident in the significant growth of China’s overseas investment. Since the implementation of economic reforms, China has laid the groundwork for realizing its “going out” strategy by attracting foreign capital, technology, and talent. As the reform deepens and modernization progresses, it is necessary to fully utilize both domestic and international markets as well as resources. Therefore, in the early twenty-first century, China intensified its efforts to implement the “going out” strategy. Additionally, following the principles of market orientation, with enterprises as the main players and the government providing supportive services, China has expedited the establishment of a management service system for foreign economic cooperation. First, a stable and transparent system for managing foreign-related economic activities has been established, ensuring a fair and predictable legal environment. This system provides institutional guarantees for Chinese enterprises engaged in standardized foreign economic cooperation. Second, a new management service system for foreign economic cooperation has been implemented. Third, efforts have been made to assist intermediaries involved in foreign economic cooperation to accurately position themselves and enhance their functions. Fourth, initiatives are being undertaken to create a more favorable international environment for cooperation between Chinese and foreign enterprises. As a result, China’s overseas investment has experienced rapid growth. In 2011, non-financial overseas direct investment reached US$60.1 billion, with a cumulative total of US$322 billion. Additionally, from 2000 to 2011, the completed value of overseas contracting projects also surged from US$8.379 billion to US$503.424 billion. The further development of the overall opening-up pattern is evident in the following aspects. Firstly, the development and construction of Tianjin Binhai New Area and Guangxi Beibu Gulf region, both of which are focused on export-oriented economies. The proposal for the construction of Tianjin Binhai New Area was made in the mid-1990s, and since the beginning of the twenty-first century, the area has experienced significant economic growth. It is expected to become the third major economic growth center, following the economic zones of the Pearl River Delta in the 1980s and Shanghai Pudong New Area in the 1990s. In January 2006, the State Council approved the implementation of the “Guangxi Beibu Gulf Regional Development Plan”. Since then, the economic development of this region has also been rapid, establishing it as another important economic growth center. Secondly, since 2003, the development of free trade zones has been rapid and significant. By 2008, China had established 12 free trade zones with 29 countries and regions across five continents. The trade volume in these zones accounted for over 20% of China’s total foreign trade. Notably, on January 1, 2010, the China-ASEAN Free Trade Area

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was officially and fully completed. This is the world’s third-largest free trade area, encompassing a population of 1.9 billion, a gross national product of US$6 trillion, and a trade volume of US$4.5 trillion. It serves as a significant milestone in the further development of China’s foreign trade in the twenty-first century.

4.9 Concluding Remarks During this period, significant progress was made in improving the socialist market economy system. Key developments included: The state-owned sector continued to undergo economic reform, focusing on strategic adjustments and improving the modern enterprise system. Reforms in the rural economy were also deepened; Continued efforts were made to promote the reform of the collective economy and the development of the non-public economy. This led to the joint development of multiple ownership systems, with the state-owned economy taking the lead. Ongoing efforts were made to enhance the modern market system and macroeconomic management system, aiming for more effective economic governance; The overall pattern of opening up to the outside world was further expanded. In terms of industries above the designated scale, there were notable changes in ownership proportions. The share of state-owned and state-controlled enterprises in main business income decreased from 50.2% in 2000 to 27.2% in 2011. On the other hand, the proportion of private enterprises increased from 5.7 to 29.0%, while the share of foreign-funded enterprises decreased slightly from 26.8 to 25.7%.

Chapter 5

Comprehensive Deepening of Market Reform, 2012–2018

5.1 Introduction Based on the resolution of the 18th Party Congress held in 2012, the Third Plenary Session of the 18th Party Central Committee held in 2013 made the “Decision on Several Major Issues of Comprehensively Deepening the Reform”. The Decision put forward that “the overall goal of comprehensively deepening the reform is to improve and develop the socialist system with Chinese characteristics, and to promote the modernization of the national governance system and governance capacity”. The Decision calls for deepening economic system reform, deepening political system reform, deepening social system reform, accelerating the establishment of an ecological civilization system, and deepening the reform of the CPC’s construction system. The Decision proposes: “The reform of the economic system is the focus of comprehensive deepening reform. The core issue is to handle the relationship between government and market, allowing the market to play a decisive role in resource allocation and better utilizing the role of government. The market determines resource allocation, which is a general law of a market economy. A sound socialist market economy system must follow this law and focus on solving problems such as an imperfect market system, excessive government intervention, and inadequate regulation.” The Decision stipulates that by 2020, significant progress must be made in important areas and key aspects of reform. This progress includes completing the reform tasks outlined in the Decision, establishing a systematic and comprehensive system that operates effectively based on scientific and standardized principles. Furthermore, all aspects of the system should be further developed and consolidated to ensure their maturity and stability. The reform during this period was carried out under the guidance of the aforementioned decision. According to the regulations since the 18th National Congress of the Communist Party of China, the goal of economic reform in this stage is expected to be achieved by 2020, but this book only covers up to 2017. © Social Sciences Academic Press 2024 H. Wang, China’s Economic System Reform (1978–2018), Research Series on the Chinese Dream and China’s Development Path, https://doi.org/10.1007/978-981-99-9267-6_5

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5.2 Reform of State-Owned Enterprises: Embracing Capital-Oriented Management and Expediting the Growth of Mixed-Ownership Enterprises 5.2.1 The Transformation from Enterprise-Oriented Management to Capital-Oriented Management In order to achieve the transformation from enterprise-oriented management to capital-oriented management as put forward by the Party Central Committee and the State Council, the General Office of the State Council forwarded the “Plan of State-owned Assets Supervision and Administration Commission of the State Council on Promoting the Function Transformation with a focus on Capital-oriented Management” on April 27, 2017. Its main contents are as follows. 1. Basic Principles (1) Adhere to accurate positioning. In accordance with the principles of separating government and enterprises, separating government and capital, and separating ownership and management, it is necessary to scientifically define the boundaries of investor supervision over state-owned assets. As a specialized institution directly under the State Council, the State-owned Assets Supervision and Administration Commission is authorized by the State Council to fulfill the role of an investor in accordance with the law. Its primary responsibility lies in the supervision of stateowned assets. However, the SASAC does not exercise social public administration functions and refrains from interfering with the autonomous management rights of enterprises as stipulated by the law. (2) Uphold supervision in accordance with the law. (3) Emphasize enterprise revitalization. (4) Enhance efficiency improvement. (5) Maintain the leadership of the CPC. 2. Adjustment and Optimization of Regulatory Functions (1) Enhance the role of capital management and uphold the responsibility of preserving and increasing value. ➀ Enhance planning and supervision of investments. ➁ Emphasize the functioning of state-owned capital operations. ➂ Strengthen incentives and constraints. (2) Enhance the supervision of state-owned assets to prevent loss. ➀ Maintain the organic unity of investor management and supervision. ➁ Strengthen the oversight of external supervisory boards. ➂ Enforce responsibilities strictly. (3) Simplify regulatory procedures and enhance the vitality of enterprises. (4) Integrate relevant functions and improve supervisory efficiency. (5) Comprehensively strengthen the Party’s construction and enhance its governance and self-discipline responsibilities. 3. Improve the Means of Supervision In accordance with the requirements of prior system regulation, tracking and monitoring during the process, and post-event supervision and accountability, actively adapt to the needs of transforming regulatory functions, enhancing the vitality of

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enterprises, and strengthening supervision and management. Innovate ways and means of supervision. Adopt more market-oriented, rule-of-law-based, and informatized regulatory approaches to enhance the targeted and effective supervision. This includes: ➀ strengthening law-based supervision; ➁ implementing categorized supervision; ➂ promoting transparent supervision; ➃ optimizing regulatory processes. 4. Effective Organization and Implementation The SASAC of the State Council shall comprehensively review and optimize specific regulatory functions based on this plan, correspondingly adjust internal institutions, clarify regulatory matters to be canceled, delegated, or authorized, accelerate the formulation of a list of powers and responsibilities for shareholder supervision, and publicly disclose it after approval according to procedures. It is necessary to prioritize pilot projects and, based on the actual situation of the enterprise, continue to promote the reform of streamlining administration and decentralization, combining decentralization with management, and optimizing services. It is necessary to adhere to classified delegation and step-by-step implementation, ensuring that the authority and responsibilities can be delegated, assumed, and effectively managed. It is necessary to proactively adapt to the requirements of functional transformation and promptly review and improve the relevant regulations and policy documents related to the supervision of state-owned assets. The establishment of state-owned capital investment and operation companies is a crucial step in achieving capital-oriented management. Since 2014, SASAC has been conducting pilot projects in this area. The pilot companies actively explored three areas: firstly, they focused on developing professional operations for state-owned capital and exploring effective investment and operation models. Secondly, they aimed to improve the relationship between SASAC and enterprises and enhance the supervision of state-owned assets. Lastly, they promoted internal reforms within state-owned capital investment and operation companies and explored market-oriented business operation mechanisms. In 2014, Chengtong Group and China Guoxin took the lead in launching the pilot state-owned capital operation companies, and in 2017, 8 central enterprises including SDIC, COFCO, Shenhua, Baowu, Minmetals, China Merchants Group, China Communications Corporation, and Poly Group piloted state-owned capital investment companies, with a total of 10 enterprises participating in the pilot programme. Local pilot reforms were also being accelerated, with 21 out of the 37 provincial SASACs undergoing restructuring to establish 52 state-owned capital investment and operation companies. Over the course of two years, the 10 central enterprises had made significant progress in advancing pilot reform work. They had actively explored and made breakthroughs in key areas such as the trial system, trial mechanism, and trial model. The pilot program had a successful start and achieved significant milestones. In 2016, the 10 pilot enterprises collectively recorded a total profit of 245 billion yuan, representing a remarkable increase of 76.5 billion yuan compared to the previous year. This marked a year-on-year growth rate of 45%, far surpassing the average level of central enterprises.

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In line with the requirements set by SASAC, the pilot program for state-owned capital operating companies in 2017 aimed to make significant breakthroughs. In the next phase of the pilot work, our first priority is to refine and implement the assigned responsibilities. Secondly, we will enhance strategic planning to optimize the structure of state-owned capital distribution among central enterprises, thereby improving the efficiency of state-owned capital allocation. This will also involve guiding and promoting the capital operations of structural adjustment funds. The pilot companies are expected to serve as a guiding force for the transformation and upgrading of strategic emerging industries. They will act as comprehensive financial service providers and undertake major special tasks. Thirdly, we need to intensify our reform efforts and establish a professional platform for market-oriented operations. This will involve enhancing our de-administration measures, adhering strictly to market rules, and improving our market-oriented management mechanisms. Fourthly, we should focus on summarizing and refining our experiences, with the aim of quickly developing replicable and scalable approaches. It is essential to intensify our efforts in publicizing these experiences and proactively addressing social concerns. But not all state-owned enterprises have to be incorporated into investment and operating companies. The SASAC should adhere to the principle of “tailored policies for individual enterprises” and enhance capital-oriented management of state-owned assets. The objective is to enhance the clarity of the content, scope, and methods of authorization for state-owned capital operation companies. This includes expanding the range of authorized activities, intensifying the level of authorization, and adhering to the principle of matching responsibility with authority. Additionally, it emphasizes the importance of combining regulatory oversight with delegation of authority. The next step in the reform of state-owned enterprises is crucial, and it involves transforming the existing two-level state-owned asset management structure into a three-level structure. This new structure would consist of state-owned asset regulatory agencies, state-owned capital investment and operation companies, and operational state-owned enterprises. Gradually, there will be a separation between the government and enterprises, with a focus on property rights management as a means to emphasize the efficient operation of state-owned capital. This will ultimately lead to the transformation of the State-owned Assets Supervision and Administration Commission from a role of “managing enterprises” to “managing capital”.

5.2.2 Accelerate the Development of Mixed Ownership Economy According to the documents of the CPC Central Committee, the decision to develop the mixed-ownership economy was first made at the 15th National Congress of the Communist Party of China in 1997. The 15th Party Congress announced that the public ownership economy should encompass not only the state-owned and collective economies, but also the state-owned and collective components of the mixed

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ownership economy. This implies that the mixed ownership economy represents the practical implementation of the public ownership economy. The third plenary session of the 18th Central Committee of the Communist Party of China in 2013 made a decision to actively develop the mixed-ownership economy in its “Decision on Major Issues Concerning Comprehensively Deepening Reforms”. In 2015, the State Council issued the “Opinions on the Development of Mixed Ownership Economy in State-Owned Enterprises”, which made comprehensive arrangements for the mixed ownership system in state-owned enterprises. The main contents are as follows. 1. Promote the Mixed-ownership Reform of State-owned Enterprises on a Classified Basis. Steadily promote the mixed-ownership reform of commercial stateowned enterprises in fully competitive industries and fields. In order to meet the demands of marketization and internationalization, the primary objective is to boost the dynamism of the state-owned economy, expand the role of stateowned capital, and achieve the growth and value appreciation of state-owned assets. In order to optimize economic benefits and foster innovative business models, we actively employ various methods, such as comprehensive listing, to introduce other state-owned capital or different types of non-state-owned capital. This allows for equity diversification and enhances our overall performance. We are committed to enhancing the governance structure and management style of mixed ownership enterprises, with capital serving as the foundation. This means that both state-owned capital contributors and various non-state-owned capital contributors must fulfill their rights and responsibilities as shareholders. By doing so, we aim to transform mixed ownership enterprises into genuine market players. Effective exploration should be conducted on the mixed-ownership reform of state-owned enterprises in the business sector that are in important industries and key areas. For commercial state-owned enterprises that operate in industries critical to national security and the lifeline of the national economy, as well as those that undertake major special tasks, it is necessary to maintain the control position of the state-owned capital while supporting non-state capital participation. The reform for natural monopoly industries includes separating government from enterprises, separating government from capital, implementing franchising operation, and emphasizing government regulation as the main components. Based on the characteristics of different industries, the reform involves separating network operation from service provision and opening up competitive businesses to promote the marketization of public resource allocation. Simultaneously, it strengthens classified and lawful supervision, and standardizes profit-making models. Guide state-owned enterprises in the public welfare sector to carry out mixed ownership reform in a standardized manner. In industries and sectors that provide public products and services such as water, electricity, gas, heating, public transportation, and public facilities, strengthen classification guidance and promote diversification of investment entities for enterprises with the necessary conditions. Encourage non-state-owned enterprises to participate in operations through

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purchasing services, franchising, commissioning agents, and other methods. The government should strengthen supervision of price levels, cost control, service quality, safety standards, information disclosure, operational efficiency, and guarantee capacity. Based on the different characteristics of enterprises, their operating performance indicators and the preservation and appreciation of stateowned assets should be assessed differently, and social evaluation should be introduced in the assessment. Promote the Mixed Ownership Reform of State-Owned Enterprises at Various Levels. Facilitate the systematic advancement of mixed ownership reform at the subsidiary level. Additionally, delve into the implementation of mixed ownership reform at the group company level. Ensure adherence to state-owned capital control within specific sectors, as regulated by national laws, and establish a rational governance structure and market-oriented operating mechanism; In other areas, it is encouraged to gradually adjust the proportion of state-owned equity through overall listing, mergers and acquisitions, reorganization, and issuance of convertible bonds, among other methods. Additionally, various types of investors should be actively introduced to form an operating mechanism with a diversified equity structure, normative shareholder behavior, effective internal constraints, and efficient and flexible operations. Encourage various types of capital to participate in the mixed-ownership reform of state-owned enterprises. Encourage non-public capital to participate in the mixed-ownership reform of state-owned enterprises. Support collective capital to participate in the mixed-ownership reform of state-owned enterprises. Absorb foreign investment in the mixed-ownership reform of state-owned enterprises in an orderly manner. Promote government and social capital cooperation (PPP) model. Encourage state-owned capital to invest in non-state-owned enterprises in various ways. Explore and improve the preferred stock and national special management stock methods. Explore the implementation of employee stock ownership in mixed-ownership enterprises. Establish and Improve the Governance Mechanism of Mixed Ownership Enterprises. Further establish and implement the status of the market subjects of the enterprises. Improve the corporate governance structure of mixed-ownership enterprises. Implement the system of professional managers of mixed ownership enterprises. Establish Lawful and Compliant Operating Rules. Strictly regulate the operation process and approval procedures. Improve the pricing mechanism for state-owned assets. Effectively strengthen the supervision. The relevant government departments should strengthen the supervision of the mixed ownership reform of stateowned enterprises and improve the rules and regulatory system for state-owned property rights transactions. Create a Good Environment for the Reform of Mixed Ownership of State-owned Enterprises. Strengthen the protection of property rights. Improve multi-level capital market. Improve policies to support the reform of mixed ownership of state-owned enterprises. Accelerate the establishment of a sound system of laws and regulations.

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With the implementation and promotion of the aforementioned policy measures, enterprises with mixed ownership have experienced rapid development. Among them, state-controlled industrial enterprises play a crucial role in leading the stateowned economy and are the most significant driving force of the national economy as a whole. In 2013, there were 18,179 state-owned industrial enterprises, accounting for 4.9% of the total number of industrial enterprises. However, their assets amounted to 34,268.92 billion yuan, accounting for 39.4% of the total assets of industrial enterprises; their owner’s equity was 13,053.83 billion yuan, accounting for 38.4% of the total owner’s equity of industrial enterprises; their main business income was 25,824.26 billion yuan, accounting for 24.9% of the total main business income of industrial enterprises; and their profit was 6837.89 billion yuan, accounting for 22.2% of the total profit of industrial enterprises. The aforementioned statistics were only applicable to industrial enterprises. However, the development of a mixed-ownership economy was also rapidly progressing in all enterprises, including both industrial and commercial ones. As of the end of 2014, among the 371,700 state-owned investment enterprises, 200,300 were wholly state-owned enterprises, accounting for 53.89%, and 171,400 were mixed-ownership enterprises, accounting for 46.11%. Roughly speaking, one-third of mixed ownership enterprises were formed through the restructuring of state-owned assets, while two-thirds were newly established through joint investment of stateowned and non-state-owned capital. In terms of registered capital, state-owned investment enterprises accounted for 37.28% of all enterprises, while mixed ownership enterprises accounted for 50.15%. Therefore, in terms of both the number of enterprises and registered capital, mixed ownership enterprises have already accounted for about half of state-owned investment enterprises. Since the 12th Five-Year Plan period, the development of mixed-ownership enterprises has grown rapidly. From 2011 to 2014, the number of mixed-ownership enterprises increased from 118,800 to 171,400, with an average annual growth rate of 9.6%, which was 4.77% points higher than that of the 11th Five-Year Plan period. However, there were still several practical issues that needed to be addressed in the development of mixed ownership enterprises, particularly in sectors critical to the national economy and in enterprises owned by employees. In order to address these issues, the State Council’s SASAC and local SASACs continued to implement pilot projects in these areas. Specifically, between 2016 and 2017, the State Council’s SASAC has identified three phases of reform pilots in relation to this matter. Meanwhile, the mixed-ownership reform of local state-owned enterprises was also accelerating. According to statistics from the SASAC, as of the end of 2016, the percentage of central enterprise groups and their subordinate enterprises with mixed ownership (including equity participation) was 68.9%. Additionally, the proportion of assets, operating income, and total profit of listed companies within all central enterprises reached 61.3%, 62.8%, and 76.2% respectively. The proportion of enterprises funded by provincial SASACs and their subsidiaries at all levels, which adopted mixed ownership, reached 47%. This not only reflects a faster pace of implementation but

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also signifies an elevated level of reform in the area of mixed ownership. The proportion of mixed ownership enterprises in secondary enterprises of central enterprises reaches 22.5%. As of the end of March 2017, 126 first-tier enterprises supervised by provincial SASACs had completed mixed ownership reform at the group level.

5.2.3 Further Promote the Restructuring and Reorganization of State-Owned Enterprises Since the implementation of the reform, there have been significant improvements in the structure and layout of state-owned enterprises through various adjustments and reorganizations. Despite the improvements made, several issues pertaining to state-owned enterprises still remained unresolved. These issues included excessive industrial distribution, an excessive proportion of state-owned enterprises, diseconomies of scale, low industrial concentration, and a complex hierarchical structure. State-owned enterprises have maintained dominance not only in natural monopolies, infrastructure, and urban public utilities, but also expanded their presence across diverse industries in agriculture, manufacturing, and services. In terms of their core operations, over 70% of state-owned enterprises can be classified under competitive industries (commercial category), while less than 30% of state-owned enterprises are primarily involved in essential industries (public welfare category). State-owned enterprises have a significant presence across all sectors of the national economy, operating in enterprises of varying sizes, including large, medium, small, and micro enterprises. However, in 2015, large enterprises accounted for only 5.8% of stateowned enterprises, medium enterprises accounted for 18.1%, while small and micro enterprises accounted for a majority of 76%. In order to address this issue, the General Office of the State Council, with the approval of the State Council, issued the “Guidance on Promoting the Restructuring and Reorganization of Central Enterprises” on July 17, 2016. The main objectives of this guidance are as follows. 1. Basic Principles: (1) Uphold the strategy of serving the nation. (2) Respect the laws of the market. (3) Emphasize the integration of reforms. (4) Strictly adhere to laws and regulations. (5) Promote overall planning and coordinated advancement. 2. Main Objectives: By 2020, enhance the strategic positioning of central enterprises to be more accurate and effectively fulfill their functional roles; Improve the overall structure of central enterprises to be more rational and significantly enhance the efficiency of state-owned capital allocation; Significantly enhance the development quality of central enterprises and establish a group of world-class multinational companies with innovation capabilities and international competitiveness. Specific Goals: (1) Ensure the effective play of functional roles by central enterprises. (2) Facilitate the reasonable allocation of resources within central enterprises. (3) Achieve a significant improvement in the quality of development for central enterprises.

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3. Priority Work: (1) Consolidate and strengthen a group of enterprises, focusing on enhancing their safety and security functions. (2) Foster innovation and development within a group of enterprises. (3) Restructure and integrate a group of enterprises to improve their overall efficiency and effectiveness. ➀ Promote strong alliance among enterprises. ➁ Facilitate specialization integration. ➂ Accelerate internal resource integration within enterprises. ➃ Actively and steadily carry out mergers and acquisitions reorganization. (4) withdraw a group of enterprises. ➀ Vigorously address excess production capacity. ➁ Intensify efforts to eliminate long-term loss-making enterprises and low-efficiency assets. ➂ Make significant efforts to divest from non-core businesses that lack development advantages. ➃ Accelerate the divestment of corporate social functions and address legacy issues. 4. Guarantee Measures. Including: ➀ Enhance organizational leadership. ➁ Strengthen industry guidance. ➂ Increase policy support. ➃ Improve supporting measures. Although this document primarily focuses on the restructuring and reorganization of central enterprises, its fundamental principles are also applicable to the restructuring and reorganization of local state-owned enterprises. Since 2012, significant progress has been made in promoting mergers and acquisitions (M&A) and restructuring of central enterprises. As a result of these efforts, the number of central enterprises under the supervision of SASAC was reduced from 196 when it was established in 2003 to 117 in 2011, and further decreased to 98 in 2017. During this period, local SASACs also expedited the pace of restructuring stateowned enterprises. For instance, by the end of 2016, the Shanghai State-owned Assets System had established seven group-listed companies, representing approximately one-third of Shanghai’s state-owned industrial groups. Similarly, by the end of 2017, around 90% of Tianjin’s state-owned capital was concentrated in crucial industries and key areas, with state-owned capital being invested in approximately 40 industries. Additionally, around 600 inefficient enterprises were withdrawn from the market, and the number of state-owned groups was adjusted to approximately 35. The restructuring efforts began to yield positive economic outcomes. Notably, China COSCO Shipping bucked the trend as Baltic Dry Index hit record low, achieving total profits of 16.1 billion yuan in 2016, marking a significant year-onyear increase of 47.3%; Similarly, in the first four months of 2017, the company’s total profit reached 5.4 billion yuan, representing a year-on-year increase of 17.7%. At the same time, through internal integration, problems such as repeated investment, vicious competition, and power dispersion before the restructuring were effectively resolved, and synergistic effects continued to emerge. Baosteel and Wuhan Iron and Steel (Group) Company, prior to undergoing restructuring, faced significant losses amounting to tens of billions of yuan. However, following the restructuring process, they were able to turn things around and achieve a profit of 7 billion yuan. Furthermore, the process of integration during the restructuring period also facilitated the effective concentration of R&D resources, leading to a faster pace of technological innovation. The restructuring efforts also strengthened the scale and overall

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strength of enterprises. Capitalizing on the opportunity of restructuring, many central enterprises expedited the implementation of industrial restructuring, reinforcing and optimizing their core business operations.

5.2.4 Improve the Corporate Governance Structure of State-Owned Enterprises Following the reform, many state-owned enterprises successfully adopted a modern enterprise system. However, it was evident that the modern enterprise system was not yet fully perfected during that time. Some enterprises still struggled to establish an effective corporate governance structure, leading to issues such as unclear rights and responsibilities, inadequate constraints, and a lack of checks and balances. These problems remained prominent within the state-owned enterprise sector. Some boards of directors existed in name only and failed to fulfill their expected roles. In order to improve the corporate governance structure of state-owned enterprises and improve the modern enterprise system of state-owned enterprises, the General Office of the State Council, with the consent of the State Council, introduced the “Guidance on Further Improving the Corporate Governance Structure of State-owned Enterprises” on April 24, 2017. Its main contents are as follows. 1. Basic Principles. (1) Adhere to deepening the reform. (2) Adhere to the leadership of the CPC. (3) Adhere to the rule of law. In accordance with the Company Law, the Enterprise State-owned Assets Law, and other relevant laws and regulations, the articles of incorporation serve as the guiding principles for regulating the allocation of powers and responsibilities, as well as the exercise of such powers. It is important to ensure that no government department or institution interferes with the regular production and operational activities of the enterprise without proper authorization. This approach aims to achieve a harmonious integration of deepening reform and lawful governance of the enterprise. (4) Insist on the reciprocity of power and responsibilities. 2. Main Objectives. By the end of 2017, the reform of the corporate system of state-owned enterprises was expected to be substantially completed. By 2020, it is aimed to further solidify the legal status of the CPC organization within the corporate governance structure of state-owned enterprises and fully leverage the essential role of the articles of association in corporate governance. In solely stateowned and wholly state-owned companies, it is essential to establish a board of directors comprising a majority of outside directors. State-owned holding companies should adopt a system of dispatching external directors, while completing the reform of the expatriate supervisory board. To fully leverage the role of entrepreneurs, it is crucial to cultivate a considerable number of politically steadfast individuals who possess strong management skills and are proactive in their approach. This includes nurturing a team of chairmen and professional managers who are both morally upright and talented, proficient in business operations, and

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willing to take on responsibilities. Efforts to establish subject responsibility and supervisory responsibility for fostering a clean and honest political environment within the Party should be fully implemented. Additionally, there should be a significant improvement in democratic supervision and management within enterprises. State-owned enterprises should adhere to the laws of the market economy and align their development strategies accordingly. They should strive to become market-oriented entities that operate independently, assuming their own profits and losses, taking risks with self-regulation, and driving their own growth. 3. Regulate the Rights and Responsibilities of the Subjects. (1) Rationalize the responsibilities of capitalists and transform regulatory methods. ➀ The board of shareholders is the organ of power of the company. ➁ In a wholly state-owned company, there shall not be a board of shareholders. Instead, the investor institution shall assume the functions and powers of the board of shareholders in accordance with the law. ➂ Shareholders’ rights and obligations shall be exercised and fulfilled by the investor institution in accordance with laws, regulations and the company’s articles of association. Relevant regulatory content shall be incorporated into the company’s articles of association in accordance with the law. (2) Strengthen the construction of the board of directors and implement the powers and functions of the board of directors. ➀ The board of directors serves as the primary decision-making body of the company. ➁ Optimize the composition of the Board of Directors. ➂ Standardize the rules of procedure of the Board of Directors. ➃ Strengthen the construction of the board of directors. (3) Maintain managerial autonomy and foster the vitality of management. ➀ The management team is the executive body of the company, appointed or dismissed by the board of directors in accordance with the law, and subject to the management and supervision of the board of directors and the supervisory board. The general manager is accountable to the board of directors and is responsible for overseeing production and operations. They are entrusted with the authority to implement the board’s resolutions, report to the board, and report to the chairman of the board in the absence of board meetings. ➁ Implement a standardized management authorization system for the management team, ensuring that it aligns with the selection process and is suitable for the company’s nature. Additionally, establish a differentiated compensation distribution system for management team members that is linked to business performance. Furthermore, gradually introduce a term system and contractual management for the management team of state-owned sole proprietorship companies in order to optimize their performance. (4) Strengthen supervision and improve accountability mechanisms. ➀ The supervisory board is the supervisory body of the company, established in accordance with relevant laws, regulations, and the company’s articles of association, to supervise the duties and actions of the board of directors and management members. ➁ Enhance the democratic management system of the enterprise by employing the congress of workers and staff as the fundamental form. ➂ Strengthen the sense of responsibility, clarify the boundary of power and responsibility, and establish a system of accountability that is commensurate with the

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performance of duties by the subject of governance. (5) Adhere to the leadership of the CPC and give full play to political advantages. ➀ Adhering to the leadership of the Communist Party and strengthening the Party’s construction is a unique advantage of state-owned enterprises. ➁ Fully utilize the supervisory functions of disciplinary inspections, inspection tours, and audits. Party members serving as directors, supervisors, and managers in state-owned enterprises should regularly report their individual performance, integrity, and self-discipline to the party group (committee) on an annual basis. The party organization at the higher level implements a system of appointment and regular rotation for the head of the discipline inspection group (secretary of the commission for discipline inspection) in state-owned enterprises, and the head of the discipline inspection group (secretary of the commission for discipline inspection) should adhere to principles and strengthen supervision. The head of the discipline inspection team (secretary of the discipline inspection committee) may attend the meetings of the board of directors and special committees of the board of directors. ➂ Engage in active exploration and find ways to effectively integrate the principle of Party leadership over cadres with the selection and recruitment of management personnel by the Board of Directors. 4. Ensure good organization and implementation, including: ➀ Timely summarizing experiences and implementing them in a hierarchical and systematic manner. ➁ Carefully standardizing operations and ensuring seamless connections. Since the reform, the corporatization reform of state-owned enterprises (including corporate governance structure) has been greatly developed. In 2016, there was a comprehensive acceleration of the reform of the company and shareholding system. By the end of the year, over 92% of subsidiary companies of central enterprises had undergone the company system reform, and the proportion of mixed ownership enterprises had reached 68%; the proportion of restructured enterprises under the supervision of provincial SASAC exceeded 90%. Simultaneously, there was an acceleration in the construction of the board of directors. Most central enterprises established a standardized board of directors with a majority of external directors. The board of directors gradually implemented its powers to select and employ personnel, make major decisions, and distribute remuneration. As of May 2017, 83 out of 101 central enterprises had established a standardized board of directors, accounting for more than 80% of the total. The talent pool of central enterprises had 417 external directors, and the number of full-time external directors had increased to 33. Of the first-tier enterprises under the supervision of the SASACs of provinces (autonomous regions and municipalities) 88% have established boards of directors, 13.1% of which have a majority of outside directors. The market-oriented personnel selection and employment of central enterprises has intensified. According to the questionnaire, by the end of 2016, approximately 5.1% of the managerial level members in central enterprise groups and their subsidiary enterprises were selected and managed on a market basis by the board of directors. Among these, about 7.4% of the managerial level members in the second-tier enterprises of central enterprises were selected and

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managed by the board of directors. Among the enterprises and affiliated enterprises invested by provincial SASACs, approximately 14% of the managers are recruited and managed through market-based processes. However, the task of completing the corporate reform of central enterprises remained challenging and pressing. In 2017, out of 101 central enterprises, 69 group companies were still publicly owned. Additionally, out of nearly 50,000 subsidiaries of central enterprises at various levels, approximately 3200 were still publicly owned. Additionally, comprehensive reforms were carried out to further deepen the restructuring of state-owned monopolies during this period.

5.3 Promote the Reform of the Rural Economic System Featuring the “Separation of Three Rights”1 The first significant progress in rural economic reform in the late 1970s was the reform of the rural collective land system, commonly known as the “separation of two rights”. Prior to this reform, the ownership and operational rights of land, which was the fundamental means of production in agriculture, were consolidated under a collective ownership system, belonging to the collective as a whole. History has unequivocally demonstrated that the land system, which fused ownership and operational rights, had a significant historical role. However, as the productive forces of society evolved, it gradually posed a substantial hindrance to the advancement of agricultural production and no longer aligned with the demands of a socialist market economy. To meet the demands of advancing social productive forces, China initiated the implementation of the “separation of two rights” reform, whereby the collective retained ownership of the land while the farmers were granted the land contract and operational rights. This reform of the rural collective land system, characterized by the “separation of two rights,” was well-suited to the evolving productive forces of the time. It proved to be an effective means of realizing the socialist collective ownership system and meeting the requirements of a socialist market economy. However, as industrialization, agricultural modernization, and urbanization progressed, the land system became increasingly incompatible with the demands of advancing social productive forces. This was particularly evident in its inability to meet the requirements of moderate-scale land operations. According to estimates, the optimal scale for moderate-scale agricultural operations can be as much as 10–15 times larger than the local average scale. In China, the average land size of households with land contracts is 7.5 mu. Based on the calculation of 10–15 times, the suitable scale for moderate-scale operations would be 75–100 mu. This scale should be adjusted according to local economic and social development conditions, the level of labor transfer, and the advancements in agricultural science 1

The “separation of three rights” means that the ownership of land remains the collective ownership, but the farmers’ contracting rights are divided into contracting rights and operation rights. While the contracting rights remain unchanged, the operation rights can be transferred.

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and technology. For instance, in the southern region where two harvests can occur per year, a household that can manage 100 acres would be suitable. However, in the northern region where only one harvest per year is possible, a household would need to manage approximately 200 acres to maintain a similar level of productivity. In terms of grain production, after accounting for all expenses, the annual income from cultivating 100 mu in the southern region can range from 80,000 to 100,000 yuan. If everything goes well, the income can even reach 150,000–200,000 yuan. Interestingly, in the northern region, the annual income from cultivating 200 mu is also at a similar level, not significantly different from the southern region. If a household consists of four members with two or three laborers, and each laborer earns an average annual income of 30,000–50,000 yuan, which is slightly higher than the income of local non-agricultural industry workers, then it can be considered as meeting the requirements of moderation. Obviously, the moderate scale of agriculture is not only an inevitable choice for developing agricultural production, increasing farmers’ income and realizing agricultural modernization, but also an objective requirement for promoting urbanization and industrialization. In order to achieve the moderate scale of land operation, it is essential to separate the operational rights from the contracting rights. This separation will create the necessary conditions for land transfer and facilitate the implementation of moderate-scale land operations. The reform known as the “separation of three rights”, which involves separating the ownership, contracting, and operational rights of collective land, has become an essential requirement for achieving agricultural modernization, urbanization, and industrialization. This rural land system, characterized by the “separation of three rights”, has proven to be an effective model for the development of the rural collective economy in line with the demands of the socialist market economy. Against this backdrop, the Third Plenary Session of the 18th CPC Central Committee in 2013 put forward: “Stabilize the relationship of contracted rural land operation and maintain its long-term stability. While adhering to and improving the strictest land protection system, grant farmers the rights to possess, use, transfer, mortgage, and guarantee the contracted land and operation rights, and allow farmers to participate in agricultural development by investing their contracted operation rights. Encourage the transfer of contracted operation rights in the open market to large professional households, family farms, agricultural cooperatives, and agricultural enterprises, and develop various forms of scale operations.” In 2015, the Fifth Plenary Session of the 18th CPC Central Committee further emphasized the need to “stabilize rural land contract relationships, enhance the separation of land ownership, contracting rights, and operation rights, and facilitate the lawful and orderly transfer of land operation rights. Establish a policy system to foster the development of new agricultural operation entities.” Accordingly, and based on the summary of the experience of implementing the “separation of three rights”, the General Office of the CPC Central Committee and the General Office of the State Council issued “The Opinions on Improving the Separation of Ownership, Contracting and Operation Rights of Rural Land in 2016”. The main contents are as follows.

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1. The Importance of the “Separation of Three Rights” is Explained. During the initial stages of reform and opening up, the implementation of the household contract responsibility system in rural areas played a crucial role. This system effectively separated land ownership from contract operation rights, with collective ownership and operation rights being retained by the farmers. It successfully mobilized the enthusiasm of millions of farmers, effectively addressing the issues of food and clothing, and yielding significant outcomes in rural reform. The ongoing deepening of rural land system reform aligns with the desires of farmers to retain land contract rights while transferring land operation rights. This reform involves dividing land contract operation rights into contract rights and operation rights, implementing the separation of ownership, contract rights, and operation rights, commonly referred to as the “three rights.” This reform is a significant institutional innovation in rural reform, following the household contract responsibility system. The primary objective of this reform is to promote agricultural modernization and address the evolving needs of the agricultural sector. The “separation of three rights” is self-improvement of the basic rural operation system, which aligns with the objective law of adapting production relations to the development of productive forces and demonstrates the lasting vitality of the basic rural operation system, and is conducive to clarifying land property relations and better safeguarding the rights and interests of farmer collectives, contracted farmer households and operation entities; It is conducive to promoting the rational utilization of land resources, building a new agricultural management system, developing various forms of moderate-scale operations, improving land output rate, labor productivity, and resource utilization rate, and promoting the development of modern agriculture. It is crucial for all relevant departments in all regions to have a comprehensive understanding of the significance of the “separation of three rights”. They should effectively manage the interrelationship between the “three rights” and accurately apply the theory of “separation of three rights” to guide reform practices. Furthermore, continuous exploration and enrichment of the specific forms of implementing the “separation of three rights” should be pursued. This will ensure the successful implementation of the reform and lead to further improvements in the rural operation system. 2. The General Requirements for the Implementation of the “Separation of Three Rights” are Put Forward. ➀ In terms of guiding ideology, it is crucial to conscientiously implement the decisions and deployments of the CPC Central Committee and the State Council. The main focus should be on correctly managing the relationship between farmers and land. This involves scientifically defining the meaning of the “three rights”, establishing clear boundaries and mutual relations between these rights, and gradually establishing a standardized and efficient “three rights” operation mechanism. Furthermore, efforts should be made to continuously improve the property rights system in rural areas. This system should have clear attribution, complete rights, smooth flow, and strict protection. This will optimize the allocation of land resources, promote the cultivation of new types of operation entities, and facilitate the development of moderatescale operations. The overall aim is to consolidate and improve the basic rural

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operation system, which will provide a solid guarantee for the development of modern agriculture, the increase of farmers’ income, and the construction of a new socialist countryside. ➁ In terms of basic principles, the will of farmers must be respected. It is necessary to uphold the main position of farmers, safeguard the legitimate rights and interests of farmers, give the options to farmers, give full play to their initiative and creativity, strengthen demonstration and guidance, and not to engage in forced orders, or one-size-fits-all management. The policy bottom line must be kept. We must uphold and improve the basic rural operation system, maintain collective ownership of rural land, maintain the basic role of household management, and stabilize the land contract relationship. We must not undermine the collective ownership of rural land, reduce farm land, weaken grain production capacity, or harm the interests of farmers. We must insist on gradual progress and be fully aware of the long-term and complex nature of the rural land system reform, maintain sufficient historical patience, prudently advance the reform, carry it out from limited area and then promote to larger areas without hastiness, and gradually upgrade our practical experience into institutional arrangements. We must adapt ourselves to local conditions and give full consideration to differences in resource endowments and economic and social development among different regions, encourage practical exploration and institutional innovation in line with reality, and sum up specific approaches and methods for the “separation of three rights” that suit different regions. 3. The Gradual Formation of a Pattern of “Separation of Three Rights” is Required. ➀ Always adhere to the fundamental position of collective ownership of rural land. The collective ownership of rural land by farmers is the foundation of the basic rural operation system and must be fully embodied and protected, and cannot be neglected. People with collective ownership of land enjoy the right to possess, use, gain from and dispose of collective land in accordance with the law. Farmers’ collectives are the subjects of collective ownership of land. In the process of improving the “separation of three rights”, it is necessary to fully safeguard the powers and functions of farmers’ collectives to contract, adjust, supervise, and take back contracted land, and give full play to the advantages and functions of collective land ownership. farmer collectives have the right to contract out collective land in accordance with the law, and no organization or individual may illegally interfere; they have the right to adjust the contracted land in accordance with the law in special circumstances such as severe damage caused by natural disasters; farmer collectives have the right to monitor the operation of contracted land by contracted farmers and business entities, and take measures to prevent and correct long-term abandonment, destruction of land, illegal changes in land use and other acts. When transferring the land contract rights of contracted farmers, it should be done within the collective economic organization and with the consent of the collective farmers; for the transfer of land operation rights, it is necessary to file a written record with the collective of farmers. If the collective land is expropriated, the farmers have the right to express their opinions on the compensation and resettlement plan for land expropriation and receive compensation in accordance with the law. Through the establishment

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of a sound mechanism for democratic deliberation of collective economic organizations, the right to information, decision-making and supervision of collective members are effectively safeguarded to ensure the effective exercise of collective land ownership by farmers’ collectives and to prevent any abuse of power or favoritism, ensuring that leaders act in the best interests of the collective.➁ Strictly protect the contracting rights of farmers. The land contract right enjoyed by farmers serves as the foundation of the basic rural operating system, and it is crucial to stabilize and maintain the existing land contract relationships for the long term. The land contract holder shall have the right to possess, use and benefit from the contracted land according to law. Rural collective land is contracted by farmer households who are members of the collective economic organization, and the right to contract collective land belongs to farmer households regardless of how the operation rights are transferred. No organization or individual can replace the land contract status of farmer households, and it is illegal to deprive or restrict the land contract rights of farmer households. In the process of improving the “separation of three rights” approach, the rights of contracted farmers to use, transfer, mortgage and withdraw from the contracted land must be fully protected. Contracted farmer households have the right to occupy and use the contracted land, build the necessary agricultural production facilities and ancillary and supporting facilities in accordance with the law and regulations, organize production and operation, dispose of products and obtain income therefor. Contracted farmer households have the right to transfer the contracted land and obtain income through transfer, exchange, lease (subcontracting), shareholding or other means, and no organization or individual may force or restrict the transfer of land. Contracted farmer households have the right to set up mortgages on the contracted land operation rights in accordance with the law and regulations, and the right to withdraw from the contracted land voluntarily with compensation. Those who meet the requirements are eligible to receive subsidies for the protection of contracted land. If contracted land is requisitioned, the contracted households have the right to receive corresponding compensation in accordance with the law. Those who meet the criteria also have the right to receive social security benefits and other entitlements. It is illegal to arbitrarily adjust the contracted land of farmers, and it is not permissible to make the relinquishment of land contracting rights a condition for farmers to settle in urban areas. ➂ Accelerating the liberalization of land operation rights is crucial for improving the basic rural operating system by granting more secure land operation rights to operating entities. Land operation rights holders have the right to possess, cultivate and obtain corresponding income from the transferred land within a certain period of time in accordance with the law. Under the premise of legally protecting the collective ownership and contractual rights of farmers, the acquired land operation rights of operating entities, as stipulated in the transfer contract, shall be safeguarded, and their expectations of stable operation shall be guaranteed. In the process of improving the “separation of three rights”, the rights required for the operation subjects to engage in agricultural production should be safeguarded in accordance with the law, so that land resources can be utilized

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more effectively and reasonably. The operating entity has the right to utilize the transferred land to independently engage in agricultural production and operation and obtain the corresponding income. With the consent of the contracted farmers, the operating entity can, in accordance with the law, improve the soil to enhance productivity, construct agricultural production, ancillary, and supporting facilities, and obtain reasonable compensation as stipulated in the transfer contract. The operating entity have the priority right to renew the land contract on equal terms at the expiration of the transfer contract. The re-transfer of land operation rights by the operating entity or the establishment of mortgages, in accordance with laws and regulations, must be agreed upon in writing by the contracted farmers or their authorized agents, and documented in writing with the collective of farmers. If the transferred land is subject to expropriation, the compensation fees for ground attachments and young crops shall be determined according to the terms agreed upon in the transfer contract. The transfer of land operation rights by the contracted farmers should not impede the operating entities from exercising their legal rights. Enhance the protection of land operation rights and facilitate the transfer of such rights to farming experts and new operation entities. Provide support to new operation entities in enhancing land productivity, improving agricultural production conditions, and facilitating legal mortgage financing for land operation rights. Encourage the adoption of diverse operation methods, such as land share cooperation, land trust, and contract farming, and explore more efficient ways to release land operation rights. ➃ Gradually improve the “three rights” relationship. Collective ownership of rural land is a prerequisite for the right to contract land, and farmers’ right to contract operation is a specific form of collective ownership. In land transfer, farmers’ contracted operation rights give rise to land operation rights. In practice, we support the active exploration of specific ways for farmers’ collectives to exercise collective ownership rights in accordance with the law and to supervise contracted farmers and operation entities in the proper utilization of land. Promote comprehensive theoretical research on topics concerning the boundaries of rights and the mutual rights relations between farmers’ collectives and contracted farmers on contracted land, as well as between contracted farmers and operating entities in land transfer. Through practical exploration and theoretical innovation, gradually improve the “three rights” relationships and provide strong support for the implementation of the “separation of the three rights”. 4. Ensure the Orderly Implementation of “Separation of Three Rights”. ➀ Accomplish the registration and certification of rural land rights with utmost accuracy. Only by identifying the rights holders of the “three rights”, clarifying ownership rights, and stabilizing land contract relationships can the establishment and effective implementation of the “separation of three rights” be ensured. It is necessary to uphold and improve the land use control system. Building upon the initial completion of confirming, registering, and certifying collective land ownership, it is necessary to further enhance relevant policies, ensuring the timely provision of confirmation and registration outcomes. This will effectively safeguard the rights and interests of farmers’ collective land, promoting their protection

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and security. Expedite the process of confirming, registering, and certifying rural contracted land by establishing an efficient online contract signing management system. Enhancements should be made to the system for confirming and registering rights acquired under contracts, as well as for recording and certifying these rights. This will streamline the overall process and ensure accuracy and effectiveness in managing rural contracted land. It is recommended to verify and validate the right of land operation through contract verification and transaction verification methods. This approach will facilitate the proper functioning and realization of land operation rights. ➁ Establish and improve a standard management system for land transfer. Standardize the transfer and trading of land operation rights, strengthen the construction of rural property rights trading markets in light of local conditions, and gradually achieve the coverage of all agriculture-related counties (cities, districts, and banners). Improve the operation standards of the market, enhance the service level, and provide information release, property rights transaction, legal consultation, equity evaluation, mortgage financing and other services for both parties involved in the transfer. Strengthen the management of transfer contract and guide both parties to use the model contract text. Improve the supervision and risk-prevention mechanisms for industrial and commercial capital leasing of agricultural land, tighten the threshold for access, and ensure the compliant and orderly transfer of land operation rights, so as to better adapt to the urbanization process, the scale of rural labor transfer, the progress of agricultural science and technology, the improvement of means of production, and the level of socialized agricultural services. Strengthen the construction of the mediation and arbitration system for rural land contracting disputes, improve the grassroots rural land contracting mediation mechanism, properly resolve land contracting operation disputes, and effectively safeguard the legitimate rights and interests of each subject of right. ➂ Establish a policy support system for new operation entities. Improve policies on finance, credit insurance, land use, and project support for new operation entities. Actively establish demonstration household farms, demonstration cooperatives of specialized farmers, demonstration bases for agricultural industrialization and agricultural service organizations, and speed up the cultivation of new types of operation entities. Guide new operation entities to establish close interest linkage mechanisms with contracted farmers, and help ordinary farmers to share the benefits of scale operation of agriculture. Support the integration of different types of agricultural entities, encourage collaboration and cooperation among family farms, farmer professional cooperatives, and leading agricultural industrialization enterprises, and legally establish industry organizations or alliances. Rely on the modern agricultural talent support program and improve the cultivation system of new professional farmers. ➃ Enhance the legal framework for the “separation of three rights”. Proactively implement pilot projects involving compensation for land contracting rights withdrawal, mortgage loans for land operation rights, and sharing of land operation rights in agricultural industrialization operations, among others. Summarize and share successful practices and experiences that can be replicated and promoted, and further refine the legal system based on

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these efforts. Accelerate the revision and improvement of rural land contract law and other related laws. Conscientiously study legal issues related to the development of rural collective economic organizations and household farms. Study and improve specific methods for the transfer of rural land operation rights, mortgage loans and withdrawal of rural land contracting rights. With the promotion of the above-mentioned policy measures, land transfer in China’s rural areas has developed greatly. According to data, as of the end of 2016, out of the 203 million farmer households holding contracted land across the country, nearly 70 million households had partially or fully transferred their contracted operation rights. The total area of land transferred in rural areas exceeded 470 million mu, which accounted for over 35% of the total contracted land. This has significantly facilitated the growth of various new market entities in rural areas. According to reports, as of the end of 2016, there were 877,000 household farms, 1.79 million cooperatives, and 360,000 industrialized enterprises, including 120,000 leading enterprises. Nevertheless, achieving an appropriate scale of land operation remains a long-term challenge. In 2017, approximately 40% of China’s rural arable land was managed by 2.8 million new types of operation entities, while the remaining 60% of arable land was still cultivated by farmer households at a relatively small scale.

5.4 Accelerate the Development of Non-public Economy The 18th National Congress of the Communist Party of China emphasized the importance of promoting and supporting the development of the non-public sector of the economy. It emphasized the need for all types of economies to have equal access to production factors, fair participation in market competition, and equal protection under the law. The Third Plenary Session of the 18th CPC Central Committee went a step further and emphasized that the economic system, which consists of public ownership as the mainstay and multiple ownership systems developing together, is a crucial pillar of the socialist system with Chinese characteristics and the foundation of the socialist market economy. It recognized that both the public sector economy and the non-public sector economy are integral components of the socialist market and essential foundations for China’s economic and social development. This elevated the status of the non-public economy to a new level. Under the guidance of such policy, the reform of the commercial system was promoted. For example, in 2014, the “Measures for the Registration and Administration of Individual Proprietorship Enterprises” and the “Measures for the Registration and Administration of Individual Industrial and Commercial Households” were revised, and the annual inspection system was changed to an annual report disclosure system. In 2015, the reform of the commercial system was carried out in depth, mainly completing the reform of “three certificates in one, one code for one license”, and accelerated the reform of “license first and certificate later”. From 2016 to 2017, the reform of the commercial system was further promoted, the integration

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of multiple certificates was promoted, and the pilot project of “separation of certificates and licenses” was expanded. As a result, the non-public economy has been able to flourish and experience rapid development due to the more favorable policy and legal environment it now enjoys. However, the accelerated growth of the non-public economy during this period was also attributed to the rapid advancement of small and micro enterprises and the widespread promotion of mass entrepreneurship and innovation. According to the classification criteria set by the National Bureau of Statistics in 2011, in the industrial sector, large-scale enterprises are defined as having an employment size equal to or greater than 1000 people and an annual revenue of 0.4 billion yuan or more. Medium-sized enterprises are defined as having an employment size equal to or greater than 300 people and less than 1000 people, with an annual revenue equal to or greater than 20 million yuan and less than 0.4 billion yuan. Small-sized enterprises are defined as having an employment size equal to or greater than 20 people and less than 300 people, with an annual revenue equal to or greater than 3 million yuan and less than 20 million yuan. Micro enterprises are defined as having an employment size of less than 20 people and an annual revenue of less than 3 million yuan. According to this standard, the number of large, medium and small enterprises in China in 2014 was 9893, 55,408, and 312,578, respectively, accounting for 2.62%, 14.66%, and 82.72% of the total number of enterprises; the main business income of the three was 43,674.6 billion yuan, 26,828.1 billion yuan and 40,200.5 billion yuan, respectively, accounting for 39.45%, 24.23% and 36.31% of the total main business revenue respectively. Practice has demonstrated that small and micro enterprises play an irreplaceable and crucial role in stabilizing economic growth, driving innovation, facilitating business model transformation, adjusting economic structure, generating employment opportunities, improving people’s livelihoods, and ensuring social stability. In order to support the healthy development of small and micro enterprises, the State Council released the “Opinions on Supporting the Healthy Development of Small and Micro Enterprises” on October 31, 2014. This includes the following measures: ➀ Enhance the effectiveness of existing special funds for small and medium-sized enterprises and encourage local small and medium-sized enterprise support funds to extend their support to small and micro enterprises. ➁ Implement tax preferential policies that have been introduced to support small and micro enterprises, and conduct further studies to introduce additional supportive policies based on the development situation. According to relevant regulations, small and micro enterprises that engage in investment projects encouraged by the state and import advanced equipment for self-use, which are not domestically producible, are eligible for exemption from import duties. ➂ Increase the support for the construction of small business start-up bases (micro-enterprise incubation parks, technology incubators, commercial enterprise agglomeration areas, etc.) through special funds for small and medium-sized enterprises. Encourage large and medium-sized enterprises to drive the development of small and micro enterprises in the industrial chain, and achieve industrial agglomeration and clustering development. ➃ For small and micro enterprises

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that employ people with employment difficulties, social insurance subsidies shall be given in accordance with regulations. ➄ Encourage governments at all levels to set up venture capital guidance funds to actively support small and micro enterprises. Actively guide venture capital guidance funds, angel funds, seed funds to invest in small and micro enterprises. Eligible small and micro enterprises can enjoy the support policy of small guaranteed loans according to regulations. ➅ Further improve the financing guarantee policy for small and micro enterprises. Vigorously develop guarantee institutions supported by the government, guide them to increase the scale of guarantee business for small and micro enterprises, and reasonably determine guarantee fees. Increase financial support for small and micro enterprise financing guarantees, comprehensively use business subsidies, incremental business rewards, capital investment, compensation, and innovation rewards to guide guarantee and financial institutions and foreign trade comprehensive service enterprises to provide financing services for small and micro enterprises. ➆ Encourage large banks to fully utilize their institutional and branch advantages, and increase efforts to establish specialized institutions for small and micro enterprise financial services. Guide small and medium-sized banks to combine the improvement of small and micro enterprise financial services with strategic transformation, scientifically adjust credit structure, and focus on supporting the development of small and micro enterprises and regional economy. Guide banking financial institutions to innovate products and services based on the operating characteristics and financing needs of small and micro enterprises. Under the premise of business sustainability and effective risk control, all banking financial institutions shall separately formulate credit plans for small and micro enterprises. Under the premise of strengthening supervision, vigorously promote the establishment of small and medium-sized banks and other financial institutions by qualified private capital in accordance with the law. ➇ For college graduates who work in small and micro enterprises, their files can be kept free of charge by the public employment service agencies at the local city and county levels. ➈ Establish an information interconnection mechanism to support the development of small and micro enterprises. Relying on the enterprise credit information publicity system of the administrative department for industry and commerce, establish a directory of small and micro enterprises on the basis of voluntary declarations by enterprises, and centrally disclose information about various support policies and enterprises enjoying support policies. Through a unified credit information platform, information such as industrial and commercial registration, administrative licensing, tax payment, and social security payment will be collected to promote the sharing of credit information for small and micro enterprises and promote the construction of a credit system for small and micro enterprises. Through information disclosure and sharing, use modern information technologies such as big data and cloud computing to promote government departments and professional institutions such as banks, securities, and insurance to provide more effective services. Select a certain proportion of sample enterprises from small and micro enterprises, conduct follow-up investigations, and strengthen monitoring and analysis. ➉ Vigorously promote the construction of public service platforms for small and micro enterprises, increase government procurement

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of services, and provide free management guidance, skills training, market development, standard consultation, inspection, testing and certification services for small and micro enterprises. Under the guidance and promotion of the aforementioned policy measures, the development of small and micro enterprises in China has been flourishing. In 2015, the total number of newly registered market entities nationwide reached 14.798 million, significantly surpassing the 4.108 million new market entities added from 2012 to 2014. It is worth noting that all of the newly added market entities in 2015 were classified as small and micro enterprises. The rapid development of small and micro enterprises, mainly in the non-public sector, has contributed to the accelerated development of the non-public sector economy. From 2011 to 2015, the number of individual businesses increased from 37.5647 million to 54.6792 million, the number of people engaged in individual businesses increased from 79.4528 million to 116.8220 million, and the capital increased from 1617.757 billion yuan to 3699.654 billion yuan. During this period, private enterprises also continued to develop rapidly. For one thing, from 2011 to 2015, the number of private enterprises increased from 9.6768 million to 19.0823 million, the registered capital increased from 25.79 trillion yuan to 90.55 trillion yuan, and the number of employees increased from 104 to 164 million. Among them, the number of investors is 35.6059 million, and the number of employees is 128 million. Second, since 2010, the number of private enterprises and the proportion of capital in overall enterprises has been rising. By the end of 2015, the number of private enterprises accounted for 87.31% of the total number of enterprises, and the proportion of total capital was 47.91%. Third, in terms of capital size per household, the average capital of private enterprises increased from 2.2714 million yuan at the end of 2010 to 4.7455 million yuan in 2015. Fourth, in 2015, there 4.2117 million new private enterprises registered nationwide, a year-onyear increase of 22.03%; the total registered capital of new private enterprises was 22.75 trillion yuan, a year-on-year increase of 55.44%. In 2015, the number of newly registered private enterprises and the year-on-year growth rate of total capital both hit record highs. Since 2016, the trend of rapid development of small and micro enterprises, mainly driven by the non-public economy, has continued to prevail. At the end of 2016, there were 87.054 million market entities of all kinds, with 16.513 million new market entities established throughout the year, an increase of 11.6% over the previous year, with an average of 45,100 new enterprises registered every day. The vitality of small and micro businesses has shown a continuous increase. Among newly established small and micro businesses, first-time ventures accounted for 85.8% of the total. The annual opening rate of new small and micro businesses reached 70.8%, and nearly 80% of the enterprises in operation achieved operating income, thus promoted the accelerated development of the non-public economy. In 2016, the number of employees in the individual and private economy grew to 310 million, an increase of 27.811 million over 2015.

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5.5 Continue to Improve the Modern Market System Along with the accelerated pace of China’s overall economic system reform and the continued healthy development of socialist modernization during this period, the modern market system has also further tended to improve. From 2011 to 2016, the retail sales of social consumer goods increased from 18.4 trillion yuan to 33.2 trillion yuan, and the total sales of social production materials increased from 45.6 trillion yuan to 57 trillion yuan. The integration of commerce and information technology deepened, and in 2016, online retail sales reached 4.2 trillion yuan, an increase of 25.6% from the previous year, accounting for 12.6% of retail sales of social goods. At the same time, the market-oriented price reform deepened (see Sect. 5.5 for details). During this period, the number of employed individuals in China rose from 764.2 million to 776.03 million. Despite the slowdown in economic growth, there was still an increase of 11.83 million in the total number of employed persons. Notably, the majority of new jobs were created by the non-public economy, which exhibits a higher level of labor marketization. This indicates an improvement in the degree of labor marketization in China. In the RMB credit market of financial institutions, from 2011 to 2016, the balance of deposits increased from 80,930.8 billion yuan to 155,542.7 billion yuan, and various loans increased from 54,794.7 billion yuan to 112,055.2 billion yuan. Between 2011 and 2015, the securities market in China witnessed positive growth. The number of listed companies increased from 2342 to 2827, and the stock financing amount rose from 413.438 billion yuan to 1097.485 billion yuan. Additionally, the issuance of treasury bonds increased from 1710 billion yuan to 5490.8 billion yuan, while corporate bonds issuance rose from 2185.071 billion yuan to 6770.424 billion yuan; the securities investment funds increased from 2651.037 billion yuan to 7667.413 billion yuan; the total futures turnover increased from 137,516.244 billion yuan to 554,234.694 billion yuan. In the insurance market, from 2011 to 2015, the total assets of insurance companies increased from 5982.894 billion yuan to 12,359.776 billion yuan, and insurance premium income increased from 1433.93 billion yuan to 2428.25 billion yuan. In 2016, listed companies raised 2334.2 billion yuan in the domestic market, an increase of 508.8 billion yuan from the previous year. The National Equities Exchange and Quotations (NEEQ) added 5034 new listed companies and raised 139.1 billion yuan, an increase of 1.44 billion yuan; enterprises issued 8.22 trillion yuan of bonds, an increase of 1.5 trillion yuan over the previous year; insurance companies earned 3095.9 billion yuan in premiums, an increase of 27.5% over the previous year. The above situation indicates that China’s financial system, mainly composed of the banking, securities, and insurance industries, further developed during this period. From 2011 to 2016, commercial housing sales increased from 5558.9 billion yuan to 11,762.7 billion yuan; technology market turnover grew from 476.36 billion yuan to 1140.7 billion yuan. International tourism revenue grew from 48.5 billion

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US dollars to 120 billion US dollars, and domestic tourism revenue grew from 1930.54 billion yuan to 3,939 billion yuan. Since the twenty-first century, the land market has been further expanded along with the further development of urbanization and the deepening of economic reforms in rural areas characterized by the “separation of three rights”. From 2011 to 2016, the value of land transfer contracts increased from 3150 billion yuan to 3560 billion yuan. The aforementioned developments illustrate that China’s modern market system has made significant progress in continuous improvement during this period.

5.6 Comprehensive Deepening of the Macroeconomic Management System Reform The fundamental objective of market-oriented reform is to transform government functions and shift the allocation of social production resources from being predominantly governed by government administrative orders under the planned economic system to being primarily governed by market mechanisms. The implementation of administrative system reform and decentralization is the most important aspect of the transformation of government functions. The Third Plenary Session of the 18th CPC Central Committee put forward that “government functions must be effectively transformed and administrative system reform must be deepened”. “Further streamline administration and delegate power, deepen reform of the administrative approval system, minimize the central government’s management of micro affairs, abolish all approvals for economic activities that can be effectively regulated by market mechanisms, and standardize the management of retained administrative approval items to improve efficiency; all economic and social matters that are more convenient to be managed by local authorities, shall be delegated to local and grassroots management.” From 2012 to 2015, the pace of reform in this area was greatly accelerated. On the basis of the cancellation and adjustment of 498 approval items by various departments of the State Council from 2008 to 2013, 416 administrative approval items were canceled and delegated in 2013; 246 administrative approval items were canceled and delegated in 2014; and again 311 administrative approval items were canceled and delegated in 2015, along with the cancellation of 123 professional qualification licensing and certification items. This comprehensive optimization led to the complete elimination of non-administrative licensing approvals. Business registration pre-approval had been streamlined by 85%, and the comprehensive implementation of the “three certificates in one, one code for one license” policy was fully implemented. Simultaneously, there is a strengthened focus on supervision during and after the event, as well as an optimization of the public service process. In 2016, another 165 approval items implemented by the State Council departments and their designated localities were canceled, 192 items of intermediary services, and 220 items of professional qualification licensing and accreditation were cleaned up and

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standardized. The reform of the commercial system was further deepened, and the policy of “double randoms and one disclosure” was fully implemented. This policy entails the random selection of objects for inspection and law enforcement inspectors, and the timely disclosure of inspection results to the public. Additionally, efforts were made to enhance the effectiveness of supervision during and after events, as well as to promote the integration of “internet + government services”. During this period, the reform of the investment system was further deepened. The Third Plenary Session of the 18th CPC Central Committee put forward the proposal to deepen the reform of the investment system and establish the status of enterprises as the entities of investment. With the exception of projects related to national security, ecological security, major national production layout, strategic resource development, and major public interests, all investment projects of enterprises are to be independently determined by the enterprises themselves in accordance with laws and regulations, eliminating the need for government approval. The implementation of these policies and measures has significantly boosted the investment enthusiasm of enterprises, particularly private enterprises. Between 2011 and 2016, private investment in fixed assets increased from 17.5649 trillion yuan to 36.5219 trillion yuan, accounting for 61.2% of total investment, a notable increase from the previous 58.2%. During the same period, state-owned holding investment also experienced an increase, rising from 10.7584 trillion yuan to 21.3096 trillion yuan. However, its share in total investment decreased from 36.6 to 35.7%. Between 2011 and 2016, foreign and Hong Kong, Macao, and Taiwan-controlled investment increased from 943.6 billion yuan to 1201.5 billion yuan. However, its share in total investment decreased from 3.1 to 2.0%. The price system reform was also further deepened during this period. The Third Plenary Session of the 18th CPC Central Committee decided: “Whatever prices can be set by the market shall be left to the market without undue government intervention. Promote price reforms in areas such as water, oil, natural gas, electricity, transportation, and telecommunications, and liberalize price reforms in competitive sectors. The scope of government pricing shall be mainly limited to important public utilities, public welfare services, and network natural monopoly links, so as to enhance transparency and accept social supervision.” The implementation of these policy measures has led to significant progress in price reform since 2012, mainly in the following areas. ➀ Significant reduction in government pricing. Compared with the 2001 catalog, the newly revised central pricing catalog has reduced government pricing from 13 to 7 categories, with specific pricing items reduced by about 80%. Revised local pricing catalogs were completed in 28 provinces, with an average reduction of about 50% in specific pricing items. ➁ The price formation mechanism for agricultural products has undergone continuous improvement. Since the release of government-determined tobacco leaf purchase prices in 2015, the prices of all agricultural products have been determined through market competition. ➂ A new phase of market-oriented electricity price reforms has been initiated, which includes the liberalization of cross-regional and crossprovincial electricity trading prices. Furthermore, the pilot reform of transmission and distribution prices has been expanded from the Shenzhen and Mengxi power grids

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to encompass five provinces and regions, namely Anhui, Hubei, Ningxia, Yunnan, and Guizhou. ➃ The price formation mechanism for natural gas has been further enhanced, achieving the unification of stock gas and incremental gas prices for nonresidential usage. Following the liberalization of natural gas prices for direct supply to users, approximately 40% of total consumption is now comprised of natural gas with market-adjusted prices. ➄ Significant progress has been made in rationalizing railway freight prices, successfully achieving the reform objective of maintaining a reasonable price balance between rail and road freight. A mechanism for fluctuating freight rates has been established, allowing for a maximum increase of 10% without a lower limit. This mechanism aims to enhance price elasticity and provide railway transport enterprises with a more flexible policy environment to adapt to market fluctuations. ➅ The implementation of the residential tiered pricing system has been progressing smoothly. This system has been successfully implemented in all provinces across the country, except for Xinjiang and Xizang. Currently, 289 cities in 26 provinces have established residential tiered water pricing systems, while 58 cities in 14 provinces have implemented residential tiered gas pricing systems. The remaining cities are actively and systematically working towards the implementation of this pricing system. ➆ Clean up fees and publish a list. Various fees related to enterprises have been reviewed and standardized, and a catalog of fees has been developed. By eliminating unreasonable fees and reducing excessively high fee rates, corporate expenses have been reduced by nearly 40 billion yuan over the past three years. ➇ Optimize resource and environmental protection pricing. A reasonable adjustment has been made to resource and environmental protection prices, including water resource fees, sewage fees, and sewage treatment fees, in different regions. Differential pricing has been implemented for industries with high energy consumption, high pollution, and serious overcapacity, such as electricity prices, water prices, and sewage charges. This initiative aims to promote energy conservation, emission reduction, structural adjustment, and transformation and upgrading in industries. However, while streamlining administration and delegating power, efforts have been made to combine delegation with regulation and optimize services. First, a price control mechanism has been gradually established, utilizing economic and legal measures as the primary tools, and administrative measures as supplementary. This mechanism has played a crucial role in ensuring the fundamental stability of the overall price level. Second, strengthen market price regulation and anti-monopoly law enforcement, and a number of major cases were investigated. Since 2013, a total of 82,500 cases of price violations were investigated nationwide, with economic penalties totaling 19.395 billion yuan. Among them, 2.019 billion yuan was returned to consumers, 4.603 billion yuan of illegal gains were confiscated, and fines totaled 12.773 billion yuan. The 18th Party Congress put forward the task of “accelerating fiscal reform”. The Third Plenary Session of the 18th CPC Central Committee made a deployment in this regard, proposing to “reform the budget management system”, “improve the tax system”, and “establish a system that aligns administrative powers with expenditure responsibilities”.

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In 2014, the Political Bureau of the Central Committee of the Communist Party of China (CPC) reviewed and approved the “General Plan for Fiscal and Taxation System Reform” released by the Ministry of Finance, aiming to optimize the system. The Plan includes the following points in the reform of the fiscal and taxation system. ➀ Promote the reform of value-added tax. ➁ Improve the consumption tax system. ➂ Accelerate the reform of resource tax. ➃ Establish the environmental protection tax system. ➄ Accelerate the real estate tax legislation and promote the reform in due course. ➅ Progressively establish an individual income tax system that combines comprehensive and classified income taxes. The Plan introduced seven measures to adjust the fiscal relationship between the central and local governments: First, after the nationwide implementation of replacing business tax with value-added tax, the central government’s share of valueadded tax should be reasonably determined; Second, the revenue generated from consumption tax collected at the import stage is allocated to the central government, while the revenue collected at other stages is distributed between the central and local governments, as part of the efforts to optimize the fiscal and taxation system; Third, the revenue generated from the ocean crude oil and natural gas resources tax will continue to be allocated to the central government. However, the revenue from other resource taxes will be adjusted to become provincial income and subsequently become local income. As a result, city and county governments will no longer participate in revenue sharing. Provinces will have the ability to use transfer payments to address any financial difficulties faced by cities and counties; Fourth, real estate tax serves as local government revenue; Fifth, all stamp duty revenue from security transactions goes to the central government; Sixth, significantly reduce the proportion of local burden on export tax rebates; Seventh, the central and local governments continue to share personal income tax and corporate income tax. After the division and adjustment of the above-mentioned income, the financial gap in the local governments shall be solved by the central government through tax rebates. Simultaneously, an initiative has been taken to reform the system that aligns government powers and expenditure responsibilities. This involves a rational division of power and expenditure responsibilities between the central and local governments, as well as an appropriate increase in the proportion of direct central financial expenditure. Under the implementation of the aforementioned policy measures, the pilot program of “replacing the business tax with value-added tax” was expanded in 2013. Additionally, a total of 348 administrative fees were canceled or exempted, resulting in a reduction of the burden on enterprises by over 150 billion yuan. In 2014, there was further development in various aspects of financial and tax reforms. Firstly, the budget management system reform was fully promoted. In addition to the issuance of important documents like the “Decision on Deepening Reform of the Budget System” by The State Council, there was an intensified focus on budgetary disclosure in 2014. This included greater transparency in the central and departmental budgets and final accounts, with detailed information provided at the “item” level. Additionally, specific items in the budgets for special transfer payments were also disclosed. All provinces (autonomous regions and municipalities) have made public their general public budgets and departmental budgets at the local level. The

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budget of the National Social Insurance Fund was included in the draft budget for the first time. The proportion of the central state-owned capital operation budget transferred to the general public budget increased by 5 percentage points. The number of special transfer payment items from the central government to local governments was reduced by more than 1/3 compared to 2013. The pilot of self-repayment of local government bonds was successfully promoted. Secondly, tax reform achieved a breakthrough. ➀ The tax reform has been smoothly and orderly promoted. The pilot scope of “replacing the business tax with value-added tax” continues to expand steadily, with railway transportation, postal services, and telecommunications being included in the pilot program one after another. The policy effect of “replacing the business tax with value-added tax” is further demonstrated, with a total tax reduction of 191.8 billion yuan for the year; the resource tax reform was deepened. The nationwide reform aimed at eliminating unreasonable fees and charges on coal resources and implementing ad valorem reform was carried out to optimize the system; consumption tax reform on finished oil and other taxable items was implemented. ➁ Combination of administration and decentralization was promoted, and the reform of tax administrative approval system was deepened. Throughout the year, a total of 45 approval items were canceled or delegated, streamlining administrative processes and reducing bureaucratic burdens. In parallel, tax regulations underwent revision, and a comprehensive cleanup of tax regulatory documents was undertaken. Efforts were made to improve the approval method, promote online approval, and enhance the efficiency of the approval process. ➂ Tax preferential policies were introduced. New tax preferential policies have been introduced, including 26 items in 12 categories to increase tax cuts and relief efforts. ➃ Accelerate the construction of the tax legal system. Fiscal reform was deeply advanced in 2015. Central government’s special transfer payment items to local governments decreased by one-third, while general transfer expenditures increased in scale. The reform of “replacing the business tax with value-added tax” has been steadily implemented, and the scope of ad valorem resource taxation has been expanded. Since the launch of the pilot reform of “replacing the business tax with value-added tax” in 2012, as of the end of 2015, the total tax reduction under the pilot project was 641.2 billion yuan. It was expected that in 2016 and 2017, the “replacing the business tax with value-added tax” and the cleanup of unreasonable fees and charges can reduce the burden of society by more than 500 billion yuan and 1000 billion yuan. However, the actual achieved results far exceeded these estimates. The Third Plenary Session of the 18th CPC Central Committee put forward the task of “improving the financial market system”. “Expand the opening up of the financial industry to both domestic and foreign markets, and allow qualified private capital to legally establish small and medium-sized financial institutions such as banks under strengthened regulation. Promote the reform of policy-oriented financial institutions. Improve the multi-level capital market system, promote the reform of stock issuance registration system, diversify channels for equity financing, develop and regulate the bond market, and increase the proportion of direct financing. Improve the insurance economic compensation mechanism and establish a catastrophic insurance system. Develop inclusive finance. Encourage financial innovation and enrich financial levels

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and products.” “Improve the market-oriented formation mechanism of the RMB exchange rate, accelerate the market-oriented interest rate reform, and improve the yield curve of government bonds that reflects market supply and demand. Promote the two-way opening of the capital market, orderly increase the convertibility of cross-border capital and financial transactions, establish and improve the management system for external debt and capital flows under the macro-prudential management framework, and accelerate the realization of the convertibility of the RMB capital account.” “Implement financial regulatory reform measures and prudent standards, improve regulatory coordination mechanisms, define central and local financial regulatory responsibilities and risk disposal responsibilities.” “Establish a deposit insurance system and improve financial market exit mechanisms.” “Strengthen the construction of financial infrastructure to ensure the safe and efficient operation and overall stability of the financial market.” Under the guidance and promotion of these policy measures, financial reform had been comprehensively deepened during this period. In the banking sector, first, there were significant reforms and breakthroughs made by the three policy and development financial institutions, namely China Development Bank, Bank of China, and Export–Import Bank of China. The large commercial banks, such as Industrial and Commercial Bank of China, Agricultural Bank of China, China Construction Bank and Bank of Communications, continued to deepen their reforms and further improve their corporate governance. Second, on the basis of the full deregulation of loan interest rates in 2013, the upper limit of the floating range of RMB interest rates was expanded from 1.1 times to 1.2 times of the benchmark rate in 2014, and the floating limit of deposit rates was abolished in 2015. This indicates that decisive progress has been made in interest rate marketization. Third, progress has been made in the construction of the deposit insurance system. In 2015, the deposit insurance system covered commercial banks, rural cooperative banks, rural credit cooperatives and other deposit-taking banking institutions established in China. Fourth, significant progress has been made in the marketization of the exchange rate. In 2014, the fluctuation range of the RMB/USD exchange rate in the interbank spot foreign exchange market was expanded from 1 to 2%, and the bank restriction on the bid-ask spread for customer USD trading was abolished, thus canceling all restrictions on the price range of foreign currency listed by banks for customers. The Central Bank has basically withdrawn from regular foreign exchange intervention, allowing market supply and demand to play a greater role in exchange rate formation. Fifth, during this period, prudential supervision was strengthened. The regulatory content included macro-prudential regulation, corporate governance and internal control, capital regulation, credit risk regulation, liquidity risk regulation, operational risk regulation, information technology risk regulation, market risk regulation, country risk regulation and reputation risk regulation. Supervision methods included market access, off-site supervision, on-site inspection, risk disposal and market exit, and supervision accountability and punishment.

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In the securities industry, the following eight aspects were realized: ➀ the rapid development of multi-level capital markets; ➁ improvement of the construction of capital market institutions and mechanisms; ➂ deepening of the reform of the administrative approval system; ➃ intensifying the supervision of information disclosure and risk prevention and control; ➄ expanding the development of the securities and futures industry; ➅ strengthening the core responsibilities of the inspection and enforcement; ➆ strengthening the protection of investors; ➇ making progress in the two-way opening of the capital market. In the insurance industry, the following five aspects were achieved: ➀ rapid development of the insurance market; ➁ increased vitality of industry development; ➂ strict supervision to prevent risks; ➃ progress in the protection of insurance consumers’ rights and interests; ➄ promotion of the modernization of insurance supervision. During this period, the guidelines of allowing workers to choose their own employment, market regulation, and government promotion of employment, which have been implemented for many years after the start of reform, continued to be implemented. Emphasis was placed on implementing policies for employment and entrepreneurship in the new situation. In April 2015, the State Council issued the “Opinions on Further Improving Employment and Entrepreneurship Under New Circumstances”. The Opinions put forward the following points. ➀ In-depth implementation of the employment priority strategy. Adhere to the development strategy of expanding employment; develop industries with high employment capacity; give full play to the role of small and micro enterprises as employment channels; actively prevent and effectively regulate the risk of unemployment. ➁ Actively promote entrepreneurship to drive employment. Create a relaxed and convenient access environment; cultivate public platforms for entrepreneurship and innovation; broaden channels for entrepreneurship investment and financing; support the development of entrepreneurship guarantee loans; increase efforts to reduce taxes and fees; stimulate the enthusiasm of scientific researchers for entrepreneurship, encourage rural labor to start businesses; and create a good atmosphere for mass entrepreneurship. ➂ Coordinate to promote the employment of key groups such as college graduates. Encourage employment of college graduates through multiple channels; strengthen employment assistance for people in difficulty; promote employment transfer of rural labor force; and promote employment of retired military personnel. ➃ Strengthen employment and entrepreneurship services and vocational training. Strengthen public employment and entrepreneurship services; accelerate the informatization of public employment services; strengthen the construction of human resources market; strengthen vocational training and entrepreneurship training; establish a sound linkage mechanism between unemployment insurance, social assistance, and employment; and improve unemployment registration methods. ➄ Strengthen organizational leadership. Establish a sound coordination mechanism; implement a target responsibility system; guarantee financial investment; establish a sound statistical monitoring system for employment and job creation; and focus on public opinion guidance.

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These policies reflect significant progress in the development of our labor and employment system during this period. Although China still faced a challenging employment situation, remarkable achievements have been made in addressing this issue. In 2016, the number of urban employment increased from 359.14 million in 2011 to 414.28 million; while the urban registered unemployment rate dropped from 4.10 to 4.05%. During this period, the reform of China’s income distribution system was further deepened. On February 3, 2013, the State Council approved and forwarded the “Several Opinions on Deepening the Reform of the Income Distribution System” issued by the National Development and Reform Commission and other departments. The “Opinions” put forward the main objectives for deepening the reform of the income distribution system, which include: double the income of urban and rural residents, aiming for faster growth in the income of low- and middle-income earners, comprehensively improve people’s living standards, and gradually reduce income inequality. Effectively narrow the large income gap between urban and rural areas, as well as among different regions and residents, greatly reduce the number of poverty alleviation targets, continue to expand the middle-income group, gradually form the “olive shape” distribution structure, and significantly improve the order of income distribution. Effectively protect the legal income, reasonably adjust excessive income, effectively regulate hidden income, and resolutely ban illegal income so that the pattern of income distribution could be more reasonable. Gradually increase the proportion of residents’ income in the distribution of national income and the proportion of labor remuneration in the primary distribution, and the proportion of people’s livelihood expenditures such as social security and employment in fiscal expenditures shall increase significantly. The implementation of these policies and measures achieved remarkable results. First, the national per capita disposable income reached 23,821 yuan in 2016, an increase of 72% over 2012. Second, during this period, there was a notable increase in the share of personal disposable income in national income. From 1996 to 2008, this proportion declined from 69.0 to 57.2%. However, from 2009 to 2013, it experienced an upward trend, rising from 57.2 to 61.3%. This trajectory continued from 2014 to 2017. For example, in 2016, the national disposable income grew by 8.1% in real terms, 1.2 percentage points faster than the GDP growth rate. This means that this share was still rising. Third, the relative income gap between urban and rural residents was narrowing. From 2000 to 2009, the ratio of urban and rural residents’ income rose from 2.79 to 3.33, while from 2009 to 2016, this ratio fell from 3.33 to 2.71. Fourth, the Gini coefficient of residents’ income was also decreasing. From 2004 to 2008, this coefficient increased from 0.473 to 0.491, while from 2008 to 2014, this coefficient decreased from 0.491 to 0.469. During this period, the social security system was further improved. On June 14, 2012, the State Council approved the “12th Five-Year Plan Outline for Social Security” put forward by the Ministry of Human Resources and Social Security, etc. The main objectives of the social security development in the next five years are:

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basically complete and sound social security system, further expansion of coverage, steady improvement of the level of protection, basic resolution of the problems left over from the past, and the provision of a moderate and stable social security network for building a moderately prosperous society in all aspects. The implementation of the Outline during this period also achieved significant results. At the end of 2016, the number of people participating in the basic pension insurance for urban workers nationwide was as high as 378.62 million, an increase of 25.01 million compared with that at the end of 2015. The number of people participating in basic pension insurance for urban and rural residents was 508.47 million, an increase of 3.75 million. The number of people enrolled in basic urban medical insurance was 748.39 million, an increase of 82.76 million. Among them, 295.24 million people participated in basic medical insurance for employees, an increase of 6.36 million people; there were 453.15 million people participating in basic medical insurance for urban residents, an increase of 76.4 million people. The number of people enrolled in unemployment insurance was 180.89 million, an increase of 7.63 million, and the number of people receiving unemployment insurance benefits was 2.3 million at the end of 2016. The number of people participating in work injury insurance was 218.87 million, an increase of 4.83 million, including 75.1 million migrant workers who participated in work injury insurance, an increase of 210,000. The number of people enrolled in maternity insurance was 184.43 million, an increase of 6.74 million. There were 14.799 million people who enjoyed the minimum living security for urban residents, 45.765 million people enjoyed the minimum living security for rural residents, and 4.969 million people were provided for the five guarantees in rural areas at the end of 2016. In 2016, 56.206 million people in difficulty in urban and rural areas were subsidized to participate in basic medical insurance. According to the rural poverty alleviation standard of 2300 yuan per person per year (adjusted to constant 2010 prices), the rural poor population in 2016 decreased by 12.4 million to reach 43.35 million, compared to the previous year. Overall, during this period, China took a solid and huge step forward in comprehensively deepening the reform of its macroeconomic management system. Therefore, although there are still difficult reform tasks in economic reform, the practical experience during this period shows that China can fully achieve the intended goal of the Third Plenary Session of the 18th CPC Central Committee: “By 2020, decisive results shall be achieved in reforming important areas and key links, completing the reform tasks put forward in this Decision, forming a system that is complete, scientific and standardized, and operating effectively, so that all aspects of the system could be more mature and complete.”

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5.7 A New Stage in the Development of the Overall Pattern of Opening up to the Outside World First, since the late 1970s, China’s reform and opening up and socialist modernization had experienced 40 years of development, creating a relatively strong material foundation, forming a relatively sound system and accumulating richer experience for the development of the overall pattern of opening up to the outside world to a new stage. Second, despite the long-term stagnation and slow recovery of the world’s major economies since the 2008 global financial crisis, which has had a negative impact on China’s opening up to the outside world, there were also positive factors worth mentioning, such as the inclusion of the RMB in the IMF’s special drawing rights currency basket in 2015. This is clearly a powerful tool for China to expand its opening up. Third, more importantly, since the 18th Party Congress, the Party Central Committee has introduced a series of reform and development strategies to promote China’s opening to the outside world: in 2012, the 18th Party Congress announced the strategic task of “comprehensively improving the level of open economy”; in 2013, the Third Plenary Session of the 18th CPC Central Committee called for “building a new system of open economy”. These favorable factors have propelled China’s overall pattern of opening up to the outside world into a new stage, marked by the establishment of a new system of open economy. In order to establish a new system of open economy, a series of policy measures were adopted. First, in May 2015, the State Council issued “Several Opinions on Building a New System of Open Economy”, which became the top-level planning and “construction roadmap” for the construction of China’s open economy. Second, in May 2016, approved by the Central Committee of the Communist Party of China and the State Council, 12 cities and regions including Jinan, Nanchang, Tangshan, Zhangzhou, Dongguan, Fangchenggang, Pudong New Area, Liangjiang New Area, Xixian New Area, Dalian Jinpu New Area, Wuhan Urban Circle, and Suzhou Industrial Park were designated as comprehensive pilot areas for building a new open economic system. In parallel with the comprehensive pilot test areas of the new system of open economy, there was the continuous expansion of the pilot free trade zone. From the Shanghai Free Trade Zone approved in 2013, to Tianjin, Guangdong, and Fujian approved by the end of 2014, and then to the seven provinces and municipalities of Liaoning, Zhejiang, Henan, Hubei, Chongqing, Sichuan, and Shaanxi approved in August 2016, China has developed 11 pilot free trade zones. Pilot free trade zones have become an important platform for a new round of opening up in China. Apart from the comprehensive pilot test areas and free trade zones, local governments were also building open economies with local characteristics based on their actual situations. Inland provinces such as Hunan and Shaanxi have put forward to create new highlands for inland opening-up. Therefore, driven by multiple forces of comprehensive pilot test areas, free trade pilot zones, and local platforms, China has accelerated the construction of a new open economic system and achieved significant results. According to data from the Ministry of Commerce, since their launch in 2013,

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the free trade pilot zones have attracted one-tenth of the country’s foreign investment with a land area of 1/20,000, and the 114 pieces of pilot experience gained in the free trade pilot zones have been replicated and promoted to the whole country. Third, in 2013, the strategic concept of building the Silk Road Economic Belt and the 21st Century Maritime Silk Road was put forward and vigorously implemented. As the “the Belt and Road” covers a wide range of areas, it has opened up vast new space and fields for international cooperation. It covers more than 60 countries and regions around the world, with a total population of over 4.4 billion, accounting for 63% of the world; and a total economic volume of over USD 20 trillion, accounting for 29% of the world. According to World Bank data, from 2013 to 2015, the average GDP growth of countries along the Belt and Road was 5.3%, which was 2 percentage points higher than the world average during the same period. The proportion of the total GDP of these countries in the world increased from 29.1 to 30.3%. Under the guidance of the principles of extensive consultation, joint contribution, and shared benefits, the construction of the “Belt and Road” has not only reflected China’s basic principles of mutual benefit and win–win results in the development of foreign relations in the past three years, but also adapted to the development needs of countries along the route. This has greatly expanded the development of China’s foreign economic relations. By the first half of 2017, more than 100 countries and international organizations had responded positively in support, and more than 40 countries and international organizations had signed cooperation agreements with China. Data show that in the three years from June 2013 to June 2016, China’s trade in goods with countries along the Belt and Road amounted to 3.1 trillion US dollars, accounting for 26% of China’s total foreign trade. The newly signed service outsourcing contract between China and the countries along the “the Belt and Road” amounted to 9.41 billion US dollars. China’s cumulative investment in countries along the “the Belt and Road” reached 51.1 billion US dollars, accounting for 12% of the total foreign direct investment in the same period. Other data show that in the first quarter of 2017, China’s imports from and exports to countries along the “Belt and Road” reached 1.66 trillion yuan, a year-on-year increase of 26.2%, which was 4.4 percentage points higher than the overall growth rate of China’s foreign trade during the same period, accounting for 26.7% of the total foreign trade. Chinese enterprises’ non-financial direct investment in 43 countries along the Belt and Road increased by 2.95 billion US dollars, accounting for 14.4% of the total outbound investment during the same period. This marked a 5.4 percentage point increase from the same period in 2016. With 61 countries along the “Belt and Road” route, Chinese enterprises signed 952 new contracts for overseas contracting projects, with a turnover of 14.39 billion US dollars. This represented a year-on-year increase of 44.7% and accounted for 49.2% of the total during the same period. Fourth, policies were further relaxed in the utilization of foreign investment. In 2016, the government passed the decision to fully implement the system of national treatment with a negative list for pre-entry access, essentially forming a new system and pattern of an open economy. In January 2017, the State Council issued the “Notice on Several Measures to Expand Opening Up and Actively Utilize Foreign Investment”, which increased the policy support for the utilization of foreign investment.

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In May 2017, the “Catalogue for the Guidance of Foreign Investment Industries” was further revised, emphasizing that this revision is an important measure to implement the Party Central Committee’s efforts to build an open economic system and promote a new round of high-level opening to the outside world. On August 16, 2017, the State Council issued the “Notice on Several Measures to Promote the Growth of Foreign Investment”. The Notice introduced policies and measures to promote the growth of foreign investment from five aspects: further reducing foreign investment access restrictions, formulating fiscal and taxation support policies, improving the comprehensive investment environment of national development zones, facilitating the entry and exit of talents, and optimizing the business environment. Fifth, in order to adapt to the economic development situation, a series of new strategies for the development of foreign economic relations were introduced. These included: adhere to the principle of giving equal importance to both exports and imports, and to simultaneously utilize foreign investment and make outbound investments; promote the transformation of foreign trade from scale expansion to quality and efficiency improvement, and from cost and price advantages to comprehensive advantages, and promote the formation of new export competitive advantages centered on technology, brand, quality, and service. Combine the utilization of foreign investment with outward investment, support enterprises to “go global” and expand new space for economic development; accelerate the optimization and upgrading of foreign trade, and develop from a major trading nation to a strong trading nation; promote the transformation of foreign trade with objectives of high quality, high price, and premium import and export, strengthen new export-oriented industries such as equipment manufacturing, and develop service trade; support enterprises to expand outward investment, promote the “going global” of equipment, technology, standards, and services, deeply integrate into the global industrial chain, value chain, and logistics chain, build a number of overseas production bases for bulk commodities, and cultivate a number of multinational enterprises. The implementation of the above-mentioned policies has boosted China’s opening up to the outside world to new and significant achievements and develop to a new stage. In terms of foreign investment, from 2011 to 2016, foreign non-financial direct investment increased from 116.011 billion US dollars to 126.901 billion US dollars. In 2016, 27,900 new foreign-invested enterprises were established. Among them, 6662 were Sino-foreign joint ventures, 126 were Sino-foreign cooperative enterprises, 21,024 were foreign-invested enterprises, and 86 were foreign-invested jointstock enterprises. In 2016, China was the world’s third largest recipient of foreign investment, and this status has kept for many consecutive years. From January to April 2017, foreign non-financial direct investment totaled 42.732 billion US dollars, among which Sino-foreign joint ventures were 9.815 billion US dollars, Sino-foreign cooperative enterprises were 391 million US dollars, foreign-invested enterprises were 29.994 billion US dollars, and foreign-invested joint-stock enterprises were 2.532 billion US dollars. A total of 9726 foreign-invested enterprises were set up.

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Among them, there were 2,632 Sino-foreign joint ventures, 33 Sino-foreign cooperative enterprises, 7026 foreign-invested enterprises and 36 foreign-invested joint-stock enterprises. Rapid expansion was seen in outward investment. The National Bureau of Statistics began releasing data on outward direct investment since 2003. Non-financial outward direct investment was 2.85 billion US dollars in 2003. However, by 2016, China’s outward direct investment reached a historical high of 170.11 billion US dollars. This fundamentally changed the previous situation of a disparity between foreign direct investment and outward direct investment. In 2003, foreign direct investment reached 53.504 billion US dollars, while China’s outbound direct investment was only 2.854 billion US dollars, a difference of 50.65 billion US dollars. However, by 2016, China’s outbound direct investment exceeded foreign direct investment by 44.11 billion US dollars. In 2016, China was the world’s second largest outbound investment country, a position that it had kept for two consecutive years. From January to April 2017, China’s non-financial outbound direct investment still reached 26.37 billion US dollars. The above statement suggests that China has not only remained a significant recipient of foreign investment during this period but has also transformed itself into a major player in outbound direct investment, becoming a net exporter of investments. In terms of foreign trade, from 2011 to 2016, China’s total import and export of goods increased from 23.6402 trillion yuan to 24.3386 trillion yuan, with the total export increasing from 12.32406 trillion yuan to 13.8455 trillion yuan, and the total import decreasing from 11.31614 trillion yuan to 10.4932 trillion yuan. Despite the sluggish global economy during this period and the reasonable decline in China’s economic growth rate, the total amount of goods imports and exports and the total amount of exports still maintained a growth momentum, with only a slight decrease in the total amount of imports. However, the structure of goods imports and exports continued to optimize. General trade import and export and its proportion continued to grow. In 2016, China’s general trade import and export was 13.39 trillion yuan, accounting for 55% of the total import and export, an increase of 1 percentage point from 2015, and the trade structure was optimized. In 2016, the import and export of mechanical and electrical products and high-tech products reached 13,080.5 billion yuan and 7,449.4 billion yuan, accounting for 53.7% and 30.6% of the total import and export respectively. This indicates that the product structure of goods import and export maintained the momentum of optimization. In 2016, China’s total services trade reached 5.3484 trillion yuan, with service exports amounting to 1.8193 trillion yuan, a modest increase of 2.3%, and service imports totaling 3.5291 trillion yuan, representing a significant growth of 21.5%. In 2016, the proportion of total import and export of services in the entire foreign trade increased from 11.5% in 2011 to 18.0%. This is also an important aspect of the structure optimization of foreign trade. In 2016, the completed amount of overseas contracting projects increased rapidly from 103.424 billion US dollars in 2011 to 159.4 billion US dollars. In the first half of 2017, China’s total import and export increased by 19.6% year-on-year, with 7.21 trillion yuan of export, an increase of

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15%, and 5.93 trillion yuan of import, an increase of 25.7%; and the trade surplus was 1.28 trillion yuan. Overall, China’s position as a major player in foreign investment, foreign trade, and overseas contracting projects indicates that the country’s overall pattern of opening up has entered a new stage of development.

5.8 Concluding Remarks During this period, China embarked on promoting the reform of the state-owned economy, focusing on capital management and the development of mixed-ownership enterprises. Simultaneously, efforts were made to advance rural economic reform, with a specific emphasis on the “separation of three rights”. The development of the non-public sector was also accelerated, aiming to establish a coexistence pattern with the state-owned economy as the mainstay. Furthermore, continuous improvements were made in building a modern market system, deepening the reform of the macroeconomic management system, and advancing the overall process of opening up to a new stage. In terms of the ownership structure of industrial enterprises above the designated scale, the proportion of state-owned and state-controlled enterprises in the main business income decreased from 27.2% in 2011 to 21.8% in 2015, while the proportion of private enterprises increased from 29.0 to 34.8%, and the proportion of foreign-funded enterprises decreased from 25.7 to 22.1%. All of this shows that China’s reform and opening up has entered a new stage. CPC General Secretary Xi Jinping summed it up well: Since the 18th National Congress of the Communist Party of China, “We have been firmly committed to comprehensively deepening the reform, promoting it to achieve comprehensive progress, making breakthroughs at multiple points, and pushing forward in depth to create a new momentum.”

Concluding Remarks: Achievements of China’s Economic System Reform and Its Significance

A.1 Achievements of China’s Economic Reform After 40 years of reform, China has initially established and developed a socialist market economy system. The two main signs of this are: First, the pattern of the socialist market economy with public ownership as the mainstay and the common development of multiple types of ownership has been formed. Before the reform, the public system was the dominant system, and the non-public economy was on the verge of extinction! However, by 2016, private enterprises accounted for 97.1% of the total number of enterprises (of which individual businesses accounted for 70.4% of the total private economy, private enterprises accounted for 29.3%, and foreigninvested enterprises accounted for 4.3%), accounting for over 60% of the country’s GDP, over 80% of employment, and over 60% of newly added fixed assets. These data show that the private economy, as an important part of the basic economic system of China’s socialist market economy, has been established and developed without doubt. This is also the case with industry sector, which plays a dominant role in the national economy, as is shown in Table A.1. Second, price regulation, as the core of the socialist market economy, has risen to a crucial position. It fundamentally addresses the situation where production, distribution, and prices of products and factors were determined by state directives before the reform. This is most evident in the determination of product prices. The information in Table A.2 shows that while product prices were mainly regulated Table A.1 The proportion of various ownership economies in the total industrial economy (unit: %) Year

State-owned and state-controlled industries

Collective industry

1978

77.6

22.5

2015

21.8

–

Non-public industry 0.0 56.9

© Social Sciences Academic Press 2024 H. Wang, China’s Economic System Reform (1978–2018), Research Series on the Chinese Dream and China’s Development Path, https://doi.org/10.1007/978-981-99-9267-6

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Table A.2 Percentage of government-directed pricing products in total sales of various products (unit: %) Year

Total sales of agricultural and sideline products

Total sales of social retail goods

Total sales of production materials

1978

92.7

97.0

100.0

2007

1.1

2.6

5.4

Note The balance of government-directed pricing in total product sales is the percentage of marketregulated prices and government-guided prices

Table A.3 China’s share of world GDP, 2012 and 2016 Country or region

2012 Position

Position

744,377

World United States

2016 Gross Share in the domestic world (%) product (USD billion)

1

Gross Share in the domestic world (%) product (USD billion) 752,780

161,553

21.7

1

185,691

24.7 14.9

China

2

85,703

11.5

2

112,183

Japan

3

62,032

8.3

3

49,386

6.6

Germany

4

35,459

4.8

4

34,666

4.6

by government administrative directives before the reform, market regulation has largely been achieved after the start of reform.

A.2 The Reform Has Propelled China from a Major World Economy to an Economic Powerhouse (1) China’s economic aggregate indicators fully reflect that China’s economic strength has jumped to the forefront of the world. In this regard, since China surpassed Japan to become the world’s second largest economy in 2010, its GDP has steadily ranked second in the world, and its share in the world’s total economy has increased year by year. In 2016, China’s GDP rose from 8.6 trillion US dollars in 2012 to 11.2 trillion US dollars, accounting for 14.9% of the world’s total, an increase of 3.4 percentage points over 2012 (see Table A.3). (2) China is the world’s largest contributor to world economic growth. From 2013 to 2016, China’s contribution to the world economy averaged 31.6%, more than the combined contribution of the United States, the eurozone and Japan. In 2016, China contributed 34.7% to world economic growth, making it the biggest driver of global growth (see Table A.4).

Concluding Remarks: Achievements of China’s Economic System …

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Table A.4 China’s contribution to world economic growth, 2013–2016 (unit: %) Country

2013

2014

2015

2016

Average annual contribution rate 2013–2016

China

32.5

29.7

30.0

34.7

31.6

Source World Bank database

A.3 The Driving Force of China’s Economic Development The driving force of China’s economic development, from the most important aspect, can be summed up in the following three aspects. (1) Economic system reform aimed at establishing a socialist market economy serves as the driving force for China’s economic development. (2) The dual promotion of science and technology as both productive forces and the primary productive force has a significant impact on the economic development of China. (3) The strong leadership of the Communist Party of China as the core of the superstructure of the primary stage of Chinese socialism, and the theory of socialism with Chinese characteristics as the guiding ideology of the Communist Party of China are the foundation of China’s economic development.