Handbook of Chinese Economics 9819904196, 9789819904198

Table of contents :
Contents
1 Overview: Economic Research in China: Analysis Based on Papers Published in the Economic Research Journal
1.1 The Evolution of Economic Research in China
The Transformation of the Research Paradigm and the Challenge of the Rural Issue (1978–1984)
Theoretical Innovations on Socialist Economy with Chinese Characteristics and Debates on Reform Strategy (1985–1991)
1.2 The Establishment of the Theory of Socialist Market Economy
From Planned Economy to Commodity Economy, Market Economy, and Socialist Market Economy
Theoretical Innovations on Ownership Structure and Distribution in the Primary Stage of Socialism
1.3 Gradual Reform, Growth Miracle, and Macro Stability
The Path of Gradual Reforms
The Economic Growth Miracle of China
Comprehensive Reforms and Macroeconomic Stability During the Transition Period
1.4 Theory of China’s Opening Up
The Switch in Development Strategy from Inward to Outward
The Dynamic Interaction Reform and Opening Up
The Big Country Model
1.5 Summary and Prospects of Economic Research in China
Subjects and Authors of the Economic Research Journal and International Publications: 1978–1988
The Chinese Road and Socialist Political Economy with Chinese Characteristics
References
2 The Establishment and Development of the Socialist Market Economy Theory
2.1 Introducing the Market Mechanism to Economic Activities and Recognizing the Commodity Economy Status in the Early Stage of Reform and Opening Up—The First Step Towards the Socialist Market Economy Theory
Theoretical Preparations Before 1966
Introducing the Market Mechanism to Social and Economic Activities in the Early Stage of Reform and Opening Up
Sharp Ideological Confrontations in the Process of Establishing the Theory of Socialist Commodity Economy
2.2 The Socialist Market Economy Established at 14th CPC National Congress in 1992
2.3 The Establishment of the Theory of Socialist Market Economy Pushes Reform Forward
2.4 The Decision of the Third Plenum of the 18th CPC Central Committee and Its Influence on the Development of Economic Reform Theories
2.5 Accelerating and Perfecting the Socialist Market Economy and Pushing for Quality Economic Growth in the New Era
2.6 Several Regularities of the Socialist Market Economy
References
3 The Establishment of the Theory of the Primary Stage of Socialism
3.1 The Formation and Development of the Theory of the Primary Stage of Socialism
Stage I: Theoretical Ruminations: From the Third Plenum of the 11th CPC Central Committee to the Sixth Plenum of the 12th CPC Central Committee
Stage II: Formation of the Theoretical System: From the Sixth Plenum of the 12th CPC Central Committee to the 13th CPC National Congress
Stage III: Development and Improvement of the Theory: From the 13th CPC National Congress to Present
3.2 The Scientific Implications of the Theory of the Primary Stage of Socialism
The Basic Characteristics of the Primary Stage of Socialism
The Main Contradictions in the Primary Stage of Socialism
The Party’s Basic Line and Programs in the Primary Stage of Socialism
3.3 The Theory of the Primary Stage of Socialism and Related Economic Research
References
4 The Establishment and Development of the Basic Socialist Economic System Theory
4.1 Break the Dominance of Public Ownership and Allow the Existence and Development of Non-public Sectors
The Rebirth and Development of Household-Owned Businesses
The Boom of the Private Economy
The Introduction and Use of Foreign Investment
4.2 The Establishment of the Basic Socialist Economic System
China’s Reform Got Its Humble Start in the Rural Areas with the Implementation of the Household Contract Responsibility System of Farmlands, Rendering the Separation of Collective Ownership and Management Rights
The Reform of State-Owned Enterprises Began with Expanding Their Business Autonomy and, Starting in 1993, Leaned Toward Establishing a Modern Enterprise System
The 15th CPC National Congress Proposed, for the First Time, to Establish a Basic Economic System in Which Public Ownership Is to Play a Dominant Role and Diverse Forms of Ownership Co-develop Side by Side
The Basic Economic System is the Foundation of the Socialist Market Economic System
4.3 The Consolidation and Improvement of the Basic Economic System
The Two Unswervinglys
The Mixed Ownership Economy as an Important Realization Form of the Basic Economic System
Enhance the Protection of Property Rights and Promote Entrepreneurship
Provide Strong Support for the Development of Private Enterprises
4.4 How to Understand the Dominant Role of Public Ownership in the Socialist Market Economy
References
5 The Innovation and Development of Enterprise Theory
5.1 Explore the Right Direction of the Reform of State-Owned Enterprises: 1979–1992
5.2 Vigorously Promote the Reform of State-Owned Enterprises and Improve the Structure of Corporate Governance (1993–2012)
5.3 Deepen the Reform of State-Owned Enterprises Driven by the Reform of State-Owned Assets (2013 to Present)
5.4 Make Strategic Adjustment to the Layout and Structure of the State-Owned Economy by Grasping Large-Scale Enterprises and Invigorating Small and Medium-Sized Ones
5.5 Reform the Management System of State-Owned Assets and Truly Realize the Separation of Government from Enterprises and from Capital
5.6 Actively Promote the Reform of Mixed Ownership and Develop the Mixed Ownership Economy
References
6 The Construction and Theoretical Innovation of the Socialist Market System
6.1 The Four Stages of the Development of China’s Market System Since Reform and Opening up
Stage I (1978–1991): Various Markets Flourished as Price Reforms Advanced and the Economic Operation Mechanism Pivoted from Central Planning to Market-Oriented
Stage II (1992–2001): As All Sorts of Markets Further Developed, State-Owned Enterprises Were Restructured from the Underlings of the Administrative Departments to Independent Market Players, and the Market Morphed from a Seller’s Market to a Buyer’s Market
Stage III (2002–2012): The Accession to the WTO Gave China the Opportunity to Build a Modern Open Market System
Stage IV (2013-Present): Let the Market Play a Decisive Role in Resource Allocation, Tackle the Tough Issues, and Strive to Have a Perfect Modern Market System by 2020
6.2 Debates About and Breakthroughs of Several Theoretical Issues During the Construction of the Modern Market System
Establishing the Socialist Market System is a Basic Requirement of the Economic System Reform
The 1987 Debate on the Priority of Reform: State-Owned Enterprises or the Economic Operation Mechanism
China’s Accession to the World Trade Organization not only Accelerated Its Integration with Globalization, but also Effectively Speeded up the Establishment of a Modern Market Economy
6.3 The Essential Condition for the Market to Play a Decisive Role in Resource Allocation Is to Speed up the Improvement of the Modern Market System
A Modern Market System is Essential to Ensure that the Market Plays a Decisive Role in Resource Allocation
Several Issues Need to Be Resolved in Order to Speed up the Improvement of the Modern Market System
Promote the Facilitation of Industrial and Commercial Registration System
6.4 Improve the Financial Markets and Establish a Unified Market for Construction Land in Both Urban and Rural Areas
Improve the Financial Markets
Establish a Unified Construction Land Market for Both Urban and Rural Areas
Deepen the Reform of the Management System of Science and Technology and Develop the Market for Technology
References
7 The Interaction of Theory with Practice in China’s Price Reform
7.1 With Remarkable Progress in Price Reforms, 97% of Prices in Goods and Services Are Now Determined by the Market
7.2 The Main Course of Price Reform and Related Theoretical Research
From 1979 to 1984, the Main Task Was to Straighten Out the Twisted Price Structure and Create Conditions for Large-Scale Price Liberalization
After 1985, Price Reform Was Dominated by Price Liberalization, and the Prices of Consumer Products Were Gradually Liberalized in Years 1985–1988
Between 1984 and 1991, China Implemented a Dual Track Price System for Industrial Goods, but Eventually Merged the Two to Form a Unified, Market-Based System
Price Reform of Resource Products Was Proposed at the Turn of the New Century and Has Been Gradually Pushed Forward
7.3 The Price Reform Debates in the 1980s Led to the Confirmation of the Goal of Building a Market Price System
7.4 Push Forward Price Reforms and Keep Inflation at Bay
7.5 Some Regularities and Basic Experiences of the Price Reform
Price Reform Includes Both the Price System and the Price Formation Mechanism. We Should Strive to Promote the Rationalization of the Price System Through the Price Formation Mechanism Reform
Price Reform Should be Carried Out Step by Step. In General, China Has Taken the Following Course of Action: Price Adjustment, Price Liberalization, and Gradually Converging to the International Market
Price Reform Starts with a Narrow Range of Products and Gradually Expands to Cover a Broad Range of Products, Including the Factors of Production
Straightening Out the Price Relationship Through System Transformation While Simultaneously Maintaining Price Stability Has Been the Major Challenge of Price Reform
7.6 Prospects of China’s Price Reform
References
8 The Theory of Industrial Structure and Industrial Organization
8.1 Research Progress from the Beginning of Reform and Opening to the Early 1990s
Introduction of Western Economic Ideas
The Exploration of Industrial Structure
Industrial Policy
Initial Involvement of China’s Industrial Organization
8.2 Review of Economic Research in the 1990s
Further Introduction of Industrial Organization Theories from Western Economics
Studies on Industrial Structure
Industrial Policy
Expand Research on Industrial Organization
Government Policies on Industrial Organization
8.3 Research Progress in the Twenty-First Century
Studies on Industrial Structure
Studies on Industrial Policy
Studies on Industrial Organization
Government Policy on Industrial Organization
8.4 Economic Research and Exploration in the New Era
Industrial Structure
Discussions About Industrial Policy
Industrial Organization
Government Policy on Industrial Organization
8.5 Several Comments
References
9 Macroeconomic Management Theory with Chinese Characteristics
9.1 The Bashan Boat Conference in 1985 Embarked on a New Stage in Macroeconomic Management in China
9.2 Research on Macroeconomic Management Since the Goal of the Socialist Market Economic System Reform Was Established
9.3 Studies and Debates About Inflation
9.4 New Developments in the Theory and Policy of Macroeconomic Management Since the 18th CPC National Congress
References
10 The Reform of China’s Fiscal and Taxation System
10.1 The Five Stages of Reform: A Sketchy Outline
Stage 1: Paving the Way and Building the Bridge for the Overall Economic Reform (1978–1994)
Stage 2: Embarking on the Road of Institutional Innovation (1994–1998)
Stage 3: Constructing a Framework of the Public Finance System (1998–2003)
Stage 4: Further Improving the Public Finance System (2003–2012)
Stage 5: Establishing a Modern System of Public Finance (2012 to Present)
10.2 From Building a Public Financial System to Establishing a Modern Public Finance System
The Main Thread of the Fiscal and Taxation System Reform: Always Obey and Serve the Requirements of the Overall Economic Reform
Matching Fiscal Publicization with Economic Marketization
Matching Fiscal Modernization with State Governance Modernization
10.3 The Direction of Reform: Expediting the Establishment of a Modern Public Finance System
Tackle the Tough, Difficult and Painful Issues
The Fiscal Relationship Between the Central and Local Governments: The Highlight of the Fiscal and Taxation System Reform in the New Era
The Budget Management System: Implementation of the New Budget Law is Urgently Needed
The Taxation System: Direct Tax Reform and Improving Local Taxation System
10.4 Main Conclusions and Implications
References
11 Innovation and Development of China’s Financial Theory
11.1 The Formation of Mobilizational Monetary and Financial System and China’s Economic Takeoff
The Mobilization Mechanism for Savings of Planned Economy
Bank Credit Expansion, Savings Mobilization, and Economic Take-Off Under state’s Implicit Guarantees
11.2 The Conflict Between Mobilizing Monetary and Financial System and the Change in the Way of Economic Growth in China
11.3 Problems Faced with China’s Financial Marketization Reform
11.4 Conclusions
References
12 Innovation and Development of Income Distribution Theory
12.1 The Affirmation of the Principle of “Material Interests” and the Returning to the Principle of “Interest Distribution According to Work of Labor Time” in the Early Stage of Reform and Opening Up
12.2 The Establishment of Socialist Basic Income Distribution System
Diversified Sources and Forms of Residents’ Income
The Establishment of the Basic Distribution System of Socialism
12.3 Further Development of Income Distribution Theory in the New Era
People-Centered Development Thinking is the Main Line of Reform and Practice of Income Distribution in the New Era
Consolidate the Dominant Position of Distribution According to Work, and Strive to Increase the Proportion of Labor Compensation and Labor Income
Improve Distribution According to Factors of Production and Increase Residents’ Property-Based Income Through Multiple Channels
Focus on Cultivating and Growing Middle-Income Groups
Alleviate Poverty in a Targeted Manner and Build a Well-Off Society in an All-Round Way
12.4 Conclusions
Narrow the Income Gap and Pursue Common Prosperity
Further Deal with the Relationship Between Fairness and Efficiency
References
13 From “Development is the Absolute Principle”, to the Scientific Outlook on Development, to the New Development Concept
13.1 Development is the Absolute Principle
Development is the Absolute Principle
13.2 The Source of China’s Economic Growth Miracle
General Drivers of the “Chinese Miracle”
Unique Factors of the “Chinese Miracle”
13.3 The Scientific Outlook on Development
Continuously Changing Conditions and Environment for Development
13.4 The New Development Concept
New Normal of Economic Development and Structural Reform on the Supply Side
“Five Major” Development Concepts
Start a New Journey of Socialist Modernization
References
14 The “Three Rural” Issues in China’s Market-Oriented Economic Reform
14.1 “Three Rural” Issues at the Early Stage of China’s Market-Oriented Economic Reform
Family Contracting System has Shaped the Business Entity of Rural Market Economy
The Development of the Second Township and Village Enterprises has Changed the Single Industrial Structure and Ownership Pattern in the Rural Areas
“Migrant Worker Tide” Hits the Urban–Rural Binary Barriers
14.2 “Three Rural” Issues at the Stage of Deepening China’s Market-Oriented Economic Reform
Different Thoughts on Deepening the Reform of Rural Economic System
The Practice of Deepening the Reform of Rural Economic System
Rethinking on Solving the “Three Rural” Issues
More Explorations on the Path of Agricultural Modernization with Chinese Characteristics
14.3 “Three Rural” Issues in the New Era of China’s Market-Oriented Economic Reform
The Proposition and Solution of the New “Three Rural” Issues in the New Period
Theoretical Exploration of Building the New Socialist Countryside
The Rural Revitalization Strategy—the Program for Solving the “Three Rural” Issues in the New Period
References
15 The Main Progress and Innovation of Regional Economic Theory Research
15.1 On the Research Object of Regional Economics
15.2 On the Regional Economic Development Strategy
The Stage of Unbalanced Development with Accelerated Development of Coastal Areas
The Stage of Regional Unbalanced and Coordinated Development
The Stage of Regional Coordinated Development with the Scientific Outlook on Development
15.3 The Debate on the Path of Urban Development in China
15.4 The Innovation of Regional Economic Development Strategy in China
A New Start with the Collaborative Development of Beijing-Tianjin-Hebei
The Promotion of the Development of the Yangtze River Economic Belt
The Proposition and Promotion of the Belt and Road Initiative
The Adherence to Targeted Poverty Alleviation and Targeted Poverty Elimination
The Promotion of the Formation of Main Functional Areas
Urbanization in the New Situation
References
16 Exploration and Development of Natural Resource Economics
16.1 The Origin of Natural Resource Economics
Theoretical Retrospect of Natural Resources Economics
The Development of Western Natural Resource Economics
Self-development and Exploration of Natural Resource Economics in China
16.2 The Development of the Discipline System of Natural Resource Economics in China
The Research Object of the Discipline
Major Research Methods
The Relationship Between the Discipline of Natural Resource Economics and Other Disciplines
The Main Characteristics of Discipline Development
16.3 Main Branches of Natural Resource Economics
Energy: Research on Renewable Energy
Water Resources: An Innovative Management Mechanism of River Leadership System
Land Resources: The Positive Role of Main Functional Areas
Climate Change: A Low Carbon Economy Perspective
16.4 Important Research Fields of Natural Resource Economics
Resource Valuation and Pricing
Externality and Circular Economy
Resource Curse and “Dutch Disease”
The Transformation of Resource-Based Cities
The Main Achievements of Natural Resource Economics in the Past 40 Years
References
17 The Transformation of Mode of Economic Growth and the Structural Reform of Supply-Side
17.1 The Policy Implementation of the Transformation of Mode of Economic Growth in China
Transformation of Economic Growth Mode Proposed in the Ninth Five Year Plan
The Transformation of the Economic Development Mode
The Structural Reform of the Supply-Side
17.2 The Research Scheme of the Transformation of Mode of Economic Growth
Research on the Mode of Economic Growth in the 1990s
The Transformation of Economic Development Mode at the Beginning of the Twenty-First Century
Supply-Side Structural Reform and Transformation of Economic Growth Mode
17.3 Some Comments and Prospects
References
18 The Development and Review of the Opening Up Theory
18.1 The Foreign Trade Theory
The Role of Foreign Trade
The Theoretical Basis of Foreign Trade
The Development Strategy of Foreign Trade
Discussion on Reform of Foreign Trade System
Discussion of International Trade Friction
18.2 Theories on Foreign Investment
The Guiding Ideology of Introducing Foreign Capital
Basic Principles and Strategies for Using Foreign Capital
The Role of Introducing Foreign Capital
Introducing Foreign Capital and National Economic Security
18.3 Foreign Exchange Theory
Should the RMB Exchange Rate System be a Single Exchange Rate System or a Dual Exchange Rate System?
Determination of RMB Exchange Rate Level
How to Reform Our Country’s Exchange Rate System?
Foreign Exchange Reserves
18.4 The Regional Opening Theory
The Economic Nature of Special Economic Zones
Who Earns Whose Money?
The Regional Opening Strategy
The Western Development, the Revitalization of the Northeast Old Industrial Base and the Rise of Central China
The Belt and Road Initiative
Regional Opening and Industrial Agglomeration
18.5 On the Construction of Foreign Economic and Legal System
18.6 China’s Positive Progress in Opening Up to the Outside World Since Its Accession to the WTO
Fulfilling WTO Commitments and Complying with International Rules
Promoting Self-development and Boosting the World Economy
Further Deepening Reform and Expanding Opening-Up
18.7 A Brief Conclusion
References
19 The Construction of Socialist Political Economics with Chinese Characteristics
19.1 The Socialist Political Economics with Chinese Characteristics Is an Important Part of the Theoretical System of Socialism with Chinese Characteristics
19.2 The Mature Socialist Political Economics with Chinese Characteristics Originates from Mature Socialist Economic System with Chinese Characteristics and Basic Realization of Modernization
19.3 Seeking the Main Line of Socialist Political Economics with Chinese Characteristics
19.4 Exploring the Basic Laws of Socialist Economy with Chinese Characteristics
References
Postscript
References

Citation preview

Zhuoyuan Zhang

Handbook of Chinese Economics

Handbook of Chinese Economics

Zhuoyuan Zhang

Handbook of Chinese Economics

Zhuoyuan Zhang Institute of Economics of the Chinese Academy of Social Sciences Beijing, China Translated by Li Lin Zhejiang Gongshang University Hangzhou, China

Congsheng Wu University of Bridgeport Connecticut, USA

Sponsored by Chinese Fund for the Humanities and Social Sciences (本书获中华社会科学 基金资助). ISBN 978-981-99-0419-8 ISBN 978-981-99-0420-4 (eBook) https://doi.org/10.1007/978-981-99-0420-4 Jointly published with China Social Sciences Press The print edition is not for sale in China Mainland. Customers from China Mainland please order the print book from China Social Sciences Press. © China Social Sciences Press 2023 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 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 publisher, 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 publisher 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 publisher remains 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

Contents

1

2

3

Overview: Economic Research in China: Analysis Based on Papers Published in the Economic Research Journal . . . . . . . . . . . 1.1 The Evolution of Economic Research in China . . . . . . . . . . . . . . . 1.2 The Establishment of the Theory of Socialist Market Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3 Gradual Reform, Growth Miracle, and Macro Stability . . . . . . . . 1.4 Theory of China’s Opening Up . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.5 Summary and Prospects of Economic Research in China . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Establishment and Development of the Socialist Market Economy Theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 Introducing the Market Mechanism to Economic Activities and Recognizing the Commodity Economy Status in the Early Stage of Reform and Opening Up—The First Step Towards the Socialist Market Economy Theory . . . . . . . . . . . 2.2 The Socialist Market Economy Established at 14th CPC National Congress in 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3 The Establishment of the Theory of Socialist Market Economy Pushes Reform Forward . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4 The Decision of the Third Plenum of the 18th CPC Central Committee and Its Influence on the Development of Economic Reform Theories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5 Accelerating and Perfecting the Socialist Market Economy and Pushing for Quality Economic Growth in the New Era . . . . . 2.6 Several Regularities of the Socialist Market Economy . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Establishment of the Theory of the Primary Stage of Socialism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 The Formation and Development of the Theory of the Primary Stage of Socialism . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 3 15 21 31 34 37 39

40 46 50

55 67 69 71 73 74 v

vi

Contents

3.2

The Scientific Implications of the Theory of the Primary Stage of Socialism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 The Theory of the Primary Stage of Socialism and Related Economic Research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

5

6

The Establishment and Development of the Basic Socialist Economic System Theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1 Break the Dominance of Public Ownership and Allow the Existence and Development of Non-public Sectors . . . . . . . . . 4.2 The Establishment of the Basic Socialist Economic System . . . . . 4.3 The Consolidation and Improvement of the Basic Economic System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4 How to Understand the Dominant Role of Public Ownership in the Socialist Market Economy . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Innovation and Development of Enterprise Theory . . . . . . . . . . . 5.1 Explore the Right Direction of the Reform of State-Owned Enterprises: 1979–1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2 Vigorously Promote the Reform of State-Owned Enterprises and Improve the Structure of Corporate Governance (1993–2012) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3 Deepen the Reform of State-Owned Enterprises Driven by the Reform of State-Owned Assets (2013 to Present) . . . . . . . 5.4 Make Strategic Adjustment to the Layout and Structure of the State-Owned Economy by Grasping Large-Scale Enterprises and Invigorating Small and Medium-Sized Ones . . . . 5.5 Reform the Management System of State-Owned Assets and Truly Realize the Separation of Government from Enterprises and from Capital . . . . . . . . . . . . . . . . . . . . . . . . . . 5.6 Actively Promote the Reform of Mixed Ownership and Develop the Mixed Ownership Economy . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Construction and Theoretical Innovation of the Socialist Market System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.1 The Four Stages of the Development of China’s Market System Since Reform and Opening up . . . . . . . . . . . . . . . . . . . . . . . 6.2 Debates About and Breakthroughs of Several Theoretical Issues During the Construction of the Modern Market System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3 The Essential Condition for the Market to Play a Decisive Role in Resource Allocation Is to Speed up the Improvement of the Modern Market System . . . . . . . . . . . .

79 86 92 93 94 101 108 115 117 119 120

123 129

133

138 142 147 149 150

166

171

Contents

vii

6.4

Improve the Financial Markets and Establish a Unified Market for Construction Land in Both Urban and Rural Areas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182 7

8

9

The Interaction of Theory with Practice in China’s Price Reform . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1 With Remarkable Progress in Price Reforms, 97% of Prices in Goods and Services Are Now Determined by the Market . . . . 7.2 The Main Course of Price Reform and Related Theoretical Research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.3 The Price Reform Debates in the 1980s Led to the Confirmation of the Goal of Building a Market Price System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.4 Push Forward Price Reforms and Keep Inflation at Bay . . . . . . . . 7.5 Some Regularities and Basic Experiences of the Price Reform . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.6 Prospects of China’s Price Reform . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Theory of Industrial Structure and Industrial Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.1 Research Progress from the Beginning of Reform and Opening to the Early 1990s . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.2 Review of Economic Research in the 1990s . . . . . . . . . . . . . . . . . . 8.3 Research Progress in the Twenty-First Century . . . . . . . . . . . . . . . 8.4 Economic Research and Exploration in the New Era . . . . . . . . . . . 8.5 Several Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Macroeconomic Management Theory with Chinese Characteristics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.1 The Bashan Boat Conference in 1985 Embarked on a New Stage in Macroeconomic Management in China . . . . . . . . . . . . . . 9.2 Research on Macroeconomic Management Since the Goal of the Socialist Market Economic System Reform Was Established . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.3 Studies and Debates About Inflation . . . . . . . . . . . . . . . . . . . . . . . . 9.4 New Developments in the Theory and Policy of Macroeconomic Management Since the 18th CPC National Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

183 184 187

197 199 201 206 211 213 215 222 232 238 247 248 255 256

258 263

267 270

10 The Reform of China’s Fiscal and Taxation System . . . . . . . . . . . . . . . 273 10.1 The Five Stages of Reform: A Sketchy Outline . . . . . . . . . . . . . . . 274 10.2 From Building a Public Financial System to Establishing a Modern Public Finance System . . . . . . . . . . . . . . . . . . . . . . . . . . . 284

viii

Contents

10.3 The Direction of Reform: Expediting the Establishment of a Modern Public Finance System . . . . . . . . . . . . . . . . . . . . . . . . . 293 10.4 Main Conclusions and Implications . . . . . . . . . . . . . . . . . . . . . . . . . 298 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 299 11 Innovation and Development of China’s Financial Theory . . . . . . . . 11.1 The Formation of Mobilizational Monetary and Financial System and China’s Economic Takeoff . . . . . . . . . . . . . . . . . . . . . . 11.2 The Conflict Between Mobilizing Monetary and Financial System and the Change in the Way of Economic Growth in China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.3 Problems Faced with China’s Financial Marketization Reform . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.4 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

301

12 Innovation and Development of Income Distribution Theory . . . . . . 12.1 The Affirmation of the Principle of “Material Interests” and the Returning to the Principle of “Interest Distribution According to Work of Labor Time” in the Early Stage of Reform and Opening Up . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.2 The Establishment of Socialist Basic Income Distribution System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.3 Further Development of Income Distribution Theory in the New Era . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.4 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

343

13 From “Development is the Absolute Principle”, to the Scientific Outlook on Development, to the New Development Concept . . . . . . . 13.1 Development is the Absolute Principle . . . . . . . . . . . . . . . . . . . . . . 13.2 The Source of China’s Economic Growth Miracle . . . . . . . . . . . . . 13.3 The Scientific Outlook on Development . . . . . . . . . . . . . . . . . . . . . 13.4 The New Development Concept . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 The “Three Rural” Issues in China’s Market-Oriented Economic Reform . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.1 “Three Rural” Issues at the Early Stage of China’s Market-Oriented Economic Reform . . . . . . . . . . . . . . . . . . . . . . . . . 14.2 “Three Rural” Issues at the Stage of Deepening China’s Market-Oriented Economic Reform . . . . . . . . . . . . . . . . . . . . . . . . . 14.3 “Three Rural” Issues in the New Era of China’s Market-Oriented Economic Reform . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

301

313 332 337 338

343 347 356 362 364 365 365 367 375 379 387 391 392 411 444 470

Contents

15 The Main Progress and Innovation of Regional Economic Theory Research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.1 On the Research Object of Regional Economics . . . . . . . . . . . . . . 15.2 On the Regional Economic Development Strategy . . . . . . . . . . . . 15.3 The Debate on the Path of Urban Development in China . . . . . . . 15.4 The Innovation of Regional Economic Development Strategy in China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Exploration and Development of Natural Resource Economics . . . . 16.1 The Origin of Natural Resource Economics . . . . . . . . . . . . . . . . . . 16.2 The Development of the Discipline System of Natural Resource Economics in China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.3 Main Branches of Natural Resource Economics . . . . . . . . . . . . . . . 16.4 Important Research Fields of Natural Resource Economics . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 The Transformation of Mode of Economic Growth and the Structural Reform of Supply-Side . . . . . . . . . . . . . . . . . . . . . . . 17.1 The Policy Implementation of the Transformation of Mode of Economic Growth in China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17.2 The Research Scheme of the Transformation of Mode of Economic Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17.3 Some Comments and Prospects . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 The Development and Review of the Opening Up Theory . . . . . . . . . 18.1 The Foreign Trade Theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.2 Theories on Foreign Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.3 Foreign Exchange Theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.4 The Regional Opening Theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.5 On the Construction of Foreign Economic and Legal System . . . 18.6 China’s Positive Progress in Opening Up to the Outside World Since Its Accession to the WTO . . . . . . . . . . . . . . . . . . . . . . 18.7 A Brief Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

ix

479 480 481 498 503 520 523 523 527 530 536 544 549 551 556 569 570 573 575 591 601 608 616 619 622 626

19 The Construction of Socialist Political Economics with Chinese Characteristics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 631 19.1 The Socialist Political Economics with Chinese Characteristics Is an Important Part of the Theoretical System of Socialism with Chinese Characteristics . . . . . . . . . . . . . 631 19.2 The Mature Socialist Political Economics with Chinese Characteristics Originates from Mature Socialist Economic System with Chinese Characteristics and Basic Realization of Modernization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 636

x

Contents

19.3 Seeking the Main Line of Socialist Political Economics with Chinese Characteristics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 641 19.4 Exploring the Basic Laws of Socialist Economy with Chinese Characteristics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 646 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 650 Postscript . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 651 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 653

Chapter 1

Overview: Economic Research in China: Analysis Based on Papers Published in the Economic Research Journal

Over the past forty years, socialism with Chinese characteristics has made remarkable progress. Meanwhile, the economic theory of socialism with Chinese characteristics has also achieved great development and prosperity. To celebrate the 40th anniversary of China’s reform and opening up, here we provide a brief review of the exploration, development and innovation of the economic theory and an outlook of what to come in the future. In the process of exploring, developing and innovating the economic theory of socialism with Chinese characteristics over the past four decades, economic researchers in China adhere to four major principles. First, they adhere to the basic principle of Marxism and guide their research with developed and Sinicized Marxism in the correct political direction. Second, they enthusiastically immerse themselves in and keep close contact with the great practice of China’s reform and opening up and its socialist modernization construction. Their research is inseparable from the country’s national conditions and the contemporary era, focused on economic development, aimed to serve the overall situation, takes in-depth study of major practical issues as the main direction of exploration, and actively pushes forward theoretical breakthrough and innovation. Third, in combination with China’s national conditions, they absorb and draw on the achievements of the civilized world and the useful achievements and methods that reflect the law of modern social production and market economy. Lastly, they provide the world a new model of development with Chinese wisdom. From the perspective of academic research, the past four decades witnessed the evolution and transformation of economic research in China, including the academic paradigm, conceptualization system, division of disciplines, methodology innovation and policy logic. The Chinese economic community has made effective contributions to the country’s economic development, in addition to the development of economics itself. Economic research in China has gradually conformed to the international standard, and continued to push forward the globalization of economic research and education. International publications of studies on the Chinese economy by Chinese

© China Social Sciences Press 2023 Z. Zhang, Handbook of Chinese Economics, https://doi.org/10.1007/978-981-99-0420-4_1

1

2

1 Overview: Economic Research in China: Analysis Based on Papers …

authors have risen exponentially, bringing the Chinese wisdom of economic theory to the global economic community. An analysis of the research articles published in the Economic Research Journal, by following the course of China’s economic development and the evolution of reform and opening up, will help trace the development in research themes, disciplines, methodologies, and theoretical paradigms over the past 40 years. China’s reform and opening-up can be broadly divided into four stages. The first stage goes from 1978 to 1991, with the rural household contract responsibility system as the breakthrough of the reform. This stage culminates in the completion of the transition from planned economy to commodity economy. The second is between 1992 and 2002. During this great transformation period, China established its market economic system framework, completed the modern macro-control system, and successfully joined the World Trade Organization (WTO). The third, lasting from 2003 to 2012, is the stage where China’s market economy system continued to improve, accompanied with rapid economic growth. In particular, its economic growth easily eclipsed the rest of the world in the aftermath of the global financial crisis of 2008–2009. During this period, China elevated itself to become the second largest economy in the world. In the fourth phase, from 2013 to 2018, China entered a new era and began to implement the supply-side structural reforms. Admittedly, it is still a work in progress. The theme of China’s economic theory changes with the times. Rural economic research is the theme in the first stage. Institutional reform, macroeconomic stability, and opening-up are the main topics in the second stage, while economic growth is the theme of the third stage. In the fourth stage, supply-side structural reforms and the construction of socialist political economy with Chinese characteristics are important research fields. China’s reform and opening up has provided the world a model of rapid growth with a dual transformation of development and system. The practice of China’s reform, development and opening-up is inseparable from theoretical induction, summation, and extration. Without major theoretical innovations and conceptual breakthroughs, reform could not have been possible. A large number of theoretical innovations are rooted in China’s economic practice and political wisdom. The evolution of theory is the unity and interactive process of knowledge and action. In their exploration of the road for socialism with Chinese characteristics, economic researchers and practitioners take an open-minded approach and absorb the essence of the development and progress of the humankind. They constantly interact theory with practice, make theoretical innovations, and introduce the Chinese mode and wisdom to the world. The past 40 years of economic research alongside China’s economic reform, opening-up and development are characterized by the full interaction between knowledge and practice and the emancipation of the minds.

1.1 The Evolution of Economic Research in China

3

1.1 The Evolution of Economic Research in China To understand the development and prosperity of the economic theory of socialism with Chinese characteristics, we follow the practical process of reform and opening up and the socialist modernization construction, and rely on the subject classifications of the Economic Research Journal from 1978 to 2018. We collect all research papers (excluding advertisements and announcements) published in journal from the start of 1979 to the 9th issue of 2018, and end up with a total of 6750 research papers. For each paper, we collect data on the author(s), work institution, paper title, year and issue of publication, page numbers, keywords in Chinese, keywords in English, the abstract, and so on. We use CiteSpaceV, a software of literature analysis, to analyze the authors, institutions, subjects, and keywords. We are able to extract the cohort of authors over the past 40 years and the cohort of research subjects after 2002. The results are then combined with the stages of China’s economic reform and development to map out the dynamic interaction between theory and practice, and the development and evolution of economic theories. The new ideas and accumulation of knowledge of China’s economic theory are closely related to China’s reform, opening-up and development, and are highly unified with the political wisdom of the central decision-making. This process, often referred to as “crossing the river by feeling the stones,” has been a tough one both in theory and in practice. More often than not, it is the breakthrough in theory that leads to big strides in practice. As mentioned earlier, the practice of economic development and the evolution of theoretical research can be divided into four broad stages, and each stage may contain a number of sub stages. Stage I (1978–1991): Inheritance and breakthrough of the socialist economic theory China’s reform and opening-up policy was conceived in the great debate of economic theory. The debate began with reflections of the Soviet textbook style ideological paradigm, followed by the exploration of the socialist political economic theory suitable for China’s development path—that is, the socialist commodity economy theory. The root of the theory lied in China’s economic reality at the time, namely how to solve the food shortage problem. Not surprisingly, China’s reform got its humble start with the household contract responsibility system in the rural areas. The stage can be further divided into two sub stages.

The Transformation of the Research Paradigm and the Challenge of the Rural Issue (1978–1984) (1) Inheritance of the theoretical exploration of socialist economy prior to the reform The research articles published in the Economic Research Journal during this period cover three broad categories of topics. In the first category are studies that directly

4

1 Overview: Economic Research in China: Analysis Based on Papers …

examine and clarify the interpretations of the classic works of Marx and Engels and Mao Zedong. The main purpose here is to clarify confusions and bring order out of chaos. In the second category are studies on political economy. This category contains 32 research subjects, as represented by 1–32 in Fig. 1.1. In the third category are the three economic sectors: agriculture, industry, and commerce. The three-sector classification is consistent with that prior to the period from 1966 to 1976, thus representing the heritage and continuity of the old paradigm. Studies published between 1978 and 1982 were mainly concentrated on rectifying the chaos and clarifying the confusions, and revisited the issues that were studied in the 1950–1960s on commodity, money, law of value, economic accounting, expanding enterprise autonomy, and enhancing productive forces. A new line of research was added in 1983—that is, the debate on the integration of commodity economy with planned economy. In 1984, the Economic Research Journal was entrusted by the Chinese Academy of Social Sciences to gather a group of economists to provide the theoretical basis for the “planned commodity economy,” a major theme of the forthcoming Third Plenum of the 12th CPC Central Committee. This

Fig. 1.1 Distribution of research subjects published in Economic Research Journal, 1978–1984. Notes (1) It mainly includes subjects of political economy and sectors of the economy. Some subjects are not listed in the figure due to too few published articles. (2) The subject classification here is consistent with the general catalogue of the Economic Research Journal, and statistics are made accordingly. Source Various issues of the Economic Research Journal

1.1 The Evolution of Economic Research in China

5

episode was arguably the most important achievement in the interaction and unification of practice, theory, and political wisdom.1 Their work helped dismantle the contradiction between planned economy and commodity economy. (2) Studies on the practical issues confronting the Chinese economy During this period, papers published in the Economic Research Journal were heavily concentrated on agriculture and economic restructuring, reflecting the zeitgeist of the time. First, China was in urgent need of new thinking and theoretical innovation on various issues such as the commodity economy, law of value, planning versus market, money, and price. Second, economic restructuring was desperately needed as China sought to find a new path of reform with Chinese characteristics. Third, since reform was initiated first in agriculture, the practice of rural reforms posed new challenges to Chinese economic scholars. (3) Theoretical exploration in the process of socialist reform and opening up In 1983, the Economic Research Journal published a series of exploratory research reports on the rural issues and enterprises. These studies helped usher in a new stage for economic research in China. This was followed by empirical studies on China’s practical issues and studies investigating the reform experience of socialist countries in Eastern Europe. In 1984, an important conference was held in Mount Mogan, a resort in Zhejiang province. This conference greatly stimulated the wisdom of a general of young economists. China’s reform and development during this period can be summarized briefly as follows. (1) The Third Plenum of the 11th CPC Central Committee, held in 1978, formulated the general policy of reform and opening up to shift the focus of the Party’s work to socialist modernization. (2) In 1979, the foundation for comprehensive opening-up and development was laid. In January, the Party’s Central Committee issued the Draft Decision on Several Issues Concerning Accelerating Agricultural Development to all localities for trial implementation. In the same year, the Adjustment, Reform, Rectification, and Improvement policy was implemented. Interest rates were raised. Two special institutions—the State Administration of Foreign Exchange and the Bank of China—were founded. Four special economic zones were set up to open up to the outside world. The State Council issued Draft Provisions on the Development of Social and Village Enterprises, Provisions on the Expanding the Operation and Management Autonomy of State-owned Industrial Enterprises, and a series of related provisions for trial implementation. (3) At the 12th CPC National Congress, held in 1982, Deng Xiaoping unveiled the task of building socialism with Chinese characteristics, laying the foundation for the practice and theoretical exploration of China’s reform. In 1984, the Third Plenum of the 12th CPC Central Committee passed the Decision on Economic Restructuring Reform. The decision proposed that the socialist economy is a planned economy based on public ownership,

1

Zhang (1999, p. 116).

6

1 Overview: Economic Research in China: Analysis Based on Papers …

and that invigorating state-owned enterprises, especially those large and mediumsized enterprises owned by the whole people, is the crucial link of the economic restructuring reform in the urban areas. China’s economic reform began with the implementation of the contract system of joint production in the rural areas. State-owned enterprises were granted more autonomy and could retain more of their profits. At the same time, the development in the rural areas speeded up the process of ownership structure adjustments. The pilot establishment of the special economic zones opened up China to the outside world. In February 1983, enterprises were required to pay taxes instead of turning their profits to the state government. In February and December 1984, government appropriations were replaced with business loans. With these reform measures, China completed the theoretical integration of planned economy and commodity economy, parted ways with the traditional theory of socialism, and took the first step towards the establishment of the new theory of China’s socialist economy. Driven by the revival and development of the rural economy, the national economy took off, with an average annual growth of 9.6% between 1978 and 1984. However, the rise in inflation in 1984 exposed China’s macro problems. People came to realize that decentralization at the micro level without proper macro control would not create a healthy national economy. The rush to delegate more power to individual economic units caused destabilization to the macro-economy, leaving China at a crossroads.

Theoretical Innovations on Socialist Economy with Chinese Characteristics and Debates on Reform Strategy (1985–1991) Since 1985, China’s economic researchers have made great progress in exploring the theory and the development path of the socialist economy with Chinese characteristics. First of all, the theoretical framework for exploring the reform and development of the socialist economy with Chinese characteristics have been gradually established. According to the classification in the general catalogue of the Economic Research Journal, as presented in Table 1.1, studies on the economic restructuring reform were the most published in the Economic Research Journal in 1985. Macroeconomic issues, ownership structure, and state-owned enterprises were the three most studied subjects during this period. In 1990 and 1991, research hotspots shifted to more specific fields such as public finance, finance and macro-control, marking the end of a period of theoretical debates. Second, a round of new reform theories were introduced. It began with the international economic seminar held on the Bashan Boat in 1985. At the trailblazing seminar, several foreign experts reviewed the traditional socialist economic system in Eastern Europe. The most prominent feature of the system was the phenomenon known as the “shortage economy,” a concept first introduced by the Hungarian economist János Kornai. Participants at the seminar grappled with the micro and macro aspects of the socialist economic system. More importantly, the target mode of reform (the so-called

1.1 The Evolution of Economic Research in China

7

Table 1.1 Topics of published in the Economic Research Journal between 1985 and 1991 Topics

1985 1986 1987 1988 1989 1990 1991

Economic restructuring

39

23

34

20

Ownership structure

1

18

13

13

Economic mechanism/economic lever

9

Comprehensive issues of macroeconomics

17

25

16

Commodity, value, price and cost

27

13

5

6

Macroeconomics (after 1987) Reproduction Issues about enterprises (changed to reform of state-owned enterprises after 1987)

23

3

18

6

9

16

16

29

24

6

15

22

8

18

9

11

8

Rural economics

14

15

18

14

16

10

7

Public finance, finance and trade

20

19

14

8

12

18

29

Labor, employment, and wages (income, consumption and employment)

7

7

5

6

10

7

4

5

6

Industrial structure and market (1991) Foreign trade and economic relationship Basic theory of the socialist economy

16 8

11

3

Source Various issues of the Economic Research Journal. The classification is based on the academic catalogue of the journal. Some subjects are modified in some years, such as in 1987 and 1991

IIB model) was put forth at the seminar. This target mode was essentially planned market coordination. It opened the door for deeper discussions about reform strategies, leading to the concept of market economy. Another development was a series of research reports on the new stage of rural development and on the challenges of reform, published in the Economic Research Journal in 1985. These research reports introduced the concept of development economics and used large-scale empirical analysis, paving the way for conducting economic analysis and empirical research on the practical problems in China. The third development was the flourishing of many new economic disciplines. Third, the thread running through this entire period was the great debate on reform strategies, including the overall reform strategy, the strategy on ownership reform, and the reform and development strategy of “seeking stable progress.” The debate on reform strategies led to ideological breakthroughs on the road of reform (Zhang 1997). In 1985, the Economic Research Journal made significant changes in terms of subject classifications. Subjects tied to the traditional political economy and economic sectors were discarded. A new classification scheme more in line with theoretical and practical contexts were gradually adopted. Outdated concepts were replaced with standard academic terminologies. For instance, comprehensive problems of national economy and reproduction were replaced with macroeconomics.

8

1 Overview: Economic Research in China: Analysis Based on Papers …

Meanwhile, new research subjects such as reform of state-owned enterprises and industrial economics gradually emerged. During this period, reform theory was closely related to reform practice. This is especially true for the relationship between price reform and enterprise vitality. In 1985, the State Council implemented a policy allowing industrial enterprises to sell their products in excess of the planned/command amount at a price of their own choice. This policy embarked on the two-track price system for factors of production. In 1987, a number of regulations concerning enterprises were issued, including the Enterprise Bankruptcy Law of the People’s Republic of China (for trial implementation) and the Law of the People’s Republic of China on Industrial Enterprises Owned by the Whole People. The State Council issued its Provisions on Deepening the Reform of Enterprises to Enhance Their Vitality. In 1990, the Law of the People’s Republic of China on Sino-Foreign Joint Ventures was passed. Meanwhile, experiments were carried out in rural reform, housing reform, financial reform and opening up, laying a foundation for theoretical exploration and reform practice in the years to come. To be sure, China’s reform has never been smooth sailing. Double-digit inflation arose in 1988, followed by economic stagnation in 1989. These setbacks prompted rethinking of the path and the cost of reform from political, economic and ideological perspectives. Despite the need for adjustments from time to time, the reform has never halted. In 1991, an important step in the reform of grain and cooking oil prices was completed, with the shift from implicit subsidies to explicit subsidies. The year also witnessed the stabilization of the household contract responsibility system in the rural areas. Scholars gradually began to re-explore the direction of the reform. In 1991, more research was conducted in areas of finance, fiscal policy, and industry, reflecting the need for economic adjustments at the time. Stage II (1992–2002): The establishment of the theory of market economy with Chinese characteristics, the establishment of the macroeconomic system, and the accession to the World Trade Organization In 1992, Deng Xiaoping, China’s paramount leader and the chief architect of reform and opening up, delivered a series of speeches during his inspection tour in the south, known as the “South Tour Talks.” In the spirit of his talks, the 14th CPC National Congress was held in the same year. The congress put forward the task of establishing the socialist market economy theory with Chinese characteristics, urging for full-fledgling reform. During 1992–2002, China accomplished three hard earned achievements. First, it established the institutional framework for the socialist market economy. Second, it stabilized the macro framework, staved off the Asian financial crisis, eradicated runaway inflation, and centralized public finance, paving the way for stable economic growth. Third, it consolidated the two exchange-rate tracks in order to boost export-oriented economic development, and successfully joined the World Trade Organization (WTO) in 2001, completing the most critical step in China’s reform and opening up (Zhang et al. 2008). Three observations can be made from the general catalogue of the Economic Research Journal. The first is the breakthrough of the theory of socialist market

1.1 The Evolution of Economic Research in China

9

economy. The most important feature of this period is the establishment of the socialist market economy system as the goal of reform. To be sure, this goal and its theoretical system had been extensively explored in the previous period. That the goal was written into the report of the 14th CPC National Congress, held in 1992, was an important demonstration of the combination of theory and practice. Affirming the theory of socialist market economy has promoted the practice of China’s economic reform and the all-round development of the theory of socialist market economy, laying a solid foundation for the success of reform and opening up. Secondly, evidence-based economic research kicked off in China. During this period, Chinese economists began to gradually integrate modern economics with their research. Development was added to the topics of reform. In macroeconomics, fiscal policy, taxation and exchange rates became the main topics of the Economic Research Journal. In microeconomics, the reform of state-owned enterprises, ownership structure, and property rights became the hottest topics in 1995. These were important reform areas after the reform of the macro management framework. Thirdly, economic researchers in China became more oriented towards solving contemporary economic problems such as the impacts of the 1997 Asian financial crisis and China’s accession to the WTO in 2001. With the establishment of the theory of socialist market economy, it is essential for practitioners and scholars, in their attempts to grasp the inherent laws of contemporary market economy, to expand the openness of theory and follow the frontiers of theory and methodology of modern economics. In response, they speeded up the absorption of modern Western economics, introducing more in fields such as institutional economics, modern macroeconomics, and development economics. Their empirical methods became increasingly mature. And they gradually strengthened the theoretical construction of the socialist market economy with Chinese characteristics. Lastly, the topics of economic research were gradually expanded. The challenges facing China’s economic development and economic operation—such as inflation, deflation, soft landing, busyness cycle, macro analysis, fiscal policy, financial crisis, exchange rate regime, financial markets, and corporate government, etc. —have become important topics in economic research. During this period, the focus of economic research turned from directly serving the goal of economic restructuring and scheme design to the close combination of reform and development, and then to a more specific exploration of the basic economic theory. As indicated in Table 1.2, research in institutional economics developed rapidly. Another hot topic in economic research was China’s economic transition. Upon entering the twenty-first century, the Economic Research Journal made adjustments in its subject classification once again. As research subjects in theoretical economics, macroeconomics, financial markets and corporate finance, public finance and income distribution, international economy and trade, microeconomics and industrial organization, market system and regional economics, and agriculture and nature resources became increasingly fined tuned, key words were needed to get a real grasp of the nature of a research paper. By 2012, the journal had basically completed its subject classification. As shown in Table 1.3, the subjects in 2017 were

11 16 16 10 16 12

Ownership and property rights

Macroeconomics

State-owned enterprises

Rural economics

Fiscal policy, finance and trade (separated from finance in 1995)

Labor, employment and wages (income, consumption and employment)

8 5

Industrial structure

Market issues 5

5

9

11

13

9

5

7

12

14

1993

5

5

9

11

20

12

16

20

13

9

1994

9

9

10

14

12

28

17

17

13

1995

14

8

8

14

13

19

16

15

17

1996

Note Significant changes regarding the subject catalogue of the Economic Research Journal were made after 2000

Financial markets

15

Basic theory of socialist economy

Open economy

12

Reform and development

1992

14

6

9

6

9

10

14

11

7

12

1997

Table 1.2 Number of papers published in the Economic Research Journal between 1991 and 2000 based on research topics

22

6

10

8

7

4

21

8

6

11

1998

27

8

11

8

14

28

7

1999

32

32

4

8

7

4

18

2000

10 1 Overview: Economic Research in China: Analysis Based on Papers …

1.1 The Evolution of Economic Research in China

11

Table 1.3 Newly adjusted subjects in 2001 and 2002 and the subjects in 2017 Newly adjusted subjects in 2001 and 2002

2001

2002

Subjects in 2017

2017

Theoretical economics

22

23

Political economy

15

Macroeconomics

24

17

Macroeconomics, money and 21 growth

Financial markets and corporate finance

35

37

Finance and securities markets

23

Public finance and income distribution

7

14

Public finance and local governments

20

International economics and trade 2

9

International economics and trade

14

Microeconomics and industrial organization

33

17

Sector and Industrial economics

23

Market system and regional economics

5

–

Corporation and corporate government

20

Labor, employment and benefits

20

Agriculture and natural resources Source Various issues of the Economic Research Journal

almost the same as those in 2012. More theoretical studies and less applied research were published, and publications were evenly distributed across various subjects. Meanwhile, the research paradigm of economic theory has changed from exploration to maturity, and gradually conformed to the international research standards. Stage III (2003–2012): Improvement of the socialist market economic system as China entered a period of rapid growth The Third Plenum of the 16th CPC Central Committee, held in 2003, decided to make the improvement of the socialist market economy system as the main task of work in the coming years. The overall trend in economic research during this period is the application of modern economic theories to China’s economic life, as the country was increasingly integrated into the global economy and the socialist market economy system with Chinese characteristics and its theory continued to improve. From the perspective of theoretical research, the most frequently studied topic was economic growth. In fact, economic growth was the most prominent research topic not only in China, but also around the world during this period. Judged from keywords, economic growth became the mainstream research topic in this period, followed by corporate governance, human capital, and monetary policy. New research themes kept coming, including economic transition, income distribution, financial crisis, information asymmetry, consumer finance, RMB exchange rate, and so on (see Fig. 1.2). In the aftermath of the global financial crisis of 2008, research on financial crisis kicked off, but lacked in depth and persistence. Research methodology improved significantly during this period.

12

1 Overview: Economic Research in China: Analysis Based on Papers …

Fig. 1.2 Research topics in the Economic Research Journal between 2003 and 2012. Source China National Knowledge Infrastructure (cnki.net)

Stage IV (2013–2018): Supply-side structural reform and the construction of socialist political economy with Chinese characteristics in the new era As China’s economy entered the new normal in 2013, economic growth remained to be the most studied subject in papers published in the Economic Research Journal. More in-depth research associated with economic growth has been carried out on total factor productivity and innovation, a line of research in parallel with China’s economic transition to endogenous growth. Other important research topics included middle-income trap, financial crisis, and monetary policy. As illustrated in Fig. 1.3, economic new normal, the Belt and Road Initiative, and market economy system were among the most prominent research keywords in 2015. In years 2016–2018, supplyside structural reform emerged as one of the top research topics. At the same time, socialist political economy with Chinese characteristics was getting more attention as a research topic, as China’s economics discourse was taking root in the discipline of economics. This up-and-coming line of research is expected to contribute more Chinese intellectual wisdom to the economics literature. An important feature of China’s economic research over the past four decades has been its extensive participation in and close connection with the practice of reform and opening up and socialist modernization. On the one hand, with the rapid development of reform and opening up and modernization construction, there is an urgent need for the support and advice of theoretical research. Many economists have been directly involved in the design and demonstration of reform programs and in the drafting of important relevant documents of the Party and the government. On the other hand, the rich practice of reform and opening up and modernization construction provides

1.1 The Evolution of Economic Research in China

13

Fig. 1.3 Research topics in Economic Research Journal between 2013 and 2018

plenty, unprecedented valuable materials to study. China’s transition from traditional command economy to socialist market economy, known as the transition economy, is a novel and important subject that is of great interest to economists all over the world. Chinese economists have duly explored this issue from many angles, conceptualized plenty of practical experience, and striven to unfold the objective regularities in this area. With the initial establishment of the socialist market economy system, the improvement of economic research itself has been put on the agenda. The close connection between theory and practice led to the unprecedented prosperity and development of applied economics, commensurate with necessity and market demand. Applied economics covers a wide range of branches, including macroeconomics, industrial economics, public finance, finance, international trade, labor economics, demographics, environmental economics, regional economics, statistics, econometrics, and national defense economics. The literature of each branch has expanded substantially in terms of the number of publications and scholars. In addition, various economic management disciplines, such as business administration (including accounting, enterprise management, tourism management, technical economy, and management), agricultural and forestry economic management, and public management (including education economics and management, social security, land resources management) have become popular topics in research and learning, attracting more and more scholars and students of economics. Data and quantitative analysis are indispensable in the study of economic theory. A paper that runs from concept to concept without using any data can hardly be a scientific research in economics. In the past, theoretical economists in China paid little attention to quantitative analysis in their study of production relations and the changes. Since reform and opening up, while continuing to study production

14

1 Overview: Economic Research in China: Analysis Based on Papers …

relations, they have increasingly turned their attention to research of productivity and specific economic issues, including policy implications. The latter entails sufficient data to support their conclusion and policy implication. Consequently, econometrics has developed rapidly, and more and more research papers have been published that conduct quantitative analysis of economic activities and use mathematical models to analyze economic issues. This is a good development in economic research, which helps legitimate economics as a rather precise science. The popularity of empirical research is an important feature of China’s economic research in the past four decades. Economic research should not only be normative, but also be positive. In the past, economic studies in China mainly focused on conceptual debates and policy annotations; they were in general normative. The lack of empirical studies significantly impaired the ability to explore and understand the hidden economic laws, undermining creative thinking in economic research. Empirical analysis aims to describe the economic process and economic phenomenon objectively and truthfully, rather than make value judgments. As such, it does not need to put forward “it must” or “it should” statements. Empirical analysis, especially case analysis, is akin to “anatomy of sparrows,” a strategy advocated by the late Mao Zedong. It is helpful for economic researchers to start with specific and typical cases, obtain data, and unfold the essential internal connections. Through crosssectional comparison of many cases, researchers can find some common regularities that happen repeatedly. Done this way, theoretical research will not be attached from the reality or violate the law of cognition. In recent years, many economic papers have carried out empirical analysis, with satisfying results. Case studies are not only found in the works of empirical analysis, but also published separately in books of case studies. They have left good impressions in the academic community. By fully absorbing the knowledge of contemporary economics, China’s economic research has improved enormously over the past 40 years. Science is the fruit of human civilization. Marxism is by no means a self-contained and inflexible theory that is detached from the road of world’s civilization development.2 It is not only ever developing, but also enriches itself by constantly absorbing the achievements of various civilizations. Marxist economics should also absorb the results of contemporary economic research and constantly enrich and develop itself. It should be noted that Western economics has many achievements in the study of capitalist market economy, achievements worthy of our absorption and reference. Over the years, Chinese economists have adopted many analytical tools from contemporary economics, and this practice has proved quite beneficial. Today, Chinese economists are no longer strangers to the concepts in modern economics, such as macroeconomics, microeconomics, opportunity cost, comparative advantage, total factor productivity, shadow price, production function, consumer choice, transaction cost, effective competition, economies of scale, economic externality, market failure, government failure, Pareto optimality, Engel coefficient, Gini coefficient, financial derivatives, options, swaps, first, secondary and tertiary industries, gross national product, gross domestic product, purchasing power parity, insider control, market 2

Selected Works of Lenin (1995, p. 309).

1.2 The Establishment of the Theory of Socialist Market Economy

15

risk, financial risk, rent-seeking, corporate governance, and so on. They borrowed existing economic theories in modern economics to analyze China’s economic problems and offer policy recommendations. Among them are theories on industrial organization, public choice, dual economic structure, unbalanced development, cost–benefit analysis, institutional efficiency, modern firm, manufacturing, shortage economy, separation of ownership and control, and market socialism. Although there are some problems in the introduction of modern economic concepts and principles— such as applying them mechanically without any attempt to tailor them to local conditions, generally speaking, the results are mostly positive and useful. Going forward, the task is to enrich and develop China’s own economic science under the guide of Marxism, make it more scientific and applicable, and better serve the cause of reform and opening up and modernization construction of the country.

1.2 The Establishment of the Theory of Socialist Market Economy In the practice of reform and opening up, how to reconcile socialism with the market economy has been a paradox that is of historical and global proportions. It is the establishment of the theory of socialist market economy that finally puts China on the road of socialism with Chinese characteristics, and eventually leads to its economic growth miracle. From Marx’s scientific socialism to the socialist practice of the Soviet Union, to the practice in China prior to its reform and opening up, the basic proposition for the socialist economic system has been formulated as “public ownership + command economy + distribution according to work.” This proposition has dominated the theory and practice of socialist countries all over the world for the better part of the twentieth century. To explore a new socialist road, China has to unshackle the fetter of this outdated theoretical framework. China’s reform and opening up is based on the country’s unique national conditions. It breaks the shackles of traditional socialist economic theory and leads China to the road of socialist market economy. It is the ultimate combination of theory, practice, and political wisdom.

From Planned Economy to Commodity Economy, Market Economy, and Socialist Market Economy According to the traditional socialist economic theory, socialism and the relationship between commodity and money are mutually exclusive, because socialism is incompatible with the market economy. Planned economy is the basic characteristic of socialism, and market economy is the exclusive property of capitalism. Prior to

16

1 Overview: Economic Research in China: Analysis Based on Papers …

reform and opening up, China’s socialist economic system was established and operated in accordance with such a theoretical framework. However, the long-term practice proved that exclusion of the commodity monetary relationship and of the market economy had significantly weakened the country’s socialist economy. The lack of economic vitality and viability, the failure to make full and reasonable use of existing economic resources, and the failure to steadily improve efficiency had widened the economic and technological gaps between China and developed economies. In the face of this harsh reality, Chinese economists began to ponder if something was amiss in their understanding of the essence of socialism and the regularity of socialist economic movement. The core of all economic problems lies in how to fully and reasonably allocate the existing resources and improve their utilization efficiency. In the past, people used to think that it was most efficient to allocate resource with the visible hand of planning, because doing so could overcome anarchy and cyclical crisis which were doomed to happen in capitalist market economy. However, China—indeed, all other former socialist countries as well—failed to reach the productivity level that was expected when planned production was fully carried out in the whole society. More realistically, since the start of the new millennium, social productivity around the world has developed rapidly. One after another, new technology keeps coming out. Production technology changes with each passing day. The number of new products increases geometrically. Supply and demand both are becoming more and more complex and unpredictable. Under these circumstances, it is impossible to achieve the balance between social production and social demand by means of planning. Planning can only lead to improper allocation and severe waste of resources. So far, the economic practice around the world shows that market is still the most effective mechanism through which to allocate scarce resources. Over a wide range of competitive economic sectors, the market mechanism automatically guides resources from low efficiency sectors to their high efficiency counterparts, thus realizing optimal resource allocation. Even in natural monopoly sectors or those that provide the essential public goods, once the market mechanism properly sets in, their efficiency can also improve significantly. Such is the magic of the market economy. And that magic explains why it is imperative for China to make the transition from planned economy to market economy. The development of China’s economic theory is inseparable from the contribution of political wisdom. In 1979, Deng Xiaoping raised the question why socialism cannot develop market economy, and stated firmly that socialism can also develop market economy. In 1984, the Third Plenum of the 12th CPC Central Committee asserted that socialist economy is a planned commodity economy that is built on public ownership. Deng Xiaoping spoke highly of the decision and considered it the political economy that combines the basic principles of Marxism with the practice of socialism in China. During his inspection tour of the South in early 1992, he stated squarely: “Socialism is not equal to planned economy, because capitalism also has plans. Capitalism is not equal to market economy, because socialism also

1.2 The Establishment of the Theory of Socialist Market Economy

17

has markets.”3 His talks laid a solid theoretical foundation for the decision of the 14th CPC National Congress, held later in 1992, which made the establishment of the socialist market economy system as the target of China’s economic reform. The 12th CPC National Congress put forth the reform principle of “planned economy first, market regulation second” and recognized the market’s supplementary role to planning, breaking the decades-long notion that planning and market were incompatible. This new reckoning promoted the gradual opening of the market for agricultural and sideline products, and paved the way for subsequent reforms. The Third Plenum of the 12th CPC Central Committee proposed that the socialist economy is a planned commodity economy. This proposition was a major theoretical breakthrough in the basic goal of economic restructuring. It helped boost comprehensive urban reforms. The 13th CPC National Congress, held in 1987, further decided to establish a new economic operation mechanism through which “the state regulates the market and the market guides enterprises” in the socialist planned commodity economy. The position of the market mechanism was escalated as a result of this decision. Deng Xiaoping’s South Tour Talks in 1992 clarified the many major confusions that had long held back people’s thinking, and for the last time made it absolutely clear that market economy is not the exclusive property of capitalism. On this basis, the 14th CPC National Congress, held in 1992, stipulated that the goal of China’s economic system reform was to establish a socialist market economy system, leading the economic reform to a stage of comprehensive system innovations. In 1997, The 15th CPC National Congress made bold innovations concerning ownership structure, distribution system and other important issues under the condition of socialist market economy. The conference proposed that public ownership can and should display diversity, that distribution according to work and distribution according to factor inputs should be combined, and that the non-public economy is an important component of the socialist market economy of China. These important propositions provided new impetus for further deepening the reform of state-owned enterprises, accelerating the strategic adjustment of the state-owned sector, vigorously developing the non-public economy, and reshaping the market main body and micro foundation. In the twenty-first century, the 16th CPC National Congress put forward the basic task of building a complete socialist market economy system and a more dynamic and open economic system in the first 20 years of the new millennium, aiming to provide a strong institutional guarantee for the overall construction of a moderately prosperous society. In 2003, the Third Plenum of the 16th CPC Central Committee put forth the scientific development outlook that is people-oriented, comprehensive, coordinated and sustainable. In 2005, the Fifth Plenum of the 16th CPC Central Committee proposed that accelerating the reform of the administrative management system is the key to comprehensively deepen the reform and improve the level of opening up. In 2006, the Sixth Plenum of the 16th CPC Central Committee proposed that social harmony is the essential attribute of socialism with Chinese characteristics. In 2007, the 17th CPC National Congress proposed to uphold high the great banner of socialism with Chinese characteristics, adhere to the road of socialism with Chinese 3

Selected Works of Deng (1993, p. 373).

18

1 Overview: Economic Research in China: Analysis Based on Papers …

characteristics, and adhere to the theoretical system of socialism with Chinese characteristics. All of these have injected a strong impetus accelerating reform and opening up, and comprehensively promoting socialist economic, political, cultural and social construction. In 2013, the Third Plenum of the 18th CPC Central Committee decided to make the market play the decisive role in resource allocation and make it the focus of comprehensively deepening reform. The Fifth Plenum of the 18th CPC Central Committee emphasized that building a moderately prosperous society in all aspects by 2020 is one of the two centenary goals. The central economic working conference held in 2015 stressed that the country should focus on promoting supply-side structuring reforms for sustainable and healthy development, and let the reforms lead other economic policy ideas in the new normal. In 2017, the 19th CPC National Congress put forward its judgment on the major social contradictions in the new era, gave a modern reposition for China’s future development, and put forward new development concepts, theoretically emphasizing the political and economic construction of socialism with Chinese characteristics.

Theoretical Innovations on Ownership Structure and Distribution in the Primary Stage of Socialism Many woke intellectuals, after calmly reexamining China’s national conditions, have realized that the country after all is still in the primary stage of socialism. The timely reckoning helped bring people wandering in fantasy for too long back to reality. China’s academic circles were replete with discussions about the nature of China’s society, and the theory and route of the transitional period. Around the Third Plenum of the 11th CPC Central Committee, economists vigorously engaged in theoretical explorations on the current stage of Chinese socialism. The first wave of debates, from 1979 to 1981, were prompted by the Party’s call for bringing orders out of chaos and setting things right for the socialist theory. The second wave of explorations, between 1986 and 1988, concentrated on the standard of productivity, the demarcation of stages, the basic economic characteristics, and the long-term nature of the primary stage. A consensus was gradually reached from these theoretical explorations. Which was that it is essential to vigorously develop productive forces and find the production relations and the economic system that accommodate productivity development. In the late 1970s and early 1980s, the intellectual circle put forward the influential argument that China’s socialism was still in the primary stage. In 1981, the Party passed the Resolution on Certain Historical Issues of the CPC since the Founding of the People’ Republic. This document, drafted under the chairmanship of Deng Xiaoping, was of historical importance. It made it very clear that China’s socialist system was still in its infancy. The 13th CPC National Congress offer systematic discussions about the theory of the primary stage of socialism. That China was still

1.2 The Establishment of the Theory of Socialist Market Economy

19

in the primary stage of socialism gradually became the consensus of the people, paving a practical and feasible way to build socialism in China. The challenge in the transition from the traditional command economy to the socialist market economy is how to integrate public ownership with the market. It is not that market economy can only run and develop under private ownership. Market economy can also be combined with public ownership, including socialist state ownership. The fact that Chinese state-owned enterprises and collective enterprises have gradually moved to the market and become the main players in market competition proves this point. At the same time, it should be noted that in order to combine public ownership with market economy, we need to reform the realization form of public ownership and state ownership, so as to promote the development of productivity. Here, the thorniest issue is how to make state-owned enterprises become separate legal entities and market subjects that have operational autonomy and are responsible for their own profits and losses. After years of trial and error, it is determined that the modern enterprise system is the direction for China’s stateowned enterprises. The major characteristics of such as a modern enterprise system are clear property rights, clear rights and responsibilities, separation of government and enterprise, and scientific management. In accordance with the requirements of the purported modern enterprise system, large and medium-sized state-owned enterprises must be restructured. Except for a few which produce special products or provide special services that must be wholly owned by the state, state-owned enterprises in general should turn into a joint-stock company in order to facilitate the separation of government and enterprise, speed up the transformation of the business mechanism, and enhance corporate governance. Here, the enterprise becomes a distinctive legal entity and its relationship with investors is clarified. The state and other investors enjoy their rights and interests as owners—including the rights to benefit from capital gains, make major decisions and select senior managers, and bear limited liability for its debt (i.e., limited to the amount of capital invested in it). Meanwhile, the enterprise enjoys civil rights, bears civil liabilities, organizes production and operation in response to market signals, is driven by the profit motive, pays taxes in accordance with law and regulation, and assumes the responsibility of capital preservation and appreciation for its investors. The government no longer directly intervenes in the business operations. This modern enterprise is designed to solve some of the long-lasting issues that have haunted state-owned enterprises, issues such as the lack of responsibility, the lack of incentives because all enterprises eat in the same big, state-provided rice pot, and insider control at the expense of owners’ rights and interests. At the same time, the separation of government and enterprise can be truly realized. The state no longer assumes unlimited responsibility for the debt of the enterprise. Most small and medium-sized state-owned enterprises can be restructured through various ways, such as leasing, contracting, merger, joint venture, and conversion to joint-stock cooperative system, or even outright sale of assets. Based on the practical experience around the country, it is entirely feasible for a large number of small state-owned enterprises to restructure themselves to joint-stock companies with a certain public ownership, in which labor and capital are intertwined. It is expected that most of the large and medium-sized state-owned enterprises in China

20

1 Overview: Economic Research in China: Analysis Based on Papers …

will gradually establish a modern enterprise system in the near future, and substantial progress will be made in the combination of public ownership and market economy. With the conventional notion that market economy and public ownership are mutually exclusive in rear view, economists began to explore the realization forms of distribution according to work from the perspective of ownership. In the primary stage of socialism, the mode of ownership is one in which public ownership dominates while other forms of ownership coexist. The form of distribution is merely the reflection of this mode of ownership. That is, distribution according to work is the main distribution form, but it coexists with a variety of other forms of distribution, and distribution is inseparable from ownership. In addition, many scholars have made new theoretical explorations on the theory and practice of distribution according to work in a socialist economy. Their work focuses on the statement that labor is the only source of value and on the participation of production factors in distribution. Some scholars, based on the premise that China is in the primary stage of socialism and that its economy is a market economy, have argued that in order to give full play to the basic role of the market in resource allocation, distribution to factors of production must be determined according to each factor’s contribution to production. This will lead to a variety of distribution forms within the existing system. The 15th CPC National Congress proposed that the basic economic system in the primary stage of socialism be a mixture of various ownership forms with public ownership assuming the dominating position. The 16th CPC National Congress proposed to uphold and improve this basic economic system in accordance with the requirements of liberating and developing productive forces, further deepening our understanding of the basic economic system. First, China’s basic economic system is determined by its basic national condition, which is that China is and will be in the primary stage of socialism for a long time. Second, the basic economic system is determined by the objective law that coordinates production relations with productive forces. In other words, it is the level of development in productive forces that determines the ownership structure. The 16th National Congress further proposed to establish the principle according to which factors of production such as labor, capital, technology and management participate in distribution according to their contributions, and improve the distribution mechanism that is dominated by the distribution according to work, but inclusive of other modes of distribution. The theory of socialist market economy and the theory of primary stage of socialism are the most important and outstanding achievements in the study of economic theory since China’s reform and opening up. They constitute the two pillars of contemporary Chinese socialist political economy. They have shattered the conventional theoretical paradigm of “public ownership + planned economy + distribution according to work” in socialism. It can be said that the two theories are the great contributions by Chinese economists to Marxist economics and to scientific socialism over the past 30 years. The most prominent feature of China’s transition to the market economy is that the transition has been carried out on the premise that the basic system of socialism is retained. That is, public ownership playing the dominant role and common prosperity are the underpinnings of China’s economic transition as it combines public ownership

1.3 Gradual Reform, Growth Miracle, and Macro Stability

21

with market economy. The notion that public ownership plays a dominant role can be understood from three angles. First, public capital retains the dominant share of total social capital. Second, the state-owned economy controls the crucial industries and key fields that are related to the lifeline of the national economy, and plays a leading role in the national economy. Third, public ownership may differ across regions and industries. A basic economic system that is dominated by public ownership will effectively preclude polarization that becomes inevitable in pure capitalism, eventually leading the country to common prosperity for all the people. In the late 1990s, economic scholars in China were faced with many problems concerning ownership and distribution that must be confronted and solved. Since the start of the new millennium, economists have turned their discussions about ownership and distribution to the various realization forms of public ownership, the management of state-owned assets, the reform of the monopoly industries, and the establishment of a modern property rights system, while their discussions about distribution have turned to fairness, efficiency, and income inequality. It should be pointed out that integrating public ownership with market economy and preventing polarization are crucial to the success of China’s reform and to the establishment of the socialist market economy system. Consequently, the policies China is actively promoting, such as the reform of state-owned enterprises and the government, the reduction of income inequality, the construction of a harmonious society, and the scientific development path, have attracted more and more global attention. The economic research on income distribution in China covers many aspects of the topic. In recent years, the Chinese government has actively promoted the goal of building a prosperous society in all aspects. And this should be used as the loadstar in efforts to improve income distribution. We should focus on proving people’s livelihoods. The income gap has gradually stabilized in recent years. Nevertheless, with a Gini coefficient of more than 0.4, the gap is still rather large. Inequality in wealth is even greater after the rising housing price in recent years is taken into account. The issue of distribution is getting more attention from the policy makers as more and more theoretical research in this area and empirical studies based on CHIPS data are published.

1.3 Gradual Reform, Growth Miracle, and Macro Stability The great practice of China’s reform and opening up has not only lead to breakthroughs in basic theories. It has also uncovered a specific mode of reform that is in line with China’s reality—a path of gradual or progressive reform. This mode of reform has created a Chinese growth miracle that stuns the world, making China the paragon in the practice and theory of socialist economic reforms. Sustainable high-speed growth would not be possible, were not for the growing maturity of

22

1 Overview: Economic Research in China: Analysis Based on Papers …

the macro-control system and regulatory policies. China’s economy has shifted from wild fluctuations to stable high-speed economic growth. Gradual reform, high growth and macro stability are the three characteristics of China’s reform path to economic modernization.

The Path of Gradual Reforms After 1976, China launched a nationwide campaign to bring order out of chaos and set things right. In the late 1970s, reform and opening up was initiated, first in the rural areas. In September 1980, the CPC Central Committee issued an influential document concerning several important issues on further strengthening the household responsibility system in agricultural production, allowing farmers to voluntarily implement the household responsibility system. Over the next two years, this system sprung up rapidly across the country. On this basis, rural collective ownership based enterprises, commonly referred to as township enterprises, arose from the horizon. Significant progress was made in reforms outside the state-ownership system. Shortly after the rural reform, Sun Yefang, a famous economist, strongly advocated for granting state-owned enterprises more management autonomy and making it the focal point of reform and development. His idea was shared by most economic scholars and leaders in elite economic research institutions. Encouraged by the self-governing enterprise system prevailing in Yugoslavia at the time, some scholars put forward more fine-tuned theories on the mode of reform. Jiang Yiwei, for instance, proposed the enterprise-centered theory.4 In light of this theory, the province of Sichuan began to carry out pilot schemes to give enterprises more autonomy and allow them to keep a bigger share of their profits. Capital Steel and Iron, a giant state-owned enterprise headquartered in Beijing, implemented the same reform with unprecedented enthusiasm, setting a good example for many others to follow. The limitations of this approach soon emerged, however, and so did the problem of how to balance and coordinate the national economy from a macro perspective. The success of the rural reforms pushed forward the system reform in an allround way. In 1984, while great progress was being made in the countryside, the urban areas were struggling. People were cautiously making baby steps in urban reforms, afraid of stepping on mines that might undo the progress. At this junction, in September 1984, a brainstorming conference was held at Mount Mogan, a resort in Zhejiang province. The conference was led by a group of ambitious young scholars such as Zhu Jiaming and Huang Jiangnan, sponsored by a number of influential newspapers and magazines, including Economic Weekly, Economic Daily, the World Economic Herald, China Youth Daily, China Youth, China 100 Towns and Villages Information, Economic Efficiency, the Central People’s Radio Station, and jointly sponsored by the Academy of Social Sciences of Zhejiang province and the Institute of Economic Research Center of Zhejiang province. The participants had in-depth 4

Jiang (1980).

1.3 Gradual Reform, Growth Miracle, and Macro Stability

23

discussions about the dual price system and price reform. These discussions led to important breakthroughs in the theory of dual price system and price reform. In 1984, the Third Plenum of the 12th CPC Central Committee adopted the Decision on Economic System Reform. The decision proposed to accelerate the pace of reform for the whole economic system (though this time concentrated on urban areas), and develop the socialist commodity economy; it emphasized the importance of establishing a reasonable price system, saying that the reform of the price system is the key to the success of the reform of the whole economic system; it proposed to enhance the vitality of enterprises, especially large and medium-sized enterprises owned by the whole people, stressing that this is the central link of the whole economic system reform; it pointed out that the country should actively develop various economic forms and modes of operation. A number of major steps in economic restructuring reform had already been made, including (1) adjustment in ownership structure; (2) pilot coastal opening up; (3) establishing pilot reform areas to promote regional development; (4) dual track mechanism in market system reform (5) shift from command to an indirect control based approach in macro control. In 1985, China’s economic development reached a tipping point. China was faced tough choices moving forward. The Bashan Boat meeting, attended by dozens of top economic experts from both China and abroad, indirectly pointed out the direction for China’s economic development, telling Chinese people for the first time what the market-oriented reform was intended to achieve, what macroeconomic management was, and what China urgently needed at the time. In the fourth quarter of 1984, investment soared thanks to excessive credit, and inflation reached 10% with fast consumption growth. It is against this backdrop that the Bashan Boat meeting was convened. The meeting helped lay a crucial academic foundation for the market economy and macro management system in the 1990s. In 1992, the 14th CPC National Congress set the goal of establishing the socialist market economic system. In 1993, the Third Plenum of the 14th CPC Central Committee passed the Decision on Several Issues Concerning the Establishment of the Socialist Market Economic System, putting forward the basic framework of the new system. The decision required the country to combine overall reform with key breakthroughs, and establish the socialist market economic system by the end of the twentieth century. The decision also put forward the goals for the reform of the key aspects of the socialist market economy, such as public finance, finance, foreign exchange management, enterprise system and the social security system. A reform plan was worked out soon. The fiscal system would be transformed from the original administrative contract to a tax sharing system in which taxes were to be divided between the central and local governments based on their functions and powers. A central bank system would be established to implement monetary policy under the leadership of the central government. The existing banks would operate like a business. Policy-oriented banks would be established to carry out the policy undertakings that had previously belonged to the original state-owned banks. In 1995, the National People’s Congress passed the Law on the People’s Bank of China. Meanwhile, state-owned enterprises engaged in various reforms to further transform the operating mechanism, establish a modern enterprise system that would adapt to the requirements of the market economy, clarify property

24

1 Overview: Economic Research in China: Analysis Based on Papers …

rights, clarify responsibilities and rights, separate themselves from the government, and adopt scientific management. Based on this, the National People’s Congress passed the Company Law. The socialist market economy system has been gradually established and incorporated into the framework of legal management. In 1997, the 15th CPC National Congress made another historic breakthrough. It put forward a slew of new policy measures that would satisfy three purposes: to develop socialist productive forces, to enhance comprehensive national strength, and to improve people’s living standards. The new policies included: shrink the size of the country; gradually withdraw state-owned capital the fields that are not the lifeline of the national economy; seek and develop various forms of public ownership that can promote the development of productive forces; encourage the development of the non-public economy and make it an important part of the socialist market economy. China’s reform has followed a progressive approach. It began with reform on the ownership structure, aimed to promote the development of the non-public economy. It then moved forward to make adjustments on the dual track economic system. It then embarked on the reform of the macro management framework of public finance. Finally, it concentrated on the reform of state-owned enterprises. In fact, in 1999, the Fourth Plenum of the 15th CPC Central Committee made a special decision on the reform and development of state-owned enterprises. In the twenty-first century and especially after the 16th CPC National Congress held in 2002, great efforts have been made to improve the market economy system, establish the management system of state-owned assets, establish and improve the social security system, improve the adjustment mechanism of income distribution, and protect the environment. This gradual reform path is the interactive result of theory and practice and has created many pioneering reform policies, such as incremental reform, pilot promotion, and the interaction between reform and opening up. Theoretical inductions of this process have caused many discussions in both domestic and global arenas, such as comparison between “Big Bang” and gradual reform.

The Economic Growth Miracle of China Economic growth in China is a miracle that has been rewritten continuously. That the miracle is achieved under a suboptimal system where adjustments are constantly being made to accommodate new development makes it all the more pronounced. To be sure, China’s gradual transition from a highly centralized command economy to a modern market economy, and eventually to a quasi-modern economic growth structure has never been easy. China’s economic growth is the direct result of its exploration of the path of economic development. In the era of command economy, academic and practical economists concentrated their discussions on the two major economic sectors and the relative importance of agricultural, light, and heavy industries. They were divided into camps in terms of strategic priority. One camp emphasized giving priority to the heavy industry while the other advocated for a balanced development. Yet they

1.3 Gradual Reform, Growth Miracle, and Macro Stability

25

both agreed on the macro management framework, i.e., planning and comprehensive balance. After reform and opening up, starting from the adjustment of the national economic structure, China began to experiment with structural changes, and explore new operation and macro-control mechanisms. In the 1980s, development economics and reform theories from Eastern Europe were introduced to China, causing a new wave of debates and discussions about development, operation mechanism and macro-control. Starting from February 1981, economic scholars in Beijing began to hold a series of symposiums once every two months to contemplate China’s development strategies. When the series ended in March 1989, a total of 49 symposiums were held. They have profound influences on the formulation of China’s economic strategies. Strategic discussions in the academic circle at this level have generally exerted significant influences on national policies. The 12th CPC National Congress, held in 1982, put forward the strategic goal of gradually increasing economic efficiency to quadruple the gross industrial and agricultural production and achieving a well-off level of people’s material and cultural life by the end of the twentieth century. The 13th CPC National Congress adopted Deng Xiaoping’s three-step strategy to basically realize modernization. In 1992, Deng Xiaoping put forthhis famous and important thought that development is the absolute priority.5 From then on, it has become a major political issue to promote economic development, and the pace of economic construction has kicked into high gears all over the country. In the economic community, there were waves of strategy studies, but these studies did not introduce additional economic methodologies, but rather offered reflections on how to improve the mode of economic growth. Many scholars continued to explore how to continuously improve economic efficiency. Deng Xiaoping’s three-step strategy pushed economists to do more research on modern development strategy, and actively delve into the research of industrial structure, regional layout, and environmental economics. In the late 1990s, research in these areas were gradually incorporated in the new economic theoretical framework. Ideas from development economics, such as structural model, comparative advantage, and learning by doing dismantled the traditional framework, making direct contributions to China’s economic growth and structural adjustment. Great progress has been made in China’s structural adjustment, especially in the development of agriculture and the light industry. Comprehensive development was also made in the manufacturing sector in line with comparative advantage and learning by doing. China’s economic growth has witnessed three major leaps. In the 1980s, the development of agriculture and township industry led the way. In the mid-1990s, the manufacturing sector, driven by exports, took off. The third leap was driven by the twin engines of urbanization and industrialization. In 1997, housing mortgage loans for homeowners were launched. In 2002, with the “bidding, auction and listing” scheme completed, all the elements in the supply and demand of the housing market were put into circulation. China entered the stage of rapid urbanization. By 2018,

5

Selected Works of Deng (1993, p. 377).

26

1 Overview: Economic Research in China: Analysis Based on Papers …

China’s urbanization rate reached almost 60%. China has completely changed from an agricultural country to a modern country dominated by cities. Since reform and opening up, China has maintained an average annual economic growth rate of around 10%. In the first 25 years, from 1978 to 2002, the average pace of GDP growth was 9.7%. China went through several exploratory stages in its reform and opening up during this lengthy period: (1) rectifying chaos and implementing rural land contract system from 1978 to 1984; (2) rapid development of township enterprises from 1985 to 1988; and (3) economic adjustment from 1989 to 1991. In 1992, Deng Xiaoping’s south-tour talks ushered in a new historical period of comprehensive reform and opening up. In 1994, the theory of socialist market economy was established in the Third Plenum of the 14th CPC Central Committee. China successfully warded off the external shocks of the 1997 Asian financial crisis and the burst of the dotcom bubble in 2001. China eventually joined the WTO in December 11, 2001 after years of negotiations. With the deepening of reform and opening up, China firmly and confidently moves forward on the road of socialist market economy with Chinese characteristics. Its great achievements have gained hearty supports of the Chinese people. In 2003, China began to shift its economic strategy from industrialization to urbanization. In 2011, China’s urbanization rate exceeded 50% for the first time. With that, China changed from an agricultural country with a dominant agricultural population to a modern economy with a dominant urban population. In 2012, the services sector surpassed the manufacturing sector to become the locomotive of China’s economic growth. With services accounting for an increasing share, the national economy has gradually shifted from high-speed growth to medium-to-high-speed growth (see Table 1.4). Table 1.4 Economic growth in China and selected countries GDP growth (%)

Growth in GDP per capita (%)

1978–2002

2003–2016

1978–2002

2003–2016

China

9.70

9.59

8.37

9.01

U.S.

3.17

1.85

2.08

1.01

Britain

2.58

1.63

2.36

0.90

Germany

2.14

1.25

1.92

1.24

France

2.33

1.09

1.83

0.52

Japan

2.96

0.86

2.50

0.89

Korea

7.98

3.59

6.82

3.05

Singapore

7.25

5.60

4. 76

3.42

Malaysia

6.48

5.10

3.80

3.21

Thailand

6.19

3.89

4.64

3.36

Indonesia

5.12

5.49

3.20

4.12

The Philippines

2.78

5.56

0.25

3.77

Source Ping and Yu (2018)

1.3 Gradual Reform, Growth Miracle, and Macro Stability

27

Table 1.5 China’s Shares in global economy in selected years Indicators

1952

1978

2016

Share in world GDP

4.6

4.9

14.84

Share in world population

22.5

22.3

18.82

Relative to the world average GDP per capita

23.8

22.1

88.3

Rank is world GDP

3

4

2

Share in total global trade

1.0

0.8

13.2

Source Ping and Yu (2018)

Over the past 40 years, China’s economy led the world in growth. In 2017, China’s share of global GDP was almost 15% (see Table 1.5). The literature on economic growth, especially endogenous growth, has expanded rapidly. The fact that China has shifted from the development economics paradigm to the economic growth paradigm has many theoretical and practical implications. According to Lucas (2004), growth and development are considered as two different fields because growth theory is confined to what we have already known about economic growth, while development theory covers what we have not yet known about it. After going through multiple stages of transformation, the Chinese economy has gradually become a stable one with well-established institutions. China’s rapid economic growth has attracted the attention of the world, and its development path is understandable now (Ping et al. 2007). China’s economic growth can be explained by the endogenous growth model. China has entered a new era where innovationdriven growth has gradually replaced growth that arises from correcting structural distortions and government stimulus. At the same time, government interventions have given way to the role of the market, boosting the growth of total factor productivity (Ping et al. 2011). Many scholars have tried to characterize China’s unique road to rapid economic growth. Growth models that describe how the central and local governments divide their responsibilities and share the benefits, such as federalism, local bidding, and local competitive neutrality, have gained widespread awareness around the world.

Comprehensive Reforms and Macroeconomic Stability During the Transition Period Another important contribution made by Chinese economists is the exploration of reforms in an all-round way. China’s economic reform kicked off at the micro level. In the early days, food shortage was the first and foremost problem to solve. Whether in the countryside or cities, in agriculture or manufacturing, micro stimulation has been used to improve productivity. A series of incentive schemes have been successfully implemented for farmers, enterprises, and local governments. In the countryside, the household contract responsibility system was adopted. For state-owned enterprises in

28

1 Overview: Economic Research in China: Analysis Based on Papers …

urban areas, the head of enterprise responsibility system and the enterprise contract system were introduced, and the green light was given to the private sector. For local governments, the local fiscal responsibility system was installed. From 1978 to 1984, the household contract responsibility system replaced people’s communes in the countryside. This new regime substantially increased grain production within a short period of time. Built on this success, township enterprises with collective rural ownership sprung up, paving the way for the development of various forms of ownership. Starting in 1985, the enterprise contract scheme was implemented to restructure the urban economic system, with the aim to emancipate productive forces. However, reforms at the micro caused disorderly competition, waste of resources, large swings in prices, and inadequacy in government fiscal revenues. The economic vitality released from the micro level often led to macro instability. This stability can be broadly attributed to the lag of price reform. In 1988, the bold price experiment failed badly, causing runaway inflation as high as 18.5%. The state government had to take tightening control measures to fend off inflation, causing economic downturn in 1989 as a result. Many scholars came to realize that the economic reform must take into account both the micro and macro aspects. Otherwise, it is very difficult to deepen the reform. At that time, the economy was still in a precarious state and could easily swerve into high inflation if government regulations were relaxed a bit. Under this background, economic scholars led by Professor Wu Jinglian began to explore the idea of comprehensive reforms. They advocated for the establishment of the macro-control system. At the time, many scholars only emphasized the importance of micro reforms, such as the shareholding reform of state-owned enterprise, endorsed by Professor Li Yining. Scholars from the Chinese Academy of Social Sciences put forward the idea requiring that the enterprise reform and the price reform be promoted simultaneously, so as to balance economic reform and social stability. Comprehensive reforms designed to promote the construction of the macro system was not merely a theoretical exploration, but also a practical choice. Following Deng Xiaoping’s southern inspection tour in 1992, China was put back on the track of reform. But inflation also roared back. The consumer price index (CPI) reached a new record in 1993, and continued to rise the next year, to as high as 24%. Meanwhile, smuggling was rampant while China was having consecutive foreign trade deficits. Without effective comprehensive reforms at the macro level, good opportunities for reform and opening up would be forgone. (1) Unification of the dual track exchange rates The exchange rate system reform in 1994 helped trigger a trade surplus for China. The reform also unfolded the curtain for the construction of China’s macro management system. In the 1980s, China implemented a dual track exchange rate system. In such a system, one was the official exchange rate at which firm doing international trade exchanged currencies with state-owned banks, while the other was the exchange rate reached in the so-called swap centers where exporters and importers traded their quotas of foreign exchange directly. Never mind the exchange rate in the black market. On January 1, 1994, China unified the two tracks, officially abolishing the

1.3 Gradual Reform, Growth Miracle, and Macro Stability

29

dual exchange rate system. In 1994, the exchange rate between RMB and the U.S. dollar was changed from 5.8 yuan to 8.7 yuan per dollar. Up to 1994, China never had a trade surplus on its balance of payments. The unification of the exchange rates enabled the country to fully take its comparative advantage. China reached a trade surplus soon, and the magnitude of the surplus has gradually increased in the years to come. Today, China has the greatest foreign exchange reserves in the world. With trade surplus and foreign exchange reserves continuing to rise, the People’s Bank of China has adopted a money supply system predicted on its holdings of foreign exchange reserves. (2) The tax-sharing system reform An effective tax sharing system is not only conducive to the maintenance of national unity, but also strengthens the central government’s fiscal position. In 1994, China began to reshape its fiscal and tax system. The original local administrative contract responsibility regime was replaced with a tax sharing system which split the tax powers and tax revenue between the central and local governments. The new system was designed to tilt the balance of power toward the central government. The fiscal position of the central government was greatly strengthened as a result, while local interests were also taken into account. The tax sharing system was an institutional and theoretical innovation in dealing with the relationship between the central and local governments. The problem of the system, however, was that the central and local governments were not put on the same footing in terms of tax powers and expenditure obligations. Specifically, while the central government got the largest share of the tax revenue, the local governments were responsible for the majority of the local expenditure obligations. With the rapid development of urbanization, increases in local governments’ expenditure obligations were not matched with increases in fiscal revenues, causing a series of regional budgetary crises in the twenty-first century. To cover the budget shortfall, beginning in 2002, local government started the practice of “bidding, auction and listing” of urban land. The fund from land transfers has enabled local governments to make up for fiscal deficits and promote urbanization, ushering in land-based financing. (3) Establishment of a modern banking and financial system In 1995, China’s state banks were modernized in accordance with the law of commercial banks. Banks were reorganized, and parts of the non-performing assets were sold to special asset management companies. One by one, the major banks transformed themselves into modern shareholding firms and completed stock market listing in mainland China and Hong Kong, further enhancing their balance sheets. A modern financial system based on commercial banks has been established. The development of macroeconomics in China has generally followed the mainstream Western macroeconomics. Armed with modern macroeconomic theories, reforms were initiated on the banking system, corporate governance, and the financial market. The common thread connecting these reforms is the export-oriented

30

1 Overview: Economic Research in China: Analysis Based on Papers …

economic development path. Through learning by doing, China has gradually established its own macro-control system, with satisfying results. Since 1995, China has never experienced runaway inflation. During this period, the macroeconomic theoretical front made great progress, promoting sustained economic growth in China, as seen in Fig. 1.4. China’s urbanization rate exceeded 50% in 2012. The share of services in gross national product has gained rapidly. Today, China is the second largest economy in the world, and its per capita GDP has reached a level that is above average. Nevertheless, China is faced with a series of problems, such as structural slowdown, inadequacy in innovation, ecological deterioration, high leverage, and so on. The central government has taken these problems seriously and, after reviewing the situation, characterized the new stage of economic growth as the new normal. The government has launched supply-side structural reforms, put forward new development concepts, and implemented new measures to reduce leverage. From theory to practice, China’s macroeconomic management framework has once again entered the new circle of reform and adjustment. China’s economic development has entered a new stage. Take urbanization. China’s urbanization process is closely related to export-oriented industrialization. It is the latter that drives urbanization, as a large number of rural surplus labor force enter the modern production sector. With urbanization rate having reached 50% in 2011, urban economy has become the mainstream of the Chinese economy. It is estimated that the urbanization rate will reach 60% by 2019, and 65% by 2023. As China is becoming a country dominated by cities, it can no longer rely on urbanization construction to drive economic growth. This means that China must adjust the macro management framework based on export-oriented industrialization to a system that is based on urban economy (Ping 2018).

Fig. 1.4 Economic growth and inflation in China

1.4 Theory of China’s Opening Up

31

1.4 Theory of China’s Opening Up From the very beginning, reform and opening-up have been intertwined and inseparable. They have consistently driven each other. Through opening up over the past 40 years, China has become a big beneficiary of globalization. Opening up has greatly promoted China’s economic development. With its accession to the World Trade Organization in 2001, China has entered a new stage of comprehensive opening up and integration into the world economy. This means that when studying contemporary economic issues, even domestic ones, we should have an open and global perspective. In particular, we should pay special attention to the global economic trends and the experiences and lessons of foreign countries. Unswervingly carrying out opening up is an important legacy of the Deng Xiaoping Theory, which embodies the greatness of political wisdom. Opening up to the outside world is a basic national policy for China to realize socialist modernization. The theory of opening up has evolved in several steps. The first is to abandon the closed and semi-closed development mode, switching to economic development driven by exports. The second is to adopt a gradual approach to opening up, starting first with the development of the special economic zones, and then gradually opening up in an all-round way. The third is to establish an open economic system with opening up as a basic national policy. Opening up has greatly promoted the deepening of the system reform. Government behavior norms have increasingly converged to the international standards, resulting in a new economic and administrative management system. The fourth is to make full use of the resources and markets both at home and abroad, actively introduce foreign direct investment, and vigorously develop imports and exports. At the same time, Chinese companies are encouraged to go global by investing in foreign markets. With its rising global status, China must be treated as a major power accordingly. The internationalization of RMB, the Belt and Road Initiative, and building a community with a shared future for mankind have been the major missions at the current stage of economic development in China.

The Switch in Development Strategy from Inward to Outward From the perspective of economic development, a country can either adopt inward and outward driven strategy. In the 1980s, China relied on an inward oriented opening strategy of “import substitution,” which caused lots of pressure on foreign debt. In response, the Third Plenum of the 14th CPC Central Committee proposed to deepen the reform of the foreign economic sector, including foreign trade, foreign direct investment, foreign-funded enterprises, foreign exchange, foreign taxes, and relevant laws and regulations. It also called for promoting export-oriented overall development. It was not until 1994 when opening up was further deepened that China

32

1 Overview: Economic Research in China: Analysis Based on Papers …

really began to implement its export-oriented strategy. Great results have achieved ever since. This strategic transformation has brought China’s economy and system to a new stage. In the years leading up to reform and opening-up, the role of foreign trade was taken simply as a means of trading surplus products with each other. Soon after the reform and opening-up policy was implemented, Chinese scholars quickly delved into the theoretical paradigm of modern international economics. Armed with newly found concepts such as international division of labor and comparative advantage, they pointed out the inevitability of international division of labor for China. In the 1980s, with the continued introduction of international trade theories, especially those that link foreign trade to national development, a theoretical analysis framework of trade and growth was formed in China. In the mid and late 1980s, foreign trade continued to promote China’s economic growth. In particular, import substitution and export-oriented activities loomed large in coastal areas. According to the big cycle theory, with the help of the international markets, a country first develops its laborintensive industries through exports, and then uses the funds from exports to support the development of the heavy industry, which in turn supports the development of the light industry and agriculture, eventually achieving long-term economic growth. At that time, some scholars advocated for the strategy of combining export orientation with import substitution. In the mid-1990s, the government put forward its grand strategy for the economy and foreign trade. Foreign trade, domestic production, and the supporting systems such as finance have all but incorporated in this grand strategy. The foreign exchange rate regime has been an inseparable component of China’s export-oriented development strategy. After Deng Xiaoping’s South Tour Talks in 1992, China reinstated its road of opening up. Since many special economic zones had not yet been export-oriented, the imbalance between imports and exports deteriorated. With the unification of the dual exchange rates in 1994, China finally transformed itself from import substitution to export-oriented growth. With rapid expansion in foreign trade, China began to speed up the introduction of foreign capital. From the perspective of theoretical paradigm, development economics covers a wide range of topics concerning international trade and capital, such as double gap, multinational corporations, protection of infant industries, and industrial transformation. These theories constitute a theoretical research paradigm to examine the introduction of foreign investment to China and its likely impacts. They also provide the basis for policy-making. Both because of the need for external demand to fully absorb the huge number of surplus labor and because of very limited long-term foreign exchange reserves, China has implemented incentive policies to boost exports and the introduction of foreign direct investment. The government provided subsidies to both exports and foreign investment. The exchange rate reform in 1994 accelerated the development of foreign investment and foreign trade. By the mid and late 1990s, foreign trade had become an important driving force of China’s economic growth. With dependence on foreign trade ever increasing, China has built up huge foreign exchange reserves. China has gradually formed an export-oriented economic system.

1.4 Theory of China’s Opening Up

33

The accession to the WTO in 2001 pushed China to a comprehensive opening up stage. The 16th CPC National Congress put forward the strategy of going out. The 18th CPC National Congress introduced the Belt and Road Initiative. The initiative will help build a new international order that is based on continental development. In recent years, China has proposed the notion of building a community with a shared future for the countries. After RMB became the fifth currency in the Special Drawing Right (SDR) basket in 2016, its exchange rates have become increasingly transparent. The introduction of RMB into the international system is another great achievement in China’s export-oriented economic development. It also entails new strategic arrangements. The process of economic globalization is full of both opportunities and challenges. The most distinctive feature of China’s opening up is the opening up in selected regions. In the early days, four special economic zones in Guangdong and Fujian were selected to experiment with opening up. This policy caused heated debates in some quarters of the economic community about the nature of the special economic zones. Later, China launched its full-scale regional opening up scheme by opening up 14 selected coastal cities. However, this opening up approach has caused imbalanced development across regions, and formed different strategies of regional development, such as the gradient development strategy. Even after China adopted comprehensive opening up in the 1990s, regional differences prevailed as the original special economic zones and cities expanded their territories. After the 18th CPC National Congress, the free trade zone pilot scheme has been fully implemented across the country. Meanwhile, China continues to expand its international cooperation and pursue a win–win development through the Belt and Road Initiative.

The Dynamic Interaction Reform and Opening Up China’s experience has shown that opening up is crucial to break the old system and form the new one. Without the promotion of opening up, it would be very difficult to break the old system. Opening up has brought about increasing returns on the new system, a continuous force to break the old system. The purpose of reform is to build a new, efficient economic system that enables China to be competitive in the world arena. Toward this end, an open economic system, rather than a closed one, is needed. The new system should absorb the knowledge from advanced civilizations, so that China can compete with other countries and become a modern developed country. This is the only way for the rejuvenation of the Chinese nation. Opening up to the outside world makes China vulnerable to unfair competition in the international markets for both commodities and financial products, and to external shocks and risks such as the Asian financial crisis in 1997. To minimize the risks from globalization, it is very important for big countries like China to follow a self-centered strategy when opening up to the world.

34

1 Overview: Economic Research in China: Analysis Based on Papers …

The Big Country Model China has always pursued a small country model in its exports-oriented economic growth. For a very long time, China has been on the receiving end of international prices and rules. Now that China is the second largest economy in the world, it has gradually embraced the big country model. The behavior of a big economy can affect global prices, monetary and fiscal policies, financial stability, division of the supply chain, and international rules. Previously, China was merely a price taker in the sense that its foreign trade activities did not affect international prices. Consequently, foreign countries cared very little about the economic and social changes in China. For example, the world paid little attention to China’s exchange rate reform in 1994, because its share of global trade was less than 1% at the time. Twenty years on, when China reformed its currency regime to enhance exchange rate transparency on August 11, 2015, the whole world noticed. China has constantly pushed the internationalization of its currency and actively participated in international governance. In 2016, the International Monetary Fund (IMF) formally included the Chinese currency to the SDR basket. Changes in exchange rates, prices, and national policies will inevitably affect the world. China is no longer a passive price taker, but an active participant and player in global affairs. In short, China has become a big economy. The world is wary of not only the spillover effect of China’s economic growth, but also its modernization transformation in terms of national governance. Its choice of development path will also affect the global political and economic pattern. Future economic research about China’s internal and external influences must be predicated on this big country model.

1.5 Summary and Prospects of Economic Research in China Under the guidance of the theory of socialism with Chinese characteristics and the scientific outlook on development, China, the biggest emerging economy with a population of 1.4 billion, continues to push forward its economic development. The goal is to basically achieve modernization and become a major world power by the middle of the twenty-first century. This unprecedented endeavor provides a very broad prospect for Chinese economic researchers.

Subjects and Authors of the Economic Research Journal and International Publications: 1978–1988 This section provides a brief review of the main research subjects and authors in the Economic Research Journal over the 1978–2018 period. A number of conclusions can be drawn regarding the research subjects. First, economic growth has been

1.5 Summary and Prospects of Economic Research in China

35

Fig. 1.5 Research subjects of studies published in the Economic Research Journal: 1978–2018. Source Various issues of the Economic Research Journal from 1978 to 2018

not only the theme of China’s economic development, but also the main subject of economic research over the 40-year period. As shown in Fig. 1.5, in 2002, research on total factor productivity gained popularity, reflecting China’s gradual transformation to endogenous growth. Second, reform and macro management provide the driving force, the guarantee, and the basis for economic development. Not surprisingly, there are abundant studies on these subjects. Third, business management has become one of the most important aspects of economic theory and economic development, pushing forward the process of China’s industrialization. Fourth, after 2017, theoretical discussions on socialism with Chinese characteristics, aimed to summarize the country’s development path, have gain momentum. Figure 1.6 provides the profile of the authors and their publications in the Economic Research Journal over the 1978–2018 period. The authors are relatively concentrated in the Economic Research Institute of the Chinese Academy of Social Sciences. They have the unique advantage to get their papers published in the journal, which itself is sponsored by the institute. A more important reason, however, is that the economic institute has long been the most prestigious institute of economic research. Over time, many authors have left the institute. At present, the author group is more spread out than before, with relatively fewer authors from the institute. Another change in research publications is that collective research has given way to individual research. Publications in international journals by Chinese scholars have risen exponentially. The Sun Yefang Foundation provides research awards to Chinese authors around the globe. International publication is an important evaluation metric for professors teaching at Chinese universities. More and more economic research is

36

1 Overview: Economic Research in China: Analysis Based on Papers …

Fig. 1.6 Author profiles of the Economic Research Journal: 1978–2018. Source Various issues of the Economic Research Journal from 1978 to 2018

done with an international perspective. Many research articles attempt to characterize the country’s historical development using data collected in China. Their research methodology and theoretical development are in line with the global standards. Yet they suffer from two bad trends. The first is that empirical research is getting increasingly detached from reality, partly due to insufficient data. Because of the rigorous requirements for data in empirical studies, research papers based on cases and field surveys are rarely published. As a result, the subject under investigation in empirical research is getting far away from the real world. Additionally, it seems like everybody is doing an econometrics homework exploring the same database. The second trend is that theoretical research is excessively trivial, formalized, and divorced from reality. Many studies tend to examine a very small topic using excessive formalization. Publish for the purpose of publication has become the norm of knowledge production. Excessive reliance on an established model such as the DSGE model is rampant in the formalization of theory. Parameter calibration and hypothesis testing are not designed to reject the theory, but rather to guarantee self-consistency. Data fabrication or outright fraud occur from time to time. Theoretical research is out of the touch with reality. This mode of producing economic knowledge—publishing for the purpose of publication—stands in sharp contrast to the notion that theory should serve practice (Fig. 1.7).

References

37

Fig. 1.7 International publications by Chinese authors from 1978 to 2018. Source Wei and Jiang (2018)

The Chinese Road and Socialist Political Economy with Chinese Characteristics The road of China’s socialist construction shows that Marxism combined with China’s reality has been an important guarantee for both revolution and economic development. Therefore, while improving the socialist market economy system, we should not forget to strengthen the political and economic construction of the socialist road with Chinese characteristics in the new era. Exploring the Chinese road will be the most important research subject in the future. There is a long way to go in this respect. To offer theoretical summarization of China’s development path and the evolution of its system, we should not only sum up its historical achievements, but also actively study the current system design and development path with the two centennial goals in mind. We should strive to maintain sustainable growth in China and offer the Chinese experience and wisdom to the world.

References Jiang Yiwei. (1980). Enterprise-based Theory. China Social Sciences, 1. Selected Works of Deng Xiaoping. (1993). Vol. 3. People’s Publishing House. Selected Works of Lenin. (1995). Vol.2. (p.309). People’s Publishing House. Wei Zhong and Jiang Ying. (2018). Several Characteristics of International Publications on China’s Economic Problems: SSCI–based Analysis. Economic Perspectives, 10. Zhang Ping. (2018). From Crossing the River by Feeling the Stone to the Big Country Model: Forty Years of Reform and Opening up and China’s Future Economic Growth Model. Vertical and Horizontal Culture, 62.

38

1 Overview: Economic Research in China: Analysis Based on Papers …

Zhang Ping and Nan Yu. (2018). China’s Economic Growth and Structural Changes over Forty years of Reform and Opening up. China Economists, 1. Zhang Ping, et al. (2007). Frontiers of China’s Economic Growth (I). China Social Sciences Press. Zhang Ping, et al. (2011). Frontiers of China’s Economic Growth (II). China Social Sciences Press. Zhang Zhuoyuan. (1997). Review and Prospect of China’s Economic Theory Research since Reform and opening up. Economic Research Journal, 6. Zhang Zhuoyuan (Editor-in-Chief). (1999). Debate and Development: Fifty Years of China’s Economic Theory. Yunnan People’s Publishing. Zhang Zhuoyuan, et al. (2008). Thirty Years of Chinese Economics: 1978–2008. China Social Sciences Press.

Chapter 2

The Establishment and Development of the Socialist Market Economy Theory

In the great practice of reform and opening up over the past forty years, China has not only accumulated tremendous experiences, but also achieved a slew of theoretical breakthroughs under the guidance of Marxism. On the economic fronts, the breakthroughs include, but not limited to, the following: theory on the primary stage of socialism; theory on socialist market economy; theory on basic socialist economic system; theory on basic socialist distribution system; the development-isthe-absolute-priority theory; the scientific outlook on development; the development theory incorporating five development ideas in innovation, coordination, green environment, opening up, and shared prosperity; theory on opening up to the outside world; theory that China has entered into an era of new normal; theory on supplyside structural reforms; theory on pushing forward new industrialization, information modernization, urbanization, agricultural modernization in a coordinated manner; and theory on establishing a modern economic system. The most important among them is none other than the socialist market economy theory—which is not only the major theoretical achievement over forty years of reform and opening up, but also the main theoretical pillar for building the socialist economy with Chinese characteristics. There are at least four reasons for this conclusion. First and foremost, China’s reform and opening up could not have moved forward without the introduction of the market mechanism to its economic activities and the respect for the law of value. The market mechanism and the law of value are the two essential elements that constantly keep the economy invigorated. Secondly, the key issue in economic institutional reforms is how to strike a balance between the role of the market and that of the government. The socialist market economy theory provides a scientific answer to this important issue. In 1992, the report by the 14th National Congress of the Communist Party of China (CPC) made the following statement: The socialist market economic system that we are striving to establish requires us to let the market play a fundamental role in the allocation of resources under the macro-control of the socialist state, to make economic activities follow the requirements of the law of value, and to adapt to changes in supply and demand; it requires us to allocate resources to those sectors © China Social Sciences Press 2023 Z. Zhang, Handbook of Chinese Economics, https://doi.org/10.1007/978-981-99-0420-4_2

39

40

2 The Establishment and Development of the Socialist Market Economy … that have better benefits through the function of price leverage and competition mechanism, and to exert both pressure and motivation to enterprises so that only the fittest of them will survive; it also requires us to take advantage of the fact that the market is more sensitive to various signals, so that we can promote timely coordination of production and demand. At the same time, we should also admit that the market has its own weaknesses and adverse aspects. We must therefore strengthen and improve the state’s macroeconomic regulation and control of the economy.

Thirdly, the Chinese economy grew at 9.5% per year, on average, over a span of forty consecutive years. China’s economic strength and influence, as well as the living standards of the Chinese people, have all increased dramatically at an unimaginable pace. At present, China is marching forward to transform itself from a big economy to a global economic power. None of these could have been achieved without the marketization reforms undertaken over the past four decades. Lastly, from the perspective of the history of economic thoughts, it is really an amazing achievement of historic proportions that a large country like China, with a population of more than one billion people, has built a market economy under the socialist conditions, and realized the integration of socialism and market economy and that of public ownership and market economy. This is an economic miracle that has been deemed impossible by mainstream Western economics. The successful practice of the socialist market economy in China and the concurrent development of the socialist market economy theory have subverted the assertions made by Western mainstream economists. They are indeed the most outstanding and epoch-making contributions made by Chinese Communists and Marxist economists to the science of socialism and political economy.

2.1 Introducing the Market Mechanism to Economic Activities and Recognizing the Commodity Economy Status in the Early Stage of Reform and Opening Up—The First Step Towards the Socialist Market Economy Theory The socialist market economy theory has gradually developed with reform and opening up. The stage for the development of the theory was set with the help of the bold assumptions made by a few economists before 1966, the introduction of market mechanism at the early stage of reform and opening up, and the affirmation that socialism can have the attributes of a commodity-based economy.

2.1 Introducing the Market Mechanism to Economic Activities …

41

Theoretical Preparations Before 1966 During the years from the founding of the People’s Republic of China in 1949 to 1966 the Chinese economic community held several rounds of heated debates about the relation between central planning and market, the role of commodity production, and the role of the law of value in a socialist economy. The major contributions to the eventual formation of the socialist market economy theory can be summarized as below. In 1956, the economist Sun Yefang put forth his famous assertion that central planning and statistics should be built upon the law of value.1 According to him, the basic contents and functions of the law of value—that is, promoting the development of social productive forces by letting the value be determined by the average social inputs, and by regulating social production or distributing social productive forces— prevail even in socialist and communist economies. In 1964, Sun Yefang pointed out further that “we should forget about a thousand or ten thousands laws. There is but one law for all, and that is the law of value.” In a research report published in 1963, Su Yefang asserted that profit is the most comprehensive yardstick of the technology level and management efficiency of an enterprise. An enterprise is an advanced one if its profitability exceeds the average social profitability, and a lagged one if otherwise.2 In 1957, Gu Zhun published an article pointing out that the socialist economy is a contradictory unity of economic planning and economic accountability, in which the law of value regulates social production through economic accountability.3 The regulatory mechanism closely ties material rewards to workers with the profitability of their enterprise, and makes price the main tool for regulating production. Because enterprises spontaneously pursue price-friendly production, price will fluctuate spontaneously, which in turn dictates production. At the same time, the whole society has a unified economic plan. Since this plan represents people’s foresights, rather than the synthesis of individual plans, it is more flexible and more inclined to stipulate crucial macroeconomic indicators, reducing the specific provisions for the economic activities of the enterprises. What this essentially means is to make full use of the law of value to regulate socialist production. And regulating production through spontaneous price fluctuations is the essential element of the socialist market economy. In this sense, it can be said without exaggeration that Gu Zhun is the first person to advocate the socialist market economy theory in China. Of course, because the traditional planned economic system was implemented before 1966, and because the dominant mainstream point of view was that of the traditional socialist economic theory, the views and propositions by the likes of Sun Yefang Sun and Gu Zhun were met with harsh criticisms at that time, and even more so from 1966 to 1976. 1

Sun (1956). Sun (1998). 3 Gu (1957). 2

42

2 The Establishment and Development of the Socialist Market Economy …

Introducing the Market Mechanism to Social and Economic Activities in the Early Stage of Reform and Opening Up The Third Plenum of the 11th CPC Central Committee, a historic meeting held in December 1978, ushered in a new era of reform and opening up, aimed to build socialism with Chinese characteristics. Rejecting the erroneous theory and practice of “class struggle as the key point,” the meeting made a historic decision to pivot the focus of the Party and the government to economic development through reform and opening up. Its communique pointed out a severe flaw in China’s economic management system at the time, namely too much concentration of power. China should, therefore, decentralize power with great leadership and resolution, and give local governments, as well as industrial and agricultural enterprises, more autonomy in their operation and management with the guidance of the unified national plan. It further proposed that the country should resolutely follow the basic economic principles, attach importance to the law of value, combine ideological and political work with economic means, and fully mobilize the enthusiasm of people of all ranks. From the late 1970s to the early 1980s, China began to implement the household responsibility system in the vast rural area. Under such a scheme, the government signed production contracts with each household, recognizing and respecting their production and operation autonomy and theirstatus as independent commodity producers. Meanwhile, the government gradually liberalized the prices of small commodities and some agricultural and sideline products. Additionally, the existence and development of sole proprietorship or individual businesses were permitted. More importantly, special economic zones were to be established in China’s coastal regions to attract foreign investment. Large state-owned enterprises were granted more autonomy in their production and operation. These reform and opening up measures, intended to introduce the market mechanism, reinvigorated the sagging national economy, leading to rapid increases in both output and wealth. The vast number of cadres and masses have witnessed the wonders the market mechanism has created. The reform and opening up practice also gave a boost to economic research in China. Under the guidance of the Party’s ideological line of emancipating the mind and seeking truth from facts, the second national economic theory seminar was held in Wuxi, Jiangsu province, in April 1979. The seminar’s main focus was the role of the law of value in the socialist system. More than 300 people attended the seminar, including Xue Muqiao and Sun Yefang, the two most famous economists in China at the time, who both made speeches during the seminar. The conference received more than one hundred papers and put forward many far-reaching and advanced theoretical views, including the recognization that socialist economy is also a commodity economy, and the recognization of the role of market mechanism in socialist economy.4 Some scholars proposed that since enterprises are independent 4

The Reference Room of the Institute of Economics of Chinese Academy of Social Sciences (1980a).

2.1 Introducing the Market Mechanism to Economic Activities …

43

or relatively independent producers and operators, they should be granted more operational autonomy. In January 1980, Jiang Yiwei put forward his famous enterprisebased theory.5 Others called for reforming the unreasonable price structure and the price management system prevailing at the time, so as to gradually reduce the price discrepancy between industrial and agricultural products.6 In hindsight, the 1979 economic theory seminar played a crucial guiding role in China’s economic reforms.

Sharp Ideological Confrontations in the Process of Establishing the Theory of Socialist Commodity Economy Establishing the theory of socialist commodity economy is an important milestone towards the theory of socialist market economy. In the late 1970s and early 1980s, during which the 1979 national economic theory seminar was held, many economists published articles supporting the claim that the socialist economy is also a commodity economy and, as such, the law of value should play a commanding role in social and economic activities. Some economists, however, held opposite views, setting up the stage for heated debates between the two schools of thought. The most heated debate occurred during the draft of the report of the 12th CPC National Congress, held in 1982. The five members on the draft committee, including Lin Jianqing and Yuan Mu, wrote a letter to Hu Qiaomu, who was in charge of the Party’s ideological apparatus at the time. Over the past few years, the dominant view prevailing in the economic community was that socialist economy is also a commodity economy and the role of the market mechanism must be enhanced. In the letter, the draft team criticized this view, stating that “in China, despite the fact that there are still commodity production and commodity exchanges, we must not characterize our economy as a commodity economy. If we make such a characterization, we will have to refer to the relationship between people’s communal possession and joint labor under the socialist conditions as the relationship of commodity exchanges of equal value; and we will conclude that the law governing our economic activities is mainly the law of value, rather than the basic economic law of socialism and the law of planned development. This inevitably will blur not only the boundary between planned socialist economy and anarchic capitalism, but also the essential difference between socialist economy and capitalist economy.”7 In August 1982, Hu Qiaomuapproved the letter and passed it on to other senior leaders. Over the next couple of years, numerous articles were published in domestic forumsto criticize the view that socialist economy is also a commodity economy. Those in support 5

Jiang (1981). The Reference Room of the Institute of Economics of Chinese Academy of Social Sciences (1980b). 7 Peng et al. (2008, Part 1; p. 120). 6

44

2 The Establishment and Development of the Socialist Market Economy …

of the view were all but silenced. Nevertheless, any attempts to block the great tide of reform are doomed to fail. The gradual development of economic reform, together with the economic vitality brought on by the market mechanism, eventually knocked down the outdated framework of the traditional economic theory. After 1983, with its stronger realistic background and fuller theoretical argumentation, the theory that socialist economy is first and foremost a commodity economy reemerged with a vengeance, attracting the attention and support from all walks of life across the country. On October 20, 1984, the Third Plenum of the 12th CPC Central Committee put forward the Decision of the CPC Central Committee on Economic System Reform. The decision summarized the debates in the economic community in recent years, affirming that China’s socialist economy is a planned commodity economy based on public ownership. According to the plenum’s decision, “to reform the planned system, we must first dismantle the outdated concept that pit planned economy against commodity economy, and make it very clear that our socialist planned economy is a planned commodity economy based on public ownership, and as such it must consciously take advantage of the law of value. The full development of a commodity economy is an inevitable stage of China’s social and economic development, and is a necessary condition for the realization of China’s economic modernization. Only by fully developing a commodity economy can China’s economy be truly invigorated, and can all enterprises be incentivized to improve efficiency, operate flexibly and adapt sensitively to the complex and changeable social needs. This cannot be achieved by relying on administrative means and mandatory plans.” Following the plenum, the economic community gradually reached a consensus that China’s socialist economy commands the attributes of a commodity economy. We should give credit to the Chinese economic community for their role in the draft of the decision of the Third Plenum of the 12th CPC Central Committee. The draft was started in June 1984. It took more than a month to come up with an outline, however. Yet the outline did not break away from the original tone of “planned economy first, market regulation second.” Dissatisfied, Hu Yaobang, then the General Secretary of the CPC Central Committee, reshuffled the drafting team. Ma Hong, then president of the Chinese Academy of Social Sciences, was summoned to put together a group of experts in the academy to write an article, to be titled “Re-exploration of China’s Commodity Economy under Socialist System.” Flipping over the case for the theory of commodity economy, this article argued that, while recognizing socialist economy is a planned economy, we should not “deny the fact that socialist economy has the attributes of a commodity economy at the same time.” The opposite of commodity economy is not planned economy, but natural economy. This paper reaffirmed the proposition that socialist economy is planned commodity economy—a proposition that had been flatly denied in the previous draft. Ma Hong sent the article to some senior revolutionary leaders for their review and comments. As it turned out, it was not met with harsh criticisms as feared. Instead, it was highly praised by Wang Zhen and other senior leaders. On September 9, the head of the State Council at that time penned a letter to other standing members of the Political

2.1 Introducing the Market Mechanism to Economic Activities …

45

Bureau of the CPC Central Committee. Entitled “Opinions on Three Issues in the Reform of the Economic System,” the letter recognized that “socialist economy is planned commodity economy based on public ownership.” Accordingly, it went on, economic planning should be realized through the law of value, and the latter should be used to serve the former. Deng Xiaoping and Chen Yun gave their approvals to the letter on September 11 and 12, respectively. As a result, the decision of the Third Plenum of the 12th CPC Central Committee was rewritten under the new guideline.8 In early September 1984, Gao Shangquan, a member of the State Commission for Restructuring and Reform, hosted a seminar on the theory of socialist commodity economy, held at Xiyuan Hotel in Beijing. The nearly 20 experts attending the seminar soon reached a consensus. A slew of innovative ideas were shelled out at the seminar, including the notion that “commodity economy is a necessary means, there is no inevitable connection with the capitalist system, and it is not limited to capitalism at all;” that “commodity economy is an inevitable stage of socialist economic development;” and that “commodity economy is not the opposite of planned economy.” Gao Shangquan, together with other participants at the seminar, summarized their results in a report, which was submitted to the CPC Central Committee. After reading the report, the premier of the State Council at the time gave his approving instructions to the drafting team, adding that Mr. Ma Hong held the same opinion.9 Deng Xiaoping spoke highly of the decision of the Third Plenum of of the 12th CPC Central Committee. On October 22, 1984, three days after the decision was passed at the plenum, Mr. Deng said, “When the Central Committee adopted the decision the day before yesterday, I said that my impression was that it was like the first draft of a political economy that combines the basic principles of Marxism with the practice of socialism in China. That’s my comments.” He moved on and made the following comments: “It is a very good document on the economic system reform. It explains what socialism is about. It has new insights and says things that our predecessors didn’t say. In my opinion, it has made everything clear. In the past, it was impossible for us to write such a document. Without the practice over the past few years, it would be impossible for us to write such a document; even if it were written out, it would be considered as a heresy and hard to get passed. We have answered some new questions in the new situation with our own practice.”10 To be sure, the decision of the Third Plenum of the 12th CPC Central Committee was not without shortcomings. It contained, for instance, some outdated points of view that had been proved wrong in reform practices. One of them was the following statement: “Under the socialist condition such as ours, labor is not a commodity. Nor are land, mines, banks, railways, and other state-owned enterprises and resources.”

8

Wu and Zhang (1999). Gao (2018). 10 Selected Works of Deng (1993, p. 83; p. 91). 9

46

2 The Establishment and Development of the Socialist Market Economy …

2.2 The Socialist Market Economy Established at 14th CPC National Congress in 1992 With the theory of socialist commodity economy established, market-oriented reforms continued to plow forward, yielding fruitful results. The private sector enjoyed rapid growth, with township enterprises blooming. State-owned enterprises were decentralized and allowed to retain more share of their profits. The reform on the economic operating mechanism, especially on the price mechanism, took the lead, making the market for products and services increasingly sophisticated. Meanwhile, the market for factors of production began to take hold. Government’s macroeconomic policy started to switch from direct control to indirect management. The economy was opened up in all aspects to the world, with Chinese manufacturers actively participating in the global markets. In 1987, the State Commission for Restructuring gathered eight research institutions at the central and local levels to formulate a plan outline for the intermediate-term (three-, five- and eight-year) reform. A consensus was reached about the goal of the intermediate-term reform, which was to let the newly established socialist commodity economy system (through transformation of the old system) take the leading position. The basic framework of this new system is that the government regulates the market while the market guides enterprises. It includes three interrelated aspects: (1) inject the market mechanism to economic activities, (2) incorporate enterprises, and (3) pivot government macrocontrol from direct to indirect.11 It should be noted that some research groups likened a planned commodity economy to a market economy with macro management.12 In 1987, the 13th CPC National Congress proposed that the socialist planned commodity economy should be regarded as the internal unity of planning and market. The interaction of planning and market should cover the whole society. The new economic operation mechanism, in general, should be a mechanism under which the state regulates the market and the market guides enterprises. The government should use a mix of economic, legal, and administrative means to regulate the relationship between market supply and demand, nurturing an accommodating economic and social environment so that enterprises can make the right business decisions. After the 13th CPC National Congress, China’s market-oriented reforms continued to move forward in earnest. In 1988, China made an attempt to break through price reforms through large-scale price liberalization. The attempt fell short of expectations, however, due to heavy inflationary pressure. In the academic circle, more and more researchers cottoned on to the notion that socialist economy is also market economy and that the allocation of resources by the market is more efficient than any other means, including central planning. But the momentum was thwarted by the unexpected political storm taking place in 1989. At that time, some economists began to have doubt on the merits of the market-oriented reforms that had been implemented in recent years. For example, some argued that it was wrong to regard 11

The Comprehensive Planning Department of the National Economic System Reform Commission (1988, p. 2). 12 Wu et al. (1988).

2.2 The Socialist Market Economy Established at 14th CPC National …

47

the commodity economy relationship as the foundation of the socialist production relationship, or to advocate that the nation should establish an economic system suitable for the commodity economy.13 To them, the reform policy that focused on the commodity economy and relied on the invisible hand to regulate everything should be stopped.14 Like that was not enough, they even came up with a list of various manifestations of bourgeois liberalization. The eighth manifestation on the list was “having doubt about the possibility and necessity of socialist planned economy and advocating the role of market regulation.”15 Some critics asserted that market economy was capitalist economy.16 Others went even further to offer harsh warnings that market economy meant the abolition of public ownership, the denial of the leadership of the Communist Party and of the socialist system, and the promotion of capitalism.17 To them, marketization was akin to bourgeois liberalism, and thus was bad for socialism.18 Most scholars, however, kept their faith in market-oriented reforms and in the socialist market economy. In this camp, one particular scholar stood out, who exerted substantial influences in the debate against the plan-oriented school. Some backgrounds are warranted here before we reveal the details. On the eve of the Spring Festival in 1991, Deng Xiaoping, then China’s paramount leader, took an inspection tour in Shanghai. In his conversations with the municipality’s top officials, he made the following speech: We need to talk about reform and opening up, and our party needs to talk about it for decades to come. It is not enough for me to speak alone. Our party should also speak out, and it needs to speak out for decades. Of course, it’s not good to be too anxious. We need to prove it with facts. At one time, many people had doubt about and disagreed with the proposal that household contracts should be carried out in the rural areas. Is it still socialism? They asked. Even though they didn’t say it directly, they resisted the proposal and delayed its implementation for a couple of years while we were waiting. Don’t equate planned economy to socialism and market economy to capitalism. That’s not the case. Both are the means, not the end. The market can be adopted to serve socialism. I hope that the people of Shanghai will be more emancipated, be more courageous, and move faster.19

Zhu Rongji, then the top leader of Shanghai, conveyed the spirit of this speech to the Standing Committee of the CPC Shanghai Committee. Between February 15 and April 22, 1991, three authors published a series of review articles in Liberation Daily, a popular newspaper in Shanghai, using a pseudo pen name of Huang Fuping. The real names were Zhou Ruijin, secretary of the Party Committee of the newspaper; Ling He, head of the Review Department of the same newspaper; and Shi Zhihong, from the Policy Research Office of the CPC Shanghai Committee. In their second 13

Chen (1989). Socialist Public Ownership Cannot Be Denied. Theoretical Information, August 14, 1989. 15 Wang (1989). 16 You (1990). 17 Gao (1990). 18 On Why We Must Persistently Oppose Bourgeois Liberalization. Contemporary Trends, 2, 1991. 19 Selected Works of Deng (1993, p. 367). 14

48

2 The Establishment and Development of the Socialist Market Economy …

article, “Reform and Opening up Needs New Ideas,” which was published on March 2, they warned against falling into a kind of new ideological trap. They criticized that “some comrades are used to equating planned economy to socialism, and market economy to capitalism, fearing that there must be a ghost of capitalism behind the market economy.” They made it clear that “capitalism has a plan in it, and socialism has a market in it,” and that the acquisition of this scientific understanding was just another greater ideological emancipation on the issue of socialist commodity economy. The article asserted that the development of socialist commodity economy and socialist market cannot be simply equated to capitalism; the use of foreign capital cannot be contrasted to self-reliance; the deepening of reform cannot be contrasted to governance and rectification; and sustained and stable economic development cannot be contrasted to the lack of urgency. In a word, further emancipation of the mind was a necessary condition to achieve the strategic goal of the second step. In their third article, published on March 22 and titled “We Need to Be Bolder in Our Thoughts about Opening up,” they warned that if we got stuck in the question of whether the surname of our economy was socialism or capitalism, we were squandering great opportunities. If we were still trapped in the bewilderment of “new Shanghai or old Shanghai,” we would not be able to move forward and achieve great things. Given the political backdrop, there was little wonder that the articles by Huang Fuping were met with some harsh criticisms. On April 20, 1991, the magazine Contemporary Thoughts published an article titled “Can Reform and Opening up Afford to Avoid the Question of Whether the Surname Is Socialism or Capitalism?” The article pointed out that in the days when bourgeois liberalism was rampant in China, there used to be a fashionable slogan, namely “Don’t ask if the surname is socialism or capitalism.” The consequence of this mantra, the article went on, was that reform and opening up had indeed led us astray to the evil road of capitalism. It warned that if we failed to ask this important question, reform and opening up would inevitably go astray to the capitalist road and our socialist cause would be doomed. In 1991, the 7th issue of Seeking Truths, an influential magazine, published an article titled “Let’s Re-mention the Socialism or Capitalism Surname Issue.” The article alluded that the notion that we should not talk about the surname issue was a smoke bomb put out by some elites to hide the hatchery. Some influential newspapers and magazines from Beijing made similar claims.20 At this crucial moment, with reform hanging in the air, Deng Xiaoping broke his silence. In the spring of 1992, he made a series of talks, collectively known as the “South-Tour Talks,” to offer his unambiguous support for the reformers. Deng Xiaoping pointed out bluntly that a little more planning or a little more market was not the essential difference between socialism and capitalism; that we should not equate planned economy to socialism since capitalism also has plans; and that we should not equate market economy to capitalism since socialism also has markets. In essence, planning and market are both economic instruments that can be used to serve socialism.21 He stressed that the Special Economic Zones established in China 20 21

Sen et al. (2008, Part I; pp. 375–376). Selected Works of Deng (1993, p. 373).

2.2 The Socialist Market Economy Established at 14th CPC National …

49

belong to socialism, not capitalism.22 The South-Tour Talks echoed the calls for reform in China, and gained widespread support and warm response by the public, including the majority of economists. In March 1992, the Political Bureau of the Party’s Central Committee made a statement to the effect that planning and market were simply economic means, and as such we should learn how to skillfully use these means to speed up the development of the socialist commodity economy. Not long before that, from October to December 1991, Mr. Jiang Zemin, then the General Secretary of the CPC’s Central Committee, hosted and chaired 11 symposiums, each lasting half a day. A small group of less than 20 experts attended the symposiums. They were mostly economists. Among them were Liu Guoguang, Jiang Yiwei, Li Cong, Zhang Zhuoyuan, and Chen Dongqi, of the Chinese Academy of Social Sciences; Wu Jinglian, Wang Huijiong, and Lin Yifu, of the Development Research Center of the State Council; Yang Qixian, Fu Fengxiang, and Jiang Chunze, of the State Commission for Restructuring; Zhou Xiaochuan of the Bank of China; Guo Shuqing of the State Planning Commission. Also attended were the relevant experts from the Ministry of Foreign Affairs, the Ministry of Security, and the International Liaison Department of the Central Committee of the CPC. Three key issues were discussed during these symposiums. The first was to grapple with the fact that capitalism would hang on and wouldn’t die. The second was to evaluate the impacts of the drastic changes in the former Soviet Union and Eastern Europe. The third was to discuss the major issues on how to further promote reform and opening up in China. The main purpose of holding the symposiums was to ruminate on the proposal for the economic system reform and on the policy outline of the 14th CPC National Congress, to be held next year. Every session was presided over by Mr. Jiang Zemin. Some experts proposed that the socialist market economy system should be implemented, not least because the practice of economic development in the world had shown that market was more efficient than planning in the allocation of resources. The latter point gained general approval by the experts attending the symposiums. The most important achievement from the symposiums was the policy leaning toward the socialist market economy system. Two explanations for this important formulation were put forth. One was the recognization that the market should play a fundamental role in resource allocation. The other was that the government should impose national macro-control on the market, rather than relying on laissez faire. The symposium is helped lay out the theoretical foundations for Jiang Zemin’s speech at the Party School on June 9, 1992, and for the establishment of the goal of the socialist market economy system reform at the 14th CPC National Congress in 1992.23 It is the south-tour talks by Deng Xiaoping in early 1992 and the symposiums hosted by General Secretary Jiang Zemin at the end of 1991 that lay the foundation for the formation of the theory of socialist market economy. The 14th National Congress of the CPC, held in October 1992, officially announced that the goal of China’s economic system reform was to establish a socialist market economic system. In such an economic system, the market would 22 23

Selected Works of Deng (1993, p. 372). Chen and Hong (2012).

50

2 The Establishment and Development of the Socialist Market Economy …

play a fundamental role in the allocation of resources, under the macro-control of the government. This essentially put an end to the more-than-ten-year-long debate between planning and market, and between planned economy and market economy. The theory of socialist market economy was finally established. In 1993, the Third Plenum of the 14th CPC Central Committee made the Decision on Several Issues Concerning the Establishment of the Socialist Market Economy System. The decision spelt out the specific goals of the socialist market economy system reform, as well as the basic framework of the socialist market economy system. To establish the socialist market economy system was to make the market play a fundamental role in resource allocation under the state’s macro-control. In order to achieve this goal, the decision required that we must adhere to the principle of public ownership as the main body, together with the common development of various economic components; further transform the operating mechanism of stateowned enterprises; and establish a modern, scientific enterprise system that adapts to the requirements of market economy, has clear property rights, clear rights and responsibilities, and separates government from enterprises. In addition, a unified and open market system should be established throughout the country to promote the optimal allocation of resources through the combination of the city and township markets and the connection of the domestic and the international markets. The government’s economic management function should be transformed as well, establishing a sound macro-control system in which indirect means are used to ensure the healthy operation of the national economy. We should build a distribution mechanism that would give priority to productivity and efficiency while at the same time would also consider fairness and equality. We should encourage some people in some areas to get rich first and take the road of common prosperity. A multi-level social security system would be established to provide urban and rural residents with social security that is suitable for China’s national conditions, and to promote economic development and social stability. These main links would be mutually connected and constrained, and be the essential parts of an organic system and the basic framework of the socialist market economic system. These would be the “four beams and eight pillars” of China’s socialist market economy system, and also the basic contents of the theory of socialist market economy.

2.3 The Establishment of the Theory of Socialist Market Economy Pushes Reform Forward Ever since the goal of the socialist market economy reform was established in 1992, China’s market-oriented reform has taken great strides forward. By the end of the twentieth century, the socialist market economy system was basically established. The operation of the socialist economy has switched from being planned oriented to market-oriented.

2.3 The Establishment of the Theory of Socialist Market Economy Pushes …

51

In 1994, a series of negotiation and coordination involving many parties led to a tax sharing scheme, a common practice in market economies, that replaced the old, backward local financial contract system. With the new tax system, the proportion of total fiscal revenue going to the central government coffer gradually increased to about 50%, greatly enhancing the ability of the central government to regulate and control the macro-economy with its financial policies. Under the new tax, the largest component is the value-added tax, which is to be shared by the central government (75%) and local government (25%). The consumption tax will go to the central government exclusively. The annual increase in value-added taxes and consumption taxes will be returned to the local government by a ratio of 1:0.3. This tax reform has promoted rapid growth in fiscal revenues. The national fiscal revenue was 434.895 billion yuan in 1993. In 2007, the figure jumped to 5130.403 billion yuan, a 10.8 fold increase in nominal terms. During the same period, the proportion of the central fiscal revenue in total revenue has also increased rapidly, reaching 54.1% by 2007, compared to only 22% in 1993. The figure has been stable at around 50% thereafter. The rapid development of the private sector gradually broke down the monopoly of public ownership in the national economy, resulting in a basic economic pattern with the public sector dominating and the private sector co-prospering. The number of households engaged in the private economy increased by more than 50% each year in 1993, 1994 and 1995, and by more than 15% in years 1996–2002. Tables 2.1 and 2.2 present the results in selected years. China began to introduce foreign capital immediately after reform and opening up. The establishment of the goal of the socialist market economy system reform in 1992, and especially China’s accession to the World Trade Organization (WTO) in 2001, helped put the country into the fast track in the use of foreign capital. Table 2.3 provides some results on the use of foreign capital in selected years. At the end of 2012, there were 440,609 foreign-invested enterprises in China, with a total investment of $3261 billion and registered capital of $1881.4 billion, of Table 2.1 Sole proprietorships in China in selected years Year

Number of households (in 10,000)

Number of employments (in 10,000)

Registered investment (in yuan 100 millions)

1992

1534

2468

601

2002

2377

4743

3782

2012

4059

8000

19,800

Table 2.2 Private businesses in China in selected years Year

Number of private businesses (in 10,000)

Number of employments (in 10,000)

Registered investment (in yuan 100 millions)

1992

14

232

221

2002

243

3409

24,756

2012

1086

12,000

310,000

52

2 The Establishment and Development of the Socialist Market Economy …

Table 2.3 Foreign investment in China in select years (in US$100 millions)

Year

Total foreign investment

Foreign direct investment

Other foreign investment

1991

115.54

43.66

3.00

1992

192.03

110.08

2.84

2002

550.11

527.43

22.68

2012

1132.94

1117.16

15.78

Source China Statistics Yearbook, 2013

which $1490.3 billion came from foreign investors. Roughly 60% of China’s foreign investment was in manufacturing. In 2012, thanks to the continued development of private and foreign-funded enterprises, the non-public economy accounted for more than 60% of China’s GDP, and more than 80% of overall employment. The private sector has played an irreplaceable role in promoting economic growth, invigorating economic life, and meeting the needs of the public in many aspects. The reform of state-owned enterprises through joint stock ownership has been gradually promoted. The deepening of the market-oriented reform laid bare the troubles confronting a large number of state-owned enterprises, which were ill suited for the market mechanism. In 1997, the Party and the government launched a campaign to help the troubled state-owned enterprises out of their woes. The goal was to turn around most of the money losing large and medium-sized state-owned enterprise over the next three years starting from 1998, and to establish a modern enterprise system for most of the large and medium-sized state-owned backbone enterprises by the end of the twentieth century. This goal had been basically achieved by the end of 2000. At the end of 1997, there were 16,874 state-owned or state-controlled large and medium-sized enterprises, of which 39.1% or 6599 were in red. Three years later, the number of money losing enterprises fell to 1800, a drop of nearly 75%. At the same time, the government carried out the pilot scheme to set the stage for a modern enterprise system. By pushing forward joint-stock ownership, the scheme strived to turn state-owned enterprises to the main market players and legal entities so that they can adapt to the development of the socialist market economy. In short, the reform has made the state-owned enterprises gradually adaptable to the market economy. Table 2.4 summarizes the development of state-owned enterprises in selected years. The economic operation mechanism has also experienced speedy transformation, now with the market playing an increasingly fundamental role in resource allocation. From 1992 on, the focus of price reforms has gradually shifted to the marketization of resource products and factors of production. By the end of the twentieth century, most commodity and service prices had been liberalized, to be determined by market forces. A unified, open market system with orderly competition had been initially established. The extent of economic marketization was estimated to have reached more than 70%. The market pattern had undergone tectonic changes. The seller’s market, which had plagued the Chinese economy for nearly half a century, was finally turned to a buyer’s market. According to surveys about the supply and demand of

2.3 The Establishment of the Theory of Socialist Market Economy Pushes …

53

Table 2.4 State-owned enterprises in China 1998

2003

2012

Number of state-owned enterprises (10,000)

23.8

14.6

14.5

Total asset (yuan trillions)

14.87

Operating income (yuan trillions) Net profit (yuan 100 millions)

213.7

19.78

85.37

10.73

42.38

3202

16,100

Taxes (yuan 100 millions)

8362

33,500

Number of central government owned enterprises

196

116

Net profit from central government owned enterprises (100 million yuan)

3006

11,315

Taxes from central government owned enterprises (100 million yuan)

3563

14,058

Note The 2012 figures of net profit and taxes for central enterprises were actually the 2011 figures Sources Shao (2014); One Hundred Questions on Learning and Guidance of the Third Plenum of the 18th CPC Central Committee. Party Building Press and Learning Press, 2013; Chi (2014)

more than 600 major commodities, conducted by China’s Internal Trade Bureau since 1995, a pattern of oversupply begun to emerge in 1995. While there had been an overall balance between demand and supply, more and more products began to show signs of over supply. By the first half of 1998, demand was met with sufficient supply in China’s retail markets, with no retail products the supply of which could not meet demand. Additionally,25.8% of the retail products had over supply.24 Upon entering the twenty-first century, China began to actively promote price reforms for resource products, aiming to extend price marketization. Coal prices were among the first to be liberalized, and they now are determined by market forces. The price reform on oil products was further deepened. By 2012, prices of oil products were, though indirectly, linked to prevailing prices in the global market. In March 2013, the price adjustment cycle was shortened from the original 22 working days to 10 working days. The adjustment range limit was lifted, but the upper and lower limits were set up—the upper limit was $130 per barrel and the lower limit $40 per barrel. Meanwhile, in the price reform on natural gas, a dynamic adjustment mechanism has been established that links the price of natural gas to that of alternative energy, achieving price integration for non residential natural gas, regardless of whether it is stock or incremental gas. After price liberalization of natural gas for direct supply users, the station price of non-residential natural gas, which accounts for 80% of the total consumption, has been dictated by the market. Water prices, which had long been severely low, have gradually increased. Water resource fees, sewage discharge fees, and sewage treatment fee have also been adjusted in a gradual way. Local governments have begun to implement a progressive price scheme for residential use of water, electricity and gas to encourage resource conservation, with remarkable results. 24

Liu (2006).

54

2 The Establishment and Development of the Socialist Market Economy …

Market-oriented price reform on factors of production has moved forwards steadily. The wages for migrant workers in the labor market are now determined by the market. The degree of interest rate marketization has continued to improve, with interest rates on loans being liberalized first, followed by interests on deposits, including the floating range in both cases. The exchange rate of RMB has also been gradually liberalized. As early as the end of the twentieth century, the exchange rates for current account transactions were already determined in the market. The convertibility of RMB for capital account has been put on the agenda. The marketization for land prices has gradually improved, as well. The accession to the World Trade Organization in November 2001 was a milestone and a major step toward economic globalization. China’s opening up entered a new stage. During the lengthy negotiation process, many raised their concerns with WTO accession, fearing that joining the international organization may pose serious threats to China’s national economic security. They worried that many industries, including the financial industry, commerce, agriculture, information industry, would be adversely impacted. It turns out that many of the original concerns have not materialized. On the contrary, China’s accession to the WTO has more advantages than disadvantages. After the accession, China’s balance of payments has improved significantly, and so has the level of China’s open economy. According to the WTO, China’s total exports grew at an average annual rate of 21.3% from 2002 to 2012, ranking first in the world during this period, compared to sixth place before hand. In 2012, China’s exports of goods accounted for 11.2% of the world total; its total imports and exports of goods amounted to $3867 billion, making China the second largest trader in the world; its total imports and exports of services reached $471 billion, the third largest in the world, of which the exports of services was the fifth largest in the world. In 2012, China’s foreign direct investment was $87.8 billion, the third largest in the world.25 In years 2003 to 2012, while China experienced rapid economic growth, its economic reform slowed down a bit. It nevertheless continued to plow forward and achieved certain results. The achievements include, but not limited to, the share structure reform of listed companies since 2005, the overall stock market listing of four largest state-owned commercial banks, the cancellation of agricultural taxes after 2006, the reform of collective forest rights system, the reform of RMB exchange rate formation mechanism in 2005, the reform of the oil price formation mechanism, the transformation of value-added tax, the reform of income tax for both enterprises and individuals, the reform of resource tax, the pilot reform of housing real estate tax, cultural system reform, the medical and health system reform, the construction of a social security system for full coverage, and so on. It should be acknowledged that, during this period, there were no major reforms that are of particularly importance or on key links that can shake up the overall economy. Nevertheless, the reform efforts during this period has inevitably exerted some influence on our understanding of the theory of socialist market economy.

25

Gao (2013).

2.4 The Decision of the Third Plenum of the 18th CPC Central Committee …

55

2.4 The Decision of the Third Plenum of the 18th CPC Central Committee and Its Influence on the Development of Economic Reform Theories In 2013, the Third Plenum of the 18th CPC Central Committee put forth the Decision on Several Important Issues Concerning Comprehensively Deepening Reform. This decision set off the clarion for and restarted a new journey of reform—the journey of comprehensively deepening reform. This time, the economic system became the focus in the campaign to deepen reform in an all-round way. The decision had many bright spots or highlights concerning the economic system reform. They have effectively promoted the deepening of market-oriented reforms. At the same time, they represent a significant development in the theory of socialist market economy. As such, the decision has made significant contributions to our understanding of the theory of socialist market economy. (1) The first highlight is the replacement of the old narrative that the market plays a basic role in resource allocations, which had been in place over the past 21 years, with a new narrative that the market plays a decisive role in resource allocations. The comprehensively deepening reform campaign is focused on the economic system reform. The core issue here is how to sort out the relationship between the government and the market so that the market can play a decisive role in resource allocation while at the same time the government plays a more effective role. Thus, the economic system reform hinges on the decisive role of the market in resource allocation. The change in wording—from basic to decisive—only two words apart, has profound implications. Letting the market play a decisive role more accurately and clearly reflects the dominant role of the market mechanism in resource allocation, and better reflect the internal requirements of the basic law of market economy, that is, the law of value. Three points are put forth concerning the decisive role to be played by the market in the allocation of resources. First, the problem of excessive government intervention in resource allocation needs to be addressed. Until 2012, the most prominent problem in China’s economic system had been excessive, direct allocation of resources made by the government. Local governments cottoned on to incorporating businesses to pursue short-term GDP growth in the region. To this end, they spared no efforts to fight for resources, to the detriment of the environment. Enormous amounts of resources were used inefficiently and wasted heavily, causing pollution to the environment and damage to the ecological system. Heavily indebted and financially strained, local governments were left with little resource to spend on improving people’s livelihoods, causing public grievances. Some central governmental departments, out of self-interest, were keen to maintain a tight examination and approval system. Some officials even engaged in power for money deals to seek private interests illegally. The government did not do enough to provide the basic public services, to maintain a level playing field, to supervise food and drug safety, and to control environmental damages. To address these issues, the decision of the Third Plenum of the 18th CPC Central Committee required

56

2 The Establishment and Development of the Socialist Market Economy …

that we must actively and steadily promote market-oriented reform in breadth and depth, significantly reduce the direct allocation of resources by the government, and promote resource allocation to maximize utilities and efficiency in accordance with market rules, market prices, and market competition. It can be seen that reform of the government and transformation of the government functions are not only the key to deepening the reform, but also the key to implementing the decisive role of the market in resource allocation. After the decision was made public, the State Council pushed forward reforms that were designed to streamline and delegate administrative power, strike a balance between deregulation and control, and optimize services. Comparatively speaking, the reform of local governments needs to be strengthened. Local governments have yet to provide satisfying answers to how to reduce direct allocation of resources, how to gradually get rid of their dependence on land-based finance, how to be more fiscally disciplined to avoid excessive debt, and how to better strengthen public services, market supervision, social management, and environmental protection, among other responsibilities. Second, to realize fair competition, the issue of imperfect market system needs to be fixed. To make the market play a decisive role in resource allocation, we need a unified and open market system and a fair competition environment. The decision pointed out, “Establishing a unified, open, competitive and orderly market system is the basis for the market to play a decisive role in the allocation of resources. We must put in place a modern market system in which enterprises enjoy independent management and fair competition, consumers have free choice and make autonomous consumption decisions, products and factors of production flow freely and are exchanged on an equal basis, strive to remove market barriers, and raise the efficiency and fairness of resource allocation.” In 2012, China’s market system was far from perfect. Price marketization for factors of production and resource products was not high enough, with varying degrees of distortions caused by excessive and improper government intervention or by immature markets. The competition environment was not perfect, either. Many local governments engaged in protectionism through price discrimination against products from other localities, or through preferential treatments on their own products selling outward. They often used their administrative and economic monopoly power to block competition and pursue improper economic interests. To help local manufacturers of low energy-efficiency products, they gave them preferential electricity prices despite the national ban on this practice, charged low or even zero price on land use to attract investments, kept a blind eye on pollution and waste discharges, provided preferential tax treatments, and so on. Shoddy and inferior products were rampant in the market, to the dismay of consumers. After the announcement of the decision, the process of building a modern market system picked up speed. The business facilitation reform has greatly promoted the creation of new businesses. More than 10,000 new enterprises were registered each day over the next three years. In 2017, the number reached 16,600. Entrepreneurship and employment were boosted significantly. New progress was made in deepening price reforms. As of 2016, more than 97% of commodity and service prices were freely determined in the market. Price marketization in important fields, such as electric power, refined oil, natural gas, and

2.4 The Decision of the Third Plenum of the 18th CPC Central Committee …

57

railway transportation, has increased significantly. New breakthroughs were made in the reform of the financial system. Financial supervision was gradually strengthened and improved. The 2017 central financial working conference led to the founding of the Financial Stability Committee of the State Council, whose main task is to ward off systemic financial risk. Meanwhile, market access has been relaxed. Foreign direct investment in China is now managed with a negative list. On June 28, 2017, the National Development and Reform Commission and the Ministry of Commerce jointly issued the Catalogue of Industries for Guiding Foreign Investment (2017 Revision), further relaxing access of foreign investment in services, manufacturing, and the mining industry. The National Development and Reform Commission pointed out that, on the basis of reducing about half of the restrictive measures in the 2015 revision, the new list once again substantially enlarged foreign investment access. The 2017 list had 63 restrictive measures, 30 fewer than the 93 restrictive measures on the 2015 list.26 The rural reform was further deepened, leaping from the separation of two rights—i.e., the ownership right of collective land and the contracting right of farming land, to the separation of three rights—the ownership right of collective land, the contracting right of farming land, and the management right of farming land. By the end of 2017, more than 80% of the rural area had confirmed the rights. The market for the transfer of land contractual management rights has been established, and various forms of moderate scale operation have emerged. Third, the discriminatory provisions against the non-public economy need to be removed. This includes the elimination of the various hidden barriers. Prior to 2012, in both theoretical and economic circles, there were always people who thought that the non-public economy was an old and backward mode of production. They played down the role of the non-public sector in the socialist market economy, refusing to recognize that the non-public sector, together with the public sector, constitutes the foundation of China’s economic society. The decision made it clear, for the very first time, that both the public and the non-public sectors are important components of the socialist market economy and the important foundation of China’s economic and social development. This is also a highlight of the decision. For a time, either due to lack of understanding or out of vested interest, discriminatory regulations and measures were implemented against the non-public economy. “Glass doors” and “spring doors” were set up to block market access or limit competition. Unduly high interest rates were imposed on loans to private enterprises. The Party and the government have taken measures to solve these problems. The decision required that “we should support the healthy development of the non-public sector of the economy.” The non-public economy plays an important role in supporting growth, promoting innovation, expanding employment, and increasing tax revenues. The decision made the following statement: “The non-public sector plays an important role in sustaining growth, stimulating innovation, increasing employment, increasing tax revenues and so on. We will persist in equality of rights, opportunities and rules, abolish all forms of irrational regulations for the non-public economy, remove all

26

See Economic References, June 29, 2017.

58

2 The Establishment and Development of the Socialist Market Economy …

hidden barriers, and adopt specific measures for non-public enterprises to enter franchising fields. We will encourage non-public enterprises to participate in state-owned enterprise reform, foster mixed enterprises with non-public capital as the controlling shareholder, and encourage qualified private enterprises to establish the modern corporate system.” Since then, a healthy development of the non-public economy has been promoted through improving the business environment, actively developing the mixed ownership economy, encouraging social capital to participate in the infrastructure construction, and encouraging and regulating foreign investment. According to statistics from the Ministry of Finance, as of June 2017, the public and private partnership (i.e., PPP) invested in 13,554 projects, with a total investment of 16 trillion yuan. (2) The second highlight of the decision is transforming the role of the state asset supervisory agencies, from supervising enterprises to supervising capital. The decision stated that “we will improve the state-owned assets management system, strengthen state-owned assets oversight with capital management at the core, reform the authorized operation mechanism for state-owned capital, establish a number of state-owned capital operating companies, support qualified SOEs to reorganize themselves into state-owned capital investment companies. State-owned capital investment operations must serve the strategic goals of the state, invest more in key industries and areas that are vital to national security and are the lifeblood of the economy, focusing on offering public services, developing important and forwardlooking strategic industries, protecting the ecological environment, supporting scientific and technological progress, and guaranteeing national security.” On August 24, 2015, the Central Committee of the Party and the State Council issued guiding opinions on deepening the reform of state-owned enterprises, calling for the transformation of the functions of state-owned assets supervisory agencies to focus on capital management. The state-owned assets supervision institutions should correctly recognize their role of representing the position of investors, scientifically define the supervisory boundary on behalf of state-owned assets investors, establish a laundry list of supervision power and responsibility, and realize the transformation from the management of enterprises to the management of capital. In 2002, the 16th CPC National Congress established a state-owned assets management system that manages not only assets but also business affairs, including personnel. As a result, State-owned Assets Supervision and Administration Commissions (SASACs) were established at the national, provincial, and municipal levels, putting an end to the dubious practice of “nine dragons co-managing water” that had prevailed for many years. However, the problem that the state-owned asset supervisors were both the boss and the mother-in-law remained unsolved, making it difficult to separate government from business. The reform of the state-owned assets supervision institutions, switching from mainly managing enterprises to mainly managing capital, is not only a major measure to deepen the reform of state-owned enterprises, but also a major innovation in the theory of economic reform. This reform has three implications.

2.4 The Decision of the Third Plenum of the 18th CPC Central Committee …

59

First, the state-owned assets supervisory agencies are no longer the immediate superiors of the state-owned enterprises. Under the old regime of “mainly managing enterprises,” even though a state-owned enterprise has its own board of directors, the board could not fulfill its the power entrusted to them by the Company Law, and thus could not make independent decisions on major issues of the company. This is because almost all major issues must be submitted to and approved by the state-owned assets supervisors. In other words, the enterprise does not even have the decision-making power of independent operation, let alone become an independent market player. In this way, letting the market play a decisive role in the allocation of resources cannot be implemented at the micro level. Time to switch the mode to “mainly managing capital”. With some exceptions, the supervisory agency will become the boss only, which sends shareholders’ representatives and directors to the enterprise and lets its board of directors truly fulfill the rights and responsibilities stipulated in the company law. In July 2017, the State Council issued the Implementation Measures for Corporate Restructuring of Central Enterprises. It is stipulated that, by the end of 2017, all central enterprises (excluding central financial and cultural enterprises) that are registered under the 1988 Law of National Ownership Industrial Enterprises and are under the supervision of the SASACs should be incorporated as a limited liability company, or joint stock limited company in accordance with the Company Law. These measures are intended to accelerate the formation of an effective corporate governance structure and a flexible and efficient market-oriented operation mechanism. The reform involved 69 central enterprise groups, which controlled 101 central enterprises in total, with nearly 8 trillion yuan in total assets; and their more than 3200 local subsidiaries, with 5.66 trillion yuan in total assets.27 This reform, long overdue for more than 20 years, finally came into effect at the end of 2017. This is not only an urgent need to deepen the reform of state-owned enterprises, but also an essential condition for the implementation of the “mainly managing capital” policy. Only after the central enterprises and their subsidiaries have been transformed into separate legal entities can the SASACs stay true to their new role of “mainly managing capital,” rather than direct control of the enterprises. Second, capital operation companies and investment companies are to be established as a professional platform for the market-oriented operation of state-owned capital. To achieve the goal of focusing on capital management, the state-owned assets supervisory institutions should either establish or restructure state-owned capital operation companies and investment companies. The state-owned assets regulatory authorities should perform their fiduciary duties on behalf of investors in these state-owned capital investment and operation companies and a few enterprises they directly supervise, and authorize the these companies to fulfill their duties on stateowned capital within the scope of authorization. Thereafter, a state-owned enterprise in general will deal with the state-owned capital investment and operation company, which is designated by the SASAC as the boss of the state-owned enterprise. After 2014, the SASAC of the State Council began to carry out pilot projects 27

See Economic References, July 27, 2017.

60

2 The Establishment and Development of the Socialist Market Economy …

on state-owned capital investment and operation companies. By 2017, there were ten such pilot companies, including the COFCO group, State Investment Corporation, Shenhua Group, China Minmetals, and Baowu Group. The pilot program has explored mainly from three aspects. The first is to promote professional operation of state-owned capital, and at the same time to explore an effective investment and operation mode. The second is to explore the relationship between the SASAC and enterprises. The third is to push for internal reforms within the capital investment and operation companies and explore market-oriented enterprise operation mechanism.28 Third, the main responsibilities of the state-owned assets supervisory authorities are to better serve national strategic objectives, and optimize the allocation, operating efficiency and liquidity of state-owned capital. The decision of the Third Plenum of the 18th CPC Central Committee put forth five key areas for state-owned capital investment: (1) providing public services, (2) developing important forwardlooking strategic industries, (3) protecting ecological environment, (4) supporting scientific and technological progress, and (5) safeguarding national security. This provision is more specific and clear than the the decision of the Fourth Plenum of the Party’s 15th Central Committee held in 1999. According to the 1999 decision, the following industries and fields should be controlled by the state government: industries involving national security, industries of natural monopoly, industries providing important public goods and services, and important backbone enterprises in pillar industries and high-tech industries. The latest decision no longer mentions the control of natural monopoly industries in general terms, but rather points out that the natural monopoly industries in which state-owned capital continues to control and operate will implement the separation of network operation based on each industry’s characteristics, and liberalize those business fields that are competitive in nature. The protection of ecological environment is added as one of the five key areas of stateowned capital investment, expanding the 1999 list of four major areas. Until 2017, state-owned capital was not well concentrated in important industries and key areas that were related to national security or to the lifeline of the national economy. Large amounts of state-owned were still invested in generally competitive industries. For instance, most central enterprises were keen to invest in real estate (excluding social security housing). The decision required that state-owned capital should make necessary adjustments to ensure that more than 80% of state-owned capital will be concentrated in the five key areas by 2020. Fourth, the state-owned assets supervisory authorities should focus on improving the operation efficiency of state-owned capital to maintain and increase its value. In the old regime of “mainly managing enterprises,” the authorities managed around 100 central enterprises. The management front became far too stretched, a blunt violation of the principle of management science, which suggests that it is most effective to manage no more than 30. To make things worse, these giant central enterprises often have up to five or six layers—and in some cases ten layers—of grandson subsidiaries, great grandson subsidiaries, and so on. The authorities were powerless faced with such a complex, multi-layered family of firms within a central enterprise. 28

See Economic References, August 9, 2017.

2.4 The Decision of the Third Plenum of the 18th CPC Central Committee …

61

This structure makes it very difficult for the authorities to concentrate on improving the efficiency of state-owned capital, and it is not conducive to the preservation and appreciation of state-owned capital. For a time, the internal management of some state-owned enterprises was in chaos. Loss of state-owned assets occurred from time to time due to embezzlement, related party transaction, transfer and exchange of interest, or illegal decision-making. In 2015, for example, the central inspection team found prominent problems related to the transfer and exchange of interest and related party transactions in many large central enterprise such as Sinopec, China Shipping, China Shipping Group, Shenhua Group, and Dongfeng.29 Many reasons are cited for the malpractice, but the root cause is the system of “mainly managing enterprises.” In the future, the state-owned assets management authorities can concentrate on the management of state-owned capital and on its preservation and appreciation. (3) The third highlight of the decision is affirming that mixed economy is an important form of the basic economic system. The decision called for vigorously developing a mixed economy, stating that “a mixed economy with cross holding and mutual fusion between state-owned capital, collective capital and non-public capital is an important way to materialize the basic economic system of China. It is conducive to improving the amplification function of state-owned capital, ensuring the appreciation of its value and raising its competitiveness, and it is conducive to enabling capital with all kinds of ownership to draw on one another’s strong points to offset weaknesses, stimulate one another and develop together. We will allow more state-owned enterprises (SOEs) and enterprises of other types of ownership to develop into mixed enterprises. We will allow non-state-owned capital to hold shares in projects invested by state-owned capital. We will allow mixed enterprises to implement employee stock ownership plans (ESOP) to form communities of capital owners and laborers.” This passage from the decision is of great significance to both the theory and the practice of reform. First, vigorously developing a mixed economy represents an important policy measure to stick to and improve the basic economic system that is dominated by public ownership but allows for a diversity of ownership economy to prosper together. With rapid economic development since reform and opening up, state-owned capital, private capital, and foreign direct investment have all increased dramatically. By the end of 2016, the total assets of state-owned enterprises directly under the supervision of the authorities reached 144.1 trillion yuan, and total private capital was more than 30 trillion yuan. Since 2010, the actual use of foreign direct investment each year has been more than 100 billion US dollars. Social capital investment accounted for more than 60% of the total fixed assets investment. From a social perspective, China’s economy is already a mixed economy. The development of a mixed ownership economy, as highlighted in the decision, mainly refers to the micro level, that is, to vigorously promote and nurture enterprises in which state-owned capital, collective capital, and non-public capital are integrated through cross shareholding and mutual integration. This will not only help amplify the function of state-owned capital 29

Chen (2015).

62

2 The Establishment and Development of the Socialist Market Economy …

and preserve and increase its value, but also boost mutual promotion and common development of all kinds of capital. The mixed economy allows employees to hold shares, ushering in a new incentive mechanism. The report of the 15th CPC National Congress admitted that the share-holding system is a realization form of public ownership. The decision of the Third Plenum of the 16th CPC Central Committee further proposed that the joint-stock system is the main form of public ownership. The decision of the Third Plenum of the 18th CPC Central Committee went a step further by proposing that the mixed economy is an important realization form of the basic economic system. Decades-long reform practice tells us that a company can be wholly owned by the state, and a joint-stock company can be jointly owned by several state-owned enterprises. Joint-stock companies in developed countries are generally held by private capital. The mixed ownership structure is the real economic entity with diverse investment subjects, and this form of ownership structure is what China needs to overcome the drawbacks associated with the existing state-ownership system and to improve efficiency of state-owned capital. From this perspective, it can be said that mixed ownership is the new stage and upgraded version of the joint-stock system. Second, vigorously developing a mixed economy also has important policy orientations. One is to fully mobilize the enthusiasm of all kinds of capital and give full play to their respective advantages. This should not be limited to playing alone, but rather playing as a whole through cross shareholding and mutual integration. For example, in order to speed up the construction of infrastructure projects with positive externalities, we should allow social capital to participate in the projects so that we can promote efficiency and shorten the payback period, for both social and economic benefits. The second is to open channels through which to reform state-owned natural monopoly industries. The decision proposed that, for natural monopoly industries in which state-owned capital continues to hold controlling shares, efforts should be made to separate infrastructure networks from network operations, and liberalize competitive business in accordance with the characteristics of different industries. Natural monopoly industries have many competitive business fields that need to be liberalized. The problem is how to do that. The best choice is to carry out reform of mixed ownership to absorb non-state capital. In this way, the competitive businesses that have been monopolized for many years can be liberalized so as to optimize resource allocation and efficiency. At the same time, state-owned natural monopoly enterprises can improve their natural monopoly business by selling some of their competitive business shares and using the funds to increase their investment in science and technology. We have seen that, before the decision was announced, state-owned enterprises in general competitive industries had already carried out company structure reform and stock ownership reform, leading to diverse investment subjects. Monopoly industries had lagged behind in the reform. Therefore, when the decision proposed to vigorously develop a mixed economy, its target was on natural monopoly industries. Third, since the decision was rolled out, the mixed ownership economy has developed rapidly. Some local governments have made the development of a mixed economy a top priority in deepening the reform of state-owned enterprises. Premier

2.4 The Decision of the Third Plenum of the 18th CPC Central Committee …

63

Li Keqiang proposed in the 2014 Report on the Work of the Government that measures should be formulated for non-state capital to participate in the investment projects of central enterprises, and a number of investment projects will be launched and open to non-state capital in the fields of finance, oil, power, railway, telecommunications, resources development, and public utilities. On July 15, 2014, the State Council’s SASAC launched a pilot program of mixed ownership economy in central enterprises, involving China Pharmaceutical Group and China Construction Materials Group. The purpose of the pilot program is to explore the following six aspects. The first is to explore the establishment of an effective corporate governance structure with checks and balance and equal protection for enterprises with mixed ownership. The second is to explore the professional management system and market-oriented labor employment system. The third is to explore the market-oriented incentive and restraint mechanism. The fourth is to explore the employee stock ownership system in enterprises with mixed ownership. The fifth is to explore the effective supervisory system and ways to avoid the loss of state assets in mixed ownership enterprises. The last is to explore the effective mechanism of Party construction in such enterprises.30 Some provinces and cities have also introduced policies and measures to promote mixed ownership economy. According to incomplete statistics, from 2015 to 2017, nearly 1000 new subsidiaries with mixed ownership were created by central enterprises, of which more than 700 were established in 2017, and 338.6 billion yuan of social capital was introduced through the capital market. By 2017, more than two-thirds of China’s central enterprises had introduced various kinds of social capital. More than half of the state-owned capital was concentrated in public listed companies. Three central enterprises have become mixed ownership enterprises at the group level. Second-tier or lower subsidiaries of the central enterprises accounted for more than 50% of the mixed ownership enterprises.31 Nevertheless, in general, the progress of mixed ownership reform is not fast enough, and the experience from the pilot have not yet been disclosed. The approval and coordination procedures for mixed ownership reform in some central enterprises are rather complex. The major issues in the mixed ownership reform include the arrangement of equity ownership ratio and the valuation of state-owned assets. Solving these issues need consensus, coordination, and transparency. (4) We must accelerate the improvement of the modern market system, and let the market play a decisive role the allocation of resources. The decision called for establishing a unified, open, competitive, and orderly market system so that the market can play a decisive role in the allocation of resources. It required that the government must put in place a modern market system in which enterprises enjoy independent management and fair competition, consumers have free choice and make autonomous consumption decisions, and products and factors of production flow freely and are exchanged on an equal basis. More over, the government must strive to remove market barriers and raise the efficiency and fairness of 30 31

See People’s Daily, July 16, 2014. See People’s Daily, February 7, 2018.

64

2 The Establishment and Development of the Socialist Market Economy …

resource allocation. The decision put forth five guiding lines on how to build such a modern market system, to be elaborated as follows. First, enact market rules that are fair, open, and transparent. For the first time, the decision put forward the implementation of the negative list management mode. A unified market access system will be implemented with a negative list. On this basis, all kinds of market players may enter areas not on the list on an equal footing and according to law. The decision called for the exploration of a management model for foreign investors with pre-entry national treatment plus the negative list. In the past, China had implemented a positive list management mode, while developed market economy countries generally adopt the negative list management mode. After several years of efforts, on June 28, 2017, the National Development and Reform Commission and the Ministry of Commerce jointly issued the Catalogue of Industries Guiding Foreign Investment (2017 Revision). The catalogue includes 63 restrictions and prohibitions on the negative list, 30 fewer than the 2015 revision. The new catalogue put forward special management measures for foreign investment access (i.e., negative list for foreign investment access), marking the beginning of a new era of China’s foreign investment management.32 The decision required that the government must make business registration system more convenient by reducing the number of items that require qualification verification, turning certification before licensing into licensing before certification, and gradually changing the paid-in capital registration system into a subscribed capital registration system. The government should propel reform of the domestic commodity distribution structure while building a business environment under the rule of law. The business environment in China has greatly improved subsequently. The optimization of business environment has fully stimulated market vitality and the creativity of the nation. From 2014, the number of newly established enterprises in China has exceeded 10,000 each day, reaching 16,600 in 2017. In comparison, the figure was only 6900 in 2013, before the reform of business registration system was initiated. According to the World Bank’s Global Business Environment Report issued in 2017, China’s business facilitation ranking ratched up 18 places over the past three years, an average of six each year.33 Second, perfecting the mechanism whereby prices are mainly determined by the market. Any price that can be determined by the market must be left to the market, and the government is not to carry out improper interventions. The government will push ahead with pricing reforms in water, oil, natural gas, electricity, transportation, telecommunications, and some other sectors while relaxing price control in competitive areas. Prices which are determined by the government will be limited to important public utilities, public-welfare services, and network-based natural monopolies while at the same time raising transparency and accepting social supervision. The government will strive to improve the pricing mechanism for agricultural products, 32 33

See Economic References, June 29, 2017. See People’s Daily, August 17, 2017.

2.4 The Decision of the Third Plenum of the 18th CPC Central Committee …

65

and attach importance to the market’s role in determining prices. After the decision, great strides have been made in price reforms, with remarkable progress. First, the items the price of which are set by the government are listed and made public. In late October 2015, the National Development and Reform Commission issued the newly revised Central Pricing Catalogue. The catalogue reduced the range of central pricing substantially, from 13 to 7 categories, a drop of 46%. The specific items were cut from about 100 to 20, a drop of 80%. At the same time, local pricing catalogues were decreased by about 50%, on average. To improve the price formation mechanism of agricultural products, in 2014 the government implemented reform by liberalizing the purchasing price of tobacco leaves and silkworm cocoons. With this reform, all agricultural products are now determined by the market. In 2016, the government promoted the reform of corn collection and storage system and established a corn producer subsidy system. Price reforms on cotton from Xinjiang and soybean from the Northeast and Inner Mongolia were carried out smoothly, narrowing the price gap between domestic and foreign markets. In the energy area, the reform of transmission and distribution price broke ground in power grids in Shenzhen and Inner Mongolia at the end of 2014. By the end of June 2017, the reform extended to all provincial power grids. In 2015, the price of trans-provincial electric energy transaction was liberalized, with the price to be determined by parties involved. In the same year, a price linkage mechanism for coal and electricity prices was implemented. In January 2016, the National Development and Reform Commission lowered the grid price on coal-powered electricity by 3 cents per kilowatt hour, and cut the price of electricity for general industrial and commercial uses by the same margin, saving enterprises by about 22.5 billion yuan each year on electricity expenses. By 2015, more than 40% of the national natural gas prices were liberalized. In March 2013, the National Development and Reform Commission shortened the price adjustment cycle for gasoline and diesel retail prices, from 22 working days to 10 working days, and lifted the limit of price adjustment only when the oil price in the international crude oil market changes by 4%. A progressive pricing system for residential water, gas and electricity has been steadily implemented. As of 2015, out of China’s 31 provinces and municipalities, only Qinghai and Tibet had not established the progressive water price system for urban residents; and only Chongqing and Xinjiang had not implemented the progressive natural gas price system. As for electricity, since the pilot implementation initiated in 2012, the progressive price system has been adopted in all provinces and municipalities, except Xinjiang and Tibet.34 Third, forming a unified construction land market in both urban and rural areas. According to the decision, the government will allow rural collectively owned profitoriented construction land to be sold, leased, and appraised as shares, on the premise that it conforms to planning and its use is under control, and ensure that it can enter the market with the same rights and at the same prices as state-owned land. Since the decision, it has been further clarified that the separation of two rights, namely, the 34

Xu and Ding (2017).

66

2 The Establishment and Development of the Socialist Market Economy …

ownership of rural collective land and the contractual right of farming land, should be developed into the separation of three rights: the ownership right of rural collective land, the contractual right of farming land, and the operating right of rural land. The market for the transfer of operating rights of farming land should be developed, and various forms of farming with moderate scale are encouraged. Fourth, improving the financial markets. The decision called for the government to further open the financial industry, and allow qualified non-governmental capital to set up, in accordance with law, financial institutions such as small or medium-sized banks on the premise that this comes under strong oversight. The government should also improve the mechanism for market-based Renminbi exchange rates, accelerate interest-rate liberalization, and improve the national debt yield curve that better reflects the relationship between market supply and demand. Since the decision, 17 private banks have been successfully established and put into operation. With the removal of the upper limit on Renminbi deposit rates, the marketization of interest rates has been basically realized. In April 2015, the State Council promulgated a regulation on deposit insurance. The regulation, effective on May 1, 2015, sets a maximum payment limit of 500,000 yuan, a milestone for the deposit insurance system. Fifth, intensifying the reform of the management system for science and technology, and developing the market for technology. The decision implored the government to set up and improve mechanisms and institutions that encourage original innovation, integrated innovation, and re-innovation, improve mechanisms that encourage market-based technological innovation, and give free rein to the market’s guiding role in research and development orientation, choice of paths, pricing of factors, and allocation of innovation factors. In 2015, the Fifth Plenum of the 18th CPC Central Committee put forth the Proposal on Formulating the 13th Five-Year Plan for National Economic and Social Development. This proposal called for the government to improve the concept of development, and firmly establish the concept of innovation, coordination, green, open, and shared development. According to the proposal, innovation is the most important driver for development. Innovation must be put at the core of the overall development of the country. Innovations in theory, system, science and technology, culture and other aspects must be constantly promoted, so that innovation runs through all the work of the Party and the country, making innovation take hold in the whole society. Driven by the strategy of strengthening innovationbased development, the technology market has developed rapidly. In 2015, a total of 307,000 technological contracts were signed, with a turnover of 983.5 billion yuan, up 14.7% over the previous year. In 2016, 320,000 such contracts were signed, with a turnover of 1140.7 billion yuan, an increase of 16% over the past year. In 2017, the corresponding figures were, respectively, 368,000, 1342.4 billion yuan, and 17.7%.

2.5 Accelerating and Perfecting the Socialist Market Economy and Pushing …

67

2.5 Accelerating and Perfecting the Socialist Market Economy and Pushing for Quality Economic Growth in the New Era In October 2017, General Secretary Xi Jinping delivered his report at the 19th CPC National Congress, entitled “Secure a Decisive Victory in Building a Moderately Prosperous Society in All Respects and Strive for the Great Success of Socialism with Chinese Characteristics for a New Era.” The report pointed out that with decades of hard work, socialism with Chinese characteristics has crossed the threshold into a new era. This is a new historic juncture in China’s development. As socialism with Chinese characteristics entered a new era, the principal contradiction facing the Chinese society has evolved as well. What we now face is the contradiction between unbalanced and inadequate development and the people’s ever-growing needs for a better life. China’s economy has been transitioning from a phase of rapid growth to a stage of high-quality development. In this pivotal stage, we need to transform our growth model, improve our economic structure, and foster new drivers of growth. It is imperative that we develop a modernized economy. This is not only an urgent requirement to get through this critical transition, but also a strategic goal for China’s development. This report put forwards a series of statements and strategies designed to further deepen market-oriented reforms and further improve the socialist market economy theory. First, it is imperative that China adheres to the socialist market economy reform, accelerates the improvement of the socialist market economy system, and strives to build an economic system with more effective market mechanisms, dynamic microentities, and moderate macro-regulation. It is the first time that the term “moderate macro-regulation” has been used. It implies that macro-regulation should play an active role in smoothing out economic fluctuations. Marco-regulation should be neither too little nor too excessive, but should be timely and appropriate, so as to create a sound macroeconomic environment for the healthy operation of the economy. Second, in conducting economic reforms, we must improve the property rights system and ensure market-based allocation of factors of production, so that property rights cab act as effective incentives. We should ensure free flow of the factors of production, flexible prices, and fair and orderly competition. We should also ensure that business survival is determined by competition. While the report of the Third Plenum of the 18th CPC National Congress also stressed the importance of protecting property rights, the latest report further proposed to improve and perfect the entire property rights system and to realize the effective incentive mechanisms based on property rights. Admittedly, in the period leading up to the 19th National Congress, the property rights of private enterprises were not well protected, bringing about some negative impacts on their initiatives. In 2016, private investment in fixed assets grew by only 3.2%, substantially below the double-digit growth in the past (e.g., 10% in 2015). After various measures taken to strengthen the protection of property rights, the growth in private investment recovered in 2017, to 6%. At present, one of the central objectives in perfecting the property rights system is to strengthen

68

2 The Establishment and Development of the Socialist Market Economy …

the protection of intellectual property and to improve the incentive mechanism. The report implored the country to accelerate market-oriented reforms on factor inputs. Price marketization is not only the prerequisite for market-based allocation of factors of production, but also an important condition for the market to play the key role in allocating resources. Third, we must strive to make state-owned capital stronger, more efficient, and bigger. This new request goes beyond the decision made at the Third Plenum of the 18th CPC National Congress which stated that the main job of the state asset management authorities was to “mainly manage capital.” The latest report required that the state authorities should focus more on state-owned capital than on state-owned assets, because the latter consists of liabilities and owner’s equity. If the liability of an enterprise exceeds total assets, owners’ equity becomes negative, making it a zombie enterprise. Additionally, pushing state-owned capital to be stronger, more efficient, and bigger is one big step forward from the decision made at the Fourth Plenum of the 15th CPC National Congress held in 1999, whose focus was on improving the entire national economy. The national economy also includes some not-for-profit institutions, whose mission it is to improve public services, not necessarily to become stronger, more efficient, and bigger. Fourth, we should support the growth of the private sector, and stimulate the vitality of various market entities. We should break administrative monopoly, preclude the forming of market monopoly, motivate business owners’ entrepreneurial spirits and protect their rights, and encourage more social entities to participate in innovation and entrepreneurship. This is the first time that the term “private enterprise” was ever mentioned specifically in important documents of the Party. In the decision of the Third Plenum of the 18th CPC National Congress, such an enterprise was referred as non-state enterprise. This term—private enterprise—is clear and straightforward, and everybody understands what it means. The objective of supporting the growth of private enterprises and protecting entrepreneurship is to mobilize the initiatives of the private sector, which plays an important role in boosting economic growth, stimulating innovation, creating jobs, and increasing revenues. Also appearing in the Party’s important documents for the very first time is the mention of precluding market monopoly. This attests to the determination of the Party to break monopoly and encourage competition. Fifth, the report proposed to improve the regulatory framework that is underpinned by twin regulation pillars—monetary policy and macro-prudential policy, and to ensure that interest rates and exchange rates become more market-based. The twinpillar regulatory framework implies that the financial regulatory agencies should not only focus on price stability, but also keep an eye on capital asset prices, house financing activities, off balance sheet financial activities, and cross-border capital flows. Lastly, during the stage of high-quality growth, we should reform and transform the driving forces of development. This includes at least four contents. The first is to stress that innovation is the first and foremost driving force of growth. In particular, innovation in science and technology should lead the innovation in the overall economy. Innovation is the strategic underpinning for building a modernized

2.6 Several Regularities of the Socialist Market Economy

69

economy. The second is to further deepen the supply-side structural reform, speed up efforts to make China a manufacturing power, develop advanced manufacturing, and promote further integration of the internet, big data, and artificial intelligence with the real economy. We should foster new drivers of growth in medium–high end consumption, innovation-driven development, the green and low-carbon sector, the sharing economy, modern supply chains, and human capital services. The third is to let opening up promote reform and development. In the Belt and Road Initiatives and in expanding foreign trade, we should strive to promote high quality economic development by implementing high level liberalization and facilitation of trade and investment, optimizing the layout of regional openness, exploring free trade ports, and innovating foreign investment modes. The fourth is to speed up the completion of the new growth model, and steadily strengthen the innovation capacity and competitiveness of China’s economy. In short, the transformation of economic drivers is a big canvas, waiting to be explored and developed in our future endeavors.

2.6 Several Regularities of the Socialist Market Economy The Third Plenum of the 18th CPC Central Committee pointed it out that “one of the regularities in the market economy is that the market determines the allocation of resources.” Over the past forty years of reform and opening up, we have studied and uncovered several laws concerning our socialist market economy. First of all, the market plays an essential role in allocating resources, and the law of value dictates social production and distribution. The practice from both home and abroad shows that resources are most efficiently allocated by the market, certainly much more efficient than by central planning. This is the reason why China has chosen the market economy system ever since its reform and opening up, and the foundation of its economic miracle. The dominant role of market forces is in full display in the economic activities, and the law of value acts as a revolutionary force pushing forward growth in productivity. The market mechanism should play some role in other areas such as culture, education, and medical services, but the role should not be dominant. Areas such as mandatory education, basic medical services, guarantee of minimum living standards, environment protection, and other basic public goods, should fall primarily on the shoulders of the state government. Second, the fact that businesses are the main economic entities in a market economy calls for the separation of government from business, and the separation of government from capital. In the socialist market economy, enterprises are no longer the appendants of the superior state authority as used to be in the planned economy. Rather, they are independent entities that are responsible for their own profits and losses. The role of the market in allocating resources is achieved through the economic activities by the micro-economic entities (i.e., individual businesses). In response to market signals such as price changes, an enterprise makes its own decision regarding what goods and services to produce and how much to produce in a way that optimizes its limited resources. In order for enterprises to become the

70

2 The Establishment and Development of the Socialist Market Economy …

real economic players and legal entities, it is imperative to separate government from business and from capital. To this end, the Third Plenum of the 18th CPC National Congress decided that the primary objective of the custodian authorities of state assets was to manage capital, hoping that reforms in state assets would kick off reforms in state-owned enterprises. At the same time, the role of state asset management authorities would pivot away from mainly managing enterprises to mainly managing assets, so that the board of directors of a company can truly exercise their power entrusted upon them by the statutory company law. Third, building a socialist market economy does not necessarily mean that the government should take the laissez faire approach. But rather, the government should manage through macro regulations. According to the Third Plenum of the 18th CPC National Congress, the primary objective of marco-regulations is to maintain overall economic balance, promote coordination of major economic institutions, promote the optimization of production, alleviate the shocks in business cycles, preclude regional or systemic risk, stabilize market expectations, and realize sustainable and healthy economic growth. The experience over the past forty years of reform and opening up has proved that China’s macro-regulations have been largely successful, with solid results. The Chinese economy has never suffered a yearly downturn over the past forty years. The lowest growth, at 3.9%, happened in 1991. Economic growth has averaged 9.5% while inflation has averaged less than 5%. This benign mixture of high economic growth and moderate inflation over such a prolonged period of time is truly an economic miracle that has rarely, if ever, happened in the history of the world economy. The fourth is the importance of the rule of law in the socialist market economy. A modern market economy is an economy under the rule of law. Only moving on the track set up by the rule of law can the market economy take full advantage of its positive effects while minimizing its various adverse impacts that may arise from its own spontaneous adjustments. In 1997, the 15th CPC National Congress spelt out a general plan to govern the country by the rule of law, signifying an important transformation from the rule of people to the rule of law. In 2014, the Fourth Plenum of the 18th CPC National Congress further formalized this plan by introducing the Decision of the CPC Central Committee on Several Major Issues Concerning Comprehensively Promoting the Rule of Law. The decision pointed it out that the socialist market economy is essentially an economy governed by the rule of law. In such an economy, in order for the market mechanism to play a decisive role in resource allocation and for the government to play a more effective role, we must take as the basic guidance the protection of property rights, the enforcement of contracts, the unification of the market, equal and fair exchange, fair competition and effective supervision, and strive to improve the legal system of the socialist market economy. Some scholars have offered their support for the rule of law in the market economy because a solid legal system ensures the healthy operation of the socialist market economy.35

35

Wu (2007).

References

71

Fifth, the objective of developing the socialist market economy is to share the fruits of the economic success and enjoy shared prosperity. In contrast, the objective of production under capitalism is the pursuit of surplus value and profit maximization. To be sure, the major economic entities in socialist market economy should also strive for more profits. The profits made by state-owned enterprises belong to the entire society, while those made by private enterprises belong to their owners. The socialist economic system is dominated by public ownership, with the common development of all sorts of ownership economy. Under the leadership of the Communist Party, the government continuously strengthens the regulations of property and income by means of taxation, transfer payments, provision of public goods and services, and improvement of the social security system. Additionally, it encourages enterprises, social organizations, and the general public to make contributions to charities and relief efforts. All these efforts are aimed to avoid polarization, gradually narrow inequality in wealth and income, and make everyone share the fruits of development, moving towards common prosperity. The Fifth Plenum of the 18th CPC Central Committee pointed out that “sharing is the essential requirement of socialism with Chinese characteristics. We must adhere to the principle of development for the people, development depending on the people, and the development results shared by the people. We must make more effective institutional arrangements to ensure everybody will enjoy increasing benefits in the process of building and sharing development, enhance growth momentum, enhance the unity of the people, and steadily advance towards common prosperity.” Sixth, the socialist market economy should be one that is characterized by scientific development, innovation, coordination, green, opening, and shared prosperity. The reform and opening up policy has mobilized the latent incentives of the general public, setting off the country’s economic takeoff. In 1992, Deng Xiaoping put forward the famous assertion that development is the absolute priority. In 2005, the Fifth Plenum of the 16th CPC Central Committee unveiled the task of transforming China’s economic growth mode. In 2007, the 17th CPC National Congress called for scientific development and transformation of the economic development mode. In 2015, the Fifth Plenum of the 18th CPC Central Committee rolled out the new development vision of an innovative, coordinated, green, and open development that is for everyone. In sum, our understanding of the laws governing the development of the socialist market economy has been constantly deepened.

References Chen Jun and Hong Nan (Ed.). (2012). Jiang Zemin and the Proposal of the Socialist Market Economy System: A Review of 20 Years of Socialist Market Economy. Central Literature Publishing Press. Chen Yishou. (1989). Against the Bourgeoisie Liberalization and Improve the Ideological Level of Teaching Political Economy. Theoretical Information, August 14, 1989.

72

2 The Establishment and Development of the Socialist Market Economy …

Chen Zhizhi. (2015). Connected Transaction Is a Chronic Disease, and Frequent Violations of Discipline Still Occur against the Wind. China Discipline Inspection and Supervision Daily, February 7, 2015. Chi Fulin (Editor-in-Chief). (2014). Market Decisions. China Economic Publishing Press. Gao Di. (1990). Socialism Must Replace Capitalism. People’s Daily, December 17, 1990. Gao Hucheng. (2013). Accelerating the Cultivation of New Advantages in Participating in and Leading International Economic Cooperation and Competition. In Guidance Book of the Decision of the CPC Central Committee on Several Major Issues Concerning Comprehensively Deepening Reform (pp.197–198). People’s Publishing House. Gao Shangquan. (2018). Review and Thought of China’s 40 Years of Reform and Opening Up (Part I; p.270). People’s Publishing House. Gu Zhun. (1957). Discussions on the Law of Commodity Production and Value under the Socialist System. Economic Research Journal, 3. Jiang Yiwei. (1981). The Enterprise-based Theory. Chinese Social Sciences, 1. Liu Guoguang (Editor-in-Chief). (2006). Research Report on China’s Tenth Five-Year Plan (p.613). People’s Publishing House. Peng Sen, Chen Li, et al. (2008). Major Events in Economic System Reform. China Renmin University Press. Selected Works of Deng Xiaoping. (1993). Vol.3. People’s Publishing House. Shao Ning (Editor-in-Chief). (2014). Records of the State-owned Enterprise Reform (1998–2008). Economic Science Press. Sun Yefang. (1956). Put Planning and Statistics on the Basis of the Law of Value. Economic Research Journal, 6. Sun Yefang. (1998). Profitability Measures in the Socialist Planned Economic Management System. In the Complete Works of Sun Yefang (Vol.2), Shanxi Economic Publishing Press. The Comprehensive Planning Department of the National Economic System Reform Commission (Ed.). (1988). The Big Ideas of China’s Reform. Shenyang Publishing Press. The Reference Room of the Institute of Economics of Chinese Academy of Social Sciences (Ed.). (1980a). The Relationship between Planning and Market in Socialist Economy. China Social Sciences Press. The Reference Room of the Institute of Economics of Chinese Academy of Social Sciences (Ed.). (1980b). Problems of Price Formation under the Socialist System. China Social Sciences Press. Wang Yifu. (1989). The Twelve Manifestations of Bourgeois Liberalization in the Economic Field. Theoretical Information, August 7, 1989. Wu Jinglian. (2007). Calls for a Market Economy under the Rule of Law. Sanlian Bookstore. Wu Jinglian and Zhang Wenmin. (1999). Socialist Market Economy Theory. In Zhang Zhuoyuan (Ed.). Controversy and Development: 50 Years of Chinese Economic Theory. Yunnan People’s Publishing House. Wu Jinglian, et al. (1988). The Outline of the Mid-term Economic System Reform Plan. In The Comprehensive Planning Department of the National Economic System Reform Commission (Ed.). The Great Ideas of China’s Reform (p. 199). Shenyang Publishing Press. Xu Guangjian and Ding Yuewei. (2017). Pushing Forward the Price Reform in Depth and Improving the Level of Deregulation Services. Price Theory and Practice, 5. You Lin. (1990). Adhere to the Combination of Planned Economy and Market Regulation. In Goals of Reform. Economic Daily Press.

Chapter 3

The Establishment of the Theory of the Primary Stage of Socialism

Reform and opening up has brought out tremendous changes to China. Since the Third Plenum of the 11th CPC Central Committee, held in late 1978, China’s social productivity, its overall national strength, and people’s incomes and living standards have all experienced steady and rapid improvement. At the same time, China has become increasingly influential in global affairs, a status commensurate with its growing economic power. The basic driver behind these remarkable achievements is the fact that the Party has, on the basis of summing up the experiences and lessons of China’s socialist construction, had a clear understanding of and accurately grasped the country’s national conditions; gradually formulated and developed the theory of the primary stage of socialism; correctly made the scientific judgment that China is in the primary stage of socialism and will be in such a stage for a prolonged period of time; and continued to promote economic development through reform and opening up in accordance with this basic judgement. The theory of the primary stage of socialism is an accurate generalization of China’s contemporary national conditions, and hence a basic prerequisite for building socialism with Chinese characteristics. Chinese economists have made great contributions to the formation and development of the theory of the primary stage of socialism. In the early days of reform and opening up, economic researchers, untamed by the constraints of traditional theory, began to carry out bold theoretical explorations, and achieved important theoretical breakthroughs. Starting from the basic premises of the primary stage of socialism, the Chinese economic community examined the socialist economic system and its operation mechanism in depth, achieving fruitful theoretical results. Their studies not only provided important theoretical supports for China’s economic development, but also enriched the connotations of the theory of the primary stage of socialism. In short, they have made significant contributions to the establishment of political socialist economy with Chinese characteristics.

© China Social Sciences Press 2023 Z. Zhang, Handbook of Chinese Economics, https://doi.org/10.1007/978-981-99-0420-4_3

73

74

3 The Establishment of the Theory of the Primary Stage of Socialism

3.1 The Formation and Development of the Theory of the Primary Stage of Socialism The theory of the primary stage of socialism was conceived and developed under China’s contemporary conditions of reform and opening up. Deng Xiaoping played a crucial role in the theory’s formation process. Upon deep reflections on the experience of the country’s socialist construction since the founding of the People’s Republic of China in 1949, Deng came to realize that China’s socialist construction could not afford to overlook the country’s national conditions and bypass the necessary stages. He made the following statements: “We should fully study how to carry out socialist construction. Today, we are summing up the experience of the past thirty years since the founding of the People’s Republic of China. First, we cannot afford to continue the left-leaning measures that have ignored the reality and look unrealistic. This should not be the way to build socialism, and we have suffered greatly from this. Second, whatever you do, they must be conducive to the development of productive forces.”1 Under the guidance of the thought from Deng Xiaoping, the Sixth Plenum of the 11th CPC Central Committee put forth, for the first time, the basic conclusion that China was in the primary stage of socialism. This notion was emphasized repeated at the 12th CPC National Congress and its Sixth Plenum. In order to better guide reform and opening up and modernization, the draft team of the report for the 13th CPC National Congress decided to make the scientific conclusion that China was in the primary stage of socialism as the basic theme of the report. When the team reported this overall idea to Deng Xiaoping, the latter commented that “the design was rather good.” On the eve of the 13th National Congress, in his interview with foreign guests, Deng Xiaoping said: “The 13th CPC National Congress will elaborate on what stage China’s socialism now stands. It is the primary stage of socialism. Socialism itself is the primary stage of communism. China is in the primary stage of socialism, that is, the underdeveloped stage. Everything must be based on this reality, and we should make our plans according to this judgement.”2 The report of the 13th CPC National Congress offered a comprehensive elaboration of Deng Xiaoping’s thought, the core of the report. Later on, Deng Xiaoping pointed out that elaboration of the theory of the primary stage of socialism was an important feature of the report.3 Under the guidance of this theory, China has firmly stuck to the principles and policies laid out at the Third Plenum of the 11th CPC Central Committee. In his south-tour talks made in 1992, he once again talked about the primary stage of socialism: “We have only been engaged in socialism construction for a few decades, and so we are still in the primary stage. To consolidate and develop the socialist system, we need a very prolonged historical stage. It may take generations, a dozen generations, or even dozens of generations. Regardless, we must make unremitting efforts and never take it lightly.”4 He once 1

Selected Works of Deng (1994, p. 312). Selected Works of Deng (1994, p. 252). 3 Selected Works of Deng (1994, p. 258). 4 Selected Works of Deng (1994, pp. 379–380). 2

3.1 The Formation and Development of the Theory of the Primary Stage …

75

again stressed the long-term nature of China’s primary stage of socialism, imploring the whole Party to continue to work hard on the road of building socialism. In the new historical era of reform and opening up and socialist construction, Deng Xiaoping put forward a series of new understandings and thoughts on socialism and its development stage. He inherited the great ideas of his predecessors, but more importantly, he broke through the stereotypes, and made indispensable contribution to the formation of the theory of the primary stage of socialism. After the Third Plenum of the 11th CPC Central Committee, the Party resumed the ideological line of “emancipating the mind and seeking truth from facts,” and gradually shrugged off the influences of the dogmatic, left-leaning thoughts. Through reassessment of socialism and through analysis of China’s basic national conditions, the Party came to the conclusion that the country was still in the primary stage of socialism. It is on this basis that the theory of the primary stage of socialism gradually taken hold. Since the theory was first rolled out in the early 1980s, it has gone through three stages, to be discussed below.

Stage I: Theoretical Ruminations: From the Third Plenum of the 11th CPC Central Committee to the Sixth Plenum of the 12th CPC Central Committee In 1981, the Sixth Plenum of the 11th CPC Central Committee adopted the Resolution on Several Historical Issues of the Party Since the Founding of the People’s Republic of China. The resolution asserted, for the very first time, that China was in the primary stage of socialism. There was no doubt that China had established a socialist system and entered a socialist society, but it nevertheless was still in the primary stage. Any view that denied this basic reckoning was incorrect. By emphasizing that China had established a socialist system and entered the primary stage of a socialist society, this passage from the Party’s resolution actually targeted the sceptics who opposed to the view. Nevertheless, the resolution did not offer more detailed discussions on the primary stage of socialism. At the Party’s 12th National Congress, Hu Yaobang pointed out in his report that China’s socialist society was still at the primary stage of development, and its material civilization was still underdeveloped. Though the report did not offer full discussions, it actually touched upon an important feature of the primary stage of socialism—namely, the material civilization was underdeveloped. In 1986, the Sixth Plenum of the 12th CPC Central Committee adopted the Resolution of the Central Committee on the Guidelines for the Construction of Socialist Spiritual Civilization. The resolution, while reaffirming that China was in the primary stage of socialism, briefly summarized the economic characteristics of the stage and elaborated on its spiritual and cultural aspects, indicating that the Party’s understanding of the primary stage of socialism had further deepened. However, the resolution failed to discuss the connotations of the primary stage of socialism.

76

3 The Establishment of the Theory of the Primary Stage of Socialism

During this period, the Party reiterated its conclusion that China was in the primary stage of socialism numerous times in many of its important documents. It had the basic understanding of the characteristics of the primary stage of socialism, especially the economic characteristics. Nevertheless, the judgment and understanding had yet to rise to the height of a theoretical level. As such, this period was the brewing stage in the development of the theory of the primary stage of socialism.

Stage II: Formation of the Theoretical System: From the Sixth Plenum of the 12th CPC Central Committee to the 13th CPC National Congress Although the Party had already formed the basic thought about the theory of the primary stage of socialism based on its reflection and summarization of China’s historical experiences, this important issue did not attract the full attention of the theoretical circle and there were few in-depth studies about it until the Party’s 13th National Congress. The report of the national congress aroused enormous research interest in the theory of the primary stage of socialism. Subsequently, Chinese economists engaged themselves in earnest discussions on the issue of the primary stage of socialism, yielding satisfying results. Relying on the wisdom of the whole Party, the report of the 13th National Congress incorporated the research results by the theoretical circle, and for the first time expounded the theory of the primary stage of socialism in a comprehensive way. Built on the central notion that China was still in the primary stage of socialism, the report offered comprehensive elaborations on the key implications, basic characteristics, main contradictions, and historical tasks of the primary stage of socialism. The report stressed that the primary stage of socialism was a given stage that the country must go through when building socialism under the conditions of backward productive forces and underdeveloped commodity economy. At this stage, the main contradiction facing the country was the contradiction between the growing material and cultural needs of the people and the backward social production. To solve this contradiction, the country must vigorously develop the commodity economy, improve labor productivity, and gradually realize the modernization of industry, agriculture, national defense, and science and technology. At the same time, it must reform the production relations and the parts of the superstructure that did not adapt to the development of productivity. On this basis, the report provided clarifications about the Party’s basic line and the goal in the primary stage of socialism, which were to lead and unite the people of all ethnic groups in the country; take economic construction as the central task; adhere to the four basic principles; adhere to reform and opening up, self-reliance, hard work and entrepreneurship; and strive to build China into a prosperous, strong, democratic and civilized socialist modern country. The report proposed a three-step economic and social development strategy. The theory of the primary stage of socialism is a creative contribution of the Party to

3.1 The Formation and Development of the Theory of the Primary Stage …

77

the development of Marxism. It is the first time in the history of Marxism that the scientific concept of the primary stage of socialism is explicitly written in the Party’s basic line.

Stage III: Development and Improvement of the Theory: From the 13th CPC National Congress to Present Since the theory of the primary stage of socialism was established at the 13th CPC National Congress, the Party has constantly summed up new practical experience and absorbed new theoretical achievements in the great practice of building socialism with Chinese characteristics, enriching the theory with new ideas and perspectives. The report of the 14th CPC National Congress proposed that in order to speed up economic development and accelerate the pace of reform and opening up, we must further emancipate our minds and further emancipate and develop the productive forces. We must not let our hands and minds be bound by the theoretical and abstract arguments about socialism versus capitalism. The target of the economic system reform was a major issue concerning the overall situation of socialist modernization. The report made a new breakthrough in the understanding of the relationship between planning and market. Based on the reality of the primary stage of socialism, the report squarely proposed that the goal of China’s economic system reform was to establish a socialist market economic system. In order to speed up reform and opening up, promote economic development and all-round social progress, the report spelt out ten major tasks underpinning the overall situation that must be achieved. Five years later, the report of the 15th CPC National Congress focused on the theory of the primary stage of socialism and put forward the Party’s basic agenda in the primary stage of socialism for the first time. The report newly concluded that China was now and would be in the primary stage of socialism for a long time, emphasizing the fact that the primary stage of socialism was a rather long historical period. It required that we should fully understand the long-term and unavoidable nature of the primary stage and get ready for hard work in many years ahead. The report clarified some issues regarding the basic economic system of the primary stage of socialism, and formulated the basic economic, political, and cultural objectives and policies in building socialism with Chinese characteristics. These objectives and policies constituted the Party’s basic agenda in the primary stage of socialism, and the basic agenda was the concrete expansion of the Party’s basic line on the economy, politics and culture, reflecting the most important experience since the reform and opening up. The report of the 16th CPC National Congress, held in 2002, provided an objective evaluation of the achievements since reform and opening up, pointing out once again that China was in and would be in the primary stage of socialism for a long time. People’s living standards had generally reached a well-off level, but it was nevertheless a low and uneven level, and the job was far from being accomplished. Based

78

3 The Establishment of the Theory of the Primary Stage of Socialism

on this judgement, the report systematically expounded the concept of building a moderately prosperous society in all aspects. The 17th CPC National Congress in 2008 put forth the Scientific Outlook on Development. This new creed, built upon the basic national conditions of the primary stage of socialism, summarizes China’s development practice, draws lessons from the development experience of foreign countries, and adapts to the new development requirements. The report required that this outlook must be upheld as the guiding ideology for China’s economic and social development, and its major strategic ideas must be implemented in the development of socialism with Chinese characteristics. The report also put forward the goal of building a moderately prosperous society in all aspects, which was to build a prosperous, strong, democratic, civilized, and harmonious modern socialist country. Adhering to socialism and developing socialism with Chinese characteristics was the main thread running through the report of the Party’s 18th National Congress, held in 2013. The report pointed out that “in building socialism with Chinese characteristics, the basic starting point is the primary stage of socialism, the overall plan is the five-sphere integrated plan, and the overarching task is to realize socialist modernization and the great rejuvenation of the Chinese nation.” Based on deep understanding of China’s national conditions, while reaffirming the great achievements from China’s reform and opening up the report did not shun the economic and social problems, emphasizing that China was still in the primary stage of socialism. Only from this point of view could we correctly understand the achievements, the challenges and the direction of future development, and stay true to ourselves—neither too arrogant nor self-belittling, for continued success of developing socialism with Chinese characteristics. The global financial crisis of 2007–2009 brought about tectonic changes to the world economic landscape. In the aftermath of the crisis, China, with its ever growing overall national strength, found itself standing at a new historical point. In the face of new challenges and opportunities, and in light of the changes in the country and the world, the Party’s 19th National Congress drew a grand blueprint for building a modern socialist country. It also made strategic arrangements to ensure a decisive victory in building a moderately prosperous society in all aspects. Its report pointed out that, with socialism with Chinese characteristics entering a new era, the principal contradictions facing the society have also evolved. For a long time in the past, the major contradiction has been the contradiction between people’s growing material and cultural needs and backward social production. What China faces now is the contradiction between unbalanced and inadequate development and the people’s ever-growing needs for a better life. The shift in the main social contradictions is of historic importance, and will have a far-reaching impact on the construction of socialism with Chinese characteristics in all aspects. The report of the 19th National Congress stressed that the shift in main social contradictions has not changed its assessment of China’s current stage of socialism. The basic judgement that China is still in and will be in the primary stage of socialism for a long time remains intact. So does China’s status as the world’s largest developing country. The report required the whole Party to firmly grasp the basic national conditions of the primary stage of

3.2 The Scientific Implications of the Theory of the Primary Stage of Socialism

79

socialism; firmly base itself on the biggest reality of the primary stage of socialism; firmly adhere to the basic line of the Party, the lifeline of the Party and the country, and the happiness line of the people; and build China into a modern socialist country that is rich, strong, democratic, civilized, harmonious, and beautiful. The formation and development of the theory of the primary stage of socialism shows that the Party’s understanding of China’s national conditions, of the essence of socialism, and of the development path of socialism with Chinese characteristics, has grown deeper and more comprehensive. The great practice of reform and opening up and socialist construction will continue to give new connotations to the theory of the primary stage of socialism.

3.2 The Scientific Implications of the Theory of the Primary Stage of Socialism The Basic Characteristics of the Primary Stage of Socialism A correct understanding of China’s basic national conditions and positioning of its historical stage is not only the primary prerequisite for building socialism with Chinese characteristics, but also the fundamental basis for the Party to formulate and implement appropriate agenda and policies. The report of the Party’s 13th National Congress made it clear that China is in the primary stage of socialism. This mantra has two implications. First of all, the Chinese society has already been a socialist society, and China should not deviate away from socialism, but rather stick to it. Secondly, the socialist society is still in its infancy. The notion that China is still in the primary stage of socialism does not merely refer in general terms to the initial stage that any country would experience when entering socialism, but rather refers to the specific stage that China must experience when building socialism under the conditions of both backward productivity and underdeveloped commodity economy. This is an overall and fundamental judgment about China’s national conditions, a judgement which constitutes an important prerequisite for building socialism with Chinese characteristics. To be sure, the Party went through a long and tortuous process before reaching this correct understanding about China’s basic national conditions. After the completion of the socialist transformation from private ownership of the means of production, the Party, on the road to explore socialist construction, at a time detached itself from China’s realities, oblivious to the basic national conditions characterized by backward productivity, underdeveloped commodity economy, and unbalanced social development. Instead, it adopted a series of measures that went far beyond its historical development stage, overemphasizing the doctrine of “one big, two public and three pure.” These measures led to a yawning gap between the production relations and superstructure. Consequently, economic development was severely stunted, productivity growth slowed down, and people’s living standards worsened. After the Third

80

3 The Establishment of the Theory of the Primary Stage of Socialism

Plenum of the 11th Central Committee, the Party began to review China’s national conditions and eventually realized that the country was still in the primary stage of socialism and would be in this stage for a prolonged period of time. This scientific judgement, while recognizing the socialist nature of the country, offered clarification about the current stage of its socialist development and provided the most concise and accurate synopsis of China’s national conditions. With the development of reform and opening up and the practice of socialist construction, the Party continued to deepen its understanding of the primary stage of socialism. The report of its 13th National Congress summarized the main characteristics of the primary stage of socialism in five aspects. The primary stage of socialism was (1) the stage of gradually getting rid of poverty and backwardness; (2) the stage of gradual transformation from an agricultural country to an industrial one; (3) the stage of transformation from a society with a large proportion of natural economy and semi natural economy to a society with a well-developed commodity economy; (4) the stage of establishing and developing a socialist economic, political and cultural system; and (5) the stage of realizing the great rejuvenation of the Chinese nation through hard work involving all the people. The report of its 15th National Congress extended the basic characteristics of the primary stage of socialism by including eight aspects: (1) a stage from an agricultural country to an industrialized one; (2) from natural and semi natural economy to market economy; (3) from a country with a low-quality population to one with relatively developed science, technology, education, and culture; (4) from a lowincome nation to a relatively wealth one for all people; (5) narrowed economic and cultural gap across regions; (6) more mature and perfect socialist market economy system, socialist democratic political system, and other systems; (7) spiritual civilization, as well as material civilization; and (8) narrowed gap between China and the advanced economies. This demonstrates that the Party’s understanding of the basic characteristics of the primary stage of socialism has elevated from economic development, institutional improvement, and national rejuvenation to all aspects of the economy, such as promoting science, education, culture and health, coordinating regional development, improving people’s incomes, and building spiritual civilization. In sum, our understanding of the basic characteristics and the development process of the primary stage of socialism getting more comprehensive and specific. To be sure, the primary stage of socialism is by no means a short historical period that can be easily overcome. The report of the 13th CPC National Congress stated squarely that “from the completion of the socialist transformation of private-owned means of production in the 1950s to the basic realization of socialist modernization, it will take at least a hundred years, all the while staying in the primary stage of socialism.” After reform and opening up, China’s social productivity developed rapidly, its comprehensive national strength greatly enhanced, and people’s living standards significantly improved. From having to deal with the food and clothing problems to the overall realization of a well-off society, the country has made a historic leap. The well-off level, however, is rather low, incomprehensive, and unbalanced. In other words, China has not yet gone beyond the primary stage of socialism. Starting at the 15th National Congress, the Party kept repeating the mantra that China

3.2 The Scientific Implications of the Theory of the Primary Stage of Socialism

81

is in the primary stage of socialism and will stay in the stage for a prolonged period of time. As pointed out by General Secretary Xi Jinping,5 “We should always bear in mind that the primary stage is not only the basis for economic construction, but also the basis for political construction, cultural construction, social construction, and ecological civilization construction. Not only should we bear this in mind at a time when total national output is low, we should also bear it in mind even when the total economic output increases. We should not only base our long-term planning on the primary stage, we should do so in our daily work as well.” This shows that the Party has a clear understanding of the long-term and arduous nature of the primary stage of socialism. The primary stage of socialism will be a long historical process. In its development process, it must go through a number of specific stages, each coming with its own distinctive characteristics. The 17th CPC National Congress provided a generalization of the new characteristics of the Chinese economy in the new century from the following eight aspects. First, while the economic strength has been significantly enhanced, the overall productivity level is not high, and the ability of independent innovation is not strong. The structural contradictions formed in the past have not been fundamentally changed, and neither has the mode of economic growth. Second, while the socialist market economy system has been established, the institutional barriers inhibiting development still exist, and further reform is faced with deep-rooted contradictions and problems. Thirdly, while on the whole people’s living standards have reached a well-off level, the widening gap in the income distribution has not fundamentally reversed. There are still a considerable number of poor and low-income people in both the rural and urban areas, and it getting more difficult to take all aspects of interests into consideration. Fourth, while remarkable achievements have been made in coordinated development, the foundation of agriculture is still weak, leaving rural development lagging behind. The task of narrowing the development gap between the urban and rural areas and the gap across regions to achieve a coordinated economic and social development is an arduous one. Fifth, while socialist democracy has continuously improved and the basic strategy of governing according to law has been solidly implemented, the current democratic and legal systems are not yet completely congruous with the economic and social development. The political system reform needs to be further deepened. Sixth, people’s spiritual and cultural needs are increasingly strong because they become more independent and selective, with varying and changing ideological activities. This raises the bar for the development of advanced socialist culture. Seven, while social vitality has improved significantly, the structure of the society, the form of social organizations, and the pattern of social interests have undergone profound changes, creating many new issues in social construction and management. Lastly, with opening up expanding day by day, international competition has become increasingly fierce. The pressure from advanced economies with economic and technological domination has persisted for a long time. This will bring about additional risks, known or unknown, making it all the more challenging to coordinate domestic development and opening up. In 5

Xi (2012).

82

3 The Establishment of the Theory of the Primary Stage of Socialism

short, these eight characteristics are the concrete manifestations of the basic national conditions of the primary stage of socialism in the new century and new stage. As China’s economy enters the so-called new normal, new challenges lie ahead in the environment, condition, task and requirement of China’s development. To solve the new problems and contradictions in the new era, we should adhere to the new development concept more consciously and take the road of scientific development. The Party’s 19th National Congress emphasized that “development is the foundation and key to solve all problems in China,” and that “it must be scientific development, and it must unswervingly implement the development concept of innovation, coordination, green, opening, and sharing.” The new development concept embodies the development thinking, the direction and focus of the country in the new era. It further deepens our understanding of the law of development of the primary stage of socialism.

The Main Contradictions in the Primary Stage of Socialism The primary stage of socialism is a rather long phase, during which all kinds of extremely complex economic and social contradictions are expected to emerge. Only through deep understanding and correct handling of the main contradictions can we determine the main problems and central tasks encountered in the primary stage of socialism, understand and master the law of development in this stage, and push forward the construction of socialism with Chinese characteristics. The Party’s understanding of the main contradictions in the primary stage of socialism has not been a smooth cruise. In the mid-1950s, with the completion of the socialist transformation in agriculture, handicraft business and capitalist commerce, China basically established a socialist system. Based on in-depth analysis of the actual situations at the time, the Party’s Eighth National Congress declared that, with the decisive victory of the socialist transformation, China had basically solved the contradiction between the proletariat class and the bourgeoisie class, putting an end to the history of class exploitation over thousands of years. The main contradiction in China became the contradiction between Chinese people’s demand for establishing an advanced industrial economy and the reality of a backward agricultural country. Which was also the contradiction between people’s demand for rapid development of the economy and the culture and the lack of it. Put simply, it was essentially the contradiction between the advanced socialist system and the backward social productive forces, once after the establishment of the socialist system. The main task of the Party and the people of the whole country, hence, was to concentrate their efforts to solve this contradiction by transforming China from a backward agricultural country to an advanced industrial economy as soon as possible. With hindsight, the report of the Eighth CPC National Congress provided an objective analysis of the major contradictions immediately following the establishment of the socialist system, and one in line with China’s reality at that time. After the 3rd Plenum of its 11th CPC Central Committee, the Party’s understanding of the major domestic contradictions was brought back to the right track.

3.2 The Scientific Implications of the Theory of the Primary Stage of Socialism

83

At the 4th Plenum of the 12th CPC Central Committee, Deng Xiaoping made a preliminary summary of the past experiences and lessons: “Over the years, we have made big mistakes and suffered a great loss. Even after the socialist transformation was basically completed, we still stuck to class struggle as the key point, completely oblivious to the development of the productive forces. The Cultural Revolution went to the extremes. Since the Third Plenum of the 11th Central Committee, the whole Party has shifted the focus of its work to the construction of socialist modernization. On the basis of adhering to the four basic principles, it has concentrated its efforts on the development of social productivity. This is the most fundamental solution. Had we not thoroughly corrected the leftism mistakes and resolutely shifted the focus of our work, we would not have achieved today’s good results.”6 The 13th CPC National Congress made an unambiguous statement about the main contradiction in the primary stage of socialism for the first time, which was the contradiction between the people’s growing material and cultural needs and the backward social production. Class struggle may exist for a long period of time within a certain range, but it was no longer the main contradiction. In order to solve the major contradictions at this stage, China must vigorously develop the commodity economy, improve labor productivity, and gradually realize the modernization of industry, agriculture, national defense, and science and technology. To this end, China must reform its production relations and the components of the superstructure that were hindering productivity development. Shortly after the 13th National Congress, however, unexpected and complex situations emerged at both home and abroad. The dramatic changes in Eastern Europe and the collapse of the Soviet Union caused a political storm in China. Under such as a complicated circumstance, should we change our judgment on the main contradictions? After a careful study of the new developments, the Party came to a conclusion that there was no need to change its basic assessment about the major contradictions in the primary stage. The report of the 14th National Congress reiterated the Party’s basic judgment on the major contradictions of the primary stage. The report of the 15th National Congress provided more thorough discussions about this issue. According to the latest report, a variety of contradictions can be found in various aspects of economic, political, cultural, and social life. Class contradiction would continue to exist for a long time due to both global and domestic factors, but it was no longer the main contradiction. Rather, the main contradiction in China was between the people’s growing material and cultural needs and the backward social production. This main contradiction would run through the whole process of the primary stage of socialism and through all aspects of social life. This entailed that the whole Party and the whole country must take economic construction as the central task, and all work must abide by and serve this central task. The reports from the 16th to the 18th CPC National Congress all examined the main contradictions in the whole historical process of the primary stage of socialism. The reports agreed that the basic assessment of the national conditions did not changed, and that China was still in and would be in the primary stage of socialism for a long

6

Selected Works of Deng (1993, p. 141).

84

3 The Establishment of the Theory of the Primary Stage of Socialism

time. And the main social contradiction between the increasing material and cultural needs of the people and the backward social production did not change. After four decades of reform and opening up, China has become the world’s second largest economy, its social productivity greatly improved, and the basic material and cultural needs of the people well met. With the continued increase in economic growth and people’s incomes, new changes are looming in social needs, which are not only material and cultural needs, but also needs for democracy, rule of law, fairness, justice, security, environment, and other aspects. Although great improvements have been made in China’s economy and society, there are still imbalances and inadequacies across regions, between urban and rural areas, and other aspects, which are not conducive to the people’s further pursuit of a better life. As the construction of socialism with Chinese characteristics enters a new era, the contradiction between the increasing material and cultural needs of the people and the backward social production can no longer accurately capture the main contradiction of the Chinese society today and in the future. Through comprehensive review and deep thinking, the 19th National Congress made a new and important judgment on the major social contradiction in China. As socialism with Chinese characteristics enters a new era, the major social contradiction in China has evolved into the contradiction between the people’s growing needs for a better life and the unbalanced and inadequate development. The change in the main social contradiction reflects the historical change of the overall situation of the country, which will have profound impacts on the overall development. Given that social productivity has developed greatly and the main social contradiction has changed, does this mean that China is no longer in the primary stage of socialism? In response to this question, the report of the 19th National Congress stressed that the change of the major social contradiction in China has not changed our judgment on the historical stage of socialism in China. The basic national condition that China is still in the primary stage of socialism and will be in it for a long time has not changed. China’s international status as the world’s largest developing economy has not changed. The whole Party should firmly grasp the basic national condition of the primary stage of socialism; firmly base itself on the biggest reality of the primary stage of socialism; firmly adhere to the basic line of the Party, the lifeline of the Party and the country, and the happiness line of the people; lead and unite the people of all ethnic groups in the country; focus on economic construction; adhere to the four basic principles; adhere to reform and opening up, self-reliance, hard work and entrepreneurship; and strive to build China into a prosperous, strong, democratic, civilized, harmonious, and beautiful socialist modern power. The main contradiction in the primary stage lies in the core of the theory of the primary stage of socialism. Built on the experiences and lessons of the primary stage of socialism over the past 70 years, the Party has correctly analyzed the main contradictions, firmly grasped the main contradictions and the central tasks, and clearly observed and grasped the overall situation of social contradictions in the practice of reform and opening up. The Party’s basic line and programs have been formed on this basis, guiding China’s reform and opening up to deepen and its socialist construction to improve each passing day.

3.2 The Scientific Implications of the Theory of the Primary Stage of Socialism

85

The Party’s Basic Line and Programs in the Primary Stage of Socialism Keeping the basic premise that China is in the primary stage of socialism in mind, the Communist Party of China has led the whole nation to begin its great ambition of building socialism with Chinese characteristics. During this process, Deng Xiaoping, with his theoretical courage, realistic spirits and farsightedness of Marxism, thought deeply about the essence of socialism. He pointed out that the essence of socialism was to liberate productivity, develop productivity, eliminate exploitation, eliminate income polarization, and eventually achieve common prosperity. In the primary stage of socialism, in order to get rid of poverty and backwardness, it is essential to make the development of productive forces the focus of all work. Under the guidance of Deng Xiaoping Thought, the report of the 13th CPC National Congress elaborated the Party’s basic line in the primary stage of Socialism as follows: leading and uniting the people of all ethnic groups in the country, focusing on economic construction, adhering to the four basic principles, adhering to reform and opening up, self-reliance, hard work and entrepreneurship, and striving to build China into a prosperous, strong, democratic, and civilized socialist modern country. These tasks can be succinctly summarized as “one center and two basic points.” One center here refers to economic construction as the central task, while two basic points refer to adhering to the four basic principles and adhering to reform and opening up. The establishment of the Party’s basic line in the primary stage of socialism has played an extremely important guiding role in the great march of China’s socialist construction. As pointed out in the report of the Party’s 17th National Congress, the basic line is the lifeline of the Party and the country, and is the political guarantee for the realization of scientific development. Making economic construction as the central task is the key to the prosperity of the country, and the fundamental requirement for the prosperity and long-term stability of the Party and the country. The four basic principles are the foundation of the country and the political cornerstone for the survival and development of the Party and the country. Reform and opening up is the road to a strong country and the source of vitality for the development and progress of the Party and the country. In the great practice of developing socialism with Chinese characteristics, we should always put economic construction at the center of all work while at the same time adhering to the four basic principles and to reform and opening-up. This should never be changed. Once the basic line in the primary stage of socialism established, it should be carried out unswervingly in the great practice of socialist construction. In order to better implement the basic line, the Party’s 15th National Congress put forward its basic program in the primary stage of socialism. The basic program consisted of the basic objectives and policies of building socialism with Chinese characteristics, which were the manifestations of the basic line in Chinese economy, politics, culture, and other aspects. With the comprehensive implementation of this basic program, the Party’s strategic objectives in the new century and new stage have been successfully achieved. Through gradual reform, China has steadily fostered a competitive

86

3 The Establishment of the Theory of the Primary Stage of Socialism

market environment in which the market plays a decisive role in resource allocations under the macro-control of the government. The market-oriented reforms have greatly improved the allocation of production forces, enhanced business efficiency, and boosted industrial growth and economic development, leading the country to become the world’s second largest economy. With continued economic growth, it has become increasingly urgent to promote the development of other aspects of the society, including the realm of politics and culture. Consequently, the goal of building a moderately prosperous society in all aspects was introduced at the Party’s 16th National Congress. This goal aimed for economic, political, and cultural development of socialism with Chinese characteristics—the so-called “Three-in-One” comprehensive objective. The Party’s 17th National Congress further proposed to comprehensively promote the “Four-in-One” integrated plan: economic construction, political construction, cultural construction, and social construction in accordance with the overall layout of socialism with Chinese characteristics. The 18th National Congress put forth the “Five-in-One” overall scheme to promote the construction of socialism with Chinese characteristics. According to the scheme, five goals were set for socialism with Chinese characteristics: building a socialist economy, a socialist democracy, an advanced socialist culture, a socialist harmonious society, and a socialist ecological civilization. All the goals should be pursued under the leadership of the Communist Party of China, based on the basic national conditions, and by centering on economic construction, adhering to the four basic principles, adhering to reform and opening up, and liberating and developing social productivity. The 19th National Congress made clear that the overall plan for building socialism with Chinese characteristics is the five-sphere integrated plan, and the overall strategy is the four-pronged comprehensive strategy. The latest report required that, in the primary stage of socialism, we should not only increase the material wellbeing and improve people’s living standards through economic growth, but should also promote the development in all aspects through political construction, cultural construction, social construction, and ecological civilization construction, so that we can gradually realize the common prosperity of all people, and build a prosperous, democratic, civilized, harmonious, and beautiful socialist modern country. These theories have deepened our understanding of the primary stage of socialism and enriched and developed the theory of the primary stage of socialism.

3.3 The Theory of the Primary Stage of Socialism and Related Economic Research After the Third Plenum of the 11th CPC Central Committee, new phenomena and issues kept emerging in the practice of reform and opening up and in the construction of socialist modernization. Chinese economists began in earnest to put forward new ideas and theories to explain the new reality and offer insights on reform policies. With the gradual recovery of the ideological line calling to emancipate the mind

3.3 The Theory of the Primary Stage of Socialism and Related Economic …

87

and seek truth from facts, the leftist ideology and dogmatism that had put huge constraints on the theoretical community for quite a while were gradually eliminated, providing plenty space for innovations and developments of the socialist economic theory. Economists in China responded with great enthusiasm, devoting themselves to the study of this unprecedented institutional changes and economic development. Their efforts produced fruitful theoretical results. In particular, research concerning the primary stage of socialism has greatly enriched the Chinese economic theories. Many of the important research results have been adopted by the Central Committee and the State Council, becoming an integral part of China’s economic policies. As early as the late 1970s, Su Shaozhi and Feng Lanrui raised the issue about the stage of social development once the proletariat have gained power.7 According to them, the transition from the capitalist society to the advanced stage of communism can be divided into three stages. The first stage is the transition from capitalism to socialism, which can be further divided into two periods. The first period is from the victory of the proletarian revolution to the completion of the socialist transformation concerning the private ownership of the means of production. This period is characterized by a variety of economic components and many corresponding classes. As a result, it is a period of intense and sharp class struggle. After the socialist transformation of the private ownership of the means of production has been basically completed, it will enter the second period, i.e., underdeveloped socialism. The second stage is developed socialism. The third, and the last stage, is communism. If we fail to distinguish the three stages and mix them up, the phenomena and factors that are unique to a particular stage will be wrongly deemed as common to all stages of socialism. This will inevitably cause serious negative consequences in both theory and practice. If, for instance, the first two stages were combined into a single historical period, then the contradiction between proletariat and bourgeoisie and the contradiction between capitalism and socialism, which prevail only in the first stage, would be incorrectly deemed as prevailing throughout the entire historical period of socialism. This wrong perception would unnecessarily extend class struggle. If what should be done only in the developed stage of socialism were attempted at the underdeveloped stage, it would lead to the premature elimination of the household economy, the abolition of small plots of farmland left to rural households for private use and family sidelines, the abolition of distribution according to work, the abolition of commodity production and commodity exchange, and even an attempt to leap forward to communism. They reckoned that China was still in an underdeveloped, or transitional, period of socialist society, and that the economic system had yet to be fully developed or completely socialist. Zhu Shuxian provided another perspective to divide the social development into different stages after the proletariat have gained power.8 The first stage is the transitional period from capitalism to socialism. The second stage is the first stage of communism, namely socialism. The second stage can be divided into two periods: underdeveloped socialism and developed socialism. The third, or advanced stage, is communism. While Zhu Shuxian agreed with Su Shaozhi 7 8

Su and Feng (1979). Zhu (1979).

88

3 The Establishment of the Theory of the Primary Stage of Socialism

and Feng Lanrui that China was still in the period of underdeveloped socialism, he did not agree with their conclusion that China was still in the transitional stage of socialism. To him, China was in the period of underdeveloped socialism. The viewpoint that the socialist society should also be divided into different stages and that socialism in China was still in the underdeveloped stage exerted significant social influences. In 1981, statement that “our socialist system is still in the primary stage” began to appear in the Party’s central documents. This notion was elaborated systematically at the 13th CPC National Congress, and has become the consensus of the whole Party ever since. Since reform and opening up in 1978, Chinese economic scholars have conducted numerous studies on the economic problems facing the primary stage of socialism. Their research, tied tightly to China’s economic development, has constantly broken through the barriers of traditional theories and put forth many new ideas. Their research results not only deepen our understanding of the law of socialist economic operation, but also play a positive role in the formation, development, and improvement of the theory of the primary stage of socialism. Their theoretical breakthroughs in the socialist basic economic system and in the income distribution system are particularly pronounced. Traditional view holds that the socialist ownership structure can only be public ownership, and the purer the better. According to this view, the household economy nurtures capitalism every day. Hence, as the root of capitalism, the private economy must be eliminated in socialism. After the reform and opening up policy was rolled out, economists began to put forward the notion of diverse socialist ownership. They advocated the development of non-public economy including household businesses and private enterprises, so long as the public sector maintains the dominant status in the economy. Xue Muqiao is the first economist to call for the development of various economic components. In 1979, he argued that keeping a little tail of individual economy and capitalism might be more beneficial than harmful after all.9 Economists’ understanding of the ownership structure in the primary stage of socialism has gone hand in hand with the rapid development of China’s non-public economy. Chen Zongsheng argued that the target of the ownership structure reform in China should a “mixed economy” in which public ownership occupies a relatively dominant position while the private economy, individual economy, state capitalism and so on co-exist for an integrated growth. Here, co-existence refers to public ownership, non-public ownership, and many other forms of ownership in the whole national economy. And integrated growth refers to the mutual penetration and intersection of various forms of ownership within an enterprise. Additionally, Chen stressed that this mode of ownership structure is not the mixed economy of private ownership, but rather the mixed economy of public ownership.10 This theoretical innovation about socialist ownership, bold at the time, has gradually gained widespread recognition. At the Party’s 15th National Congress, the notion that public ownership is the main body while multi ownership economy develops together was officially recognized 9

Xue (1996). Chen (1987).

10

3.3 The Theory of the Primary Stage of Socialism and Related Economic …

89

as the basic economic system in the primary stage of socialism, and the non-public economy was designated as an important part of the socialist market economy in China. The Party’s 16h National Congress proposed to “unswervingly consolidate and develop the public economy” and “unswervingly encourage, support, and guide the development of the non-public economy.” The two “unswervinglys” have been repeatedly stressed in successive Party congresses ever since. At the Party’s 19th National Congress, it was further established to be a major policy of the Party and the government. The basic economic system is an important pillar of the socialist system with Chinese characteristics and the foundation of the socialist market economic system. One traditional view holds that public ownership must and can only take the form of state ownership; that the means of production of the socialist economy can only be possessed by the state on behalf of all the working people; and that the state directly controls the state-owned enterprises through state agencies, which in turn directly plan all production activities of the enterprises. At the beginning of reform and opening up, Dong Fuchu became skeptical about this traditional view, believing instead that the essence of the economic system reform was to reform state ownership. He proposed that state administration should be separated from economic organizations, and economic activities should be carried out by the various economic organizations, so that they, under the unified leadership, can carry out their own comprehensive, independent and strict economic accounting, have their own economic interest, and bear the economic responsibilities as stipulated by law.11 This article opened the door for debates on the reform of state ownership. Since the 1990s, especially after Deng Xiaoping’s famous South-Tour Talks, discussions on state-ownership reform have become more and more active within the economic community. Zhou Shulian put forward the view that the form of ownership is but an economic means.12 In his view, ownership, like planning, is an economic means. The establishment of the state ownership system is to promote the development of productive forces. Here, the development of productive forces is the end while state ownership is merely an economic means. He criticized that some people regarded state ownership as the purpose of socialism and became quite superstitious about it. These people believed that recognizing the property rights of state-owned enterprises would change the nature of state ownership and destroy the economic foundation of socialism. This superstition is essentially the traditional view on state ownership under the socialist economic system. It takes ownership as an end, rather than a means. The Third Plenum of the 16th CPC Central Committee affirmed the importance of clarifying property rights in state-owned enterprises, stressing that the establishment of a modern property rights system with “clear ownership, clear rights and responsibilities, strict protection, and smooth circulation” would help maintain public property rights and consolidate the dominant position of public ownership. The Third Plenum of the 18th CPC Central Committee emphasized that “state-owned enterprises belong to the whole people and are an important force of promoting national modernization 11 12

Dong (1979). Zhou (1993).

90

3 The Establishment of the Theory of the Primary Stage of Socialism

and protecting the common interests of the people.” It also urged to further improve the modern enterprise system for state-owned enterprises and guide an orderly flow and rational allocation of state-owned capital, on the basis of accurately clarifying the functions of different state-owned enterprises. Another traditional view holds that the realization form of socialist public ownership can only be ownership of the whole people and collective ownership, with the former being the high-level of socialist ownership and the later the low level. Additionally, collective ownership will eventually transition to ownership of the whole people. In the early 1980s, noticing that some new forms of public ownership had emerged in real life, He Wei proposed that the theory of ownership of socialist means of production should be reexamined from the perspective of the changes taking place in real economic life.13 Liu Shibai believed that in an underdeveloped socialist society, public ownership is a complex ownership structure that is dominated by ownership of the whole people, but also include collective ownership, joint ownership and other forms of public ownership.14 Yu Guangyuan’s book, titled “China’s Economy in the Primary Stage of Socialism,” is the first to systematically study the economic problems in the primary stage of socialism in China. The book, hailed as one of the ten economic works that have affected the economic construction of new China, noticed that various new, non-basic forms of socialist ownership had emerged in China.15 The book predicted that over a certain period of time in the future, this composite form of socialist ownership would occupy a more important position than the non-composite form of socialist ownership. As for specific reform ideas, some scholars such as Li Yining opined that the joint-stock system would be a more effective way to realize public ownership from many aspects. The report of the Party’s 15th National Congress agreed that the form of public ownership can be multi-faceted. The Third Plenum of the 16th CPC Central Committee put forward its Decision of on Several Issues Concerning the Improvement of the Socialist Market Economy System, urging the nation to make the stock system the main form of public ownership, and vigorously develop the mixed ownership economy that includes stateowned capital, collective capital, and non-public capital to achieve diversity in investment subjects. The Third Plenum of the 18th CPC Central Committee put forward its Decision on Several Major Issues of Comprehensively Deepening Reform, pointing out that the mixed ownership economy with cross shareholding and mutual integration between state-owned capital, collective capital, and non-public capital is an important realization form of the basic economic system. The mixed ownership will not only help amplify the function of state-owned capital, protect and enhance its value, and improve its competitiveness, it will also provide an environment for all forms of ownership capital to learn from each other, promote each other, and prosper 13

He (1984). Liu (1986). 15 In the book, the basic form or the non-compound form of socialist ownership refers to the traditional form of public ownership. The non-basic or compound form of socialist ownership refers to public enterprises with multiple types of equity holders formed through horizontal combination or cross-fundraising between public enterprises. See Yu (1988). 14

3.3 The Theory of the Primary Stage of Socialism and Related Economic …

91

together. In the same vein, the Party’s 19th National Congress specifically called for deepening the reform of state-owned enterprises, developing mixed ownership economy, and cultivating world-class enterprises of global competitiveness. Still another traditional view holds that public ownership of the means of production determines that distribution according to work is the sole principle of distribution in socialism. The participation of land, capital and other elements in the distribution is part of vulgar bourgeois economics. Gu Shutang and Cai Jiming argued that this view does not apply to the primary stage of socialism. They argued that distribution according to work cannot be fully implemented in this stage, because there still remain many types of ownership systems in the primary stage of socialism, because the state, enterprises and individuals still have their own relatively independent economic interests, and because enterprises and individuals have certain degree of autonomy in income distribution and accumulation. According to them, the principle of distribution in the primary stage of socialism is distribution according to contributions, that is, distribution according to the actual contributions made by various factors of production in the creation of social wealth. In the primary stage of socialism, all kinds of income are distributed according to the marginal contribution of each factor of production. Moreover, in the primary stage of socialism, only by implementing the principle of distribution according to contributions can we ensure equal opportunities, improve efficiency, realize optimal allocation of resources, and promote the development of social productivity.16 Their view, controversial at the time of publication, has been verified by the development of the reform practice. The 16th CPC National Congress finally accepted the legitimacy of this distribution principle, making it clear that the principle of distribution according to contributions by labor, capital, technology, management and other factors of production should be established, and that the distribution system in which distribution according to work as the main form with multiple distribution modes coexisting should be improved. The report of the 19th CPC National Congress emphasized once again that we should adhere to the principle of distribution according to work, and improve the system and the mechanism of distribution according to factors of production, so as to create a more reasonable and orderly income distribution system. It is not hard to see that China’s economic scholars have made important contributions to the formation and development of the theory of the primary stage of socialism. As reform and opening up deepens, economists will have deeper understanding of the economic problems encountered in the primary stage of socialism, and will further enrich and develop the theory of the primary stage of socialism. According to Zhuang Zhuoyuan, this theory is among the most important and outstanding achievement in the study of economic theory since China’s reform and opening up. In fact, the theory of the primary stage of socialism and the theory of socialist market economy constitute the two pillars of contemporary socialist political economy in China. At this stage, the study of all economic problems and the formulation of corresponding

16

Gu and Cai (1989).

92

3 The Establishment of the Theory of the Primary Stage of Socialism

economic policies in China should be predicated on and guided by these two theories.17 Based on the scientific conclusion of the primary stage of socialism, the great practice of building socialism with Chinese characteristics strides forward constantly. The Chinese economy, political system, culture, social and ecological civilization, and many other aspects of the society are undergoing tremendous and profound changes. China is on its way to become a wealthy, strong, democratic, harmonious, and beautiful socialist modern power by the mid-twenty-first century.

References Chen Zongsheng. (1987). On the Target Model of Ownership Reform. Nankai Economic Research, 3. Dong Fureng. (1979). On the Form of Socialist Ownership in China. Economic Research Journal, 1. Gu Shutang and Cai Jiming. (1989). Distribution according to Contributions Is the Principle of Distribution in the Primary Stage of Socialism. Economist, 2. He Wei. (1984). The Many Forms of Socialist Public Ownership. People’s Daily, December 31, 1984. Liu Shibai. (1986). The Structure of Socialist Ownership. In Review and Prospect of China’s Socialist Economic Theory, Economic Daily Press. Selected Works of Deng Xiaoping. (1993). Vol.3. People’s Publishing House. Selected Works of Deng Xiaoping. (1994). Vol.2. People’s Publishing House. Su Shaozhi and Feng Lanrui. (1979). The Stages of Social Development after the Proletariat Have Gained Power. Economic Research Journal, 5. Xi Jinping. (2012). Tightly Stick to the Development of Socialism with Chinese Characteristics and Implement the Spirits of the Party’s 18th National Congress. http://cpc.people.com.cn/n/2012/ 1119/c64094-19615998-2.html. Xue Muqiao. (1996). Memoirs of Xue Muqiao. Tianjin People’s Publishing House. Yu Guangyuan. (1988). China’s Economy in the Primary Stage of Socialism. China Finance and Economics Press. Zhang Zhuoyuan. (2005). Review and Prospect of China’s Economic Theory Research since Reform and Opening Up. In Zhang Zhuoyuan’s Anthology, Shanghai Dictionary Press. Zhou Shulian. (1993). Ownership Is an Economic Means: An Exclusive Interview with Professor Zhou Shulian. Comparison of Economic and Social Systems, 5. Zhu Shuxian. (1979). On the Stages of Social Development after the Proletariat Have Gained Power: Discussions with Comrade Su Shaozhi and Feng Lanrui. Economic Research Journal, 8.

17

Zhang (2005, p. 53).

Chapter 4

The Establishment and Development of the Basic Socialist Economic System Theory

China’s basic economic system is one where public ownership plays a dominant role while a variety of ownership economies co-develop. This position is the foundation of the Chinese socialist market economy. It highlights the importance of the basic theory of the socialist economic system with Chinese characteristics. With the deepening of reform and opening up, people’s understanding of China’s basic national conditions has gradually conformed to the objective reality. It becomes clear that China is still in the primary stage of socialism, and the unification of public ownership is not conducive to the development of social productive forces. To establish the basic socialist economic system, it is necessary to reform the ownership structure to allow the existence and development of individual and private sectors and the use of foreign capital. In 1997, the 15th CPC National Congress formally established the theory of the basic socialist economic system, proposing that the basic economic system is one where public ownership is the mainstay while multiple ownership economies co-develop. This theory, together with the theory of socialist market economy and the theory of primary stage of socialism, constitutes the three pillars of the socialist economic theory with Chinese characteristics. With the deepening and development of reform and opening up, the basic socialist economic system has also been consolidated and developed. The adjustment and reform of China’s ownership structure and the establishment of the basic socialist economic system are inseparable from our deepening understanding of the status and role of various ownership systems in the primary stage of socialism.

© China Social Sciences Press 2023 Z. Zhang, Handbook of Chinese Economics, https://doi.org/10.1007/978-981-99-0420-4_4

93

94

4 The Establishment and Development of the Basic Socialist Economic …

4.1 Break the Dominance of Public Ownership and Allow the Existence and Development of Non-public Sectors China’s economic restructuring reform, initiated in 1979, has advanced along two main threads. One is adjustment and reform of the ownership structure. Here, the purpose is to establish an ownership structure that lays the economic foundation for the development of the socialist market economy with Chinese characteristics. This foundation has three main building blocks: (1) adjustment and reform of public ownership—i.e., state ownership and collective ownership; (2) rebirth and development of individual and private economy, and (3) introduction and development of foreign investment. It also includes the role and positioning of the above three blocks in the development process of the socialist market economy. The result is the establishment of the basic socialist economic system and its theory, whereas public ownership is the main form and multiple ownership economies co-exist. The other thread is reform of the economy’s operating mechanism. This reform calls for transitioning from planning to market-oriented, liberalizing prices, and building a modern market system in which the market plays a fundamental and decisive role in resource allocations. For the stable and healthy operation of the economy, the government uses mainly economic and legal means to regulate and control the economy. To be sure, the two main threads are parallel and mutually reinforcing. The reform practice over the past four decades shows that the reform of the economic operating mechanism has been in the forefront. In ownership structure reform, the economic activity funded by private and foreign capital has developed relatively fast. In contrast, the reform of state-owned enterprises has not moved as fast due to many headwinds. In 1993, after many years of debate the goal of the reform of state-owned enterprises was finally determined—namely building a modern corporate system adaptable to the development of the socialist market economy. At the time, more than 70% of goods and services the price of which had been liberalized. It is generally believed that, by 2018, the biggest and most difficult challenge confronting China’s economic reform was still the reform of state-owned assets and state-owned enterprises.

The Rebirth and Development of Household-Owned Businesses Prior to reform and opening up, the Chinese economy was ruled by public ownership. In 1978, state-ownership dominated the urban areas while collective ownership prevailed in the rural regions. The private economy was wiped out shortly after the completion of China’s socialist transformation in 1957, with very little, if any, trace of individual economy. According to statistics, in 1978 there were only 140,000 individual businesses, with an employment of 150,000, across China. In the early days of reform and opening up, the initial motivation to break the dominance of public ownership was to solve the employment problem for tens of

4.1 Break the Dominance of Public Ownership and Allow the Existence …

95

millions of people without jobs. It was the return of urban educated youths to their cities that promoted the rebirth of the individual economy. From 1966 to 1976, with the economy and social development stagnated, the labor and employment issue worsened. After 1976, a huge number of educated young people came back to their cities from their reeducation in the countryside, making the employment issue all the more prominent. According to statistics, by June 1979, as many as 20 million people were looking for employment in cities and towns across China. They included 1.05 million graduates from colleges, technical schools, and discharged soldiers who were urban dwellers; 3.2 million urban youths who were allowed by policy to stay in their cities; 7 million urban youths who had just returned from the countryside; 2.3 million idle urban dwellers; and 850,000 people who were unfairly treated needed to be resettled.1 How to increase labor employment hence became the most urgent issue for China. In February, the State Administration for Industry and Commerce held a meeting, attended by the directors of local industry and commerce administration. In the face of the enormous pressure caused by a large number of returning educated youths and huge backlogs of unemployed people in cities and towns across the country, the meeting concluded with a proposal, which was approved by the Central Committee of the Party and the State Council. According to the proposal, local government agencies in charge of industry and commerce administration should, conditional on the approval by other relevant government departments, approve individual businesses such as small repairs, services and handicrafts owned by people with formal urban hukou. However, they would not be allowed to hire workers. Although this decision was very restrictive—especially the stipulation that hiring was not allowed, it was nonetheless a significant move because it had switched on the green light for the development of urban individual economy. On July 18, 1979, Xue Muqiao, a renowned economist in China, published an article, titled “Several Opinions on the Employment Issue of Urban Labor,” in Beijing Daily, a popular newspaper. In it, Mr. Xue raised the issue of adjusting the ownership structure for the very first time. The article pointed out squarely that letting older employees retire early so that their adult children could replace them was not the right policy. According to him, the fundamental solution to the unemployment problem was to develop productive forces, broaden employment opportunities, reform the labor management system, and enrich the ownership and industrial structures. After the public–private joint enterprises and handicraft cooperatives were wiped out in 1958, a contradiction emerged where, on the one hand, a large number of jobs urgently needed by the society were not filled; and on the other hand, a large number of people could not find suitable jobs. In industries such as transportation, construction, catering, and repair services that were in great need but were very lacking at that time, it was necessary to change the way how some people used to regard them—as capitalism loopholes, that is—and to allow the development of collective enterprises and even self-employed businesses. Young people returning to the city should be encouraged to create their own employment opportunities such as setting up small 1

The Steering Committee of the CPC Central Committee for Party Reorganization (1983).

96

4 The Establishment and Development of the Basic Socialist Economic …

Table 4.1 Development of China’s urban and rural individual businesses: 1979–1985 Year

Employment in urban individual businesses Employment in rural individual businesses (10,000) (10,000)

1979

31.1

1980

80.6

1981 105.6

121.0

1982 135.8

184.0

1983 209.0

537.8

1984 291.0

1013.0

1985 1766.0 (combined) Source Su (2007, p. 559)

stalls for traditional foods and snacks. This view was later summarized by policy makers succinctly as follows: “Keep the door wide open, and create job opportunities as much as possible in state-owned, collective-owned and individual businesses.”2 On September 29, 1979, in his National Day address to the nation, Ye Jianying, then Chairman of the National Congress of China, admitted that China’s socialist system was still in its infancy. China was still a developing socialist country, its socialist system was still very imperfect, and its economy and culture were very underdeveloped. He went on to make it very clear that the individual economy in both urban and rural areas would continue to exist within a limited range, providing supplements to the socialist public economy. In August 1980, the CPC Central Committee put forward its document On Further Perfecting Urban Work and Employment. The document stated that the Constitution clearly stipulated that individuals were allowed, within the scope of the law, to engage in self-employed work as long as they did not exploit other people; and that the individual economy was an indispensable supplement to the socialist public ownership economy, and it would play an active role for a long period of time in the future and thus should be properly developed. The document urged relevant government departments to actively support the individual sector of the economy, and not to make trouble or discriminate. All law-abiding individual workers should be respected by the society. On December 11, 1980, Zhang Huamei, a 19-year-old girl from Wenzhou city, Zhejiang province, made history by receiving the first Individual Industrial and Commercial Business License—with registration No. 10101—from the local industrial and commercial office. A total of 1844 individual business licenses were issued in this batch. By the end of the year, the number of registered individual businesses quickly reached 810,000 across the country. Since 1981, the Party and the government introduced successive supporting policies, giving a big boost to China’s urban and rural individual economy. See Table 4.1 for the achievements.

2

Huang (Editor-in-Chief) (2010).

4.1 Break the Dominance of Public Ownership and Allow the Existence …

97

The rebirth and subsequent development of the individual economy not only helped solve the huge unemployment problem, but also played a vital role in many other aspects. First, it boosted production in general and, in particular, the production of small commodities such as clothes, buttons, local specialty products, and the construction and repair of small farm tools. It helped recover some local flavored food and snacks in the catering industry, which for many years had been on the verge of extinction. Second, it invigorated the retail business for some products, contributing to the prosperity of the market. Urban and rural regions across the country established local trade fairs, and some also established markets for secondhand or used products. Third, individual businesses did not rely on state investment, neither did they compete for employment rations. Yet they greatly expanded the outlets in commerce, catering, and services. From the Third Plenum of the 11th CPC Central Committee to 1983, a total of 5,349,000 business outlets were created nationwide, of which 4,142,200 were owned by households, accounting for 87.7% of the total. Fourth, the individual economy greatly alleviated the long-lasting problems faced by both urban and rural residents, such as problems associated with eating out, clothing, finding a hotel to stay, and urban transportation, and problems associated with selling and buying by farmers. Fifth, it expanded employment opportunities. Sixth, it contributed to government tax revenues. Seventh, it promoted competition. Dynamic individual businesses have increasingly become the competitors to stateowned and collective owned enterprises.3 In sum, the individual economy has proved to be a necessary and beneficial supplement to the public economy.

The Boom of the Private Economy Once the individual economy was in full swing, the private economy would follow suits inevitably, conforming to the general principle of economics. With the development of the individual economy, well-managed household businesses would like to expand their scale and scope. This would entail an increase in labor and employment. At the same time, there was a considerable amount of surplus labor in urban and rural areas, making hiring very easy. Consequently, some well-managed individual businesses began to hire external workers despite government restrictions against such hiring. To cope with this problem, on July 7, 1981, the State Council issued Several Policy Regulations on Urban Non-Agricultural Economy. According to the new policy, self-employed households, which were generally owned and operated by one person or by the family, may, if necessary, hire one or two external workers, conditional on the approval by the local administration office of industry and commerce; those with strong technical skills or special skills may bring in two or three, but no more than five, apprentices. In January 1983, the CPC Central Committee rolled out a new policy titled Some Issues Concerning Current Rural Economic Policy— nown as Central Document No. 1—to further relax the restrictions. According to 3

Su (2007, p. 560).

98

4 The Establishment and Development of the Basic Socialist Economic …

the document, the hiring or job changing within a certain range would be treated as mutual labor assistance or technical cooperation of ordinary folks, and thus should be permitted. Household businesses in the rural areas, especially those engaged in the breeding business, could hire helpers and take apprentices in accordance with the new policy. As for hiring by large numbers or in other businesses, it was recommended that the government would neither publicize the practice, nor would it rush to ban the practice, but should instead guide the situation and make it gradually develop into a different form of cooperative economy. This soft policy effectively loosened the constraints on hiring employees. The debate then turned to how many people a household business was allowed to employ from outside the household. At the time, some economists opined that the answer to this question could be found in Chap. 14 of Karl Marx’s magnum opus Capital. According to Marx, an employer who hires no more than eight people and he himself also participates directly in the business can be regarded as an intermediate between capitalists and workers—that is, a small business owner. But if the number of external hiring exceeds eight, he begins to exploit the surplus value created by workers, hence becoming a capitalist. Based on this argument, a line of demarcation is drawn between household business and private business: if less than eight workers are hired, it is regarded as a household business; if eight or more workers are employed, it becomes a private business. This yardstick has generally been used to distinguish between the individual economy and the private economy for many years. On October 22, 1984, upon hearing the briefing about the current economic situation, Deng Xiaoping offered his opinion: “Regarding the issue of hiring workers, my opinion is to look at it two years from now.” On April 17, 1987, when meeting with guests from Hong Kong, Deng Xiaoping said, “Right now people in our country are discussing the issue of hiring workers. As I have talked with many comrades before, we don’t have to rush to make any changes on this issue. We can just watch it without making any changes for a few more years, maybe two more years.” His concern was that if we rushed to change the policy it would give the public a bad impression. More time and more study were needed before we could find the right time and the right approach to make policy amendments.4 With continued development of private enterprises in urban and rural areas, external hiring became a common practice. According to one survey, in 1990 there were 60,400 private enterprises in the rural areas that employed at least eight people, with a total employment of 997,700 and an average of 16.5 employees per enterprise. In areas where the collective economy was weak but the commodity economy was developed, the employment of workers picked up more rapidly. For example, in Wenzhou, Zhejiang province, more than 10,000 private enterprises each employed at least eight workers in 1987, accounting for 70% of the total output of township and village enterprises in the city. In 1987, Lu Chunming, nicknamed the “Pearl King,” from Hubei province, had more than 7 million yuan in assets and employed more than 300 people, with an annual profit exceeding 1 million yuan.5 4 5

Selected Works of Deng (1993, p. 216). Peng et al. (2008, Part I, pp. 184–185).

4.1 Break the Dominance of Public Ownership and Allow the Existence …

99

After a period of observation and practice, the public’s understanding of the private economy gradually came to a consensus, culminated with the report of the 13th CPC National Congress, held in October 1987. While recognizing that the ownership structure in the primary stage of socialism should be dominated by public ownership, the report admitted that the issue with other economic components in the national economy was not that they had developed too much, but rather that they had not developed enough. Therefore, we must encourage the urban–rural cooperative economy, the individual economy, and the private economy to continue to develop. The private economy was an economic component where there existed an employer-labor relationship. Under the socialist conditions, however, it must be connected to and influenced by the dominant public economy. Practice has proved that a certain degree of development of the private economy is conducive to promoting production, activating the market, expanding employment, and better meeting the people’s various living needs. It is a necessary and beneficial supplement to the public economy. In April 1988, the First Session of the Seventh National People’s Congress passed Amendment to the Constitution of the People’s Republic of China. According to the amendment, “the private economy is complementary to the socialist public economy. The state protects the legal rights and interests of the private economy, and provides guide, supervision, and management of the private economy.” In 1988, local industry and commerce administrative agencies began to handle the registration of private enterprises, further justifying their existence and growth. Since the goal of the socialist market economic system reform was established in 1992, the private economy has developed rapidly (See Table 4.2). The private economy has played a positive role in the development of China’s socialist market economy. First, thanks to their rapid growth, the private sector’s contribution to GDP increased from less than 1% in 1979 to more than 20% in 2001. Second, it has helped expand social employment. Since the 1990s, the individual and private economy has gradually become the main source of new employment. From 1992 to 2000, individual and private enterprises created, on average, 6 million new jobs each year, accounting for three quarters of the new jobs created in the whole society. Third, it has driven the development of a number of new industries, most prominent of which are technology companies. From 1992 to the end of the Table 4.2 Development of China’s private businesses: 1992–1997 Year

Number of business (10,000)

Growth (%)

1992

13.9

28.8

231.9

1993

23.8

70.4

372.6

680.5

1994

43.2

81.7

648.4

1447.8

1995

65.5

51.4

956.0

2621.7

1996

81.9

25.2

1171.1

3752.4

1997

96.1

17.3

1349.3

5140.1

Source China National Statistics Bureau

Number of employment (10,000)

Registered capital (yuan 100 millions) 221.3

100

4 The Establishment and Development of the Basic Socialist Economic …

twentieth century, total revenues and taxes of privately owned technology companies increased at an average annual rate of more than 30%. By 2001, there were more than 100,000 private technology enterprises nationwide, with 6.44 million long-term workers, more than 2.48 trillion yuan in total assets, and exports worth 31.9 billion US dollars. These enterprises are the shining spots of the Chinese national economy. Fourth, the private sector has promoted the adjustment and optimization of the economy’s ownership structure. The development of the individual and private businesses upended the dominance of public ownership in the economy, ushering in a competitive and dynamic environment for the socialist market economy. It has greatly mobilized the enthusiasm of the masses to work together for the acceleration of economic growth.6

The Introduction and Use of Foreign Investment In the early days, the main channel to open up to the outside world was the special economic zones, which were established for the introduction of foreign capital. On August 26, 1980, the Regulation of the Guangdong Special Economic Zones, submitted by the State Council, was approved at the 15th Session of the Standing Committee of the Fifth National Congress of the People’s Republic of China, chaired by Chairman Ye Jianying. This regulation officially announced the setup of special economic zones in three cities of Guangdong province: Shenzhen, Zhuhai and Shantou. Subsequently, the Standing Committee of the National People’s Congress approved the Regulation of Xiamen Special Economic Zone of Fujian Province. The Minutes of the Working Conferences on Special Economic Zones in Guangdong and Fujian, held from May to June 1981, put forward a series of policy opinions for the construction of the special economic zones. The main objectives of the special economic zones were to absorb foreign capital, introduce advanced technology, expand foreign trade, and accelerate economic development. The special economic zones were also intended to observe and study the contemporary capitalist economy in practice, learn and improve the ability to participate in international exchanges, and conduct economic system reform experiments. The ownership structure of the special economic zones would consist of myriad economic components under the leadership of the socialist economy. In areas of industrial production, foreign investors may have a bigger equity than domestic investors. Under the guidance of the socialist plan, the economic activities of the special economic zones were expected to give full play to the role of the market. The establishment of the special economic zones and the introduction of foreign capital aroused rather differing opinions from the very beginning. The focus of the debate was on the nature of the special economic zones. Was it capitalism or socialism? With the vigorous support by the CPC Central Committee and its leader 6

The CPC Central Committee on Several Issues Concerning the Improvement of the Socialist Market Economic System (pp. 44–45). People’s Publishing House, 2003.

4.2 The Establishment of the Basic Socialist Economic System

101

Deng Xiaoping, the Shenzhen Special Economic Zone achieved great results in the first few years. The introduction of foreign capital substantially increased industrial and agricultural output, as well as fiscal revenues, for the city. Its industrial output reached 360 million yuan in 1982, and more than doubled the next year. Deng Xiaoping was very happy with the results. When he visited Shenzhen on January 26, 1984, he wrote down the following message: “Shenzhen’s development and experience prove that our policy of establishing the special economic zone is correct.” With the support from the CPC Central Committee and Deng Xiaoping, the introduction of foreign capital gradually expanded from the special economic zones to the whole country. As foreign direct investment in China increased, foreign invested enterprises gradually became an important part of the Chinese market. Table 4.3 summarizes the use of foreign capital in China from 1979 to 2012. By the end of 2012, there were 440,609 foreign-invested enterprises in China, with total investment of $3.261 trillion and registered capital of $1.8814 trillion, of which $1.4903 trillion came from foreign investors. With around 60% of foreign direct investment invested in manufacturing, foreign-funded enterprises helped boost China’s industrial growth. The tremendous growth in China’s exports since the 1990s was largely due to the rapid growth of foreign-invested enterprises. Exports by foreign-invested enterprises in China increased by almost 100 folds between 1991 and 2014—from $12 billion in 1991 to $1074.734 billion in 2014. Their share of total national exports rose from 16.75% in 1991 to 45.9% in 2014. In 2011, foreign investment accounted for 23.97% of total assets in the industrial sector. In sum, foreigninvested enterprises have become a very important market player in China. They have made significant contributions to China’s economic growth, exports growth, job creation, tax revenues, and introduction of advanced technology and management.

4.2 The Establishment of the Basic Socialist Economic System China’s Reform Got Its Humble Start in the Rural Areas with the Implementation of the Household Contract Responsibility System of Farmlands, Rendering the Separation of Collective Ownership and Management Rights It is the implementation of the household contract responsibility system that set off China’s economic reform. In December 1978, 18 farmers from Xiaogang village of Liyuan commune in Fengyang county, Anhui province, signed a collusive agreement to contract out the collectively owned farmlands between them. Each household could manage agricultural production on its own initiative. This practice soon received the approval by and support from the central government, and quickly spread out to other

102

4 The Establishment and Development of the Basic Socialist Economic …

Table 4.3 The use of foreign capital in China: 1979–2012 Year 1979–1984

Total amount ($100 millions)

Foreign direct investment ($100 millions)

Other foreign investment ($100 millions)

141.87

41.04

10.42

1985

47.60

19.56

2.98

1986

76.28

22.44

3.70

1987

84.52

23.14

3.33

1988

102.26

31.94

5.45

1989

100.60

33.92

3.81

1990

102.89

34.87

2.68

1991

115.54

43.66

3.00

1992

192.03

110.08

2. 84

1993

389.60

275.15

2.56

1994

432.13

337.67

1.79

1995

481.33

375.21

2. 85

1996

548.05

417.26

4.10

1997

644.08

452.57

71.30

1998

585.57

454.63

20.94

1999

526.59

403.19

21.28

2000

593.56

407.15

86.41

2001

496.72

468.78

27.94

2002

550.11

527.43

22.68

2003

561.40

535.05

26.35

2004

640.72

606.30

34.42

2005

638.05

603.25

34.80

2006

670.76

630.21

40.55

2007

783.39

747.68

35.72

2008

952.53

923.95

28.58

2009

918.04

900.33

17.71

2010

1088.21

1057.35

30.86

2011

1176.98

1160.11

16.87

2012

1132.94

1117.16

15.78

14,774.35

12,761.08

581.70

1979–2012

Source China National Statistics Bureau

places across the country. By the end of 1980, 14.9% of villages had contracted out collectively owned farmlands to farmers, compared to merely 1.1% at the start of the year. The year 1980 was a normal year in terms of agricultural environment. The agricultural output, however, could not be more contrasting. The output remained unchanged in villages staying in the traditional collective communes. In villages

4.2 The Establishment of the Basic Socialist Economic System Table 4.4 Annual growth in major agricultural products: 1979–1984

103

Agricultural product Overall growth (%) Annual growth (%) Grain

33.6

4.95

Cotton

188.8

19.33

Cooking oil

128.2

14.75

79.9

10.28

Meat

Source Chang et al. (2018)

that contracted out farmlands to groups of farmers, the output increased by 10– 20%; in those that contracted out farmlands to individual households, the output increased by 30–50%. The results attested to the effectiveness of the household contract responsibility scheme in liberating rural productivity. The early success helped boost the promotion of the household contract responsibility scheme. By June 1981, 86.7% of villages in China had implemented the scheme.7 By the end of 1983, 98% of the rural collectives had contracted out farmlands to households. It should be noted that the implementation of the contract responsibility system did not change the nature of collective ownership of the farmlands; it merely separated ownership and management. Nevertheless, since it mobilized the enthusiasm of the farmers, it has effectively promoted the recovery and development of agricultural production in China, as shown in Table 4.4. At the same time, township enterprises sprung up rapidly. By 1983, such enterprises, which were sponsored by villages and communes, employed 32.35 million workers, with a total output of 101.9 billion yuan and a net profit of 17.7 billion yuan. The performance yardsticks increased by 14.4%, 104.5%, and 69%, respectively, relative to their 1978 levels. In March 1984, the central government approved a report submitted by the former Ministry of Agriculture, Animal Husbandry and Fishery on creating an innovative environment for the commune- and village-sponsored enterprises. These enterprises, together with those set up by a single or by multiple households, were collectively dubbed as township enterprises. The document pointed out that township enterprises were an important pillar of agricultural production, an important way for farmers to move towards common prosperity, an important source of national income, and an important supplement to the national economy. Since then, township enterprises have expanded at a rapid pace. In 1988, employment by township enterprises reached 94.95 million, total output value reached 701.8 billion yuan, and profit and tax revenue reached 89.2 billion yuan, a 2.36-, 13.24-, and 7.1-fold increase, respectively, relative to the 1978 levels. Between 1989 and 1991, the development of township enterprises slowed down a bit, due to the rectification policies adopted by the government. In 1996, township enterprises employed 135 million workers, created 1.8 trillion yuan in added value, and earned 625.3 billion yuan in profit and tax revenue.8 In the same year, the township enterprises contributed to 39.39% of the total industrial output of the country. 7 8

Peng et al. (2008, Part I, p. 72). Zhang et al. (2001, pp. 140–141).

104

4 The Establishment and Development of the Basic Socialist Economic …

The rise of township enterprises benefited not only from the timely formation of a flexible operating mechanism, but also from the external economic environment characterized by prominent product shortages. With the deepening of reform and opening up, especially after the whole economy had gradually turned from the seller’s market to the buyer’s market in the mid and late 1990s, the market system gradually took hold and the role of the market mechanism gradually strengthened. This development laid bare some of the deep-rooted problems facing township enterprises, such as the lack of separation of government and enterprise and unclear property rights. For township enterprises to prosper further, these problems must be solved first. Since the mid and late 1990s, various reforms have been implemented to change the relationship between government and enterprise and to clarify and enforce property rights. Starting from 1997, township enterprises in southern Jiangsu province went through two rounds of reform, covering 80% of the enterprises. The reform has greatly altered the ownership structure. Take Wuxi city. In 2005, the proportional contributions by various ownership structure enterprises to the city’s total industrial output were as follows: 5.4% by state-owned enterprises, 7.4% by joint-stock cooperative companies, 22.8% by joint-stock companies, 29.2% by collective enterprises, 1% by self-employed enterprises, and 22.1% by private enterprises and joint ventures. After the reform, collective enterprises still accounted for a certain proportion, despite the rapid growth in other forms of ownership such as joint-stock enterprises, jointstock cooperative enterprises, private enterprises, and joint ventures. The reform gave a boost to both production and farmers’ income. The per capita net income for rural residents in Wuxi was 7115 yuan in 2004 and 8004 yuan in 2005, higher than the national average in both years.9 According to data from the Ministry of Agriculture, by 2006, ninety-five percent of China’s 1.68 million township enterprises had implemented various reforms in the property rights system, of which more than 200,000 had transformed into joint-stock or joint-stock cooperative companies, and 1.3 million into private enterprises.10

The Reform of State-Owned Enterprises Began with Expanding Their Business Autonomy and, Starting in 1993, Leaned Toward Establishing a Modern Enterprise System The reform of state-owned enterprises has been the central link of China’s economic system reform, and arguably the most difficult one. In the early years, Sichuan and other provinces embarked on pilot programs through which some selected stateowned enterprises were given more autonomy and allowed to retain more of their 9

Fan and Sun (2007). Chang et al. (2018, p. 52).

10

4.2 The Establishment of the Basic Socialist Economic System

105

profits. By 1987, the contract system had been widely implemented. The biggest problem with the contract system, however, was the lack of separation between government and enterprise. With one-on-one negotiation, no external supervision, and no system transformation, more often than not the contract system led to the loss of state-owned assets. It was not until 1992 when the goal of the socialist market economic system reform was established, which was to build up a modern enterprise system or a modern company system, that the direction of the reform of state-owned enterprises was clarified. As the market-oriented reforms moved forward, a large number of state-owned enterprises, having not transferred their operating mechanism and ill adapted to the development of the market economy, fell in hard times. In 1997, the Party and the state government decided to offer help to the struggling state-owned enterprises. The goal was to drag most of the large and medium-sized state-owned enterprises out of financial woes in about three years starting 1998, and to establish a modern enterprise system for most of the large and medium-sized backbone enterprises by the end of the twentieth century. This goal had been basically achieved by 2000. Since then on, state-owned enterprises in industry and commerce have gained strength rapidly, in terms of total assets, net assets, tax revenue, and profit. In 2012, 64 state-owned enterprises were put on Fortune magazine’s list of 500 largest companies in the world. China’s important industries and the key areas of the national economy are still firmly under the control of state-owned enterprises. At the end of 2012, 953 state-owned companies were listed in the stock market, accounting for 38.5% of the total number of A-share listing in China; their market value was 13.71 trillion yuan, accounting for 51.4% of the total market capitalization of A-share listed companies.

The 15th CPC National Congress Proposed, for the First Time, to Establish a Basic Economic System in Which Public Ownership Is to Play a Dominant Role and Diverse Forms of Ownership Co-develop Side by Side After considering the changes in the ownership structure in China, the 15th CPC National Congress, held in 1997, raised the issue of establishing a basic socialist economic system for the very first time. It decided that the basic economic system in the primary stage of socialism in China should be one with public ownership playing the dominant role and diverse forms of ownership co-developing side by side. This basic economic system is jointly determined by the nature of socialism and the national conditions in the primary stage. First, China is a socialist country and must adhere to public ownership as the basis of the socialist economic system. Second, China is in the primary stage of socialism, and other forms of ownership should develop under the condition that public ownership plays the dominating role. Third, all forms of ownership, as long as they conform to the “Three Advantages,” can and should be used to serve socialism. Since the Third Plenum of the 11th Central

106

4 The Establishment and Development of the Basic Socialist Economic …

Committee, the Party has carefully summed up the experience and lessons from previous ownership issues and formulated the policy to let public ownership play a main role and various other economic components develop together. It has gradually eliminated the fetters imposed by unreasonable ownership structure on productivity, creating a situation where public ownership takes varied forms and other economic components prosper as well. According to the report of the 15th CPC National Congress, a major task in the economic system reform was to continue to adjust and improve the ownership structure and further liberate productive forces. This represented another major reform and policy adjustment, because this time it was about the basic economic system, not just a regular policy. As such, it was not to be an expedient measure, but rather a stable and long-term institutional arrangement. The fact that China is still in the primary stage of socialism entails that its basic economic system is one with public ownership playing a dominant role and diverse sectors developing together. Soon after reform and opening up, a consensus was reached that China was still in the primary stage of socialism. It is this realization that led to the transformation from 100% public ownership to the basic economic system just described. In the primary stage of socialism, the productivity level is not high, and the degree of social production is far from the stage at which the private economy can be completely eliminated and public ownership controls everything. Insisting upon 100% public ownership can only stunt the development of social productivity. Before China adopted its reform and opening up policy, tens of millions of people in cities and towns were without jobs and farmers did not have much incentive to increase agricultural production, all the while the economy remained stagnant. The pure public ownership structure proved to be an obstacle to productivity development. After reform and opening up, the Party and the government, in light of China’s basic national conditions in the primary stage of socialism, have gradually adopted policies to support, encourage, and guide the development of the individual and private economies and the utilization of foreign capital, and carried out reforms of the public sector in order to increase its vitality. These reform policies have effectively liberated and developed social production. As a result, the Chinese economy took off rapidly, a miracle that has amazed the whole world. After 2010, China’s individual, private, and foreign-funded economies have accounted for more than 60% of GDP, more than 80% of urban employment, more than 60% of investment in fixed assets, and more than 50% of government tax revenues. In short, the non-public sector has played an important role in the rapid growth of the Chinese economy. It can be said that it is an important and irreplaceable production force driving China’s economic growth. As pointed by some scholars, the primary stage of socialism is characterized by low level of productivity, multiple layers, unbalanced development, and underdeveloped commodity economy. This characterization determines that the ownership structure in the primary stage of socialism must be such that a variety of ownership economies co-exist and co-develop for a prolonged period of time, with socialist public ownership playing the dominant role. This indeed is the basic economic system in the primary stage of socialism in China. And this basic economic system

4.2 The Establishment of the Basic Socialist Economic System

107

is an important pillar of the socialist system with Chinese characteristics and the foundation of the socialist market economic system.11 One prominent feature China’s economic system reform is that, while within the public sector the reform process has been very slow due to various reasons, the non-public economy has grown rapidly. The development of the private sector has invigorated the whole national economy, leading to rapid economic growth and substantial increase in people’s living standards. It has also become an important external force driving the reform of the state-owned economy.

The Basic Economic System is the Foundation of the Socialist Market Economic System The Third Plenum of the 18th CPC Central Committee decided that the basic economic system in which public ownership dominates while a variety of ownership forms develop side by side is an important pillar of the socialist system with Chinese characteristics and the foundation of the socialist market economic system. China’s reform and opening up began with the introduction of the market mechanism to its economic activities. In 1984, it was affirmed that China’s socialist economy was a planned commodity economy built on public ownership. In 1992, the goal of reforming the socialist market economy system was established, which was to integrate socialism with the market economy, and public ownership with the market economy. In the socialist market economy, the individual, private, and foreigninvested enterprises have no problem at all to integrate with the market economy, because they are independent market players to begin with. But the traditional public ownership, especially the state-owned enterprises, have found it very difficult to integrate with the market economy. This is because they were run according to the state’s mandatory planning. Appropriate forms were needed to realize the integration of public ownership with the market economy. In 1997, the report of the 15th CPC National Congress put forward the idea of seeking the realization forms of public ownership. It decided that the share-holding system can be used by socialism. According to the report, the realization forms of public ownership can and should be diverse. All sorts of management and organization forms, as long as they conform to the law of social production, can be explored boldly. The report called on to find a form of public ownership that can significantly boost the productive forces. The joint stock system is a form of capital organization of modern enterprises that is conducive to the separation of ownership and management and to the improvement of operation efficiency of business and capital. After all, capitalism can be used in socialism. One should not make generalizations regarding whether the shareholding system is public or private, for it depends on who holds the controlling shares. If the state or the collective holds the controlling shares, it helps expand the scope of control of public capital and enhance the dominating role of public ownership. 11

Hu (2015).

108

4 The Establishment and Development of the Basic Socialist Economic …

In 2003, the Third Plenum of the 16th CPC Central Committee decided that it is necessary to make the joint-stock system the main form of public ownership. The decision stated: “We should adapt to the trend of continuous development of economic marketization, further enhance the vitality of the public sector of the economy, vigorously develop the mixed ownership economy of state-owned capital, collective capital, and non-public capital, realize the diversity of investment subjects, and make the joint-stock system the main form of public ownership.” Since the 1990s, China’s state-owned enterprises, especially large and mediumsized ones, have constantly pushed forward and deepened the reform of the corporate stock system and the mixed ownership system in accordance with the above requirements. They have strived to organically integrate the state- and public-owned economy with the market economy, constantly consolidate the dominant position of the public ownership and the leading role of the state-owned sector in the national economy, constantly consolidate and improve the basic socialist economic system, and promote the continued development of the socialist market economy.

4.3 The Consolidation and Improvement of the Basic Economic System After the establishment of the socialist basic economic system, as the reform deepens and develops, the basic economic system and its theory have been constantly consolidated and improved.

The Two Unswervinglys The following passage regarding China’s basic economic system can be found in the report of the 16th CPC National Congress: In line with the requirements of releasing and developing the productive forces, we must uphold and improve the basic economic system, with public ownership playing a dominant role and diverse forms of ownership developing side by side. First, it is necessary to consolidate and develop unswervingly the public sector of the economy. Expansion of the state sector and its control of the lifeline of the national economy is of crucial importance in displaying the superiority of the socialist system and reinforcing the economic strength, national defense capabilities and national cohesion. As an important component of the public sector, the collective sector of the economy plays a significant role in achieving common prosperity. Secondly, it is necessary to encourage, support and guide unswervingly the development of the non-public sectors of the economy. The non-public sector of self-employed, private and other forms of ownership is an important component part of the socialist market economy. They play an important role in mobilizing the initiative of all quarters of the society

4.3 The Consolidation and Improvement of the Basic Economic System

109

to quicken the development of the productive forces. Thirdly, we must stimulate the development of the non-public sectors while keeping the public sector as the dominant player, incorporating both into the process of the socialist modernization drive instead of setting them against each other. All sectors of the economy can very well display their respective advantages in market competition and stimulate one another for common development.

The use of two unswervinglys in the passage highlights an important development in the Party’s understanding of the basic economic system. It is generally believed that the public sector, especially the state sector, commands advantages in infrastructure construction and some high technology projects due to large investment requirements, long construction cycle, slow payback, and significant economies of scale. The non-public sector, however, has advantages in generally competitive areas with low market entry thresholds, full competition and strong flexibility of production and operation. In the socialist market economy, the public sector and the non-public sector can complement each other. After reform and opening up, the non-public economic sectors in China’s eastern regions experienced rapid growth. This development created a good market environment and favorable conditions for the reform of state-owned enterprises, promoted the reform and development of the state-owned economy, and improved the quality and efficiency of the growth of the state-owned economy. The whole national economy developed rapidly as well, a result of the complementarity and interaction of state-owned and non-state-owned sectors of the economy. In 2007, the 17th CPC National Congress reiterated the two unswervinglys, pointing out that we must adhere to and improve the basic economic system with public ownership playing the dominant role and diverse forms of ownership developing side by side; we must unswervingly consolidate and develop the public sector of the economy, and unswervingly encourage, support and guide the development of the non-public sector; and we must adhere to the principle of equal protection of property rights and form a new pattern of equal competition and mutual promotion for all kinds of ownership economy. In 2017, the report of the 19th CPC National Congress once again stressed the two unswervingly, pointing out: We must uphold and improve China’s basic socialist economic system and socialist distribution system. We must unswervingly consolidate and develop the public sector; and unswervingly encourage, support and guide the development of the non-public sector of the economy. We must see that the market plays the decisive role in resource allocation, the government plays its role better, and new industrialization, IT application, urbanization, and agricultural modernization go hand in hand. We must actively participate in and promote economic globalization, develop an open economy of higher standards, and continue to increase China’s economic power and composite strength.

At a time when there were still calls for the elimination of private ownership and the deprivation of private entrepreneurs’ assets, reaffirming the two unswerving principles was not only necessary, but also squarely on the mark.

110

4 The Establishment and Development of the Basic Socialist Economic …

The Mixed Ownership Economy as an Important Realization Form of the Basic Economic System In 2013, the decision by the Third Plenum of the 18th CPC Central Committee made the following statement: We must vigorously develop a mixed economy. A mixed economy with cross holding by and mutual fusion between state-owned capital, collective capital and non-public capital is an important way to materialize the basic economic system of China. It is conducive to improving the amplification function of state-owned capital, ensuring the appreciation of its value and raising its competitiveness, and it is conducive to enabling capital with all kinds of ownership to draw on one another’s strong points to offset weaknesses, stimulate one another and develop together. We will allow more state-owned enterprises and enterprises of other types of ownership to develop into mixed enterprises. We will allow non-state-owned capital to hold shares in projects invested by state-owned capital. We will allow mixed enterprises to implement employee stock ownership plans to form communities of capital owners and workers.

The above statement is among the bright spots of the decision, with important practical and theoretical implications. Actively developing the mixed ownership economy would become the focus of improving China’s basic economic system in the years ahead. Since reform and opening up, the Party has endeavored to find the effective forms of public ownership for the basic economic system. In 1993, the Third Plenum of the 14th CPC Central Committee recognized that “with the flow and reorganization of property rights, more and more economic units with mixed ownership of property will emerge, creating a new structure of property ownership.” In 1997, the report of the 15th CPC National Congress pointed out that “the realization forms of public ownership can and should be diversified.” In 1999, the decision of the Fourth Plenum of the 15th CPC Central Committee required that large and medium-sized state-owned enterprises, especially those well positioned to implement joint-stock ownership, should be transformed into joint-stock enterprises through stock market listing, Sino-foreign joint venture, or cross holding with other enterprises, for the development of the mixed economy. In 2002, the report of the 16th CPC National Congress stated that “except for a few enterprises that must be wholly owned by the state, we should actively promote the joint-stock system and develop the mixed ownership economy.” In 2003, the decision of the Third Plenum of the 16th CPC Central Committee proposed that “we should vigorously develop the mixed ownership economy which combines state-owned capital, collective capital and non-public capital and make the joint-stock system the main form of public ownership.” The decision by the Third Plenum of the 18th Central Committee concerning the role and significance of the mixed ownership economy was the continuation and development of the Party’s previous judgments in this regard, and the result of further deepening the practice and understanding of the reform. The vigorous development of the mixed ownership economy is mainly due to the reform of state-owned enterprises and the search for ways to integrate state ownership with the market economy. The direction of the state-owned enterprise reforms leans

4.3 The Consolidation and Improvement of the Basic Economic System

111

towards the establishment of a modern enterprise system, i.e., a modern company system. One prominent feature of a modern company is its diverse equity ownership. In addition to the original state capital, it needs to absorb non-state capital as strategic investors. When it goes public through stock market listing, a large number of individual investors and private enterprises will become its shareholders. The practice of China’s economic reform has proved that state-owned enterprises can realize the combination of state ownership with the market economy through share-holding, all the while effectively improving productivity. In fact, since the 1990s, China has implemented the policy of allowing domestic private capital and foreign capital to participate in the restructuring and reform of state-owned enterprises. A large number of state-owned enterprises, including financial institutions, have been listed in the stock market, to the delight of the mixed ownership economy. According to the various issues of China Tax Yearbook, between 1999 and 2011 the contribution of the mixed ownership economy to national tax revenues increased year by year, from 11.68% in 1999, to 36.57% in 2005 and 48.52% in 2011. China Building Materials Group is a paragon of developing mixed ownership. After 2002, under the leadership of Song Zhiping, a famous entrepreneur, the company gradually developed and expanded through restructuring private enterprises. In the field of cement, the company has reorganized more than 900 enterprises from scratch and, from small to large, eventually formed four major cement enterprises. With a total production capacity of 450 million tons, it has become the largest cement producer in the world. As of 2013, 1113 enterprises were under the flag of the corporate group. With 22 billion yuan of state capital, the group controlled 66 billion yuan worth of net assets, and more than 360 billion yuan of total assets. China Building Materials International Engineering Co., its mixed ownership subsidiary, was a pioneer in employee shareholding. Its operating revenue and total profit both grew in the past decade. The experience of China Building Materials Group has been selected as a case study at Harvard University. Song Zhiping summed up the following formula for its success: “strength of a central enterprise + vitality of a private enterprise = competitiveness of the enterprise.”12 It should be noted, however, that the development of the mixed ownership economy is far from balanced, with fast development in competitive industries but relatively slow growth in monopoly ones. The Third Plenum of the 18th CPC Central Committee decided to open up the competitive businesses of a natural monopoly industry for the development of mixed ownership economy. To this end, a broad range of channels would be made available for a monopoly industry to open up their competitive businesses and absorb social capital. In 2013, 65.7% of central enterprises had mixed ownership. The proportion increased to 68.9% by 2016. After 2017, more than 900 new enterprises with mixed ownership have been created, absorbing more than 420 billion yuan in social capital. A pilot mixed ownership reform in key fields has been carried out in three batches involving a total of 50 enterprises. This scheme was met with positive market reaction and achieved good social impacts.13 12 13

Xiao (Editor-in-Chief) (2014, pp. 172–173 and p. 175). See Economic Information Daily, October 16, 2018.

112

4 The Establishment and Development of the Basic Socialist Economic …

The pilot demonstration projects of mixed ownership included both central enterprises and local enterprises, covered a wide range of industries including power, oil, natural gas, railway, civil aviation, telecommunications and the military industry, and extended to some important industries with relatively high concentration of stateowned economy. China Unicom, in the second batch of the pilot program, was the first central enterprise from a monopoly field to be reformed. Through the mixed ownership reform, the firm has introduced 14 strategic investors, including Tencent, Baidu, Alibaba, JD, and other private capital. As a result, Unicom Group’s equity ownership has dropped from 62.7% before the reform to only 36.7%. On its latest board of directors, five of the eight non-independent directors were taken by the new strategic investors. Management positions were cut by 51.3%, 205 institutions from its 31 provincial branches around the country were eliminated, 14 directorship and deputy directorship positions of the group’s second-tier subsidiaries were withdrawn, and an average of 15% of the middle-level managers in the provincial branches withdrew from reappointment. The new organization structure was leaner and more efficient. At the same time, China Unicom granted more than 7800 core employees with restricted shares accounting for 2.7% of the total shares outstanding, in an attempt to boost the morale of its most core elements.14

Enhance the Protection of Property Rights and Promote Entrepreneurship The decision of the Third Plenum of the 18th CPC Central Committee, held in 2013, made the following statement concerning how to enhance protection of property rights: Property rights are the core of ownership. We need to improve the modern property rights system with clear ownership, clear-cut rights and obligations, strict protection and smooth flow. The property rights of the public sector are inviolable, as are those of the non-public sector. The state protects the property rights and legitimate interests of all economic sectors, ensures that they have equal access to the factors of production according to the law, participate in market competition on an open, fair and just footing, and are accorded with equal protection and oversight according to the law.

Nevertheless, these reform measures were not well implemented in the following two years, and the protection of property rights in the private sector was not strong enough. In 2016, the growth of private capital investment in fixed assets in the whole society dropped sharply, to merely 3.2%, compared to double-digit growth in previous years (e.g., 10% in 2015). In 2016, wary of this abnormal development, the Central Committee and the State Council jointly issued a document titled Opinions on Improving the Property Rights Protection System and Protecting Property Rights According to Law. In 2017, another document, Opinions on Creating a Healthy Environment for Entrepreneurs and Promoting Sound Entrepreneurship, was issued. 14

See People’s Daily, April 13, 2018.

4.3 The Consolidation and Improvement of the Basic Economic System

113

The report of the 19th CPC National Congress, held in 2017, clearly stated: “In our economic reforms, we must concentrate on improving the property rights system and ensuring the market-based allocation of factors of production, so that property rights act as effective incentives. We should ensure free flows of factors, flexible prices, fair and orderly competition, and that business survival is determined by competition.” “We will sort through and do away with regulations and practices that impede the development of a unified market and fair competition, support the growth of private businesses, and stimulate the vitality of various market entities.” “Stimulate and protect entrepreneurship, and encourage more social subjects to engage in innovation and entrepreneurship.” With the implementation of these policies, the slow growth in private capital investment was quickly turned round. In 2017, private investment in fixed assets grew by 6%, and the momentum continued in 2018. As has been pointed out by some experts, it is the inherent requirement and the inevitable law in the development of socialist market economy with Chinese characteristics to break away from the traditional notion and recognize the nonpublic economy. The traditional notion—that private ownership must be eliminated in socialism—has been and is still affecting some people’s value judgment and thinking. If this outdated notion is not fully rectified, the negative view on private economy would continue to haunt people’s minds, and the future prospects of private investment would not be worry free. At present, the state has fully recognized the importance of nurturing the non-public economy in terms of law, regulation, and policy. This is far from enough. And more is needed, in theoretical analysis, political judgment, moral value, ideological education and public opinions, to make it absolutely clear that the development of the non-public economy is not just an expediency. It is instead the inherent requirement and the inevitable law in the development of the socialist market economy with Chinese characteristics. It is essential that the whole society reaches a consensus that, under the conditions of the socialist market economy, non-public and public economies, and private and state-owned enterprises, are not only equal in economic and legal status, but also equal in political and social status, moral reputation, and value judgement. Their difference is difference in functions, not difference in superiority. For the sustainable and healthy growth of China’s private enterprises and the whole national economy, it is imperative to completely eliminate the misconceptions and prejudices against private capital, not to mention the concerns of entrepreneurs.15 It should be noted that an important aspect of the property rights system is the protection of intellectual property rights. For China to turn to high-quality, innovation-driven development, it must strengthen the protection of intellectual property rights. This is the most important factor in property rights-based incentive mechanisms and the most effective means to encourage innovations in science and technology. As pointed out by some experts, innovation is the primary driving force of development, and science and technology is the first and foremost productive force. We should foster a culture of innovation, and strengthen the creation, protection, and application of intellectual properties. We should further improve the management 15

Chang et al. (2018, p. 237).

114

4 The Establishment and Development of the Basic Socialist Economic …

of the rights and interests of scientific and technological achievements, improve the incentive and evaluation system for the transformation of intellectual property rights, and strengthen the legal protection of intellectual property rights, making China an innovation-based country.16

Provide Strong Support for the Development of Private Enterprises On November 1, 2018, Xi Jinping, the general secretary of the Party, chaired a symposium attended by private enterprises. He stressed that he would unswervingly encourage, support, and guide the development of the non-public sector of the economy, and support the development of private enterprises as they move to a broader stage. In his speech, Xi Jinping fully affirmed the important position and role of China’s private economy. In 2017, the number of private enterprises in China exceeded 27 million, and that of individual businesses exceeded 65 million, with a total registered capital of more than 165 trillion yuan between them. Generally speaking, the private sector contributes at least 50% of tax revenues, 60% of GDP, 70% of technological achievements, 80% of urban labor employment, and 90% of all enterprises. On the list of top 500 largest companies in the world, the number of private enterprises from China increased to 28 in 2018, from merely one in 2010. General Secretary Xi Jinping pointed out that lately some rather negative comments on the private economy were circulating in the society. For example, some people put forward the notion that it’s time for the private sector to exit, saying that it has completed its mission and should withdraw from the historical stage; some wrongly interpreted the current mixed ownership reform as a new round of “public–private joint venture;” still others argued that strengthening Party building and trade unions in private enterprises is akin to controlling private enterprises. These statements are totally wrong and do not conform to the Party’s general policy. The private economy is an inherent factor of our country’s economic system, and the private enterprises and entrepreneurs are our own people. The private economy is an important achievement of the socialist market economy. It is also an important force to promote the development of the socialist market economy. The private sector of the economy plays an important role in the supply-side structural reforms, in promoting high-quality development, and in building a modern economic system. It is an importance force in the Party’s long-term drive to unite and lead the whole country to achieve the two centenary goals and realize the great rejuvenation of the Chinese nation. In the new journey of building a well-off society and then building a socialist modern country in all aspects, China’s private economy will only grow, not weaken. It will not leave. It should go to a broader stage.

16

Guide Book of the Report of the 19th CPC National Congress (p. 208). People’s Publishing House, 2017.

4.4 How to Understand the Dominant Role of Public Ownership …

115

In his speech, Xi Jinping also pointed out that, in the process of China’s economic development, we should constantly create a better development environment for the private economy, help it to overcome the difficulties on the road, support the reform and development of private enterprises, convert pressures to incentives, and let the spring of innovation in the private economy to fully flow so that the vitality of the private economy is fully emancipated. To this end, we should focus on the implementation of six policies and measures. First, reduce the tax burden on enterprises. Second, solve the financing problems confronting private enterprises. Third, create a fair competition environment for them. Fourth, improve the way of policy implementation. Fifth, build a new pro-business relationship between government and businesses. Sixth, protect the safety of the family members and the properties of private enterprises.17 Following Xi Jinping’s speech, the relevant departments around the country immediately took actions and implemented unprecedented effective measures to actively support the development of the private economy. Private entrepreneurs, greatly relieved, are ready to exert all their efforts. It is believed that this major policy measure will have a significant and far-reaching impact on the development of China’s private economy and its socialist market economy.

4.4 How to Understand the Dominant Role of Public Ownership in the Socialist Market Economy An important feature of the socialist market economy is the dominant role of public ownership. But why should it be this way? The reason is that it can help mobilize the enthusiasm of the general public and lead them to the road of common prosperity, and hence liberate and boost social productivity. Therefore, public ownership is consistent with the productivity standard. In the socialist market economy, public ownership is not equal to state ownership. This is because public ownership is not limited to the state-owned and collective economy. It also includes the state and collective components of the mixed ownership economy. This point warrants clarification. Ever since the Third Plenum of the 18th CPC Central Committee, held in 2013, there have been two differing views from scholars and practitioners about the dominant role of public ownership in the socialist market economy. With the rapid growth of the non-public economy since reform and opening up, its contribution to GDP has reached 50% or even 60%, its contribution to fixed asset investment exceeded 60%, and its contribution to total employment reached 80% or even 90%. These rapid developments have caused discomfort to some scholars in the theoretical circle. They exclaimed that public ownership was no longer in the dominant position and that the foundation of the socialist system has been shaken. They advocated limiting the development of the non-public economy. Some even suggested that the wealth accumulated by the rich people should be put back to public ownership. At the same time, some theorists and businessmen held the notion that the private sector has 17

See People’s Daily, November 2, 2018.

116

4 The Establishment and Development of the Basic Socialist Economic …

gradually become the main player in China’s real economic activities. If we continue to insist on public ownership playing the dominant role in the economy, it would no longer be worthy its name, and not conducive to the development of the private economy, either. They suggested that the basic economic system should be revised such that the state-owned economy plays a guiding role and a variety of ownership forms develop together. In our opinion, the two arguments are not comprehensive, and neither commands a good understanding of the true meaning of the dominant role of public ownership. When the 15th CPC National Congress, held in 1997, decided to establish the basic economic system whereas public ownership plays the dominant role and diverse forms of ownership develop side by side, it also provided unambiguous provisions on the principle: “Public ownership playing the dominant role means that public assets account for the majority of total social assets, and the state-owned economy controls the lifeline of the national economy and plays a leading role in economic development. As far as the whole country is concerned, different areas and industries can be treated differently. The domination of public ownership is not just the dominant in quantity, but also, more importantly, the domination in quality. That the stateowned economy plays a leading role is mainly reflected in its control power.” From the inception of reform and opening up in 1978 to 2017, China’s GDP increased by 33.5 folds. Its share of global GDP increased from a paltry of 1.8% in 1978 to 15.3% in 2017. All forms of ownership economy—state, collective and cooperative, individual and private, foreign-funded, as well as mixed ownership— have achieved great developments. That public assets are dominant in total social assets and that state ownership controls the lifeline of the national economy and plays a leading role in the economy have not changed fundamentally. Some experts reckoned that, as of 2012, total operating assets in China were about 487.53 trillion yuan (including the assets of self-employed businesses), of which 258.39 trillion, or 53%, belonged to public ownership.18 If non-operating assets such as state-owned natural resources were added, the share of public ownership would be much greater. According to data published by the Ministry of Finance, the State-owned Assets Administration and Supervision Commission, and the National Bureau of Statistics, as of 2015, the state owned 34.46 trillion yuan in operating assets, 11.23 trillion yuan in administrative assets, 53.41 trillion yuan in financial assets, and 458 trillion yuan in resource assets (of which about 43 trillion could be traded or sold). The four categories of state assets amounted to 557.1 trillion yuan. Here, stateowned assets refer to the net value of state-owned assets.19 These statistics clearly indicate that state-owned natural resources account for the majority of total assets. As for the state-owned economy controlling the lifeline of the national economy and playing a leading role in economic development, there is no doubt about it, and it need not be addressed here.

18 19

Pei (2014). Chang et al. (2018, p. 18).

References

117

In short, after four decades of reform and opening up, while the assets of all kinds of ownership economy have increased substantially, the dominant position of public ownership in total social assets has not changed fundamentally, leaving plenty of space for the common development of all forms of ownership economy in accordance with the provisions stipulated by the 15th CPC National Congress. In the future, therefore, we must continue to adhere to and improve the basic economic system whereas public ownership plays the dominant role and diverse forms of ownership develop together.

References Chang Xiuze, et al. (2018). Ownership Reform and Innovation: 40 Years of Ownership Structure Reform in China. Guangdong Economic Publishing House. Fan Cong and Sun Qinyu. (2007). The Common Wealth Effect of the Ownership Structure of the New Southern Jiangsu Model. Journal of Nanjing University, 2. Hu Naiwu. (2015). On the Core Issues of Building a Discourse System of Socialist Economics with Chinese Characteristics. In Zhang Zhuoyuan (Ed.). The Road to Economic Growth in China (p.40). Social Sciences in China Press. Huang Mengfu (Editor-in-Chief). (2010). Chronicles of the History of China’s Private Economy (p.176). China Industrial & Commercial United Press. Pei Changhong. (2014). Quantitative Estimation of the Dominant Position of China’s Public Ownership and Its Development Trend. Social Sciences in China, 1. Peng Sen, Chen Li, et al. (2008). Major Events of China’s Economic System Reform (I). China Renmin University Press. Selected Works of Deng Xiaoping. (1993).Vol.3. People’s Publishing House. Su Xing. (2007). Economic History of New China. Party School Press of the CPC Central Committee. The Steering Committee of the CPC Central Committee for Party Reorganization (Ed.). (1983). Compendium of Important Documents since the Third Plenum of the 11th CPC Central Committee (p.29). People’s Publishing House. Xiao Gan (Editor-in-Chief). (2014). National Progress: Song Zhiping on Mixed Ownership. Enterprise Management Press. Zhang Zhuoyuan, Hu Jiayong, and Liu Xuemin. (2001). On China’s Ownership Reforms. Jiangsu People’s Publishing House.

Chapter 5

The Innovation and Development of Enterprise Theory

The reform of state-owned enterprises (i.e., state-owned industrial and commercial enterprises) is the most important, and the most difficult and controversial, part of China’s economic system reform. In the traditional planned economy, state-owned enterprises, which were the underlings and the abacuses of the government, carried out production and operation according to the state’s mandatory plan. All or almost all of their profits were handed over to the government. Wages were set uniformly by the government, regardless of their performance. With enterprises eating “big pot rice” and workers holding “iron rice bowl,” enthusiasm and creativity were a rare commodity. Since the implementation of reform and opening up at the end of 1978, state-owned enterprises have gone through several rounds of continued and deepened reform. By now, the most difficult stage of the reform has passed and the task of rebuilding the microeconomic foundation for state-owned enterprises has been initially realized. Most of the state-owned enterprises have basically become market players that are adapted to the socialist market economy, operate independently, and are responsible for their own profits and losses. The state-owned sector continues to play a leading role in the national economy. The reform of China’s state-owned enterprises over the past four decades can be divided into three stages. The first stage (1979–1992) mainly explores the right direction of the reform. The second stage (1993–2012) leans towards establishing a modern enterprise system and actively promotes the corporate and shareholding system in large and medium-sized state-owned enterprises. The third stage (2013 to present) deepens the reform, especially that of state-owned assets. Each stage is replete with theoretical innovations. This chapter examines how the theory of enterprise has evolved with the deepening of the reform of state-owned enterprises and the accumulation of practical experience, and how theoretical innovations in turn help deepen the reform and provide guidance for the gradual improvement of the new system and mechanism.

© China Social Sciences Press 2023 Z. Zhang, Handbook of Chinese Economics, https://doi.org/10.1007/978-981-99-0420-4_5

119

120

5 The Innovation and Development of Enterprise Theory

5.1 Explore the Right Direction of the Reform of State-Owned Enterprises: 1979–1992 In October 1978, with the approval of the State Council, Sichuan province selected six local state-owned industrial enterprises, including Chongqing Iron and Steel, to take the lead in a trial scheme aimed to expand business autonomy. Under this pilot scheme, a profit target was set for each enterprise. If the target was reached, the enterprise could retain a small portion of the profit and reward its employees with a small amount of bonus. In January 1979, the province expanded the pilot project to 100 industrial enterprises. At the same time, it carried out a similar scheme to expand operation autonomy to 40 state-owned commercial enterprises. On May 25, 1979, six government ministries and commissions, including the State Economic Commission and the Ministry of Finance, jointly issued a notice to embark on a pilot reform to expand the autonomy of operation and management involving eight large enterprises that included Capital Iron and Steel. Five years later, in May 1984, the State Council issued the Interim Provisions on Further Expanding the Autonomy of State-Owned Industrial Enterprises, stipulating that business autonomy would be expanded in the following ten aspects: the right to plan production and operation, the right to sell products, the right to set price, the right to purchase materials, the right to use funds, the right to dispose of assets, the right to restructure organization, the right to hire employees, the right to set salary and bonus, and the right for joint operation. At the start of 1981, a kind of profit-based management responsibility system began to be implemented in Shandong and other provinces for big enterprises such as Capital Iron and Steel. Since then, various types of contract system have been implemented throughout the country. Capital Iron and Steel, for example, formulated a profit responsibility plan according to which it would increase its profit to be submitted to the state government each year at an annual rate of 7.2%. This plan was approved by the State Council. Consequently, the economic responsibility system reform, similar to that implemented in Shandong province and Capital Iron and Steel, was vigorously carried out for state-owned enterprises across the country. This period also witnessed the two-step reform that required state-owned enterprises to pay income taxes instead of turning their profits to the government—often known as the “tax for profit” reform. On February 28, 1983, the State Council approved the interim measures drafted by the Ministry of Finance on how to implement the tax-for-profit reform. The specific measures, becoming effective on January 1, 1983, were as follows: while the original industrial and commercial taxes (calculated and levied on the basis of sales) remained unchanged, a 55% income tax would be levied on medium and large state-owned enterprises, rather than taking their profits. A certain proportion—to be determined by the state—of the after-tax profit would be turned over to the state while the remainder would be retained by the enterprise. For small state-owned enterprises, a progressive tax schedule with eight tax brackets would be implemented, and these enterprises would be responsible for their own profits or losses.

5.1 Explore the Right Direction of the Reform of State-Owned Enterprises: …

121

On September 19, 1984, the State Council approved the report submitted by the Ministry of Finance on how to implement the second step of the tax-for-profit reform for state-owned enterprises. The second step was formally rolled out in September 1984. The main contents were as follows. First, the state government would levy income taxes and adjustment taxes on the income of state-owned enterprises. Enterprises could retain their profits after both taxes were paid. Second, enterprises would be allowed to deduct interest payments on technical loans for tax purposes. Third, the adjustment tax would be determined and set separately for each enterprise. Fourth, the standards for small enterprises would be loosened up. Fifth, those enterprise with operating loss or little profit would be responsible for their own results. Lastly, the source of taxes would be increased. Due to the lack of external system, as well as the limitation of historical conditions, these expedient measures led to 22 consecutive months of declining profit in stateowned enterprises. The tax-for-profit reform did not succeed as hoped, and would soon be replaced by the contractual management responsibility system. The contractual management responsibility system was formally recognized at the Fifth Session of the Sixth National People’s Congress, held in March 1987. The Report on the Work of the Government pointed out: “This year’s reform should focus on improving the enterprise mechanism, and conscientiously implement various forms of contractual management responsibility system in accordance with the principle of separation of ownership and management.” In 1987, the first wave of management contracts emerged in China. By the end of 1987, the practice had reached to 78% of the enterprises under the national budget, and 80% of the large and medium-sized enterprises. In 1990, over 33,000 industrial enterprises under the budget saw their first round of contract expired, accounting for 90% of the total contracted enterprises, only to be followed by the second round.1 These reform measures, from the expansion of business autonomy to the contractual management responsibility regime, were intended to invigorate the moribund state-owned enterprises, to some early success. The contract system, however, was riddled with significant flaws. The one-to-one negotiation of the contract did strengthen the separation of government and enterprise. But this was a one-sided scheme—there was incentive, but no constraint. With this kind of separation of ownership and management, the owner (i.e., the government) was absent, and hence ownership could not constrain management. As a result, the contractors tended to abuse their autonomous power for their own private interests or the interests of a small group. Short-term behaviorism and controlling by insiders were rampant, causing severe consequences. Each round of contract led to a new round of loss of state-owned assets. More often than not, the contractors got rich at the expense of the whole economy. The contractual management responsibility scheme proved to be the wrong way to reform state-owned enterprises. Effective reform must be sought elsewhere. As early as 1980, the economist Jiang Yiwei published his theory of enterprisebased economy. The theory posited that the economic system in the past had been built 1

Zhang and Zheng (2008, pp. 31–34).

122

5 The Innovation and Development of Enterprise Theory

on the basis of taking the whole nation as a single, unified economic organization. The central and local governments, sitting on top of this gargantuan and complex organization, wielded direct control over the numerous branches and subsidiaries across the country. Jiang’s theory of enterprise-based economy was totally different from the traditional state-centered economy. He advocated that each enterprise should be taken as a basic economic unit, and that each enterprise should carry out its own independent operation and independent accounting under the unified leadership and supervision of the state government. As a basic unit of the modern economy and a dynamic organization, the enterprise should have its own independent economic interest, which in turn would promote its growth and development. To this end, the state should adopt economic means and implement economic legislation in the management of enterprises.2 Jiang Yiwei’s theory, quickly recognized by many economists and practitioners, would exert great influences on enterprise reforms in years ahead. In 1987, the National Development and Reform Commission summoned eight renowned research teams to make policy suggestions for the medium-term (1987– 1995) reform plan. The research team of Beijing University and that of the Central Party School both pointed out that the prevailing management contract scheme, because of its various insurmountable defects and contradictions, should not be taken as the target mode of reform of state-owned enterprises. Instead, they recommended joint-stock and modern enterprise as the direction of the reform. The consensus of the research teams was that the goal of the medium-term reform was to establish the leading position of the new socialist commodity economy through the transformation of the old system to a new one. The basic framework of this new economic system was such that the government would regulate the market and the market would guide enterprises. It comprised three interrelated aspects: the marketization of economic operation, the corporatization of enterprises, and the indirection of macrocontrol. Specifically, the corporatization of enterprises was to establish a legal person enterprise system, transforming large and medium-sized state-owned enterprises in competitive industries into joint-stock limited companies or limited liability companies.3 The task force of the Central Party School pointed out, in particular, that the central task of the next round of reform was to establish a modern enterprise system. It recognized the two most salient features associated with the modern enterprise system. One concerned the property system of the corporate legal person, while the other concerned the economic and legal liability relationship among owners, managers, and employees that were interdependent and mutually constrained. This constituted the basis for the decision-making, operation, and supervision of the enterprise. The paragon of such a business organization is the modern enterprise system. The modern enterprise system satisfies both the need of the commodity economy and that of the development of social mass production. The establishment of such a modern enterprise system is also a prerequisite for the in-depth development of China’s economic system reform. The key to establish a modern enterprise system is the large and medium-sized state-owned enterprises. The establishment of a modern 2 3

Jiang (1980). General Planning Department of the National Development and Reform Commission (1988).

5.2 Vigorously Promote the Reform of State-Owned Enterprises …

123

enterprise system must be carried out in a comprehensive way and through stages.4 At the same time, some economists also advocated the joint-stock reform of large and medium-sized state-owned enterprises.5 In sum, since the mid and late 1980s, economists in China have advocated the establishment of a modern enterprise system as the direction of the reform of stateowned enterprises, especially for large and medium-sized ones. They voiced their concerns about the contractual management responsibility scheme, a prevailing practice at that time, pointing out that this scheme, to say the least, should not be taken as the target mode of the reform of state-owned enterprises.

5.2 Vigorously Promote the Reform of State-Owned Enterprises and Improve the Structure of Corporate Governance (1993–2012) The 14th CPC National Congress, held in 1992, established the goal of the socialist market economic reform, and made it clear that the market should play a fundamental role in the allocation of resources under the macro-control of the government. In November 1993, its Third Plenum issued the Decision on Several Issues Concerning the Establishment of a Socialist Market Economic System, proposing, for the first time, that the goal of the state-owned enterprise reform was to establish a modern enterprise system characterized by clear property rights, clear rights and responsibilities, separation of government and enterprise, and scientific management. Prior to the final draft of the decision, the draft team had repeatedly discussed and debated the four features of the modern enterprise system, and got the approval by relevant government officials and experts after several rounds of consultations and discussions. Even judged from today’s standards, the generalization of these four features of the modern enterprise system is rather accurate. Since then, the state-owned enterprise reform in China has entered the stage of system innovations. During this period, some economists strongly advocated that large and medium-sized state-owned enterprises should establish a modern enterprise system to replace the contract scheme.6 Once the goal of the socialist market economic reform was firmly established, an immediate issue was how to integrate state ownership with the market economy in the reform of the state-owned enterprises. How could state-owned enterprises adapt to the development of the socialist market economy? In the traditional state ownership system where there was no separation of government and enterprise, the adaption was rendered impossible. Prior to the reform, state-owned enterprises kept falling in trouble because they were ill-suited for the market economy. 4

General Planning Department of the National Development and Reform Commission (1988, pp. 129–134). 5 Li (1986). 6 Wu et al. (1993).

124

5 The Innovation and Development of Enterprise Theory

In 1997, the report of 15th National Congress of the Communist Party of China urged the country to find a realization form of public ownership that could greatly promote the development of productive forces. The joint stock system is a commonly used capital organization form for modern enterprises around the world. This business form is conducive to the separation of ownership and management and to the improvement of operating efficiency. Here, capitalism can be borrowed to the benefit of socialism. It is meaningless to ask whether the nature of the shareholding system is public or private; it all depends on who holds the controlling shares. With state and collective holding the controlling shares, it is obviously public ownership, and it helps expand the control scope of public capital and enhance the main role of public ownership. The report also proposed that standardized corporate system reform should be carried out in large and medium-sized state-owned enterprises in accordance with the requirements of “clear property rights, clear rights and responsibilities, separation of government and enterprises, and scientific management,” aiming to make the enterprises separate legal entities and competitive players adaptable to the market. Chinese economists, meanwhile, have studied the various forms of realizing public ownership. In the early 1980s, some researchers argued that with the advancement of the reform, public ownership should not be limited to either ownership by the whole people or collective ownership. In fact, many forms of socialist public ownership have emerged. They called for a reexamination of the ownership structure of socialist production based on what actually have happened in the economic life, rather than trying to explain the reality with traditional theory.7 Some economists put forth the notion that in underdeveloped socialist societies, public ownership is a diverse, multi-layered composite structure, which is dominated by the ownership of the whole people, but also comprises collective ownership, joint ownership, and other forms of public ownership. The degree of public ownership goes from high to low in this multi-level, multi-step ownership structure.8 In addition to state ownership and collective ownership, many new forms of public ownership have been proposed and practiced since reform and opening up, including joint-stock cooperation, community ownership, leasing, franchising, local community ownership, joint-stock controlled by public ownership, township ownership, and so on.9 The Fourth Plenum of the 15th CPC Central Committee, held in 1999, made a special decision on the reform and development of state-owned enterprises. The first and only one ever made on this topic by the plenary session of the Party’s Central Committee since reform and opening up, the Decision on Several Issues Concerning the Reform and Development of State-Owned Enterprises offered a more systematic, in-depth and specific exposition on the reform and development of state-owned enterprises that was laid out in the report of the 15th National Congress two years earlier. This decision was of theoretical and practical significance. It discussed issues concerning the strategic adjustment of the layout of the state-owned economy, the promotion of strategic restructuring of state-owned enterprises, and the establishment 7

He (1981). Liu (1986). 9 Wei (1997). 8

5.2 Vigorously Promote the Reform of State-Owned Enterprises …

125

and improvement of the modern enterprise system. It provided new and comprehensive elaborations on how to conduct normal enterprise restructuring in large and medium-sized state-owned enterprises. It emphasized that corporate governance was the core of the enterprise system. The decision pointed out that the company system was an effective organizational form of the modern enterprise system. Corporate governance structure was the core of such a corporate system. In this system, the responsibilities of the shareholder meeting, the board of directors, the supervisory committee, and the management must be clarified, forming a corporate governance structure with coordinated operation and effective checks and balances. The owners shall have the ultimate control over the enterprise. The board of directors shall safeguard the rights and interests of investors and be responsible to the shareholder meeting. The board of directors shall make decisions on the company’s development objectives and major business activities, hire senior managers, and evaluate their performance. The supervisory committee shall play a full supervisory role on the firm’s finances and the behavior of the directors and managers. The director of the Party committee in solely state-owned or state-controlled enterprises may enter the board of directors and the supervisory committee through appropriate legal procedures; and both the board of directors and the supervisory committee shall include employee representatives; the Party members on the board of directors, the supervisory committee, the management team, and the trade union may become members of the firm’s Party committee in accordance with the Party constitution and relevant regulations. The directorship of the Party committee and the chairmanship of the board of directors may be held by one person, but the chairman and the general manager in principle shall not be the same person. The board of directors shall play its role of making unified decisions on major issues, and the supervisory committee shall play its role of conducting effective supervision. The Party organization within the firm shall perform its duties in accordance with the Party constitution. The trade union and the employee representative congress shall perform their duties in accordance with the relevant laws and regulations. Diversified equity ownership is conducive to the formation of a standardized corporate governance structure. Except for a few enterprises that must be monopolized by the state, companies are encouraged to actively seek multiple major investors. In fact, the preliminary draft of the report of the 15th CPC National Congress, held in 1997, included passages on corporate governance structure, but that part was deleted in the final draft due of the lack of consensus. Two years later, corporate governance structure was recognized as the core of the corporate system and written into the decision of the Fourth Plenum of the 15th CPC Central Committee, indicating how rapidly the reform and people’s awareness have progressed. Meanwhile, Chinese economists actively studied the modern enterprise system and its corporate governance structure. Wu et al. (1993) pointed out that the modern company was the result of the gradual development and improvement of the global market economy over the past four hundred years. Funded by numerous investors, this business form breaks up the bond of consanguinity of a family business. The most distinctive feature of the modern enterprise is that it is a separate corporate entity. As such, it operates on the basis of corporate property and enjoys the status

126

5 The Innovation and Development of Enterprise Theory

of a legal person. Shareholders have limited liability in the sense that their liability is limited to their investment in the firm. Another distinctive feature of the modern enterprise is that, rather than being directly operated by its owners, it is managed by professional managers in line with the corporate governance structure. The separation of ownership and management in the modern enterprise makes it more adaptable to large-scale production and large-scale exchange of economic activities. Not surprisingly, it has become the basic organizational form for large and medium-sized enterprises. In order to establish a socialist market economy and revitalize China’s large and medium-sized enterprises, it is therefore necessary to follow the common path of enterprise developments around the world and reorganize large and medium-size state-owned enterprises into modern companies.10 The modern enterprise system as expounded in the decision of the Fourth Plenum of the 15th CPC Central Committee has unique Chinese characteristics in that the corporate governance structure comprises three new boards, as well as three old institutions. The former includes the board of shareholders, the board of directors, and the board of supervisors, while the latter includes the Party committee, the trade union, and the employee representative congress. The board of directors plays a particularly important role in corporate governance. The Party committee in a stateowned holding company plays a core leading role. Since state-owned enterprises are prone to “insider control,” it is important to improve and enhance the board of directors. The directors are elected by the board of shareholders or by the general meeting of shareholders. It is generally required that external directors should account for the majority and the board should include some independent directors. Entrusted by and responsible to the shareholder meeting, the board of directors has the ultimate authority on the company’s development strategies and major business activities, as well as on the hiring of senior managers. The relationships between the shareholder meeting, the board of directors, the supervisory committee, and the management are defined in the Company Law of the People’s Republic of China (hereinafter referred to as the company law). Years of implementing the contractual management responsibility system have made the state-owned enterprises ill-suited for the market economy. Moreover, the contract scheme has caused losses of state-owned assets. Consequently, many stateowned enterprises, including large and medium-sized ones, fell into deep financial trouble. In 1997, the Party and the state government put forward the task of helping these large and medium-sized state-owned enterprises out of their financial woes. The goal was to help most of the money losing enterprises to turn around in the next three years starting from 1998, and establish a modern enterprise system for most of the large and medium-sized state-owned backbone enterprises by the end of the twentieth century. By the end of 2000, this goal had been basically achieved. At the end of 1997, there were a total of 16,874 state-owned and state-controlled large and medium-sized industrial enterprises, of which 6599, or 39.1%, had a loss. By 2000, only 1800 of them experienced a loss, a drop of nearly 75% from the 1997 level. At the same time, the modern enterprise pilot program was carried out aggressively, and 10

Wu et al. (1993, pp. 208–209).

5.2 Vigorously Promote the Reform of State-Owned Enterprises …

127

great efforts were made to make them more adaptable to the development of socialist market economy. Within three years, large and medium-sized state-owned industrial enterprises have dug themselves out of their financial woes. They got rid of more than 150 billion yuan of bad debt reserves for banks, and 20 billion yuan of discount interests for technological transformation. A total of 580 enterprises implemented debt-for-equity swaps involving a total amount of 405 billion yuan, and ceased paying interests by April 1, 2000, saving interest expenses of 19.5 billion yuan in the year.11 It should also be noted that state-owned, large and medium-sized industrial enterprises accounted for only a small portion of all state-owned enterprises. According to statistics from the Ministry of Finance, there were 238,000 state-owned enterprises (excluding state-owned financial enterprises) in China at the end of 1998. Among them, small enterprises were hit particularly hard, losing money as a whole year after year. According to statistics from relevant departments, at the beginning of 2000, there were more than 50,000 state-owned small-scale industrial enterprises in China, employing about 14 million workers. These small enterprises had lost money consecutively over the past six years, with a total loss of 30 billion yuan. In the field of circulation, state-owned material enterprises lost money for seven consecutive years, commercial enterprises lost money for five consecutive years, grain enterprises owed hundreds of billions of yuan, and foreign-trade enterprises did not fared much better. Faced with this daunting situation, the report of the 15th CPC National Congress, held in 1997, proposed that small state-owned enterprises should use restructuring, liaison, merger, leasing, contracting, joint-stock cooperation, and even sales to speed up the pace of opening up and invigorate themselves. Across the country, in accordance with the policy of “grasping the big enterprises and letting go of small ones,” a slew of measures had been adopted to liberalize and invigorate state-owned enterprises of small size. They include the Zhucheng model of Shandong province (stock cooperation system), the Shunde model of Guangdong province (asset sales), the Changsha model of Hunan province (employee ownership of property rights), the Yibin model of Sichuan province (transfer of net assets), and so on.12 The most difficult task in the reform of small and medium-sized state-owned enterprises has been the replacement of about 30 million workers who were laid off in the reform. In 1999, total employment of state-owned enterprises was 64 million. After more than ten years of reform, by 2010, the figure had dropped to 35.99 million. In 1997, the Central Committee of the Party and the State Council put forward a policy aimed to encourage mergers, standardize the bankruptcy procedure, properly distribute the laid-off workers, enhance efficiency through layoffs, and implement reemployment schemes. Over the next five years, the Party and the state government adopted a series of policy measures to properly redistribute and settle the surplus workers. By 2002, a total of 27.5 million laid-off workers had been diverted. At that time, China had not yet established a social security system. How to arrange these laid-off and diverted workers became a major issue affecting the life and social stability of nearly 30 million people and their families. The guiding principle was that 11 12

See Economic Daily, June 19, 2001. Shao (Editor-in-Chief) (2014).

128

5 The Innovation and Development of Enterprise Theory

enterprises absorbed first and state assistance came second, all the while protecting the basic livelihoods of those affected. Based on this principle, local governments actively explored the establishment of reemployment centers for the laid-off workers. Specifically, the laid-off workers did not directly enter the society, but instead entered the reemployment center. The center would provide training for the laid-off workers, pay them a modest salary to cover their living expenses, handle various social insurances, and recommend employment according to supply and demand in the labor market. It should be noted that not all of the 30 million laid-off workers joined the reemployment centers. Some chose to accept a one-off buyout of their working years for a very limited sum—as low as 10,000 yuan in some cases. Having been pushed to the boundary of the society and struggled financially, some of them had to turn to their former employers and local governments for help. After three years of arduous efforts during which small and medium-sized stateowned enterprises were liberalized and invigorated and a total of 30 million workers were laid off, state-owned enterprises, especially large and medium-sized ones, have reestablished themselves to become more adaptable to the socialist market economy, especially through the implementation of the joint-stock system. Statistics show that enterprises with diverse ownership performed better than solely state-owned enterprises. It is estimated that, in 2004, the profit margin of sales for solely stateowned companies was 6.12%, compared to 6.67% for limited liability companies and 9.38% for joint stock companies. In 2008, among the industrial enterprises with a certain scale, the profit margin of net assets was 11.71% for state-owned enterprises, 25.12% for private enterprises, and 16.72% for foreign-funded enterprises.13 The results show that the joint-stock system with diverse investors is rather effective at improving efficiency. In 1994, the State Council selected 100 state-owned enterprises to carry out a pilot project aimed to build a modern enterprise system in China. Subsequently, local governments and departments selected their own batch of enterprises to carry out similar pilot projects. According to statistics, by 1998, 2714 enterprises across the country had been put into such an experiment. After four years of efforts, the trial scheme basically had reached its expected goal. The pilot project for the one hundred selected enterprises ended in 1997 according to plan, and no new pilot project was to be introduced. A normal process of restructuring followed suit—that is, restructuring would take place once an enterprise was ready. Of the 100 enterprises selected by the State Council, 74 were originally independent factory enterprises, and 26 were administrative headquarters or industry authorities. Eventually, 93 of them were restructured into corporate enterprises, of which 70 were transformed from a factory system to solely state-owned holding companies. After the ownership structure of state-owned assets was clearly identified and the parent-subsidiary relationship within the group clarified, the production units or subsidiaries were invested by diverse investors. At the same time, among the 2714 enterprises selected 13

Zhang (2011).

5.3 Deepen the Reform of State-Owned Enterprises Driven by the Reform …

129

Table 5.1 Economic indicators of state-owned enterprises in selected years 1998

2003

2012

Number of state-owned enterprises (10,000)

23.8

14.6

14.5

Total assets (yuan trillions)

14.87

19.78

85

10.73

42.38

3202

16,100

Taxes (yuan100 billions)

8362

33,500

Number of central enterprises

196

116

Operating income (yuan trillions) Total profit (yuan 100 billions)

213.7

Total profit from central enterprises (100 billion yuan) Taxes from central enterprises (100 billion yuan) Note The total profits and taxes of central enterprises in 2012 are the figures of 2011 Source Shao (Editor-in-Chief) (2014, p. 375); Learning Guidance and 100 Questions on the Decision of the Third Plenum of the 18th CPC Central Committee, Party Building Readings Press and The Learning Press, 2013; Tui (Editor-in-Chief) (2014)

by local governments and departments, 2066 were restructured into limited liability companies (712), joint stock companies (700), and solely state-owned companies (654).14 After two decades of efforts, by the end of 2012, 90% of the state-owned enterprises had completed their restructuring reform. Central enterprises controlling 70% of the net assets owned by all central enterprises were listed in the stock market. Fiftytwo percent of the central enterprises and their subsidiaries became mixed ownership enterprises through the introduction of non-public capital. The reform has constantly enhanced the vitality and competitiveness of stateowned enterprises. With improved efficiency, the state-owned economy has developed rapidly. On Fortune’s 2011 top 500 largest firms around the world, 70 hailed from mainland China, 64 of which were state-owned enterprises or state-owned holding enterprises. Table 5.1 presents some economic indicators for the development of state-owned enterprises in selected years.

5.3 Deepen the Reform of State-Owned Enterprises Driven by the Reform of State-Owned Assets (2013 to Present) In 2013, the Third Plenum of the 18th CPC Central Committee passed the Decision on Several Major Issues Concerning Comprehensively Deepening Reform. The decision proposed to improve the management system of state-owned assets, strengthen state-owned assets oversight with capital management at the core, reform the authorized operation mechanism for state-owned capital, establish a number of

14

Shao (Editor-in-Chief) (2014, p. 375).

130

5 The Innovation and Development of Enterprise Theory

state-owned capital operating companies, and support qualified state-owned enterprises to be reorganized into state-owned capital investment companies. Additionally, state-owned capital investment operations must serve the strategic goals of the state, invest more in key industries and areas that are vital to national security and are the lifeblood of the economy, focusing on offering public services, developing important and forward-looking strategic industries, protecting the ecological environment, supporting scientific and technological progress, and guaranteeing national security. On September 24, 2015, the Central Committee of the Party and the State Council put forth their guiding opinions on how to deepen the reform of state-owned enterprises, offering further explanations on the transition to “state-owned assets oversight with capital management at the core.” They called on the management and supervisory agencies of state assets to accurately grasp the position of performing their fiduciary responsibility in accordance with law, scientifically clarify the supervisory boundary, establish the list of supervision powers and responsibilities, and transform themselves from managing enterprises to managing capital as the main focus of their work. Within the supervisory boundary, they must be responsible and use scientific approach, with a focus on the distribution of state-owned capital, the normalization of capital operation, the rate of return on capital, and capital preservation. For issues outside their supervisory boundary, they should not get involved directly, but rather delegate authority to relevant enterprises and other departments according to law. They should let the enterprises handle issues regarding their subsidiaries and assign the functions of public management to the relevant government departments and institutions. Moreover, the state-assets management and supervisory agencies at all levels should pivot from focused on the “management of enterprises” to focused on the “management of capital.” Towards this end, the management rights that belong to the enterprises must be turned over to them. This fundamental transformation involves institutional organizations, personnel, streamlining administration and delegating power, and the adjustments of interest. It is also a result of theoretical innovation. It is not only the fundamental policy to realize the separation of state-owned enterprises from the government, the separation of capital from the government, and the separation of ownership and management. It also helps state-owned enterprises to strengthen their dominant position in the market, energize their vitality and competitiveness, and promote the optimal allocation of state-owned capital so that they can focus on the key areas of the national economy. Last but not the least, it helps prevent the loss of state-owned assets and hence safeguard their security. In line with the spirit of the CPC Central Committee, starting from 2014 the State-Owned Assets Supervision and Administration Commission (SASAC) of the State Council selected eight central enterprises (including Shenhua Group and China Development Investment Group) in a pilot scheme to establish state-owned capital investment companies. It selected China Chengtong Holding Group and China Guoxin Holding, two central enterprises, in another pilot scheme to establish stateowned capital operation companies. By the end of 2017, local state-owned assets supervisory authorities had established 89 state-owned capital investment companies and operation companies. In March 2018, Xiao Yaqing, the director of the SASAC,

5.3 Deepen the Reform of State-Owned Enterprises Driven by the Reform …

131

summarizing the two pilot schemes, made the following comments: “Positive results have been achieved for the two new types of companies. On the basis of the initial success, the pilot projects will be expanded in the following year. More work and efforts are needed to promote comprehensive reform and improve the operation efficiency of state-owned capital. It is important to continue to innovate the operation mode of state-owned capital and promote the normal operation and development of all kinds of state-owned capital.”15 The gradual establishment of state-owned capital investment companies and operation companies has boosted the liquidity of state-owned assets, and allowed the supervisory authorities to focus on optimizing the allocation of state-owned capital and improving its operation efficiency. In particular, the newly created companies have become the intermediaries that shield state-owned enterprises from the supervisory authorities. The supervisory authorities are no longer the boss or mother-inlaw, and the state-owned enterprises no longer their underlings that ask for their approval on almost everything. This proves to be an effective mechanism to separate the government from state-owned enterprises and from state-owned capital. Now, the board of directors has the ultimate legal authority on the major issues of an enterprise. China’s company law entrusts 11 powers on the board of directors of a joint stock limited company or a limited liability company. These powers include the company’s business plan and investment plan; its annual financial budget; profit distribution and loss recovery; increase or decrease of registered capital and the issuance of corporate bonds; merger, division, dissolution or change of the corporate form; establishment of the internal management organization; appointment or dismissal of the CEO and other top management and their compensation packages. Therefore, a key area of the state-owned enterprise reform in the years ahead is to improve the board of directors and make sure the board executes its authority entrusted upon them by the company law more effectively, so as to improve the corporate governance structure and the modern enterprise system. On June 26, 2017, in its 36th meeting, the leading group of the central government for comprehensively deepening the reform, a central government commission, passed an important document titled Implementation Measures for the Restructuring of Central Enterprises. The meeting emphasized that the corporate form is an effective organizational form of the modern enterprise system; it is also a prerequisite for the establishment of the modern state-owned enterprise system with Chinese characteristics. The meeting required that the corporate reform of the state-owned enterprises should be basically completed by the end of 2017. To this end, in July 2017, the State Council issued its own implementation plan for the company reform of the central enterprises. It required that, by the end of 2017, all central enterprises, except those in the financial and cultural sectors, that are registered in accordance with the 1988 Law of the People’s Republic of China on Industrial Enterprises Owned by the Whole People and supervised by the SASAC, must be restructured into a limited liability company or a joint stock limited company in accordance with the company law. The aim was to accelerate the formation of an effective corporate 15

See Economic References Daily, March 7, 2018.

132

5 The Innovation and Development of Enterprise Theory

governance structure and a flexible and efficient market-oriented operation mechanism. This round of restructuring reform involved 69 central holding groups. At that time, there were a total of 101 central holding groups. The total assets of the 69 restructured holding groups amounted to nearly 8 trillion yuan. This was on top of the 5.66 trillion yuan assets owned by their more than 3200 subsidiaries.16 The restructuring was implemented in line with the transformation of the state-owned assets management authorities. Only after the central enterprises are restructured can the authorities realize the transformation from directly managing enterprises to focusing on capital management. Central enterprises can be divided into three broad categories: public policy oriented enterprises, enterprises in a particular field of the national economy, and enterprises in the general business. In 2015, for example, among the 113 central enterprises, five were public policy oriented enterprises: China Grain Storage Corporation, China Cotton Storage Corporation, Huafu Group, State Grid, and China Southern Power Grid. Additionally, 32 belonged to a particular industry or sector of the national economy: 11 companies (ten largest military enterprises and China Nanfei) in the national defense and military industry; three companies in the oil industry; National Nuclear Power, China Guangdong Nuclear Power, and other six major enterprise in the power industry; and China Salt, China Guoxin, COSCO Group, China Shipping, three major telecommunication companies, and three major airlines. The rest (or 76) were in the general commercial business, such as general industrial manufacturing, comprehensive trade services, construction engineering, scientific research, or small and medium-sized enterprises with assets of less than 50 billion yuan. For those enterprises that are deemed as operating in the general business, the strategic goal is to get rid of their administrative monopoly business, enhance their vitality and efficiency through market-oriented means, and establish a flexible exit mechanism so that they can gradually dispose part of state-owned capital and invest it in areas that are more aligned with public services and the national strategic goals. For those state-owned enterprises that are categorized as providing public services, the strategic goal is for them to withdraw from for-profit business fields and instead focus on the realization of the public policy goals. On this premise, state-owned capital should increase investment in such enterprises. For those enterprises that specialize in a particular field of the national economy, the overall strategic goal of the restructuring reform is to rely on the platform of state-owned capital investment and operation companies to actively retreat from the fields where competition has taken hold and their strategic importance has diminished, so that they play a better role in providing public services, in ensuring national security, and in emerging industries that meet the requirements of the national strategy.17 According to some scholars, the success of state-owned enterprises lies in identifying and eliminating monopoly. Monopoly are of two types: economic monopoly and non-economic monopoly. Economic monopoly includes natural monopoly and innovation monopoly, where firms have the monopoly advantage because they have 16 17

See Economic References Daily, July 27, 2017. Huang et al. (2015, pp. 9–11).

5.4 Make Strategic Adjustment to the Layout and Structure …

133

the lowest cost. In non-economic monopoly, market power or control is obtained through non-market means, such as administrative monopoly, bribery, collusion, or threat. Non-economic monopoly protected by entry barriers leads to not only low enterprise efficiency, but also a net social efficiency loss. The higher the barriers to entry, the more efficiency loss they will cause. The only way to liberate the economy to achieve its potential is to reform the old system by removing the monopoly forces that stunt economic development.18

5.4 Make Strategic Adjustment to the Layout and Structure of the State-Owned Economy by Grasping Large-Scale Enterprises and Invigorating Small and Medium-Sized Ones In the reform of state-owned enterprises, it is of great importance to make strategic adjustments to the layout and structure of the state-owned economy. The government should grasp large-scale enterprises while at the same time opening up and invigorating small and medium-sized ones. In 1997, the report of the 15th CPC National Congress proposed to make strategic adjustment to the layout of the stateowned economy. According to the report, the state-owned economy must command a dominant position in important industries and key fields that are related to the lifeline of the national economy. In other areas, the overall quality of state-owned assets must be strengthened and improved through asset restructuring and structural adjustments. As long as public ownership maintains its dominant position, the state controls the lifeline of the national economy, and the control and competitiveness of the state-owned economy are enhanced, even if the share of the state-owned sector in the overall economy falls, it will not affect the socialist nature of the economy. The reform of state-owned enterprises must be combined with restructuring, transformation, and strengthening of management. The focus of the work should be on the whole state-owned economy. In carrying out the strategic restructuring, we should hold tight big state-owned enterprises and open up small ones. Through the link of capital and the market, we should establish large, competitive enterprise groups that operate across regions, across industries, across ownership, and across nations. At the same time, we should speed up the pace of opening up and invigorating small state-owned enterprises through restructuring, horizontal coalition, merger, leasing, management contract, joint-stock cooperation, and divestment. In 1999, the Fourth Plenum of the 15th CPC Central Committee put forth the Decision on Several Major Issues Concerning the Reform and Development of StateOwned Enterprises, further pointing out that strategic adjustments to the layout of the state-owned economy should be combined with the optimization and upgrading of

18

Chang et al. (2018, pp. 336, 342, and 343).

134

5 The Innovation and Development of Enterprise Theory

the industrial structure and the adjustment and improvement of the ownership structure. The decision stressed that we must adhere to what must be upheld. However, we should retreat from what can be done through the market. In some cases, inaction is better than action. At that time, the distribution of state-owned economy was over stretched, the overall quality not high, and the allocation of resources not optimal. These issues must be resolved. The key industries and fields over which the state-owned economy maintains its control mainly include those involving national security, natural monopoly, essential public goods and services, and important backbones in pillar industries and high-tech industries. In other industries and fields, efforts must be made to strengthen and improve the overall quality of the stateowned economy through asset restructuring and structural adjustment. The decision stressed the importance of enlivening small and medium-sized state-owned enterprises. This represented a further development of the policy of “focusing on the big and letting go of the small,” laid out in the report of the 15th CPC National Congress. Meanwhile, the academic community carried out extensive research on this issue. Some scholars pointed out squarely that some people still held on to the old notion that the state-owned economy is the advanced form of public ownership, and hence it should be the goal of socialism. These people failed to understand the significance of the decision made at the 15th CPC National Congress to adjust and improve the ownership structure. After 20 years of reform and opening up, the non-stateowned economy had developed so much that it was capable of replacing or partially replacing the role of the state-owned economy in many industries and fields. Under this backdrop, state-owned assets should withdraw from some industries and fields in a planned manner, and switch to important industries and key fields related to the lifeline of the national economy. This would form a mixed structure of mutual replacement and complementarity with private capital, further enhancing the overall national strength.19 Prior to reform and opening up, China’s urban areas were dominated and controlled by tens of thousands of state-owned enterprises. In the wake of reform and opening up, market competition began to emerge, thanks to the introduction of the market mechanism to the economic activities. Many state-owned enterprises, especially small and medium-sized ones, had inherent institutional defects—such as bureaucracy, overstaffed and redundant personnel, lack of innovation, lack of incentives, and years of producing the same products. They were ill prepared for the economic reform. For want of market competitiveness, they began to lose money or even became insolvent. Things were getting worse in the mid-1990s, as the buyer’s market was becoming more prominent in the whole market pattern. Many local governments began to regard small state-owned enterprises in their locality as a burden. Starting from 1995, some of the local governments launched various radical schemes to transform these small state-owned enterprises. In Zhucheng county, Shandong province, for example, some enterprises were converted to joint-stock cooperative companies. At the time, Chen Guang, the Party head of the city, was not treated well by the public. The government of Shunde county, Guangdong province, was 19

Chen et al. (1999).

5.4 Make Strategic Adjustment to the Layout and Structure …

135

also among the earliest local governments to have divested some small state-owned enterprises. In fact, this situation was not bad. A few years later, when Chen Guang was promoted to be the party chief of Heze, also of Shandong province, he was faced with a more daunting task: the small state-owned enterprises were so insolvent that nobody wanted them. The government had to hand them out. Mr. Chen Guang got a bad rap for this and was dubbed Mr. Selling Everything in jest. It is under this backdrop that the central government first put forth the policy of “focusing on the large and opening up the small” and then the policy of “focusing on the large and opening up the small and medium-sized” in adjusting the layout of the state-owned economy. The main focus was on large and medium-sized stateowned enterprises, especially the large backbone enterprises. In 1997, the central government decided to help state-owned enterprises to turn around within three years. The target here was again large and medium-sized state-owned enterprises, mainly industrial enterprises. At the same time, the government made it clear that in the drive to turn around the whole national economy we should not expect to turn around each and every state-owned enterprise, because doing so was almost impossible. The decision by the Fourth Plenum of the 15th CPC Central Committee in 1999 also made it clear that the state-owned economy should maintain control over four major industries and fields that were related to the lifeline of the national economy. As long as the state-owned economy firmly controlled these industries and fields, it would command a strong power and effectively play a leading role in the national economy. In the following years, two new major developments were rolled out to improve the state-owned economy as a whole by focusing on large state-owned enterprises. One was to focus on the central enterprises. The other, as proposed in the report of the 19th CPC National Congress, was to make state-owned capital stronger, better, and bigger. In 2003, in order to strengthen the supervision of state-owned assets, the central government set up the State-Owned Assets Supervision and Administration Commission (SASAC). Similar agencies were established at the provincial and municipal levels. At the time, 196 central enterprises were under the direct supervision of the SASAC. These central enterprises were the largest and strongest among all stateowned enterprises. In 2003, they accounted for more than half (56.7%) of the total state-owned industrial and commercial assets. It was estimated that 38 (or 20%) of the 190 central enterprises operated in key industries and areas, including national defense and military, natural monopoly, essential public goods and services, strategic resources and other industries directly related to national security and the lifeline of the national economy, controlling 72% of the total assets of all central enterprises. The second category included 84 (or 44%) backbone enterprises and scientific and technological enterprises in the pillar industries of the national economy, such as metallurgy, machinery, electronics, chemical industry, and construction, and they accounted for 16% of the total central enterprise assets. Among them, 16 major enterprises accounted for 10% of the total central enterprise assets. The third category comprised 68 enterprises in other industries, and they accounted for 12% of

136

5 The Innovation and Development of Enterprise Theory

the combined assets of all central enterprises.20 When the SASAC was established in 2003, the central enterprises had a total assets worth 6.9 trillion yuan. By the end of 2017, the figure went up to 54.5 trillion yuan. In 2016, 83 state-owned enterprises from China, most of which were central enterprises, were listed on the Fortune 500. In 2016, one quarter of the total R&D expenditure in the country was made by central enterprises. During the 2013–2016 period, they won one third (or 335) of the national science and technology awards.21 Therefore, the key to a healthy stateowned economy as a whole was to speed up the reform and development of the central enterprises. The Ninth CPC National Congress proposed to promote state-owned capital and make it stronger, better, and bigger. This objective is more to the point than the overall improvement of the state-owned economy. Some state-owned enterprises or institutions are in the business of providing public welfare. As such, it may not be appropriate to require them to be stronger, better, and bigger. An important indication of making state-owned capital stronger, better, and bigger is to have more and more world-class enterprises with global competitiveness. Moreover, the focus of stateowned capital investment proposed by the Third Plenum of the 18th CPC Central Committee, held in 2013, is more accurate and comprehensive than the four industries and fields proposed by the Fourth Plenum of the 15th CPC Central Committee. The former pointed out that the investment and operation of state-owned capital should serve the national strategic objectives, invest more in the important industries and key areas related to national security and the lifeline of national economy, focus on providing public services, developing important forward-looking strategic industries, protecting the ecological environment, supporting scientific and technological progress, and safeguarding national security. While the Fourth Plenum of the 15th CPC Central Committee required that the state maintain control of the natural monopoly industries, the Third Plenum of the 18th CPC Central Committee proposed that the natural monopoly industries in which the state-owned capital continues to maintain control should be reformed by separating government from enterprise and capital and through franchising and government supervision. Additionally, the network operation should be separated according to the characteristics of different industries, the competitive business should be liberalized, and the marketization of public resource allocation should be promoted. Therefore, state-owned capital should control the natural monopoly business of the monopoly industries, but open up their competitive business. Moreover, the Third Plenum of the 18th CPC Central Committee added the protection of the ecological environment as another focal point of state-owned capital investment. Since 1997, remarkable results have been achieved in adjusting the layout and structure of the state-owned economy. First of all, the number of state-owned industrial and commercial enterprises has gradually declined. In 1998, the total number of state-owned enterprises in China was 238,000. It dropped to 145,000 by 2012. The number of central enterprises was reduced from 196 in 2003 to less than 100 20 21

Shao (2014, p. 474). People’s Daily, July 28, 2017.

5.4 Make Strategic Adjustment to the Layout and Structure …

137

in 2018. Secondly, the value of state-owned assets has increased substantially, from 13.5 trillion yuan in 1998 to 144.1 trillion yuan by year-end 2016. Thirdly, stateowned capital has become more concentrated in important industries and key fields, forward-looking strategic industries, and advantageous enterprises. In 2017, stateowned assets accounted for more than 90% in the fields of military industry, telecommunications, civil aviation, and energy. In addition, with the company and shareholding system reforms, more and more state-owned enterprises have been restructured. By the end of 2016, 92% of the central enterprises and their subsidiaries at all levels, as well as 90% of local enterprises under the supervision and administration of provincial state-owned assets authorities, had completed restructuring.22 In the second half of 2017, the remaining 69 central enterprises were restructured in accordance with the company system. It should be noted that the task of strategically adjusting the layout and structure of the state-owned economy had not been completed as of 2017. The report of the 19th CPC National Congress pointed out that we should accelerate the optimization of the layout, structural adjustment, and strategic restructuring of the state-owned economy. The main problem was that there were still too many state-owned enterprises, and many of them were in the generally competitive industries, especially in the crowded real estate industry. In short, state-owned capital has not been well concentrated in the five aspects, as required by the decision of the Third Plenum of the 18th CPC Central Committee. The reform in monopoly industries has lagged behind. Many non-natural monopoly links are reluctant to open up to competition, hindering the optimal allocation of resources. The slow progress of the reform of state-owned capital has negatively affected the deepening of the reform of stateowned enterprises, including the optimization of the layout and structure of the state-owned economy. For state-owned enterprises to become truly market forces with the separation of government from enterprise and the separation of government from capital, the reform need to be further deepened. In other words, the reform of state-owned economy and state-owned enterprises depends on the further promotion of the reform of state-owned capital. Some experts have suggested that we should expedite the clean-up of the socalled zombie enterprises and promote the distribution and structural adjustment of the state-owned economy in different categories. Cleaning up the zombie enterprises will serve as a breakthrough and open the door for bankruptcy restructuring, merger and acquisition, debt for equity swap, and mixed ownership reform. It will also effectively reduce the leverage ratio of state-owned enterprises and accelerate the layout and structural adjustment of the state-owned economy. In industries with severe overcapacity such as coal, steel, building materials, and raw materials, we should speed up the demise of the zombie enterprises resolutely. In competitive fields such as commerce, logistics, services, foreign trade, and manufacturing, except for a few state-owned enterprises that have already become stronger, better and bigger, they should gradually adjust and withdraw. For those enterprises that are currently profitable, but are not in line with the overall development strategy of the national 22

See People’s Daily, July 28, 2017.

138

5 The Innovation and Development of Enterprise Theory

economy or with the long-term development direction of state-owned enterprises, they should also gradually exit. Small state-owned enterprises in the financial services industry, which is perhaps already in a bubble and prone to systematic risk, should also get out because they have large operating risk, lack of internal control mechanism, and lack of sufficient risk-bearing capability.23

5.5 Reform the Management System of State-Owned Assets and Truly Realize the Separation of Government from Enterprises and from Capital China has gargantuan amounts of state-owned assets. After reform and opening up, with the rapid development of the economy, state-owned assets in terms of both total assets and net assets have grown rapidly. In order to make better use of these assets, which are created by the working people, it is necessary to reform the management system so that is suitable for the socialist market economy. In 1998, the State Council set up the State Administration Bureau of State-Owned Assets. Local governments in Shanghai, Shenzhen, Wuhan, Qingdao and other places followed suit by establishing their own, local-level supervision and management agencies of state-owned assets. As early as 1994, the State Council put forward the state holding company pilot scheme for three national industrial groups. One of them was Sinopec, an oil giant. Starting from 1998, 44 national industrial groups in the petrochemical, military, and electric power industries were selected to carry out such a pilot. In 1998, the State Council decided to send special inspectors to large state-owned enterprises. Two years later, it went one step further by sending a board of supervisors to key state-owned enterprises.24 In the 1980s and 1990s, the deepening of reform laid bare two major problems in the management of state-owned assets. The first was that it involved multiple government departments and agencies—a phenomenon known as “nine dragons co-managing water.” When positive results arose, they would all rush to claim their share of contributions; but when bad results happened, they kicked the can down the road and none wanted to be responsible. The second was the lack of proper governance, which led to the “insider control problem” and caused substantial loss of state-owned assets. In response, the 16th CPC National Congress, held in 2002, put forth the principle for the state-owned assets management system reform. It was to establish a management system whereby the central and local governments would perform their fiduciary duties on behalf of the whole nation, enjoy the rights and interests but also bear the obligations and responsibilities, and combine the management of assets with the management of business affairs. Since then, the reform of the state-owned assets management system has accelerated and made great progress. 23 24

Peng (Editor-in-Chief) (2018). Office of the Financial and Economic Committee of the National People’s Congress (2007).

5.5 Reform the Management System of State-Owned Assets and Truly …

139

New institutions have been established. In 2003, the State-Owned Assets Supervision and Administration Commission (SASAC) was set up to replace the State Administration Bureau of State-Owned Assets. By June 2004, all 31 provinces, autonomous regions and municipalities, as well as the Production and Construction Corps of Xinjiang, had all established their local SASACs. Local governments at lower levels also established state-owned assets authorities. At the same time, interim regulations on the supervision and administration of state-owned assets and corresponding regulations were formulated and issued. The draft of the law on state-owned assets, 14 years in the making, was put on the agenda of the Standing Committee of the National People’s Congress, held in December 2007. On October 28, 2008, the Standing Committee of the National People’s Congress passed the Law of the People’s Republic of China on Assets of State-Owned Enterprises, which was officially promulgated and implemented on May 1, 2009. Solid progress has been made. The total enterprise assets under the state-owned assets supervision and administration system increased almost ten folds, from 14.87 trillion yuan in 1998 to 144.1 trillion yuan at year-end 2016. In 2016, stateowned enterprises contributed one third of total national tax revenues, and oneseventh of China’s GDP. The total assets held central enterprises alone reached 50.5 trillion yuan, more than six times greater than the figure in 2003.25 In 2016, 83 state-owned enterprises from China were on Fortune Magazine’s Global 500 list, compared to only three in 1998. These results clearly indicate that the competitiveness of China’s state-owned enterprises has greatly improved. In 2003, the Third Plenum of the 16th CPC Central Committee put forward the task of establishing the budgeting system for the operation of state-owned capital. In 2007, the Party’s 17th National Congress further proposed to establish the budgeting system for the operation of state-owned capital operation. The latter is a major policy measure in deepening the reform of the management of state-owned assets. Starting from 1994, state-owned enterprises were allowed to retain all their net profits. At that time, though, they were not very profitable. After years of fast growth, however, especially in the twenty-first century, their profits have increased significantly, reaching 1.62 trillion yuan in 2007, of which close to 1 trillion yuan were made by central enterprises. Under this circumstance, it was no longer appropriate for the state-owned enterprises to keep all their profits. The establishment of the budgeting system for the operation of state-owned capital was put on the agenda. State-owned enterprises were to submit to the government a certain proportion of their profits, to be used to pay for the cost that incurred in the process of reorganization, merger and acquisition, and bankruptcy of state-owned enterprises, and to take care of retired employees such as their wages and benefits in arrears. At the end of 2007, with the approval of the State Council, the Ministry of Finance and the SASAC issued the administrative measures for the collection of capital gains from central enterprises, stipulating the proportion of profits that would be submitted by central enterprises to the government. The proportion differed across three broad categories of industries. The first category

25

See People’s Daily, July 28, 2017.

140

5 The Innovation and Development of Enterprise Theory

covered enterprises in resource industries such as tobacco, petroleum and petrochemical, electric power, telecommunications, and coal. These enterprises would turn over 10% of their profits to the government. The second group included enterprises in generally competitive industries such as steel, transportation, electronics, trade, and construction, and their proportion was set at 5%. The third comprised the military enterprises and the scientific research institutes that have been restructured, and their proportion was to be determined in three years.26 The management system of state-owned assets established in 2003 was meant to supervise and manage capital, personnel, and business affairs. Ten years on, it had become increasingly clear that the SASACs at all levels were not only the superiors but also the mothers-in-law of the enterprises they supervised. Many of the things that should be decided by the board of directors were instead turned over to the SASAC for approval. Corporate property rights were not duly respected. Many boards of directors did not function properly. Government and enterprise were not properly separated, and neither were government and capital. This had severely hindered the vitality and creativity of enterprises. Consequently, there was an urgent need for deepening the reform of state-owned assets. In 2013, the Third Plenum of the CPC 18th Central Committee decided to reshape the state-owned assets management system, strengthen oversight with capital management at the core, and reform the authorized operation mechanism for stateowned capital. It also decided to establish state-owned capital operating companies, and support qualified state-owned enterprises to reorganize themselves into stateowned capital investment companies. In addition, the plenum decided to transfer part of the state-owned capital to the social security funds, improve the budgeting system for the operation of state-owned capital, and gradually increase the proportion of capital gains from these assets to be turned over to public finances to 30% by 2020, to be used to ensure and improve people’s livelihoods. The decision has three important implications. Firstly, the responsibilities of the SASAC must be changed significantly, and their focus should be on the management of capital, rather than on the management of enterprises as in the past. Stateowned capital investment and operation companies would be established. They would operate between the SASAC and state-owned enterprises, thus converting the twotier structure to a three-tier structure. The newly established state-owned capital investment and operation companies would become the true boss of the state-owned enterprises. However, they would only perform the duties as the boss, not as the mother-in-law. Therefore, it was urgent to set up state-owned capital investment and operation companies as soon as possible, so that they could perform the fiduciary responsibilities on behalf of the state, while state-owned enterprises would operate as independent and separate legal entities. In 2014, the SASAC designated eight central enterprises to carry out the pilot for the establishment of state-owned capital investment companies. At the same time, it designated two central enterprises to carry out the pilot for the establishment of state-owned capital operation companies. Both pilot reforms led to satisfying results. First, the transformation to state-owned capital 26

See Securities Times, December 12, 2007.

5.5 Reform the Management System of State-Owned Assets and Truly …

141

investment and operation companies has been basically completed. According to the positioning of the state-owned capital investment and operation companies, stateowned enterprises have carried out numerous internal restructurings to straighten out the functional departments in the headquarters, consolidate business sectors, and authorize and decentralize their subsidiary enterprises, creating a novel management system. Second, the investment and operation companies have been given a full role to play as a platform. Built around solid and advantageous industries, the investment companies have actively promoted industrial restructuring and integration, setting good examples for other industries and for the supply-side structural reforms. Meanwhile, the operation companies have explored the market-oriented operation of stateowned capital, and supported structural adjustments, innovative development, quality improvement and efficiency enhancement of central enterprises. Third, they have actively explored ways to reform the internal control mechanism. Many enterprises have attempted comprehensive reforms to enhance the board of directors, implement the professional management system, reform the compensation structure, and introduce mixed ownership. These measures are intended to accelerate the formation of a new market-oriented operation mechanism and effectively stimulate the vitality of enterprises.27 On March 5, 2018, in his Report of the Work of the Government, Premier Li Keqiang called for the deepening of the pilot reform of state-owned capital investment and operating companies, promising to give them more autonomy. With the support of the Party and the government, new progress will be made in the two types of companies. Secondly, an effective corporate governance structure should be established, with the focus on strengthening the construction of the board of directors. To this end, we should earnestly implement and safeguard the rights of the board of directors to make major decisions, select and hire managers, and distribute remuneration in accordance with the law, and ensure managerial autonomy. It is important to maintain checks and balances within the board of directors. Both the board of directors and the supervision commission of solely state-owned companies should have employee representatives. External directors should occupy the majority seats on the board. The one-person-one-vote system should be implemented, and the directors should be held accountable for the resolutions by the board of directors. Thirdly, it is necessary to gradually increase the proportion of capital gains from state-owned assets to be turned over to public finance. As required by the Third Plenum of the 18th CPC Central Committee, the proportion would rise to 30% by 2020, a rather tall order. This reform measure was rolled out in 2014. On March 25 of the year, the Ministry of Finance revealed its state-owned capital operation budget for central enterprises, clearly stating that the proportion would increase by 5%in 2014 from the current level.28 Since then, the proportion has gradually increased. It has been suggested by some scholars that, to establish the state-owned assets management system that is focused on the management of capital, China should build its own version of Temasek, which is a holding company owned by the government 27 28

See Economic Reference Daily, March 13, 2018. See Economic Reference Daily, March 26, 2014.

142

5 The Innovation and Development of Enterprise Theory

of Singapore, in three steps. The first is to push state-owned enterprises to the market. The management of capital is predicated on the premise that enterprises’ decisions in finances, human resources, products, and assets are carried out according to the rules of the market. The second is to ensure the complete separation of government and capital and that of government and enterprise. According to the principle of separating the functions of social public management from those of investors, the state supervision agencies shall assume solely the responsibilities of the investors in state-owned assets, not the functions of social public management. The public management department of the government shall manage enterprises of all kinds of ownership from the perspective of government economic adjustment and social management, and shall not assume the responsibilities of investors. The separation of government and enterprise and the separation of ownership and management imply that the state-owned assets supervisory authorities shall focus on the management of capital, and use capital as the link to exercise the shareholder rights under the standardized corporate governance structure in accordance with the law. They shall not interfere in the production and operation of the enterprises they supervise; rather, they shall respect and maintain the autonomy of state-owned enterprises in the market place. Upon the completion of the first two steps, the third, or last, step is to build China’s own model out of Singapore’s Temasek. In this new model, the functions of the existing SASACs at all levels will be adjusted, their nature as ad hoc government agencies will be changed, and the civil servants status of the personnel will be changed, and in the end the SASACs will be turned directly into capital investment and operation companies.29

5.6 Actively Promote the Reform of Mixed Ownership and Develop the Mixed Ownership Economy One important highlight in the decision by the Third Plenum of the 18th CPC Central Committee is the call for actively developing the mixed ownership economy. Mixed ownership with cross holding and mutual integration of state-owned capital, collectively owned capital, non-public capital, and others is an important form of the basic economic system. It will amplify the function of state-owned capital, preserve its value and enhance its gain, and improve its competitiveness. It will also boost the mutual promotion and common development of all kinds of ownership capital. State-owned entities are encouraged to develop into mixed ownership. State sponsored investment projects should allow non-state-owned capital to participate. The mixed ownership economy should allow employees to hold stocks to better align their interests with shareholders’. The plenum’s emphasis on promoting the mixed ownership reform to state-owned enterprises can be interpreted from the following three perspectives. 29

Peng (Editor-in-Chief) (2018, pp. 77–78).

5.6 Actively Promote the Reform of Mixed Ownership and Develop …

143

First of all, the mixed ownership reform is intended to mobilize state-owned capital and other social capital to jointly promote the development of the socialist market economy. After decades-long reform and rapid economic growth, the size of China’s state-owned capital, collective capital, private and non-public capital has increased by a factor of several scores. From 2010 on, utilization of foreign capital exceeded 100 billion US dollars each year. According to data released by the Ministry of Finance on July 28, 2014, as of year-end 2013, the total assets held stateowned enterprises amounted to 104.1 trillion yuan, with total shareholder equity of 37 trillion yuan. At the end of 2012, the registered capital of private enterprises reached 31 trillion yuan. Bank deposits by residents also increased enormously. At the beginning of 2014, total household bank deposits were 47 trillion yuan, more than half of which were time deposits. Under this circumstance, actively developing the mixed ownership economy will boost the participation of all kinds of capital in the socialist modernization drive. To be sure, China is already a mixed economy at the macro level, with the co-development of state-owned, collective, individual and private, and foreign owned enterprises. Here, when we talk about the development of mixed ownership economy, we mainly refer to the development of mixed ownership economy at the micro level—that is, the mixed ownership of state-owned enterprises, so as to truly achieve diversity of investors. Secondly, cross shareholding and mutual integration of state-owned capital and non-state-owned social capital combine their respective advantages, learn from each other, and achieve high-quality development for both. State-owned capital is characterized by its huge size, and private capital by its dynamics. The organic combination of the two will surely lead to the synergy effect in that “1 plus 1 is greater than 2.” During the years up to the Third Plenum of the 18th CPC Central Committee, many local state-owned enterprises cottoned on to seeking cooperation from the central enterprises, hoping to rely on their strong strength to drive their own development. But that should not be taken as the direction of the reform for local state-owned enterprises. The direction of the reform remains to be the corporate system, the joint shock system, and mixed ownership with diverse investment subjects. Mixed ownership is actually an upgraded version of the company system and the joint stock system. This is because a company can be solely owned by a state-owned enterprise, and a joint-stock company can be owned by a group of state-owned investors. But a mixed ownership enterprise should, in general, have both state-owned capital and non-state-owned capital or non-public capital, to truly achieve owner diversity. Thirdly, the mixed ownership reform will open the door for the reform of the monopoly industries. For a very long time, the monopoly industries have shut their doors for non-state-owned strategic investors. Their excuse has been that they are in the network-based natural monopoly business. In reality, however, they are administrative monopoly. With the development of science and technology, more and more non natural monopoly competitive businesses will emerge from all monopoly industries. Some economists have been calling for speeding up the reform of the monopoly

144

5 The Innovation and Development of Enterprise Theory

industry and opening up more competitive businesses in the natural monopoly industries.30 However, the reform of China’s monopoly industries has progressed slowly due to numerous headwinds. Some experts even think that the reform of China’s monopoly industries is a false proposition. Some believe that China does not have a monopoly problem at all. To them, the problem is the lack of concentration, not monopoly. The forces against the reform of the monopoly industries have been rather strong. These industries are characterized with low efficiency, poor quality, and high prices, all having adverse effects on the optimal allocation of resources. For instance, despite the fact that the price of gasoline is much higher in China than that in the United States, the quality is lower, worsening air pollution in large cities. High gasoline prices are partly due to the high tax imposed by the Chinese government. But the deeper reason is that crude oil imports have long been monopolized by three oil giants—that is, CNPC, Sinopec and CNOOC, which also control the refineries. Monopoly and lack of competition result in high retail prices of refined oil products, to the dismay of consumers. Therefore, the reform of monopoly industries is urgently needed. The decision of the Third Plenum of the 18th CPC Central Committee required the natural monopoly industries to open up their competitive businesses. The development of the mixed ownership economy provides a channel for the monopoly industries to open up their competitive businesses. In other words, the entry of nonstate-owned capital to these competitive businesses will not only enlarge the function of the state-owned capital, but also enhance efficiency and achieve innovative, market-driven development. After more than 30 years of reform and opening up, the state-owned enterprises in the competitive fields have in general already carried out the company system and shareholding system reforms, and their equity ownership has been diversified as a result. Indeed, the Chinese economy has already become a mixed ownership economy. For the remaining solely state-owned enterprises, which are mainly giant enterprises in the monopoly fields, the reform should begin by breaking the monopoly first. On September 6, 2013, the executive meeting of the State Council proposed to launch a number of projects in finance, oil, power, railway, telecommunications, resources development and public utilities that are in line with industry policy and conducive to the transformation and upgrading. These projects are open to private capital. It is hoped that these projects, if successful, will bring out the demonstration effect in the development of the mixed ownership economy while promoting the structural reform. Some progress has been made since then. On July 15, 2014, the SASAC decided to launch a pilot involving two central enterprises—China Pharmaceutical Group and China Construction Materials Group—to explore the effective ways of promoting mixed ownership. The pilot has six objectives. The first is to explore the establishment of an effective corporate governance structure with checks and balances and equal protection. The second is to explore the professional manager system and market-oriented employment system. The third is to explore the market-oriented incentive and restraint mechanism. The fourth is to explore the employee stock ownership system. The fifth is to explore the effective supervision and mechanism and the prevention of the loss of state-owned assets. 30

Wang and Zhou (2004); Qiu and Wang (2006); Qi et al. (2013).

5.6 Actively Promote the Reform of Mixed Ownership and Develop …

145

The last is to explore the effective mechanism of Party building in mixed ownership enterprises.31 Soon afterwards, many provinces and cities across the country have launched their own plans to develop the mixed ownership economy. Chongqing, a municipal city, for example, proposed to transform two thirds of its state-owned enterprises into mixed ownership enterprises over the next three to five years. Whenever these enterprises are ready, they can be listed in the stock market though initial public offerings. Guangdong province decided to increase the proportion of mixed ownership enterprises to over 60% by 2017. From the Third Plenum of the 18th CPC Central Committee to the end of 2016, 68.9% of central enterprises and their subordinate enterprises carried out a total of 1995 mixed ownership restructurings. Out of the total assets, revenues, and profits of all central enterprises, the listed companies accounted for 61.3%, 62.8% and 76.2%, respectively.32 New progress has been made in mixed ownership reforms since 2017. In that year, the National Development and Reform Commission selected 50 enterprises in three batches (19 in the first and second batches, and 31 in the third batch) to conduct a pilot. According to the commission, the pilot enterprises have achieved three remarkable results through the mixed ownership reforms: significant increase in investment strength, drastic decrease in leverage, and substantial improvement in financial conditions. The results are especially salient for China Unicom, China Eastern logistics, and others, which have created a positive social atmosphere with their strong reform efforts and positive market reactions. The first two batches of the pilot enterprises are all central enterprises, while the third batch includes local state-owned enterprises, as well as some large enterprises from monopoly industries. The three batches of the pilot demonstration projects of mixed ownership reform include central and local state-owned enterprises from seven major fields, including power, oil, natural gas, railway, civil aviation, telecommunications, and the military industry, some of which are important industries with relatively centralized state ownership. China Eastern Logistics, one of the pilot enterprises in the first batch, achieved great results. In 2017, its sales grew by 30%, total profit rose by over 70%, and the return on assets reached 53.25%, much higher than the average 15% return on assets for its global competitors. In the mixed ownership reform, the company successfully introduced foreign and private capital, including Global Logistic Properties and Deppon Express. The equity ownership held by foreign investors, middle and senior managers, and core employees reached 25%. China Unicom, from the second batch, was the first central enterprise from a monopoly industry to experiment with the mixed ownership reform. It introduced 14 strategic investors, including Tencent, Baidu, Alibaba, and JD. After the restructuring, the equity ownership by its parent, Unicom Group, decreased from 62.7% to only 36.7%. Management positions were reduced by 51.3%. 205 business units from 31 provincial branches were eliminated, 14 of the top and deputy top management of the second-level institutions were retired and, on average, 15% of middle-level managers in the provincial branches withdrew 31 32

People’s Daily, July 16, 2014. People’s Daily, July 28, 2017.

146

5 The Innovation and Development of Enterprise Theory

from seeking reappointment. Overall, the restructuring has made the company much leaner and stronger. Additionally, China Unicom granted restricted shares accounting for 2.7% of the number of shares outstanding to more than 7800 core employees, hoping to arouse the enthusiasm of the most core elements of the firm.33 By the end of 2017, more than two thirds of China’s central enterprises have introduced various kinds of social capital. More than half of the state-owned capital is invested in publicly listed companies. Three central enterprises have become a mixed ownership enterprise at the group level. More than 50% of the central enterprises’ subsidiaries have become mixed ownership enterprises. It is anticipated that a new round of mixed ownership reform will create the following pattern for China’s state-owned enterprises. Eventually, only a very small number of solely state-owned enterprises will be retained. They include state-owned capital investment and operation companies and essential public welfare enterprises. State-owned enterprises in monopoly industries in general will become mixed ownership enterprises. The natural monopoly business must be controlled, or even absolutely controlled for a certain period of time, by state-owned capital, while the competitive business is controlled or held by state-owned capital. For generally competitive industries, mixed ownership will become the norm, where state-owned capital may or may not hold controlling shares, share ownership can be realized in the form of preferred stock held by the state-owned capital investment company holding preferred stock, and in some cases, state-owned capital may exit completely. Some experts have suggested that mixed ownership can be used as a breakthrough to systematically promote a three-pronged reform for state-owned assets and enterprises. The first is to further deepen the reform of property rights to truly realize the transformation of system and mechanism of state-owned enterprises. The second is to use mixed ownership as an important means to adjust the layout and optimize the structure of the state-owned economy. The third is use the mixed ownership reform to break the monopoly industries and further improve the basic system of the socialist market economy. From the experience of developed economies and the practice in some monopoly industries in China, the key to promoting the reform of monopoly industries is to separate the competitive business from the monopoly business. The competitive links and fields should be pushed to the market in the form of mixed ownership to enhance competitiveness, reduce costs, and improve efficiency.34 As pointed by some experts, the practice of promoting the mixed ownership reform over the past 20 years has taught us four essential lessons. First, let the market decide, aided by government guidance. Second, protect property rights and treat them fairly. Third, operate in accordance with laws and regulations. Lastly, make overall planning and coordination and advance steadily.35

33

People’s Daily, April 14, 2018. Progress Report on the Economic System Reform since the 18th National Congress of the People’s Republic of China (p. 80–81). China Academy of Administration Press, 2018. 35 Chang et al. (2018, p. 387, 388 and 390). 34

References

147

References Chang Xiuze, et al. (2018). Ownership Reform and Innovation: Forty Years of Ownership Structuring Reform in China. Guangdong Economic Publishing House. Chen Qingtai, Wu Jinglian and Xie Fuzhan. (1999). Fifteen Key Issues of State-owned Enterprise Reform. China Economic Press. General Planning Department of the National Development and Reform Commission (Ed.). (1988). Great Ideas of China’s Reform (p2). Shenyang Press. He Wei. (1981). There Should Be Many Forms of Socialist Public Ownership. People’s Daily, December 31, 1984. Huang Qunhui, et al. (2015). Research on Comprehensively Deepening the Reform of the Stateowned Economy in the New Era. China Social Sciences Press. Jiang Yiwei. (1980). The Enterprise-based Theory. China Social Sciences, 1. Li Yining. (1986). Ownership Reform and Joint Stock Enterprise Management. China’s Economic System Reform, 12. Liu Shibai. (1986). Socialist Ownership Structure: Review and Prospect of China’s Socialist Economic Theory. Economic Daily Press. Office of the Financial and Economic Committee of the National People’s Congress. (2007). Reform and Legislation of the State-Owned Assets Management System. China Development Observation, 12. Peng Sen (Editor-in-Chief). (2018). Progress Report on the Economic System Reform since the 18th CPC National Congress. National Academy of Governance Press. Qi Yudong, et al. (2013). Mode and Path of Market-oriented Reform of China’s Monopoly Industry. Economic Management Press. Qiu Baoxing and Wang Junhao. (2006). Reform of China’s Municipal Public Utilities Regulatory System. China Social Sciences Press. Shao Ning (Editor-in-Chief). (2014). Chronicles of the Reform of State-owned Enterprises: 1998– 2008, Economic Science Press. Tui Fulin (Editor-in-Chief). (2014). Market Decisions, China Economic Press. Wang Junhao and Zhou Xiaomei. (2004). Privatization Reform of China’s Natural Monopoly Industry and Government Regulation Policy. Economic Management Press. Wei Jie. (1997). Various Forms of Realizing Public Ownership: Theoretical Basis and Conceptual Innovation. In Wang Jue (Ed.). The Forum on the Reform of Labor Ownership and Chinese Economy. Guangxi People’s Publishing House. Wu Jinglian, et al. (1993). Reform of Large and Medium-sized Enterprises: Establishing Modern Enterprise System. Tianjin People’s Publishing Press. Zhang Wenkui. (2011). The Direction and Task of the Reform of State-owned Enterprises during the 12th Five-Year Plan Period. Economic Essentials, 5. Zhang Zhuoyuan and Zheng Haihang. (2008). Thirty Years of China’s State-Owned Enterprise Reform: Review and Prospects. People’s Publishing House.

Chapter 6

The Construction and Theoretical Innovation of the Socialist Market System

China’s economic reform has moved forward along two main development paths. One is the introduction of the market mechanism through price liberalization. Various markets have been established, from agricultural to industrial products, from consumer products to production materials, from goods and services to factors of production, and from spot to futures markets. Upon entering the twenty-first century, China has endeavored to improve its modern market system from many more aspects, including the establishment of market rules that are fair, open, and transparent, and the improvement of market-based price determining mechanisms. The objectives are to let the market play a decisive role in the allocation of resources; let enterprises operate independently and compete fairly; let consumers choose and consume freely; and let commodities and factors flow freely and be exchanged on an equal footing. Myriad market barriers have been cleared up to enhance the efficiency and fairness of resource allocations. The other path is the reform on ownership structure and enterprises. It aims to explore the various realization forms of public and state ownership that are conducive to promoting productivity; and to support, encourage, and guide the development of private and other non-public ownership economies, including the use of foreign capital. It also aims to reform the state-owned and collective-owned enterprises so as to establish a modern enterprise system and a mixed ownership economy. The overall goal is to establish, consolidate and improve the basic socialist economic system with public ownership as the mainstay and a multitude of ownership economies co-prospering. The practice of reform and opening up over the past four decades has shown that market-oriented price reforms have been relatively smooth and gradually deepened, well on its way to form a perfect modern market system by 2020. At the same time, theoretical research on the socialist market system has continuously deepened and developed. It is widely and well accepted that the market should expand further, from playing a fundamental role to playing a decisive role in resource allocations. This notion has been implemented in reform practices.

© China Social Sciences Press 2023 Z. Zhang, Handbook of Chinese Economics, https://doi.org/10.1007/978-981-99-0420-4_6

149

150

6 The Construction and Theoretical Innovation of the Socialist Market …

6.1 The Four Stages of the Development of China’s Market System Since Reform and Opening up The development of China’s market system since 1978 can be divided into four stages. The first stage (1978–1991) was driven by price reforms. Markets flourished as the economic operation mechanism gradually morphed from central planning to market-oriented. In the second stage (1992–2001), as the market continued to develop, the demand–supply relationship changed dramatically from a seller’s market to a buyer’s market. State-owned enterprises were restructured from being the underlings of the administrative departments of the government to become independent market players. The third stage (2002–2012) was characterized by the establishment of an open modern market system as China joined the World Trade Organization (WTO). In the last or fourth stage starting from 2013, the objective is to let the market play a decisive role in resource allocations as the country tackles tough and critical issues, aiming to complete the modern market system by 2020. The four stages are discussed in detail as follows.

Stage I (1978–1991): Various Markets Flourished as Price Reforms Advanced and the Economic Operation Mechanism Pivoted from Central Planning to Market-Oriented (1) Price liberalization to boost market development Since reform and opening up, China has adopted a gradual approach in its implementation of market-oriented price reforms. It started with price adjustments, then combined price liberalization with price adjustments, and gradually connected with the global market. Prior to 1984, while price liberalization was under consideration, the government took the initiative to adjust the unreasonable price structure so that all sectors and businesses would have roughly the same level of profitability. After 1984, the main government policy was to liberalize prices and liberalize as much as possible. Under the guidance of this principle, price reform was promoted while the overall price level was kept generally stable—with annual inflation below 6%. At the same time, local governments were allowed to make bold price reforms whenever opportunities arose and circumstances permitted. In the early 1980s, for instance, the city of Guangzhou relaxed its price controls on vegetables, fruits, aquatic products, and pork. The markets were invigorated immediately after price deregulation. Price may rise a bit initially, but thanks to ample supply, it subdued quickly and stabilized, to the benefit and applause of consumers. Another salient positive effect of price liberalization was the gradual phase-out of the nationwide ration system. Under such a system, food and other household necessities were rationed with each citizen receiving a highly limited and fixed amount each month using coupons. The ration system had long inhibited the supply and consumption in China. In the 1970s,

6.1 The Four Stages of the Development of China’s Market System Since …

151

ration was applied to as many as 118 consumer products in Guangzhou. With the liberalization of commodity prices and ample market supply, fewer and fewer products were rationed. By 1982, the number of rationed products was reduced to only 48. By 1988, only two products were still on the list: grain/rice and sugar. Before long, the last vestige of the ration system became a thing of the past, forever.1 In the following years, local governments across the country all followed the Guangzhou model to gradually loosen up their control over prices. Beginning in 1985, except for a few products such as grain, rice, cotton, cooking oil, and sugar that were still procured by the state government, the purchase prices of most agricultural and sideline products were deregulated. Prices of industrial consumer goods were gradually liberalized as well. In 1985, price controls on sewing machines, radios and watches were relaxed. In 1986, seven durable consumer goods, including bicycles, refrigerators and washing machines, were taken off the list of price control. The prices of 160 small commodities were liberalized in September 1982, and 350 more were liberalized in August 1983. In 1988, the prices of 13 brand-name cigarette and liquor were opened up. In 1992, with the improvement of the macroeconomic environment, the government expanded its efforts to liberalize commodity prices. As a result, the catalogue of products and services the prices of which were under the control of the central government was reduced substantially. The number of products concerning the factors of production in the heavy industry and transportation dropped from 737 to 89; agricultural products, from 40 to 10; and light industrial products, from 41 to 9. As a result, the market price system has gradually taken hold in China.2 With price liberalization, the wholesale and retail markets for agricultural and sideline products were set up and expanded all over the country, and the market for industrial consumer goods became more and more prosperous. (2) Establishment of a unified market for industrial production materials as the two price tracks were unified The double-track price scheme for industrial production materials was initiated in the mid-1980s as a useful invention. The gradual transition to a unified price system in the early 1990s is often deemed as a success of China’s gradual market-oriented price reform. Bruce, a Polish economist, spoke highly of the twin-track price system for industrial products at the famous Bashan Boat conference, held in September 1985, believing that it was a useful invention by China.3 In 1984, China started to implement the twin-track price regime according to which industrial production materials in a given marketplace would fetch two distinctive prices. One would be the planned price set by the government, while the other would be dictated by the free market forces. The twin-track scheme was expanded to all products after 1985. Take the heavy industry. According to statistics compiled in 1988, the government set the prices for 95.1% of the production materials used in the 1

Guangzhou Liberalizes Prices of Agricultural Products, Marking the Beginning of China’s Price Reform. Guangdong and Hong Kong Information Daily, July 5, 1988. 2 Ma (1999). 3 China Economic System Reform Research Association (1986).

152

6 The Construction and Theoretical Innovation of the Socialist Market …

mining industry, 74.6% in the raw materials industry, and 41.4% in the processing industry. The remaining products were purchased at a price determined freely in the market. In a shortage economy, the dual price system for industrial production materials was the direct result of the corresponding dual economic system, especially the dual economic operation system and the dual production and circulation systems. The dual track price system was expected to bring about several positive effects. It could effectively stimulate the production of scarce materials, encourage output in excess of the planned amount, and satisfy the needs of the non-state economic sector—such as the demand for raw materials by township enterprises—that was not included in the central planning. It could help balance surplus and deficiency, regulate the circulation, and provide feedback about the demand and supply relationship. However, the dual track system could lead to non-performance of the supply contracts, and encourage profiteering, illicit dealings, and other malfeasance. Experiences showed that when the market price was kept within two times the planned price, the purported positive effects outweighed the negative ones. However, when the market price was more than twice the planned price, the negative effects would become prominent. In the mid-1980s when the dual track system was first implemented, the gap between the two prices was not very big. It was estimated that, at the end of 1985 and the beginning of 1986, the market-to-planed price ratio was around two, well within the normal range. Later on, however, driven by excessive demand, the ratio shot up to 3 or even 4, resulting in chaos in the marketplace with rampant wheeling and dealing activities involving industrial products. Doubts about the dual track scheme loomed on the horizon. In 1990–1991, as the macroeconomic environment had improved, the supply–demand imbalance began to ease, and the gap between the two prices narrowed to within two times or even one and half times. The Party and the state government seized this golden opportunity to combine the two price tracks into a unified, market-based track. This is another successful story in China’s price reforms. During the implementation of the dual track system for industrial materials and the transition to the unified track, the market for industrial factors of production developed rapidly. An orderly market gradually emerged from the extreme chaos. (3) Establishment of the market for factors of production With the overall development of the market for consumption products and services, the market for factors of production began to emerge. The most outstanding achievement is the founding of the Shanghai Stock Exchange and the Shenzhen Stock Exchange, in December 1990. China got its own capital market for the first time—a milestone indicating that its market system construction had reached the middle and high-end level.

6.1 The Four Stages of the Development of China’s Market System Since …

153

Stage II (1992–2001): As All Sorts of Markets Further Developed, State-Owned Enterprises Were Restructured from the Underlings of the Administrative Departments to Independent Market Players, and the Market Morphed from a Seller’s Market to a Buyer’s Market In 1992, the 14th CPC National Congress made a historic decision to set the goal of China’s economic restructuring reform, namely, to establish a socialist market economy. One year later, in 1993, the Third Plenum of the 14th CPC Central Committee issued the Decision on Several Issues Concerning the Establishment of a Socialist Market Economy System. This important decision further concretized the reform goal set by the 14th National Congress. Since then on, China’s market-oriented reform has made great strides, as all types of markets further developed. (1) The gradual development of the real estate market Prior to, and during the early days of, reform and opening up, a nationwide welfare housing system had been implemented for government employees in urban areas. On July 18, 1994, the State Council issued the Decision on Deepening the Reform of the Urban Housing System. According to the decision, the fundamental purpose of the housing reform was to establish a new urban housing system that would be suitable for the socialist market economy and realize the commercialization and socialization of housing. The reform also intended to accelerate the construction of housing, improve the living conditions, and meet the growing housing demand by urban residents. It included a series of policy measures. The cost of housing construction used to be shouldered by the state and the work unit. This was to be changed so that urban residents would share a reasonable portion of the construction cost. The construction, distribution, maintenance, and management of the apartments in each work unit or institution would be handed over to specialized, independent contractors in the society. The mode of housing distribution would switch from one that was based on welfare to one that was primarily based on an employee’s rank and wage. Affordable housing with the nature of social security would be provided for middle and low income urban residents. At the same time, high-end commercial housing was to be developed for high-income families. The system of housing reserve funds would be established. Housing-related finance and insurance services, including a housing credit system with both policy and commercial features, would be established. The decision also called for the establishment of a standardized, normal real estate market, the development of a housing maintenance and management market, and the gradual realization of a virtuous cycle of housing capital input and output, with the goal to promote the development of the real estate industry and related industries. In March 1998, at his first press conference as the newly elected premier of the State Council, Zhu Rongji summed up the missions of the government during his tenure succinctly as “one guarantee, three put-in-places and five reforms.” Housing reform was the third on the list of five reforms. Premier Zhu said that housing construction would be a new driving force of the economy, and the current welfare

154

6 The Construction and Theoretical Innovation of the Socialist Market …

housing policy must be changed to a commercialized policy so that the people would buy their own apartments. In fact, the whole housing reform plan had been brewing for more than three years up to his premiership. He said that the government would issue a new policy in the second half of the year to put an end to the welfare housing policy, and after that all housing would be commercialized. By the end of 1999, more than 60% of the public apartments available for sale were sold to urban dwellers, and the urban home ownership reached 70%. The old housing regime with uniformly public ownership was gone forever, as a new pattern of housing ownership, dominated by ownership by residents and coexisting with various forms of property rights, took hold. By 2001, the per capita housing construction area for urban residents increased to 21 m2 , from merely 7.2 m2 in 1978. The proportion of urban households in need of housing dropped from 47.5 to 1.1% during the same period. In 2001, in order to further boost housing construction, stimulate economic growth, and achieve the goal set in the tenth Five-Year Plan for housing development, the government proposed to take measures in eight aspects to further deepen the reform, as follows. (1) Speed up legislations, clarify property rights according to law, and effectively protect the rights and interests of homeowners. (2) Increase efforts to monetize housing distribution and support residents in their apartment purchases. (3) Accelerate the opening of the secondary housing market, actively cultivate the housing rental market, and accelerate the start-up and standardization of the housing rental market. (4) Further improve housing supply so that people can buy houses with ease. (5) Expand housing consumption services in an all-round way and speed up the operation of the market. (6) Vigorously develop housing finance and further improve the financial support for the housing market. (7) Standardize the development of the property management industry. (8) Effectively improve the administration of real estate and provide convenient services and property rights protection for buyers.4 Data released by the National Bureau of Statistics confirmed the rapid development of the real estate market. In 1998, 121.853 million square meters of new commercial housing were sold. In 2001, the figure reached 224.119 million, an increase of 84% within three years. (2) Through the establishment of a modern enterprise system, state-owned enterprises have gradually become market players and separate legal entities that operate independently and are responsible for their own profits and losses Before reform and opening up, China’s cities and towns were dominated by stateowned or quasi state-owned enterprises. In the traditional command economy, these enterprises were the underlings of the administrative departments in the government. The departments gave enterprises orders on what to produce and how much to produce. The government implemented a “unified collection and expenditure” approach to their finances, and a “unified purchase and sales” approach to their products. In other words, the government and enterprises were not separated at all. State-owned enterprises were not market players or beneficiaries of their business 4

Peng et al. (2008).

6.1 The Four Stages of the Development of China’s Market System Since …

155

activities. Workers held “iron rice bowls” and shared food in a “big wok,” so to speak. This form of equalitarianism severely undercut the enthusiasm and initiative of enterprises and their employees. In the early stage of reform, the government used decentralization by granting enterprises more autonomy and allowing them to retain a bigger share of their profits. From 1987 to 1992, the government experimented with a contractual management responsibility system. Nevertheless, the reforms fell short in separating government from enterprises. Without transforming the operating mechanism, enterprises could not become effective and independent players in the market. In 1992, the 14th CPC National Congress set the goal of China’s economic restructuring reform, which was to establish a socialist market economic system. In November 1993, the Third Plenum of the 14th CPC Central Committee put forth the Decision on Several Issues Concerning the Establishment of a Socialist Market Economy. For the first time, the Party pointed out that the direction of the reform of state-owned enterprises was to lean toward establishing a modern enterprise system, and that the characteristics of such a system were clear property rights, clear rights and responsibilities, separation of government and enterprise, and scientific management. This decision ushered in a new stage for the reform of China’s state-owned enterprises, a stage characterized by institutional innovations and transition to market entities. The contractual management responsibility system implemented by state-owned enterprises for many years not only failed to make them more adaptable to the market economy, it also worsened the blurring of government and enterprises and led to huge losses of state-owned assets. Consequently, many state-owned enterprises, including large and medium-sized ones, fell into deep financial troubles. In 1997, the Party and the government put forward a plan to help state-owned enterprises out of financial woes. According to the plan, within the following years, starting from 1998, the vast majority of financially struggling large and medium-sized state-owned enterprises were expected to stem their losses and turn around. The longer-term goal was to establish a modern enterprise system for most of the large and medium-sized state-owned backbone enterprises by the end of the twentieth century. This goal was basically completed by the end of 2000. At the end of 1997, there were 16,874 state-owned or state-controlled large and medium-sized industrial enterprises, of which 6599 (39.1%), suffered losses. By 2000, the number of money-losing enterprises dropped by three quarters, to 1800. This was not achieved without paying a hefty price, however. Over the three years, to elevate these large and medium-sized state-owned industrial enterprises out of financial woes, China’s banks booked more than 150 billion yuan in provisions for bad credits, and provided 20 billion yuan in discount business loans for technological transformation. In addition, 580 enterprises implemented debt for equity swaps, involving a total amount of 405 billion yuan, and interest payments were suspended after April 1st, 2000. In that year alone, total interest expenses by all enterprises were reduced by 19.5 billion yuan. Moreover, of the 1.3 trillion yuan of non-performing assets set aside by banks, about half were the non-performing loans of state-owned industrial and commercial enterprises. While bailing out these enterprises, the government also carried out pilot projects intended to build up a modern enterprise system, and gradually implemented the joint-stock

156

6 The Construction and Theoretical Innovation of the Socialist Market …

company reform. Great efforts have been made to transform state-owned enterprises into market players and legal entities so that they could adapt to the development of the socialist market economy.5 The elevation of state-owned enterprises out of financial difficulties and the establishment of a modern enterprise system helped lay a solid foundation for the growth and rapid development of state-owned large and medium-sized industrial enterprises in the twenty-first century. The successful reform of state-owned enterprises in the form of joint-stock companies and through the modern enterprise system has solved the dilemma in the process of establishing a socialist market economy in China. Conventional economic theories have long held that market economy can only be combined with private ownership, but not with public or state ownership. China’s reform practice has proved otherwise, since it has found the common form of business organization in the market economy—i.e., the modern enterprise system, which can be used as the realization form of public and state ownership. Through this form of business organization, we can achieve the combination of public ownership with market economy, and socialism and market economy. This is an epoch-making contribution to the Marxist political economy! (3) The household and private sectors emerged and developed, gradually becoming an important part of the socialist market economy Another important force of the socialist market economy is the household businesses and private enterprises that have gradually developed after reform and opening up. The individual and private sectors are the natural subjects of the market economy, and hence also the natural subjects of the socialist market economy. Their production and operation activities are dominated by market demand and supply, and regulated by the basic laws of the commodity market economy. The rapid development of the non-public economy has been a salient feature of China’s reform and opening up. In the traditional socialist economic system, household and private businesses were regarded as a dissenting force and hence were rejected or limited. On the eve of reform and opening up, China’s economy was all but dominated by the public sector. Left with only 140,000 private businesses, with a total of 150,000 employees across the country, the private sector were almost completely wiped out. One of the greatest achievements of China’s economic reform is the rapid development of the non-public sector of the economy, as the public sector goes through a series of reforms with the introduction of the market mechanism. Economic downturn or stagnation has never occurred during the process. Indeed, China has achieved the optimal mixture of development and stability in its reform: as economic activities are increasingly active, the market is becoming more prosperous, and people’s living standards are getting better and better. In the early days of reform and opening up, tens of millions of people were without jobs, causing huge employment pressure in the society. In order to alleviate this pressure, the Party and the government began to allow the existence and development of sole proprietorship. The development of the private sector showed that 5

Zhang and Zheng (2008).

6.1 The Four Stages of the Development of China’s Market System Since …

157

they effectively energized the market and made people’s life more convenient. By picking up and filling the gaps in the economy, the booming individual sector has become a powerful supplement to the national economy. The 14th CPC National Congress, held in 1992, established the goal of the socialist market economy reform. The 15th CPC National Congress, held in 1997, decided to build the basic economic system in which public ownership is the mainstay and diverse forms of ownership are allowed to develop side by side, giving a boost to the individual sector. Thanks to these important decisions, the private sector has gradually evolved from playing a supporting role to become an important part of the socialist market economy. By 2001, the number of registered household businesses in industry and commerce reached 24.33 million, with 47.603 million employments and total registered capital of 343.58 billion yuan. The individual sector was mainly concentrated in the tertiary industry such as retail, catering, and social services. Overall, 82.6% of the household businesses were engaged in the tertiary industry in 2001. As shown in Table 6.1, the individual businesses have become an important force in the development of the national economy. The existence and development of sole proprietorship would inevitably lead to the private economy. Ideologically speaking, allowing the existence and development of the individual economy is an acquiescent recognition of the existence and development of the private economy. In general, the development of the latter falls behind that of the former. China’s private economy kicked off in the late 1980s. Deng Xiaoping’s famous South-Tour Talks in 1992 gave it a boost, and it has developed rapidly ever since. As shown in Table 6.2, from 1992 to 2000, the private sector grew Table 6.1 Individual commercial and industrial households in China: 1990–2001 Year

Number of registered household business (in 10,000)

Total employment (in 10,000)

Total registered capital (in yuan 100 millions)

1990

1328.3

3092.8

397.4

1991

1416.8

2258

488.2

1992

1533.9

2467.7

600.9

1993

1766.9

2939.3

854.9

1994

2186.6

3775.9

1318.6

1995

2528.5

4613.6

1813.1

1996

2703.7

5017.1

2165.4

1997

2850.9

5441.9

2574

1998

3120.2

6114.4

3120.3

1999

3160.1

6240.9

3439.2

2000

2571.4

5070

3315.3

2001

2433

4760.3

3435.8

Source Bureau of National Statistics. Data for 2001 is from China Commerce and Industry Daily, April 19, 2002

158

6 The Construction and Theoretical Innovation of the Socialist Market …

Table 6.2 Development of China’s private economy: 1992–2001 Number of private businesses (10,000)

Annual growth (%)

Total employment (10,000)

Annual growth (%)

Registered capital (yuan 100 million)

Annual growth (%)

1992

13.9

28.8

231.9

26.0

221.2

79.8

1993

23.8

70.4

372.6

60.7

680.5

300

1994

43.2

81.7

648.4

74

1447.8

110

1995

65.5

51.4

956

47.4

2621.7

81.1

1996

81.9

25.2

1171.1

22.5

3752.4

43.1

1997

96.1

17.3

1349.3

15.2

5140.1

37

1998

120.1

25

1709.1

26.7

7178.1

1999

150.9

20.5

2021.6

18.3

10,287.3

36.3

2000

176.2

16.8

2406.5

19

13,307.7

29.4

2001

202.9

15.1

2713.0

12.8

18,212.2

36.9

40

Source Bureau of National Statistics. Data for 2001 is obtained from China Commerce and Industry Daily, April 19, 2002

each year at no less than 15%. In years 1993–1995, the number of household-owned businesses grew by more than 50% each year. Foreign-funded enterprises are another big chunk of the non-public economic sector. They are also important market subjects of China’s socialist market economy. (4) This stage witnessed a landmark event, as the landscape of China’s market changed dramatically from a seller’s market to a buyer’s market In the many years leading up to reform and opening up, China had implemented the traditional command economic system. Since the system was exclusive of the market and the market mechanism, the economy lacked vitality and its growth was inhibited. Gradually, it fell into a shortage economy, with the shortage of almost everything. The shortage of consumption goods made peoples’ life very inconvenient. People holding ration coupons and waiting in a long queue to buy necessities was a very common phenomenon. People’s living standards and the quality of life suffered as a result. After reform and opening up was launched, the market and the prices of various products were gradually liberalized. Under the market mechanism, each market subject strives to expand production and operation for more profits. Consequently, new products began to emerge from an endless stream, with more varieties and improved quality. Products which had suffered long lasting shortage in the past, such as food, clothing, home appliances, and building materials, were soon enriched. The market pattern changed fundamentally, first in the consumer market, from a seller’s market to a buyer’s market. A buyer’s market refers to a situation in which supply exceeds demand, giving purchasers an advantage over sellers in price negotiations. Supermarkets, very common in developed countries, were rapidly

6.1 The Four Stages of the Development of China’s Market System Since …

159

Table 6.3 Demand and supply of consumer goods in the retail markets in the mid-1990s Period

Demand exceeds supply (%)

Demand and supply are balanced (%)

Supply exceeds demand (%)

First half of 1995

14.4

67.3

18.3

Second half of 1995

13.3

72.3

14.4

First half of 1996

10.5

74.5

15.0

Second half of 1996

6.2

84.7

9.1

First half of 1997

5.3

89.4

5.3

Second half of 1997

1.6

66.6

31.8

First half of 1998

0

74.2

25.8

Second half of 1998

14.4

67.3

18.3

Source Data released by China Business Information Center over the years (Also see Liu Guoguang) (Ed.). (2006). Research Report on China’s Ten Five-Year Plans (p. 613). People’s Publishing House)

popularized and developed in China. Soon, the market presented a prosperous scene, full of colorful and dazzling consumer products. The results from a survey by the Ministry of Domestic Trade on the supply and demand of more than 600 major commodities since 1995 are presented in Table 6.3. The results show that the signs of excess supply begun to emerge in 1995. While most commodities maintained a balance between demand and supply in years 1996–1998, excess supply was more common than excess demand. This phenomenon continued to strengthen during the period. In the first half of 1998, no consumer product in the retail market experienced a supply shortage. In comparison, 25.8% of consumer goods were met with excess supply.

Stage III (2002–2012): The Accession to the WTO Gave China the Opportunity to Build a Modern Open Market System (1) Foreign direct investment gradually became an important part of the Chinese economy Economic reform and opening up have gone hand in hand from the very beginning. The main objective in the early stage of opening up was to attract foreign capital. Over the years, foreign-funded enterprises have become important participants of China’s socialist market economy. In some sectors, their shares account for one third or more. In the early days of reform and opening up, special economic zones were set up to attract foreign investment. In 1981, the CPC Central Committee and the State Council approved the founding of four special economic zones in Shenzhen, Zhuhai, Shantou, and Xiamen, respectively. A working conference concerning the special economic zones to be established in Guangdong and Fujian provinces was held in Beijing from May to June in 1981. According to the minutes of the conference, the

160

6 The Construction and Theoretical Innovation of the Socialist Market …

purposes of establishing the special economic zones were to absorb and utilize foreign capital, introduce advanced technology, expand foreign trade, accelerate economic development, observe and study contemporary capitalist economy in practice, learn and improve the ability to participate in international exchanges, and carry out experiments in the economic system reform. On May 4, 1984, the CPC Central Committee and the State Council decided to open 14 port cities—Tianjin, Shanghai, Dalian, Qinhuangdao, Yantai, Qingdao, Lianyungang, Nantong, Ningbo, Wenzhou, Fuzhou, Guangzhou, Zhanjiang and Beihai—to establish economic and technological development zones, so as to promote the opening and development of the entire coastal region. The central government granted preferential treatment to foreign investors who brought in capital and advanced technology to these 14 newly established zones. However, the absorption and utilization of foreign capital was controversial from the very start. Some conservative members in the Party were skeptical about the nature of foreign capital: was it capitalism or socialism? In response to the debate, during his now famous inspection tour of the southern region in early 1992, Deng Xiaoping said: “From the very beginning, there were different opinions on the establishment of the special economic zones, and some people were concerned whether it was capitalism. The achievements in Shenzhen provide a sounding response to those who are so concerned. The surname of the special economic zones is definitely socialism, not capitalism. In Shenzhen, public ownership remains the mainstay, with foreign investment accounting for only a quarter of the city’s economy. From the foreign investment, we can also benefit from taxation, labor services and other aspects! So don’t be afraid to engage in more foreign-funded enterprises… In accordance with the current regulations and policies, foreign businessmen always need to earn some money. But at the same time, the state collects taxes, and workers receive wages. We can also learn technology and management, get information, and open the market. Therefore, these foreign-funded enterprises are constrained by the whole political and economic conditions of our country, and are beneficial supplement to the socialist economy. Ultimately, they are conducive to socialism.”6 Deng Xiaoping’s talks, together with the establishment, in 1992, that the goal of the reform was to build the socialist market economy system and China’s accession to the World Trade Organization in 2001, helped put China back on the express way of absorbing and utilizing foreign investment. Among all developing economies, China received the most foreign direct investment for 21 consecutive years up to 2012. As of year-end 2012, there were 440,609 foreign-invested enterprises in China, with total investment of 3261 billion U.S. dollars and registered capital of 1881.4 billion dollars, including 1490.3 billion coming from foreign investors. About 60% of China’s foreign direct investment was in manufacturing. This made the contribution of foreign-invested enterprises to China’s industrial growth all the more outstanding. Since the 1990s, China’s exports have greatly benefited from the rapid growth of foreign direct investment. In 2011, foreign investment accounted for 23.97% of total assets of the industrial sector. All these show that foreign-invested enterprises have become important market participants in China, making substantial 6

Selected Works of Deng Xiaoping, Volume 3, People’s Publishing House. pp. 372–373.

6.1 The Four Stages of the Development of China’s Market System Since …

161

contributions to the country’s economic and export growth, employment growth, tax revenues, and the introduction of advanced technology and management. (2) With the rapid development of foreign trade, China’s accession to the World Trade Organization accelerated its integration with economic globalization As with foreign direct investment, China’s foreign trade also expanded rapidly during this period. Growth in foreign trade escalated after China’s accession to the WTO at the end of 2001, all the way up to 2012. In 1978, China’s total imports and exports of merchandises were merely 20.6 billion dollars, ranked 32nd in the world. Foreign trade picked up momentum after reform and opening up. Accession to the WTO further accelerated the growth in imports and exports. In 2004, total imports and exports of goods exceeded 1 trillion US dollars for the first time, only to be doubled three years later. In 2007, China’s total foreign trade in goods exceeded 2 trillion US dollars. Four years later, in 2011, its total international trade reached another milestone—$3 trillion. (3) Foreign trade in services enjoyed rapid development as well. Over the past two decades, China had an enlarging trade deficit in services. With the rapid development of imports and exports of goods, trade in services also experienced rapid growth. In the early 1980s, China’s total trade in services was only over 4 billion US dollars. Accession to the WTO boosted China’s services trade significantly. In 2003, the total services trade exceeded 100 billion US dollars for the first time. With continued rapid growth, the figure exceeded 500 billion US dollars in 2013. At the time of the writing, China was the third largest trader in services in the world, behind the United States and Germany. In comparison, in 1982, China’s share in global trade of services was only 0.57%. In 2013, its share reached 6%. In 1995, China began to experience a services account deficit on its balance of payments. The magnitude of the deficit has gradually expanded ever since. Analysis of the services account show that the deficit is largely attributable to gaps in transportation, tourism, insurance, franchising rights, and royalties.7 As China transforms its economic structure and growth mode to focus more on the development of services, especially modern services, the trade deficit in services is expected to gradually shrink or even reverse. (4) The 2005–06 non-tradable share reform was an important measure to improve China’s stock market Due to historical reasons, China’s state-owned enterprises listed in the stock market have two types of shares: tradable and non-tradable shares. The shares offered to the public and traded on the Shanghai Stock Exchange or the Shenzhen Stock Exchange are known as tradable shares, while the shares that are not available for trade for the time being are referred to as non-tradable shares. Non-tradable shares account for a large chunk of shares outstanding in some publicly traded companies. The cost difference between the two types of shares can be rather large. Typically, the cost 7

Wan (2015).

162

6 The Construction and Theoretical Innovation of the Socialist Market …

base of tradable shares is much greater than that of non-tradable shares. This cost gap has led to some unpleasant episodes among investors holding different share classes, which is not conducive to the protection of shareholder interests, especially small shareholders’, or to the healthy development of the capital market. Upon entering the twenty-first century, calls for resolving this unreasonable share structure kept coming from all quarter of the society. In April 2005, with the approval of the State Council, China Securities Regulatory Commission (CSRC) issued the Notice on Issues Concerning the Pilot Reform of Non-tradable Shares of Listed Companies, officially launching the non-tradable share pilot reform. In August of the same year, the CSRC, the SASAC, the Ministry of Finance, the People’s Bank of China, and the Ministry of Commerce jointly issued the Guiding Opinions on the Reform of the Split Share Structure of Listed Companies, providing more details to guide the pilot reform. In September, the CSRC, Shanghai Stock Exchange, Shenzhen Stock Exchange, China Securities Depository and Clearing Corporation and other relevant departments and institutions released a series of documents, including the Administrative Measures of the Reform of the Nontradable Shares of Listed Companies, the Guidance on the Format of the Instructions for the Reform of the Non-tradable Shares of Listed Companies, and the Operational Guidelines on the Pilot Reform of the Non-tradable Shares of Listed Companies, the Guidelines on the Work of Recommendation of the Reform of Non-tradable Shares of Listed Companies, among other supporting documents. The reform of non-tradable shares has been gradually promoted. By the end of 2006, 1301 companies listed in the Shanghai and Shenzhen stock markets had either completed the reform or entered the reform process, accounting for 97% of the companies to be reformed, and their corresponding market value accounting for 98%. With only 40 companies left unreformed, the reform of the non-tradable share structure was basically completed. The problem that had perplexed China’s capital market for more than ten years was finally solved smoothly.8

Stage IV (2013-Present): Let the Market Play a Decisive Role in Resource Allocation, Tackle the Tough Issues, and Strive to Have a Perfect Modern Market System by 2020 Looking back on China’s 40 years of reform and opening up, one can see full-fledged reform in all aspects in the first 25 years. In years 2003–2012, however, the pace of reform slowed down a bit, due to the many headwinds that had built up over time. The 18th CPC National Congress, held at the end of 2012, sounded the clarion again, calling for further reform to tackle these tough issues. The national congress put forward the task of building a moderately prosperous society in all aspects. Its Third Plenum made a decision to further deepen the economic restructuring reform, 8

Economic and Resources Management Institute, Beijing Normal University (2008, p. 80).

6.1 The Four Stages of the Development of China’s Market System Since …

163

accelerate the improvement of the modern market system, and let the market play a decisive role in the allocation of resources. (1) In 2013, the Third Plenum of the 18th CPC Central Committee proposed that the market should play a decisive role in resource allocation The narrative of letting market play a decisive role in resource allocation was the extension of the market’s basic function formulation that had been in place for more than 20 years. In 1992, while establishing that the goal of the reform was to build the socialist market economy, the Party and the government made it clear that the market should play a basic role in resource allocation. So why did the Third Plenum of the 18th CPC Central Committee replace the original “basic” role with the new “decisive” role? There are three major reasons. First, this is the result of the Party’s increasingly deepened understanding of the socialist market economy reform. In 1992, the 14th CPC National Congress proposed to “make the market play a basic role in resource allocation under the macro-control of the socialist country.” In 2002, the 16th CPC National Congress further proposed to “to make the market play a basic role in resource allocation to a greater extent, and establish a unified, open, competitive and orderly modern market system.” In 2012, the 18th CPC National Congress further proposed that “the basic role of the market in resource allocation should be played to a greater extent and in a wider scope.” It can be seen that over the past two decades, the Party’s understanding of the role of the market mechanism moved forward gradually, culminating with the formulation that the market should play a decisive role in the allocation of resources. Compared with the original “playing a basic role” formulation, the latest formulation more accurately and more clearly reflects the dominant role of the market mechanism in resource allocation, and the internal requirements of the basic law and the law of value in the market economy. Second, this is the inevitable pragmatic choice for the development of the economic restructuring reform. After the goal of the socialist market economic system reform was set firmly at the 14th CPC National Congress, the socialist market economic system improved rather quickly through the promotion of market-oriented reforms. However, the system is far from perfect, and there exist many institutional defects and flaws. The government still engages in direct allocation of too many resources. It intervenes too much in the social and economic activities. There exist many forms of administrative monopoly. Some non-natural monopoly fields are shielded from competition by the government. Improper intervention by the government in the market and prices hinders the formation of a unified modern market system. The implementation of discriminatory policies against the non-public sector hinders the formation and improvement of a fair competition market environment. The government’s macro management is not perfect, either. The supervision of the market is not well put in place. The supervision of public services, environmental protection, and social governance are far from being perfect. In order to further deepen market-oriented reforms, it is essential to change the narrative about the role of the market, from being “basic” to being “decisive.” The new formulation can help tackle the difficult issues in the reform process, achieve decisive results in important

164

6 The Construction and Theoretical Innovation of the Socialist Market …

fields and key links of the economy, and make the socialist market economic system more mature and more stereotyped by 2020. Third, the new narrative pushes the government to play a better role. The decisive role of the market in resource allocation does not mean that it does not attach importance to the role of the government, but rather that it clarifies the functions of the government and allows it to pay a better role. In the spirit of the decision made by the Third Plenum of the 18th CPC Central Committee, we believe that the functions of the government mainly include the following five aspects. The first and foremost is to do a good job in macroeconomic regulation and control, ensure the stable operation of the macro-economy, and avoid large swings of economic activities. These are the exclusive functions of the central government. The second is to strengthen market supervision to maintain fair and orderly competition. The government is the referee, not the players. Even for state-owned enterprises, it is necessary to ensure the separation of government from enterprise and from capital. Third, the government needs to do a good job in public services, an area that is not well put in place and should be strengthened as soon as possible. The forth is to improve social governance and promote social harmony and overall progress. The fifth is to protect the environment and ecology, perfect the property rights and control system of natural resources, draw the red line of ecological protection, implement the system of compensated use of resources and ecological retribution, and reform the management system of ecological environment protection. (2) The reform of the commercial system stimulated the vitality of the market participants and improved the business environment The Third Plenum the 18th CPC Central Committee proposed to make the business registration system more convenient by reducing the number of items that require qualification verification, turning certification before licensing into certification, and gradually changing the paid-in capital registration system into a subscribed capital registration system. Since then, great progress has been made in comprehensively deepening the reform of the commercial system. In particular, micro market entities, especially newly established enterprises, grew rapidly. In 2015, 14.798 million market entities were newly registered in China, including 4.439 million new enterprises, an increase of 21.6% over the previous year. On average, 12,000 new enterprises were registered each day in 2015, compared to 10,000 in 2014. In 2016, the number of newly registered enterprises increased by 24.5%, with an average of 15,000 new businesses created each day. In 2017, 16,600 new enterprises were registered each day. In comparison, before the reform, only 6900 enterprises were registered daily. According to the World Bank’s business environment reports, China’s ranking reached up six spots each year consecutively in 2015 and 2016. China ranked 84th out of 189 economies in 2015, indicating continued improvement in the country’s business environment.9 According to Doing Business 2019: Training for Reform, an annual report on business-friendly environment around the world released by the World Bank on October 31, 2018, China’s ranking rose to the 46th place, from 9

People’s Daily, February 23, 2016.

6.1 The Four Stages of the Development of China’s Market System Since …

165

previous year’s 78th place, making it among the top 50 business-friendly economies in the world.10 (3) Price reforms were deepened with new progress The Third Plenum of the 18th CPC Central Committee decided to deepen the economic system reform that is centered on making the market play a decisive role in resource allocation. To this end, it is necessary to improve the mechanism whereby prices are mainly determined by the market. Since then, the Party and the government have pushed forward price reforms from various angles, and the reforms have made new progress. First of all, prices of many goods and services have been gradually liberalized. The prices of nearly 60 goods and services used to be administered by the central government have been liberalized or decentralized. The prices of all agricultural products, the vast majority of medical drugs and the vast majority of professional and technical services are now determined by the market. Only about 20 projects are directly priced by the central government, a drop of about 80% from the level in 2001. Secondly, the degree of marketization of prices in some important fields such as electric power, oil products, natural gas, and railway transportation has increased substantially. The reform of electricity transmission and distribution prices has been expanded from the power grid in Shenzhen to other provincial power grids. The prices of electricity transmission across regions or provinces have been fully liberalized. By the end of 2016, the transmission and distribution price reform fully covering the first level power grid was completed, one year ahead the plan. The feed-in tariff of coal-generated electricity and the retail electricity price paid by commercial businesses were reduced sharply. The price of refined oils has basically realized marketization. The prices of natural gas stock and incremental gas for non-residential users were smoothly unified. By the end of 2016, the price of natural gas at valve station for non-residential users, which accounted for 80% of the total consumption, was determined by the market.11 The price of railway freight has been basically straightened out, and a flexible adjustment mechanism of price fluctuations has been established. Thirdly, the progressive price system for residential use has been gradually promoted. Progressive natural gas prices have been implemented in 50 cities from 13 provinces, progressive natural water prices implemented in 275 cities from 26 provinces, and progressive electricity prices established in all places except Xinjiang and Tibet. Finally, the reform of local prices has speeded up at the same time, cutting the number of items the prices of which are set by the government by more than half. Eleven regions, including Shanghai and Beijing, have completed the revision of local pricing catalogue.12 In October 2015, the CPC Central Committee and the State Council jointly issued Several Opinions on Promoting the Reform of the Price Mechanism, spelling out six areas for future reform: (1) improving the price formation mechanism of agricultural products; (2) accelerating the marketization of energy prices; (3) improving the price policy of environmental services; 10

Economic Information Daily, November 1, 2018. Hu (2017). 12 People’s Daily, October 19, 2015. 11

166

6 The Construction and Theoretical Innovation of the Socialist Market …

(4) rationalizing the price of medical services; (5) improving the price mechanism of transportation; and (6) making innovations in the price management of public utilities and public welfare services. It can be expected that the price reform will be further deepened and developed in the future, and the construction of the modern market system will continue to make progress.

6.2 Debates About and Breakthroughs of Several Theoretical Issues During the Construction of the Modern Market System Driven by price reforms and market development, China’s economic activities gradually pivoted from central planning to market-oriented, and its economy gradually evolved from the traditional planned economy to the socialist market economy. Market-oriented reforms entail the construction and improvement of the modern market system. In the process of constructing such a system, Chinese economists have actively engaged themselves in the exploration, discussion and innovation of theories, and made policy suggestions to promote the smooth progress of the reform.

Establishing the Socialist Market System is a Basic Requirement of the Economic System Reform Soon after the affirmation, in 1984, that the socialist economy was a planned commodity economy, economists made the suggestion that establishing the socialist market system should be a fundamental requirement of the economic system reform. (1) The essence of the economic restructuring reform is to bring in the market mechanism to invigorate the economy. Making full use of the market mechanism is the general direction of the economic system reform. (2) The market is the stage for all economic activities, whereby various producers and operators compete against each other on the same footing. A competitive market ensures a level playing ground for all enterprises. (3) The market provides the key link between the macro economy and the micro economy. In the new operation mode of the commodity economy, the state regulates the market and the market guides the enterprises. (4) It is the inherent requirement of the planned commodity economy that the government carries out macro-economic management mainly through indirect control of enterprises. It must be predicated on their operational autonomy and financial responsibility, as well as the general improvement of the market system. (5) The establishment and improvement of the market system make enterprises real producers and operators, and enable the government to gradually transform its management of enterprises from direct control to indirect control through mainly

6.2 Debates About and Breakthroughs of Several Theoretical Issues During …

167

economic and legal means, so as to establish a new socialist macroeconomic management system. (6) The market is not isolated. It is a system. Only by establishing and improving the socialist market system can the function of the market be fully exerted.13 Some studies provided special discussions on the establishment and development of the socialist market system. One such study argued that the reform should be divided into two stages. The main purpose of the first stage is to establish a relatively complete commodity market, whereas the main purpose of the second stage is to establish a complete market system on the basis of an improved commodity market. This is because, whether in history or in logic, the commodity market is the premise or foundation of the markets for labor, land, and capital. Of course, these markets cannot exist independent of each other. In fact, the commodity market and other markets grow and develop side by side, sometimes mutually exclusive and sometimes mutually stimulating. Therefore, in the first stage, while focusing on the establishment and improvement of the commodity market, we should also start to build up the other markets.14 In their overall plan designed for China’s economic system reform, John C. Fei and B. Reynolds, both of Yale University, divided the reform into the initial stage (1978–1985), the middle stage (1986–1997), and the last stage (1998–2006). They used the degree of development in various markets as an important indicator to distinguish the three stages. The arrival of the monetary economy was the salient symbol of the initial stage, the commodity market was established in the middle stage, and the capital market and labor market were established in the last stage.15 Economists from some developing countries in Asia agreed that the development of various markets in developing countries has followed a pecking order, roughly as follows: first establish the commodity market, then the financial market, and finally the labor market.16

The 1987 Debate on the Priority of Reform: State-Owned Enterprises or the Economic Operation Mechanism From October 1987 to June 1988, the State Commission for Restructuring summoned a group of research teams from some prestigious institutions and universities to submit their consulting reports on the outline of China’s medium-term (1988– 1995) economic reform plan. They included the research teams from the Chinese Academy of Social Sciences, Peking University, the Party School of the Central Committee, People’s University of China, the Development Research Institute of 13

Chen (1988). Guo et al. (1986). 15 On the Rational Order of the Overall Reform of China’s Economic System. Learning Materials for Economic Workers, 11 (1987). 16 Zhang and Wu (1987). 14

168

6 The Construction and Theoretical Innovation of the Socialist Market …

the Agricultural Research Center of the State Council, the State Planning Commission, and the Shanghai Municipality, as well as the research team headed by the economist Wu Jinglian. This was a crucial junction in China’s transition from the old to the new economic system. More than one hundred experts and scholars from relevant economic departments, research institutions, colleges and universities, and some municipalities directly under the central government were invited by the State Commission for Restructuring to brainstorm about specific ideas and plans on how to carry out the economic reform over the next five to eight years. This was an exploration of collective wisdom for best reform policies. The eight research teams agreed unanimously on the marketization direction of the economic reform going forward. However, they had differing opinions on how to promote market-oriented reforms, what the path of the medium-term reform should be, how to deal with the relationship between reform, development and stability, and whether to implement short-term, rapid transition or take a long-term, gradual approach. Each team put forward its own ideas and policy recommendations for the debate, forming a delightful scene of a hundred schools of thought contending each other. At that time, the most controversial issue concerned with the main line of the midterm reform. Three differing opinions were put forward during the debate. The first came from the research teams from Peking University and the Party School of the CPC Central Committee. This school advocated enterprise-centered or ownershipcentered reforms. The main line of the medium term reform was to implement the joint-stock system and establish the modern enterprise system. They suggested that price reform should not be taken as a breakthrough in designing the reform plan going forward. The rationale was that price was, after all, the transactional condition for the transfer of ownership between various parties in the marketplace. Without an effective ownership structure, there could be no effective restriction on the property rights relationship between enterprises and consumers, and neither could there be a real reasonable price system. Moreover, in a severe shortage economy, price and its adjustment had little impact on resuming economic imbalance. In an economy where enterprises did not have the freedom as separate legal entities, even if price was liberalized, the expected effect would not take place. The effect of price reform on the whole economic life would depend on the degree of the corporate status enterprises were allowed to have under the socialist conditions. In the commodity economy, the price system was not so much given to enterprises by the central government as created by the enterprises themselves after they became commodity producers in a legal sense. Therefore, price reform could only be the end result of the enterprise reform. At the core of the whole economic system reform could only be the transformation of the enterprise system itself. Around this core, price could be adjusted gradually and, after the market was formed, be fully liberalized. The second school of thought was represented by the research team led by Wu Jinglian. This school advocated that we should take price reform as the main line and strive to transform the economic operation mechanism, so as to create a good market environment for the reform of enterprises and other areas. The key to market-oriented reforms, therefore, lied in price reform. With mandatory planning annulled, were prices not simultaneously deregulated and the market formed, the whole economic

6.2 Debates About and Breakthroughs of Several Theoretical Issues During …

169

activity would inevitably fall into chaos. Price liberalization and establishment of a competitive market system were the prerequisite for the new system to come into full play. Therefore, the market price reform should be the center of the economic system reform. The medium-term reform plan must take the price reform and the establishment of the market as its basic line. The third school, as represented by the research team of the Chinese Academy of Social Sciences, advocated two main lines of reform: one was the reform of enterprises and prices, while the other was the ownership reform and the economic operation mechanism reform. They argued that the two lines were like the two sides of the same coin and hence should be carried out simultaneously in a coordinated way. Price reform and ownership reform were interlinked and interacted as both cause and effect. Therefore, it was out of the question to ask which one should come first. On the one hand, the transformation of the enterprise property rights system required, as an external condition, the liberation of prices and the formation of a competitive market simultaneously. On the other hand, the rationalization and liberalization of prices required the corresponding transformation of the enterprise behavior mechanism. Therefore, the basic idea of deepening reform was to grasp the two main lines at the same time, and adhere to the organic and dialectical combination of the two aspects of reform. Of course, the focus may vary over time, depending on the specific situations. The practice of China’s economic reform in the 1980s and 1990s showed that price reform led other reforms, pushing forward the development of the market. The role of the market mechanism expanded gradually. As shown in Table 6.4, by 1997, after two decades of price reform, market prices dominated total retail sales of social commodities, total sales of industrial means of production, and total purchases of agricultural and sideline products. During the same period, the number of the categories (kinds) of products the prices of which were under the control of the state department in charge and other relevant departments was reduced from 1336 in 1978 to only 58 in 1997. As price reform was rapidly promoted, reform of state-owned enterprises fell short of expectation. Between 1987 and 1992, the contractual management responsibility system prevailed. But one round of contract led to a new round of losses of state-owned assets. This practice deepened the blurring between the government and enterprises. More and more state-owned enterprises suffered losses due to the lack of market competitiveness. In 1997, the central government put forward the Table 6.4 Role of the market in determining prices of various products in 1978 and 1997 Year Percentage of total retail sales of social commodities whose prices are determined by the market

Percentage of total sales of industrial means of production whose prices are determined by the market

1978

0

2.8

1997 93.2 Source Wang (1999)

81.6

Percentage of total purchases of agricultural and sideline products whose prices are determined by the market 7.4 80.5

170

6 The Construction and Theoretical Innovation of the Socialist Market …

task of helping state-owned enterprises out of their financial woes over the next three years and speeding up the establishment of the modern enterprise system. Overall, China’s reform practice is more in line with the judgment of the research team led by Wu Jinglian. The price reform and the economic operation mechanism reform have forced reforms on state-owned enterprises. Without the reform, state-owned enterprises won’t be able to respond to the changes in market price, the role of the market in optimizing resource allocation will be limited, compromising the function of market prices. Put simply, price reform and reform of state-owned enterprises must be carried out in a coordinated way, and neither should be neglected. With the continuous promotion of market-oriented reforms, the degree of marketization in the economic activities has made steady progress. It is reckoned that 69.0% of the Chinese economy was marketized in 2001, 73.3% in 2004, 78.3% in 2005, and 77.7% in 2006. Other estimates are similar.17 With the degree of marketization exceeding 70%, the economy has entered the market-driven stage.

China’s Accession to the World Trade Organization not only Accelerated Its Integration with Globalization, but also Effectively Speeded up the Establishment of a Modern Market Economy China formally joined the WTO at the end of 2001, becoming the 143rd member of the international organization. It was a major event in the process of reform and opening up—indeed, a milestone of historic proportions. It was also a major move in line with the trend of globalization. The accession to the WTO elevated China to a brand new stage of opening up. During the negotiation process, however, there were concerns about the potential adverse impacts of WTO accession on many domestic industries, such as finance, agriculture, commerce, information technology, medicine, and education. In hindsight, these concerns are unwarranted. The benefits from WTO accession have far outweighed the disadvantages. Foreign trade and both inbound and outbound foreign direct investment (FDI) have experienced rapid growth. Many of the original concerns have never materialized. Admittedly, China is a huge beneficiary of economic globalization. Its accession to the international organization has increased its rate of return. Its economic aggregates, balance of payments, foreign exchange reserves, and international status have all increased enormously, attesting to the benefits from WTO accession. Opening up in turn has promoted reform. In particular, a large number of laws, regulations and policies that were either contradictory to or inconsistent with the general rules of the market economy have been revised or abolished, which helped speed up China’s progress towards the modern market economy and the improvement of the modern market system.

17

Economics and Resources Management Institute, Beijing Normal University (2008, p. 3).

6.3 The Essential Condition for the Market to Play a Decisive Role …

171

Since joining the WTO, China has fulfilled its commitments in earnest, deepened various reforms, participated in economic globalization on a larger scale and to a deeper extent, and participated in global economic governance with a more positive attitude. China has fully fulfilled its commitment on tariffs, with the average tariff dropping from 15.88% in 2001 to 9.6% in 2014. With a new round of tax reduction measures implemented on November 1, 2018, the overall tariff rate dropped to 7.5%, to a level exceeding China’s commitment to the WTO and lower than most developing countries.18 China’s exports increased from $266.098 billion in 2001 to $2342.746 billion in 2014. Its share of total global exports went up from 5.9% in 2003 to 12.2% in 2014. China’s imports increased from $243.553 billion in 2001 to $1960.253 billion in 2014, and its share of total global imports rose from 5.4% in 2003 to 10.5% in 2014. China’s actual use of foreign capital increased from $49.67 billion in 2001 to $119.705 billion in 2014, $126.3 billion in 2015, $126 billion in 2016, and $131 billion in 2017. China’s outward foreign direct investment has also grown rapidly in recent years, with $102.9 billion in 2014, $118 billion in 2015, $170.1 billion in 2016, and $120.1 billion in 2017. In 2016, the outbound FDI exceeded the inbound FDI for the first time. The total contract value of foreign projects undertaken in China increased from $13.039 billion in 2001 to $191.76 billion in 2014, $154.1 billion in 2015, $159.4 billion in 2016, and $168.6 billion in 2017. These figures indicate that after its accession to the WTO, China has built a new open economic system more aggressively.

6.3 The Essential Condition for the Market to Play a Decisive Role in Resource Allocation Is to Speed up the Improvement of the Modern Market System Accelerating the improvement of the modern market system is crucial for the market to play a decisive role in the allocation of resources. China’s reform practice over the past four decades has shown that the construction of a well-structured, fully functioning, and competitive modern market system is the major focal point in the transformation of the economic operation mechanism and the basis for the healthy operation of the socialist market economy. To realize the goal of building a perfect socialist market economy system by 2020, we need to accelerate the improvement of the modern market system.

18

People’s Daily, November 18, 2018.

172

6 The Construction and Theoretical Innovation of the Socialist Market …

A Modern Market System is Essential to Ensure that the Market Plays a Decisive Role in Resource Allocation The decision of the Third Plenum of the 18th CPC Central Committee, held in 2013, made the following statement: Establishing a unified, open, competitive and orderly market system is the basis for the market to play a decisive role in the allocation of resources. We must put in place a modern market system in which enterprises enjoy independent management and fair competition, consumers have free choice and make autonomous consumption decisions, products and factors of production flow freely and are exchanged on an equal basis, strive to remove market barriers, and raise the efficiency and fairness of resource allocation.

In the spirit of the decision, the modern market system should include three essential elements. First, enterprises are independent market players and, as such, enjoy operating autonomy and fair competition. Autonomous operation is the basic condition for an enterprise to truly become an enterprise. It implies that the enterprise freely engages in purchasing raw materials and selling its products and services. Fair competition is the core of market competition in the socialist market economy. Only under fair competition can the survival of the fittest truly materialize, rather than the expulsion of good money by bad money (or adverse selection), and can the basic function of the market to optimize resource allocation be fully put in play. Second, consumers are free to choose and consume at their own will, rather than forced to buy. Consumer rights and interests must be protected, including the rights to have information. This can only be achieved in a buyer’s market where the market system is relatively well-developed. The ration system and coupon-based consumption as implemented in the old economic regime are contradictory to this. Third, products and factors of production flow freely and are exchanged on an equal basis. To ensure free flow and exchange, all sorts of market barriers must be dismantled. Equal exchange means fair and open exchange. Price is formed through bargaining between buyers and sellers in the competitive market, rather than set by the government or controlled by monopolists. Only when the above three essential elements are all satisfied can we call it a unified, open, competitive, and orderly market system. Otherwise, it would be a fragmented, disorderly, and noncompetitive market system. Only by forming a modern market system can the market play a decisive role in resource allocation and optimize its efficiency and fairness. To be sure, the modern market system can only be formed gradually, the result of the development and maturity of all kinds of markets. In the planned economic system prior to 1978, the role of the market mechanism and the law of value were excluded. With prices mainly set by the government, there were only some scattered, small-scale markets for consumer goods. After reform and opening up, with the gradual development and deepening of market-oriented reforms and the continuous development of commercialization, monetization and marketization, the markets for agricultural and sideline products and industrial consumer goods were rolled out first. The market for industrial means of production followed suit and grew gradually. The fledgling market took off after the early 1990s when the dual price

6.3 The Essential Condition for the Market to Play a Decisive Role …

173

system was transformed to a unified system built on market price. In the mid and late 1990s, the buyer’s market pattern gradually took hold. The ration system with the widespread use of coupons for consumer goods was completely eliminated. Before long, the markets for various factors of production, including land, labor, capital, and technology, were established and quickly developed. All in all, China has become the largest market in the world. In 2015, the total retail sales of consumer goods reached 30.0931 trillion yuan, exceeding the 30 trillion milestone for the first time. It continued to rise, to 33.2316 trillion yuan in 2016, and 36.6262 trillion yuan in 2017. In 2016, total imports and exports of merchandises amounted to 24.3386 billion yuan, with a trade surplus of 3.3523 trillion yuan. In 2017, total trade of goods reached 27.7923 trillion yuan, with a surplus of 2.8718 trillion yuan. In 2017, companies listed in the stock market raised a total of 4.0836 trillion yuan in equity capital in the domestic market alone. In 2015, the transaction volume was 131.6369 trillion yuan in the bond market, and 554.23 trillion in the futures market. In 2017, total sales of commercial housing was 13.37013 trillion yuan. Although the modern market system has been basically established in China, it is far from being perfect. It is riddled with many institutional defects and shortcomings to be fixed in the future. It should also be noted that even after a better modern market system is formed, it still needs to improve continuously as the market-based economic activities expand. Therefore, the construction of the modern market system is a work in progress, rather than a mission accomplished. The global financial crisis of 2008–2009 reminds us that although developed economies are generally believed to have a modern market system, including the financial market, defects and regulatory loopholes abound, constantly in need of repairs and improvement. The role of the government is indispensable in the construction of the modern market system. The government should not only cultivate and build various markets. It should also formulate fair and reasonable market rules, create an open, fair and just market competition environment, and maintain market order. It is not sufficient to merely be a watchman. The government should also act as a regulator, supervisor, and law enforcer to ensure sound market and economic orders. The government buys goods and services in the market, but it should participate in market and economic activities on an equal footing with ordinary consumers, and should not abuse its administrative power to interfere and hinder fair competition. The main responsibility of the government is to act as the referee of the market and supervise the economic activities. As such, it should not act as both the referee and the player who participates in market activities, because doing so will affect or even destroy fair market competition. Some scholars have proposed that we should deepen the reform of the market for factors of production and create a fair competition environment for them. The market for factors of production is the main battlefield of the supply-side structural reform. The market-oriented reform of factor resources is focused on the free flow and optimal allocation of various production factors such as capital, land, labor, technology, management, and resources. In January 2017, the general office of the CPC Central Committee and the general office of the State Council jointly issued the Guidance on Innovating the Allocation of Resources by the Government. The policy aimed

174

6 The Construction and Theoretical Innovation of the Socialist Market …

to greatly reduce the allocation of resources directly dictated by the government, introduce more market mechanisms and market-oriented means, and improve the effectiveness and efficiency of resource allocation. It is of great significance for the government to take the initiative to reform the way resources are allocated, so as to allow the market to play the decisive role. Towards this end, the following measures are needed. First and foremost, improve the multi-level capital market system and enhance the vitality of the real economy. Secondly, steadily promote reform of the land system and stimulate the rural development potential. Thirdly, tear down the barriers associated with the household registration (or hukou) system to promote the free flow and optimal allocation of the labor force. Fourthly, improve the mechanism for the protection of intellectual property rights and promote the construction of the technology market. Lastly, accelerate the construction of the urban and rural factors market and enhance the sustainable power of economic and social development.19

Several Issues Need to Be Resolved in Order to Speed up the Improvement of the Modern Market System In the spirit of the decision by the Third Plenum of the 18th CPC Central Committee, the following issues must be resolved in order to speed up the improvement of the modern market system. (1) Implement a unified market access system that is based on the negative list The decision of the Third Plenum of the 18th CPC Central Committee stated: “We will implement a unified market access system; and on the basis of making a negative list, all kinds of market players may enter areas not on the negative list on an equal basis and according to law. We will explore a management model for foreign investors with pre-entry national treatment plus the negative list.” Prior to this decision, China had relied on the positive list approach to manage market access. Under this approach, the government explicitly listed the sectors where market access was allowed, and sectors not on the list were not accessible. In reality, however, entry to the sectors on the positive list had never been easy. An application had to be submitted to the relevant government departments for review and approval. The waiting period could be very lengthy—so long that it was often dubbed as the Long March. The practice was replete with red tape and bureaucracy, not only causing time, energy and money, but also prone to graft. The positive list scheme was particularly discriminatory against private capital in sectors such as finance, oil, electricity, railway, telecommunications, resources development, and public utilities, or in the non-natural monopoly fields of monopoly industries. In 2005 and 2010, the State Council twice issued its opinions (referred to as the “36 Rules” in brief), intended to encourage, support, and guide the development of the non-public economy, including both individual and private sectors. However, the rules had proved difficult to implement, not least because under 19

Peng (Editor-in-Chief) (2018, pp. 16–18).

6.3 The Essential Condition for the Market to Play a Decisive Role …

175

the positive list regime, for private investors to enter into the monopoly industries and public utilities, they had to get the approval from the government departments none other than those that were in charge of these fields. The department officials were reluctant to stamp their approval because doing so would hurt their own vested interests. Consequently, they set up various artificial obstacles akin to glass doors, whereby one could see through but could hardly get in. Under the proposed negative list scheme, market access is unified in the sense that sectors not on the list are free to enter. You can’t possibly put the competitive businesses on the negative list. Enacting a negative list helps break up all kinds of administrative monopoly, liberalize the competitive businesses of monopoly industries, and expand the scope of private capital. The negative list approach is a common practice in developed economies around the world. It enhances transparency and rule of law, mitigates discriminations against the non-public sector, and nurtures a market environment of fair competition. On September 29, 2013, the Shanghai Free Trade Zone was officially enacted. The 2013 Negative List, which consisted of 190 restrictive measures, was released to the public on the same day. As China’s first negative list, it marked the beginning of the country’s shift to market entry management based on a negative list. The 2014 edition of the negative list, revised substantially, contained a total of 139 special restrictive measures for foreign access, 51 fewer than the 2013 edition, a drop of 26.8%. After two years of practice and exploration in the Shanghai Free Trade Zone, in 2015 the State Council issued the Special Management Measures for Foreign Investment Access in the Pilot Free Trade Zone (Negative List). The number of special management measures, which applied uniformly across the four free trade zones established at the time, including the zone in Shanghai, was further reduced to 122.20 It is expected that as openness widens the negative list will get shorter and shorter in years to come. Moreover, the negative list system will be gradually extended to all parts of the country. By the end of 2016, in addition to the Shanghai Free Trade Zone, seven new pilot free trade zones had been established. (2) Reform the market supervision system, implement uniform market supervision, and truly form a market environment of fair competition The main purpose of market supervision is to ensure that market players comply with rules and regulations, so as to maintain an orderly market and a fair competition environment. The Third Plenum of the 18th CPC Central Committee decided to tidy up and annul all sorts of regulations and policies that impede the creation of a unified market and fair competition, strictly ban and punish all unlawful acts that extend preferential policies, combat regional protection, and oppose monopoly and unfair competition. It also decided to establish and improve a social credit system that commends honesty and punishes fraud, improve the market exit system whereby good players chase away bad ones, and perfect the enterprise bankruptcy system.

20

Wan (2015, pp. 65–66).

176

6 The Construction and Theoretical Innovation of the Socialist Market …

For a rather long period of time, some local governments unlawfully offered preferential treatments in land uses and tax policies to local businesses, in order to maximize GDP growth in their own localities. For example, they granted preferential electricity prices to high energy consuming industries, covered or even protected highly polluting enterprises that were destructive to the environment and the ecological system, forced consumers to buy local products, and imposed price discriminations against raw materials producers selling to other regions. Such local protectionism led to vicious regional competition. Some local governments even provided subsidies to zombie state-owned enterprises with a long lasting loss record and no hope to turn around, or offered bank loans to keep them float. Such practices had hindered the establishment and improvement of a unified national market. They were not conducive to the optimal allocation of resources, because they aggravated overcapacity. Some monopoly industries were reluctant to open up their non-natural monopoly business areas, and went to great lengths to maintain high prices and high charges, all at the expense of the quality of services. Some enterprises were engaged in collusive alliances to hike prices and in other forms of unfair competition. This, in essence, was regional protectionism. Monopoly stifled competition and innovation. It paralyzed the market’s decisive role in resource allocation, and impaired the efficiency of resource allocation. In addition, some enterprises compromised the standard of business integrity. Since the cost of dishonesty was too low, fake and shoddy products were rampant in the market. Despite repeated efforts, the problem of widespread breaching of contracts had never been truly solved. Such were the problems that overshadowed China’s business environment and slowed down the construction of the modern market system. Therefore, it’s imperative to strengthen the unified market oversight, standardize the behavior for each market participant, and create a sound environment for the market to play a decisive role in resource allocation. The decision of the Third Plenum of the 18th CPC Central Committee put forward some specific provisions in response to the problem that the conducts of some market subjects were not yet normalized. For example, in view of the problem that some local governments offered preferential tax treatments without central government authorization, the decision pointed out: “In line with the principles of unifying taxation, promoting equality in tax burdens and fair competition, we will strengthen management of preferential tax policies, especially regional preferential tax policies. All preferential tax policies will be made clear in taxation laws and regulations and we will sort out existing preferential policies in this regard.” In view of the monopoly problem, the decision stated: “In natural monopoly industries in which state-owned capital continues to be the control shareholder, we will carry out reform focusing on separation of government administration from enterprise management, separation of government administration from state assets management, franchise operation, and government oversight, separate networks from operations and decontrol competitive businesses based on the characteristics of different industries, and make public resource allocation more market-oriented. We will continue to break up all forms

6.4 Improve the Financial Markets and Establish a Unified Market …

177

of administrative monopoly.” The decision also proposed to establish a unified data platform to make basic data such as real estate and credit available to the whole society, and to promote information sharing among departments.

Promote the Facilitation of Industrial and Commercial Registration System The Third Plenum of the 18th CPC Central Committee decided to make the business registration system more convenient by reducing the number of items that require qualification verification, turning certification before licensing into licensing before certification, and gradually changing the paid-in capital registration system into a subscribed capital registration system. The State Council and the relevant departments quickly implemented this reform measure and achieved immediate results. Market vitality and entrepreneurship were greatly stimulated. Starting from 2014, on average, more than 10,000 new enterprises were registered each day. The number of tax paying enterprises went up at the same time. According to an independent assessment, in the first half of 2015, newly created enterprises contributed 0.4% points to China’s GDP growth. New enterprises are essential to creating new jobs and increasing people’s incomes. Over the past few years, China’s economic growth has slowed down, yet employment has increased, thanks to the reform of the business registration system. According to surveys, each enterprise on average created 7.4 jobs, and each individual business created 2.9 jobs. Based on this, it is estimated that newly registered enterprises created more than 12 million jobs in 2014, and more than 14 million jobs in 2015.21 Reforms intended to promote steady growth in employment will continue to move forward. More work is needed to improve the market oversight system. The business environment in China can only get better.

6.4 Improve the Financial Markets and Establish a Unified Market for Construction Land in Both Urban and Rural Areas To speed up the improvement of the modern market system, it is also important to improve the financial markets, establish a unified construction land market in both urban and rural areas, and deepen the reform of the science and technology sector.

21

People’s Daily, February 23, 2016.

178

6 The Construction and Theoretical Innovation of the Socialist Market …

Improve the Financial Markets In the spirit of the decision by the Third Plenum of the 18th CPC Central Committee, the following aspects deserve special attention. (1) Allow private investors to found small and medium-sized banks and other financial institutions The Third Plenum of the 18th CPC Central Committee decided, for the first time, to allow qualified non-state capital to set up, in accordance with law, financial institutions such as small or medium-sized banks, on the precondition that this would come under stronger oversight. In March 2014, China Banking Regulatory Commission (CBRC) designated five banks to be funded by private capital in a trial scheme. As part of the requirements, each bank was to be co-sponsored by at least two investors. By the end of 2016, CBRC had approved 17 private banks. Sixteen urban commercial banks were listed in the stock market. Additionally, there were 35 private capital funded investment trusts, 39 finance companies owned from enterprise groups, 35 financial leasing companies, six auto finance companies, 14 consumer finance companies, and one financial asset management company. Private capital accounted for 86.3% of the equity of small and medium-sized financial institutions in the rural areas.22 The development of small and medium-sized private financial institutions helped improve the structure of China’s financial system, and better serve small and medium-sized businesses. (2) Accelerate the marketization process of the RMB interest rates and exchange rates, and accelerate the realization of RMB capital account convertibility The decision of the Third Plenum of the 18th CPC Central Committee made the following statement regarding this issue: “We will improve the mechanism for market-based RMB exchange rate formation, accelerate interest-rate liberalization, and improve the national debt yield curve that reflects the relationship between market supply and demand. We will promote the opening of the capital market in both directions, raise the convertibility of cross-border capital and financial transactions in an orderly way, establish and improve a management system of foreign debt and capital flow within the macro-prudential framework, and accelerate the realization of RMB capital account convertibility.” The report of the 19th CPC National Congress further pointed out that we should strengthen the regulatory framework based on monetary policy and macro-prudential policy (the twin pillars), and deepen the marketization reform of interest rates and exchange rates. In 2015, the People’s Bank of China, China’s central bank, uncapped the upper limit of RMB deposit interest rate, signaling that the marketization of RMB interest rate had been basically realized. The floating band for the RMB exchange rate was expanded, further improving the degree of its marketization. RMB convertibility for capital account transactions has been put on the agenda. In sum, reforms in these areas have gradually advanced in accordance 22

Peng (Editor-in-Chief) (2018, p. 271).

6.4 Improve the Financial Markets and Establish a Unified Market …

179

with the requirements by the Third Plenum of the 18th CPC Central Committee and the 19th CPC National Congress. (3) Establish a deposit insurance scheme and improve the market-based exit mechanism of financial institutions This is another bright spot of the decision of the Third Plenum of the 18th CPC Central Committee. Deposit insurance is an important scheme to protect depositors in the market economy. It is an indispensable component of the financial safety net. At present, 110 countries and regions around the world have established deposit insurance. Following the decision of the Third Plenum of the 18th CPC Central Committee, the State Council put forth the regulation on deposit insurance in April 2015. Effective on May 1, 2015, the insurance scheme would cover bank deposits up to 500,000 yuan. In setting this maximum limit, the People’s Bank of China consulted experts from various fields. The central bank also took into account Chinese preference to hold bank deposits and the role of deposits as a sort of social security. The amount is 12 times the per capita GDP in 2013, higher than most countries based on the same yardstick. It provides full coverage on 99.63% of the deposits.23 The establishment of the deposit insurance scheme has created the most important condition for market-based exit of financial institutions.

Establish a Unified Construction Land Market for Both Urban and Rural Areas The Third Plenum of the 18th CPC Central Committee made the following statement in its decision: “We will allow rural collectively owned profit-oriented construction land to be sold, leased and appraised as shares, on the premise that it conforms to planning and its use is under control, and ensure that it can enter the market with the same rights and at the same prices as state-owned land. We will narrow the scope of land expropriation, regulate the procedures for land appropriation, and improve the rational, regular and multiple security mechanism for farmers whose land is requisitioned. We will broaden the scope of compensated use of state-owned land, and reduce land appropriation for non-public welfare projects. We will establish a mechanism for the distribution of incremental benefits from land that takes into account the interests of the state, the collective and the individual, and appropriately raise individual income from such benefits. We will improve the secondary market for land leasing, transfer and mortgage.” To be sure, land is the most important factor of production and the most important property for farmers. In the past, farmers’ property rights were not well respected. Many local governments had generated income from activities infringing farmers’ property rights, distorting land-based finance. The key to the establishment of a unified construction land market for both urban and rural areas is to allow rural collectively owned, profit-oriented construction land to be sold, 23

Economic Daily, April 1, 2915.

180

6 The Construction and Theoretical Innovation of the Socialist Market …

leased and appraised as shares, on the premise that it conforms to planning and its use is under control, and ensure that it can enter the market with the same rights and at the same price as state-owned land. The establishment of a unified construction land market will help invigorate collectively owned construction land in the rural areas, improve land use efficiency, increase the incomes to farmers and rural collectively owned economic organizations, and narrow the income gap between urban residents and farmers, as well as the development gap between urban and rural areas. Some existing laws and regulations should be revised to incorporate the spirit of the decision by the Third Plenum of the 18th CPC Central Committee. This way, reforms can be carried out in accordance with law and regulation, and the land market can be put on the track of healthy development, and the market can better play its role in the allocation of land resources. After the Third Plenum of the 18th CPC Central Committee, all localities have deepened the reform of the rural collective property rights system in the spirit of the decision. The most prominent achievement is the implementation of the separation of three rights: the rural collective ownership right of land, farmers’ contracting right, and land operation right. In October 2016, the general office of the CPC Central Committee and the general office of the State Council jointly issued Opinions on Improving the Measures for the Separation of the Ownership Right, Contracting Right, and Operation Right, proposing to explore the effective realization forms of rural land collective ownership. The policy required that collective ownership of farm land be clarified, farmers’ contracting right be stabilized, and farm land management right be liberalized, so as to form a well-structured framework offering equal protection of the three rights. It also required to speed up the confirmation and issuance of certificates for the contracted land in rural areas and expand the scope of pilot projects across the country. Comprehensive and coordinated efforts should be made to promote rural land acquisitions, entry of collectively owned construction land into the market, and pilot reform of the homestead system.

Deepen the Reform of the Management System of Science and Technology and Develop the Market for Technology To achieve economic transformation and industrial upgrading, China must rely on technological progress and innovation, reverse the situation of overly dependence on foreign technology, and build up a nation of innovations. The decision of the Third Plenum of the 18th CPC Central Committee made it clearly with the following message: “We will set up and improve mechanisms and institutions that encourage original innovation, integrated innovation, and re-innovation based on introduction and absorption, improve the mechanism that encourages market-based technological innovation, and give free rein to the market’s guiding role in technological research and development orientation, choice of paths, pricing of factors, and allocation of all innovation factors. We will establish an innovation system that integrates enterprises,

6.4 Improve the Financial Markets and Establish a Unified Market …

181

universities and research institutes, strengthen the dominant position of enterprises in technological innovation, give full play to the role of large enterprises as the backbone of innovation, arouse the innovation vitality of small and medium-sized enterprises, promote the reform of applied technology research and development institutes to make them more market-oriented and transform them into business enterprises, and build a national innovation system.” The review of technological innovation projects and the allocation of funds have long been dominated by the administrative departments of the government. There has been a dearth of strong policies to support the commercialization of innovative technologies and products and cultivate business models. In response to this problem, the decision of the Third Plenum of the 18th CPC Central Committee stated: “We will abolish administrative dominance and departmental fragmentation, and develop a mechanism within which the market plays a key part in determining innovation programs and allocation of funds, and assessing results. We will develop the technology market, improve the technology-transfer mechanism, improve the financing conditions for small and medium-sized enterprises of science and technology, improve the venture capital investment mechanism, innovate business models, and promote the capitalization and industrialization of scientific and technological achievements.” In order to better promote innovation and technological progress, the plenum called for strengthening the use and protection of intellectual property rights, improving the incentive mechanism for technological innovation, and exploring the establishment of intellectual property rights courts. In 2015, the Fifth Plenum of the 18th CPC Central Committee put forward the Proposal on Formulating the 13th Five-Year Plan for the National Economic and Social Development. The proposal made it very clear that we should improve the concept of development and firmly establish the concept of innovation, coordination, green, open and shared development. Additionally, since innovation is the first and foremost driving force of development, we must put innovation at the core of the overall development of the country, and constantly promote innovation in theory, system, science and technology, culture and other aspects, so that innovation runs through all the work of the Party and the country and takes hold in all corners of the society. It also proposed to implement an innovation-driven development strategy in depth, give full play to the leading role of scientific and technological innovation in comprehensive innovation, strengthen basic research, encourage original innovation, integrated innovation, and re-innovation based on the introduction and absorption of existing technology. Driven by the government strategy of strengthening innovation driven development, the technology market has developed rapidly. In 2015, a total of 307,000 contracts were signed, with total turnover of 983.5 billion yuan, an increase of about 14.7% over the previous year. In 2016, a total of 320,000 contracts were signed, with total turnover of 1147.7 billion yuan, an increase of about 16% over the previous year. In 2017, the corresponding figures were 368,000, 1342.4 billion, and 17.7%, respectively.

182

6 The Construction and Theoretical Innovation of the Socialist Market …

References Chen Xiaowei. (1988). Overview of Theoretical Research and Discipline Construction in Marketing over the Past Decade. Review of Finance, Trade and Economics, 4. China Economic System Reform Research Association (Ed.). (1986). Macroeconomic Management and Reform (p.50). Economic Daily Press. Guo Shuqing, Lou Jiwei, and Liu Jirui. (1986). On the Grand Planning of the Economic System Reform. Reference Materials for Economic Research, 35. Hu Zucai. (2017). Push Forward Price Reforms in Depth, Improve Price Supervision, and Welcome the Opening of the 19th CPC National Congress with Excellent Performance in Price Reforms. Price Theory and Practice, 1. Institute of Economics and Resources Management, Beijing Normal University. (2008). Report of China’s Market Economy Development. Beijing Normal University Press. Ma Kai. (1999). Historical Process and Basic Experience of China’s Price Reform over the Past 20 Years. Price Theory and Practice, 1. Peng Sen (Editor-in-Chief). (2018). Report on the Progress in Economic System Reform since the 18th CPC National Congress. National Academy of Governance Press. Peng Sen, Chen Li, et al. (2008). Major Events of China’s Economic System Reform (Volume II; pp. 634, 637, 639, and 640). China Renmin University Press. Wan Jun. (2015). Towards a New Era of Open Economy (pp. 88–90). Guangdong Economic Publishing House. Wang Mengkui (Ed.). (1999). Twenty Years of China’s Economic Transformation (pp. 103–104). Foreign Language Press. Zhang Zhuoyuan and Wu Jinglian. (1987). The Development Paths of Three Asian Countries. Comparison of Economic and Social Systems, 4. Zhang Zhuoyuan, and Zheng Haihang (Ed.). (2008). Review and Prospect of China’s SOE Reforms over the Past Thirty Years (p. 3 and 11). People’s Publishing House.

Chapter 7

The Interaction of Theory with Practice in China’s Price Reform

As an essential component of China’s economic restructuring, price reform is crucial to the formation of a modern market system and the decisive role of the market in resource allocations. Over the past four decades, price reform has been at the forefront of the economic restructuring reform, striding forward steadily from the very beginning, sometimes at a rather past pace. This stands in sharp contrast to the sputtering reform of state-owned enterprises. The success in price reform is an important factor contributing to the rapid transition of China’s economic operation mechanism, the emergence of a buyer’s market in the mid and late 1990s, and the rapid increase of economic marketization. China’s price reform includes two aspects: one is to straighten out the price relationship and form a reasonable price structure, while the other is to alter the price formation mechanism from command to market-based. The latter is more important than the former. Only through transforming from command to market-based pricing can the price relationship be fundamentally straightened out. In fact, China’s price reform began with the reform of the price formation mechanism—by gradually correcting the distorted price structure. It started with goods and services, gradually expanded to resource products, and finally moved to factors of production. In other words, the path of price reform has been progressive, going from small to broad scales. The continuous promotion and deepening of price reform is inseparable from the theoretical innovations by researchers in their exploration of the regularities of price reform. In fact, mutual promotion of successful practice and theoretical innovation has been one of the characteristics of China’s price reform.

© China Social Sciences Press 2023 Z. Zhang, Handbook of Chinese Economics, https://doi.org/10.1007/978-981-99-0420-4_7

183

184

7 The Interaction of Theory with Practice in China’s Price Reform

7.1 With Remarkable Progress in Price Reforms, 97% of Prices in Goods and Services Are Now Determined by the Market The Party and the state government have always attached great importance to price reform. As early as in 1984, the Third Plenum of the 12th CPC Central Committee pointed out that price was the most effective means of adjustment. Reasonable price levels could invigorate the national economy without causing any ill effects. The Plenum asserted that the price system reform was the key to ensure the success of the overall economic reform. In the meantime, China’s economic community was fully aware of the importance of price reform. At the conference held at Mount Moganin 1984, a group of ambitious young and middle-aged economists agreed that the progress of China’s economic reform would largely depend on the progress of its price reform.1 Some participants at the historic meeting asserted that without price reform, there would be no fundamental change in other systems. The reform of the price system, they argued, must be implemented first before any other reform because price was the central link of all economic activities.2 In the actual process of reform and opening up and economic transition, price reform was the next breakthrough in the wake of the rural reform, which had successfully implemented the household contract responsibility system. In 1992, building a socialist market economy system was formally recognized as the goal of China’s economic reform. At the time, China had basically realized the transition from government directly setting prices to a market-based system for consumer goods and services. Since then on, price liberalization has moved forward continuously. As more and more prices are liberated, the vast majority of prices are now dictated by the market forces. Table 7.1 shows the proportion of three price mechanisms for merchandises from 1978 to 2008. Market-oriented price reform for services also made rapid progress. By 1992, the prices of over 64% of services were determined by the market, as can be seen from Table 7.2. In 2005, the central government put forward the 11th Five-Year Plan, proposing once again to change China’s economic growth mode. Two years later, in 2007, the 17th CPC National Congress urged the country to pursue a new economic development model. From then on, the task of deepening price reform rose to prominence. The task required improving the price formation mechanism for factors of production and resources. The mechanism should incorporate the demand–supply relationship, the degree of scarcity, and the cost of environmental damage. Prices of water, electricity, and metal ores were gradually raised, coal prices were liberalized, gasoline prices became more in line with crude oil price in the global market, and natural gas prices were gradually liberalized as well. With these measures, the long-lasting

1 2

Zhou et al. (1984). Zhang (1984).

1.1

2.4

1.0

1.7

47.0

29.8

20.9

5.9

8.8

3.2

3.0

2.4

1988

1990

1991

1992

1995

2000

2004

2008

95.6

95.3

95.8

88.8

93.0

68.8

53.0

34.0

16.0

3.0

0.7

1.9

4.7

17.0

12.5

22.2

25.0

37.0

67.5

92.2

2.2

1.4

2.8

4.4

5.7

20.0

23.4

23.0

14.4

2.2

Source Cheng (2006b), p. 163. Data for 2008 are obtained from China Price, 5 (2012; p 6)

2.0

10.3

17.2

19.0

10.5

73.5

1984

0

97.0

1978

Guided by government

97.1

96.5

92.5

78.6

81.8

57.8

51.6

40.0

18.1

5.6

Set by market

Purchasing prices of agricultural products Set by government

Set by market

Set by government

Guided by government

Retail prices of consumer goods

Table 7.1 Three price mechanisms for merchandises: 1978 to 2008

2.4

8.9

8.4

15.6

18.7

36.0

44.6

60.00

–

100.0

1. 1

2.7

4.2

6.5

7.5

18.3

19.0

0

–

0

Guided by government

Prices of industrial materials Set by government

96.5

87.8

87.4

77.9

73.8

45.7

36.4

40.0

–

0

Set by market

7.1 With Remarkable Progress in Price Reforms, 97% of Prices in Goods … 185

186

7 The Interaction of Theory with Practice in China’s Price Reform

Table 7.2 Pricing and components of services in China’s tertiary industry in 1992 Pricing mechanism

Type of services

Share of output (%) 64.4

Market price Finance and insurance Real estate Wholesale, retail and catering

16.4 4.7 31.0

Culture and art

1.0

Social services

5.9

Comprehensive technical services

0.8

Movie

0.3

Agriculture, forestry, animal husbandry and fishery

0.9

Others

1.5

Geological exploration and water conservancy management

1.2

Scientific research

0.9

Storage

0.9

Regulated price

15.5 Transportation, postal service and telecommunications

15.5 20.1

Public services Health, sports and social welfare State and Party organs and social organizations Education, broadcasting and television

4.2 11.5 4.4

Source Zhang (1996)

price distortion that resource prices had been kept artificially low by the government gradually phased out. The decision by the Third Plenum of the 18th CPC Central Committee called for improving the mechanism whereby prices would be mainly determined by the market. The decision pointed out: “Any price that can be determined by the market must be left to the market, and the government is not to carry out improper interventions. We will push ahead with pricing reforms of water, oil, natural gas, electricity, transportation, telecommunications and some other sectors while relaxing price control in competitive areas. Prices which are determined by the government will be limited to important public utilities, public-welfare services and network-based natural monopolies while raising transparency and accepting social supervision. We will improve the pricing mechanism for agricultural products, and attach importance to the market’s role in determining prices.” In the wake of this important decision, significant progress has been made in price reform. After more than four decades of unremitting efforts, the prices of products and services are now overwhelmingly determined by the market. According to estimates

7.2 The Main Course of Price Reform and Related Theoretical Research

187

made by authoritative departments, the degree of price marketization was 94.68%, 95.16%, 96.45%, and 97.01% respectively, in years 2013–2016. With the liberation of tobacco purchasing prices in 2015, the prices of agricultural products are now entirely determined by the market. In 2016, the degree of price marketization reached 100% for the primary industry, and 97.37% for the secondary industry. After China successively deregulated fees of telecommunications and prices of transportation, postal services, and construction-related services, 95.6% of the services in the tertiary industry were determined by the market in 2016. It can be said that prices of goods and services are the most marketized in the Chinese national economy. Relatively speaking, price marketization for factors of production lags behind. With the upper limit on RMB deposit interest rates lifted and the deposit insurance scheme established, the marketization of interest rates has been basically realized. The Chinese currency is fully convertible for current account transactions, with capital account convertibility being pushed forward in an orderly manner. Wages (the price of labor) are now fully determined by the market. Nevertheless, the construction of a mobile labor market has lagged behind, mostly due to the decades-long household registration system, which hinders the free flow of labor between the urban and rural areas. The reform of the land market has been challenging, but it is moving forward in the spirit of the decision put forward by the Third Plenum of the 18th CPC Central Committee. The plenum called for forming a unified construction land market for both urban and rural areas. Rural collectively owned, profit-oriented construction land is allowed to be sold, leased and appraised as shares, on the premise that it conforms to planning and its use is under control, and ensure that it can enter the market with the same rights and at the same prices as state-owned land. The prices of other factors of production, such as technology and information, have been mostly formed by the market. Nevertheless, the market construction for these factors has not yet been completed, and there is room for improvement.

7.2 The Main Course of Price Reform and Related Theoretical Research In the spirit of “crossing the river by feeling the stones,” China’s market-oriented price reform has been relatively stable and smooth. In the early days of price reform, some economists advocated dramatic, one-off price liberalization.3 But many economists opposed to this idea, and it was not adopted by the Chinese government. Instead, price reform has been carried out in a gradual, step-by-step manner. Unlike the former Soviet Union and some Eastern European countries, which encountered hyperinflation, sharp economic downturns, and declines in people’s living standards during their transition to market economy, China has been able to carry out its price reform while maintaining stability in the general price level. From 1978 to 2016, the average annual inflation, as measured by the consumer price index (or CPI), was 4.95%. 3

Wu et al. (1988).

188

7 The Interaction of Theory with Practice in China’s Price Reform

Between1978 and 2007, inflation was slightly higher, at 5.7%, but was well within the range of social affordability. Along the way, moderate to high inflationary pressure occurred three times. Each time, it was successfully warded off with timely measures taken by the government, and no major economic disaster ensued. The past forty years of reform and opening up has been characterized by the mutual, organic promotion of reform, development, and stability. There has been no negative economic growth or decline in people’s incomes and living standards in any year during this lengthy period. The slowest growth, at 3.8%, occurred in 1990. Of course, in the course of price reform over the past four decades, there have been many difficulties, as well as minor twists and turns, let alone ideological and theoretical confrontations.

From 1979 to 1984, the Main Task Was to Straighten Out the Twisted Price Structure and Create Conditions for Large-Scale Price Liberalization In 1979, the state government substantially increased the purchase price of 18 categories of agricultural products. They were grains, cooking oil and grease, cotton, pigs, cows, goats, fresh eggs, aquatic products, beets, sugar canes, hemp, ramie, sesame oil, cocoon, southern woods, bamboo, cow hides, and buffalo hides. An additional 50% increase was applied to grains and cotton in excess of the planned output. The average price increase was 24.8%. The price increase greatly stimulated the output of agricultural products and increased farmers’ incomes. In 1979, the aggregate income for farmers increased by 10.8 billion yuan, thanks to price increases for agricultural products. Following the price increases of agricultural products, the State Council made adjustments to the selling price of eight main non-staple food products: pork, beef, mutton, poultry, eggs, vegetables, aquatic products, and milk. The price increases, effective on November 1, 1979, amounted to a total of 4.2 billion yuan, or 30% increase. At the same time, the State Council issued subsidies of 5 yuan per person each month for non-staple food products to urban residents. In order to mitigate the burden to urban residents, the government kept the selling price of grains and edible oil unchanged within the rationed amount, but increased its subsidies to relevant government departments dealing with these products. During this period, the state government also made adjustments to the price of some important industrial products. The prices of coal, iron and steel, and other products were raised, so were transportation prices. The price of railway freight, for example, was raised by 21.6% on October 1983. Meanwhile, prices of agricultural film, agriculture-use diesel, electronic products, and agricultural machinery products were cut down. The state adjusted textile prices twice, first in November 1981 and then at the beginning of 1983, by greatly reducing the price of polyester cotton and appropriately increasing that of pure cotton. The adjustment was aimed mainly to

7.2 The Main Course of Price Reform and Related Theoretical Research

189

rationalize the price ratio between polyester cotton and pure cotton. As a result, the price ratio shrank from 3:1 to 1.4:1. It should be pointed out that in the early stage of the reform, the Party and the state government adopted a slew of price adjustment measures, such as substantially increasing the purchase prices of agricultural products to boost farmers’ incomes. These efforts achieved great results. The achievements led some scholars to believe that price adjustments by the government alone could straighten out the twisted price relationship. In the mid-1980s, they recommended the use of shadow price in price reforms. They put too much trust on role of shadow price and attempted to rationalize the price relationship by adopting the command price system.4 Many economists opposed this view, however. They instead strongly advocated that price should be formed through exchanges in the market, and the market should be the target mode of price formation. They argued that price adjustment, shadow price or floating price could only be used as a transitional form. Economists holding this view acknowledged that, due to the severe distortion of the price structure at the beginning of the reform, in order to avoid drastic changes in the interest relationship among various parties—changes that an all-round price liberalization reform might bring about, and to enhance the controllability of the reform, it was not inappropriate to take some measures to adjust prices, in light of the shadow price and through floating price. But they also pointed out that there were inherent flaws associated with price adjustment. Price adjustment could straighten out the price relationship for a while, but since the price formation mechanism remained unchanged, it would not be long before new twists took place, not least because of the ever-changing supply and demand relationship. The straightened price relationship was distorted again, calling for another round of price adjustment. Consequently, price adjustment alone would never straighten out the price relationship. Only by completely transforming the price formation mechanism—that is, relaxing price regulations and establishing the market price, could we provide institutional assurance to straighten out the price relationship and form a more reasonable price system and structure.5

After 1985, Price Reform Was Dominated by Price Liberalization, and the Prices of Consumer Products Were Gradually Liberalized in Years 1985–1988 On January 1, 1985, the central government issued its Document No.1, stipulating that from the beginning of the year, except for a few products, the state would no longer assign procuring and purchasing targets of agricultural products to farmers. Instead, a combination of contract orders and market acquisitions would be used, in 4

The Industrial Policy Research Team of the Research Center for Economic, Technological and Social Development of the State Council (1987). 5 Zhang (Editor-in-Chief) (1990), pp. 45–49.

190

7 The Interaction of Theory with Practice in China’s Price Reform

accordance with the practical situations. The government would no longer monopolize the purchases of grains and cotton, but instead would use contracts to make purchases. This policy would gradually expand to cover pork and aquatic products, and vegetables in large and medium-sized cities and industrial and mining areas. Through this reform, the national monopoly of purchases of agricultural products was replaced with a combination of state-imposed and market-based pricing. In terms of industrial products, since 1982 the prices of small commodities have been successively liberalized, with the first batch covering 160 products in six categories. The second batch covering of 350 products in eight categories was announced in September 1983. In October 1984, it was further stipulated that, except for a few varieties that governments at all levels must maintain control, the prices of all small commodities would be liberalized. By 1986, the prices of all small commodities had been opened up. Additionally, the markets for bicycles, tape recorders, refrigerators, washing machines, black-and-white TV sets, various fiber fabrics, and cotton products were liberalized, further expanding the scope of price adjustment for consumer goods. Price liberalization of agricultural products and consumer goods gradually raised the proportion of market-based prices in the total retail sales of social goods. By 1990, this proportion exceeded 50%. The State Price Bureau reckoned that, in 1978, 97% of the total retail sales of social commodities were transacted at prices set by the state government, and only 3% of them were determined by the market. In 1984, 73.5% of the total retail sales were made at state-set prices, 10.5% at state guided prices, and 16% at market prices. By 1990, the corresponding figures were 29%, 17.2%, and 53%, respectively.6 After 1985, the state government started to open up the prices of industrial means of production, first by implementing a dual track system and then by consolidating the two price tracks into a unified, market-based price system.

Between 1984 and 1991, China Implemented a Dual Track Price System for Industrial Goods, but Eventually Merged the Two to Form a Unified, Market-Based System In the mid-1980s, China began to implement a dual price track scheme for industrial means of production. In the early 1990s, the government replaced the dual track scheme with a unified system based on the market price. The smooth transition has been hailed as a successful example of China’s gradual approach to market-oriented price reforms. In the early days of the dual price track scheme, at the Bashan Boat conference held in September 1985, Bruce, a renowned Polish economist, spoke highly of the scheme. To him, it was an ingenious Chinese invention to implement the dual price 6

Cheng (2006b), p. 648.

7.2 The Main Course of Price Reform and Related Theoretical Research

191

track scheme for industrial goods. In the transition from the ration system to commercialization, some socialist countries implemented dual prices for consumer goods, but none of them had applied the policy to industrial goods. This was a useful invention in the sense that it could be used as a bridge, linking the transition from one price system to another—that is, from administrative price to market price. With this bridge, the transition would be relatively stable. Bruce also cautioned that there was but one condition, that is, the dual track regime should not last for too long.7 More than a decade later, Joseph Stiglitz, an American economist, paid homage to the implementation of the dual price scheme in China, calling it a “genius solution.”8 China began to implement the dual price scheme in 1984. Industrial goods were sold at two different prices: one was applied to the planned amount set by the government, while the other was applied to the output in excess of the planned amount. On May 20, 1984, the State Council stipulated that an enterprise had the right to set its own price on 2% of its planned output and the output in excess of the planned amount. The price would be determined through negotiations by the supplier and the buyer in the marketplace, but in general it should not exceed 20% of the planned price set by the government. On January 24, 1985, the State Commodity Price Bureau and the State Material Administration jointly issued a notice to lift the limit on the price markup. The proportion of the output the price of which the supplier was allowed to set could be sold at a price slightly lower than the local market price. The notice legitimized the dual-track price regime by making it official and open. The dual price track system was merely a reflection of the coexistence of the dual economic system in a shortage economy, especially the dual economic operation mechanism, and of the coexistence of the dual production system and the dual material circulation system. The aim of the production planning system reform was to cut down the scale of the nationwide mandatory plan and give enterprises autonomy over what to produce and how much to produce. The aim of the circulation system reform was to reduce the scale of planned government procurements and allocations and give enterprises more autonomy to purchase raw materials and sell their own products. This would be of practical significance only when they had the right to set their own prices. Without such a freedom and a mechanism, the so-called free production and free purchases and sales would be meaningless. It was under this backdrop that the dual-track price regime was established. And the dual track regime for the means of industrial production was the most prominent one. For agricultural products, a similar dual track system had long existed. According to government regulations, farmers sold most of their products to the state at the quoted price. The rest could be sold in the free market, at a price often much higher than the price offered by the government. The prices of consumer goods had been gradually liberalized since the early stage of the reform. It was not common or important to implement dual track prices on consumer products. The situation for industrial goods was rather different. After 1984, the dual-track price policy quickly spread to almost all industrial products, becoming the most characteristic phenomenon in the process of price reform 7 8

China Economic Restructuring Reform Research Institute (Ed.). (1986), p. 51. Stiglitz (1998).

192

7 The Interaction of Theory with Practice in China’s Price Reform

in China. According to statistics for products used in heavy industries, in 1988, the state government (including local governments) set the ex-factory prices for 95.1% of the production materials used in the mining industry, 74.6% in the raw materials industry, and 41.4% in the processing industry. The rest of the products were sold at the market price. In addition, according to a survey conducted by the State Price Bureau in 17 provinces, autonomous regions, and municipalities directly under the central government, in 1989, 44% of industrial goods were purchased according to government planning. In monetary terms, however, the corresponding share was only 28%. The planned allocation in coal, steel, wood, and cement were 45.4%, 29.7%, 21.7%, and 15.5%, respectively. The adoption of the dual-track price scheme for the means of industrial production was an inevitable choice in China’s implementation of gradual reform. It was an effective approach for the smooth transition from the highly centralized command system to the socialist market system, as the market mechanism gradually penetrated into economic activities. This policy was all the more logical for China, giving its underdeveloped commodity market and poor market development. The dual-track price scheme revealed both its advantages and disadvantages in the reform practice. In a shortage economy, the scheme was expected to bring about a number of positive effects. It could effectively stimulate the production of scarce materials, encourage output in excess of the planned amount, satisfy the need of the non-state sector of the economy such as the demand for raw materials by township industrial enterprises that was not included in the central planning, help balance surplus and deficiency, regulate the circulation, and provide feedback about the demand and supply relationship. However, it also led to non-performance of the supply contract arising purely out of self-interest. Additionally, it encouraged profiteering, illicit dealings, and other malpractice. Experience showed that when the market price was kept within two times the planned price, the purported positive effects outweighed the negative ones. However, when the market price was more than twice the planned price, the negative effects would become prominent. Additionally, since the dual track system could only be used as transitionary measure, it should not last for too long. The price gap between the two tracks was mainly determined by market demand and supply. In the mid-1980s when the dual track scheme was first implemented, the ratio of the two prices was around two, which was deemed as normal. Later on, however, driven by excessive demand, the ratio shot up. By year-end 1988, it was well over 2. Table 7.3 presents the prices of various industrial materials during December 1 to 15, 1988, based on surveys by the Market Regulation Department of the Ministry of Materials. Big price gaps between the two tracks not only distorted the market order. They also led to profiteering, excessive speculation, not to mention rampant abusing of power for personal gains. People began to blame the dual-track price regime and called for its elimination. In 1990–91, the government implemented effective rectification and economic tightening policies to improve the macroeconomic environment. As the imbalance between demand and supply eased, the market price of industrial production materials fell, and the price gap between the two tracks was narrowed.

7.2 The Main Course of Price Reform and Related Theoretical Research

193

Table 7.3 Prices of industrial materials during December 1–15, 1988 Ex-factory planned price

Average market price

Highest price in the region

Region

Wire rod (6.5 mm, yuan/ton)

610

1680

2200

Jinzhou, Wuxi, and Zhengzhou

Round steel (10-20 mm, yuan/ton)

592

1473

1980

Xiamen

Threaded steel (19-24 mm, yuan/ton)

520

1611

2120

Xiamen

Cold rolled sheet (1 mm, yuan/ton)

870

4602

6670

Nanchang

Hot rolled carbon steel (17–28 mm, yuan/ton)

707

1707

1900

Xiamen

Angle steel (2–6#, yuan/ton)

593

1665

1960

Xiamen

Medium and thick plate (over 4 mm, yuan/ton)

570

1804

3850

Guangzhou

Lead (1#, yuan/ton)

4000

16,077

19,000

Cast pig iron (Z22, group II, class II, yuan/ton)

293

752

820

Wuxi

90

193

279

Shanghai

Soda ash (grade I product, yuan/ton)

390

1192

1800

Wuhan

Caustic soda (content > 93%, yuan/ton)

640

2986

3800

Wuhan

25,800

46,538

63,800

Shenyang

Truck (Jiefang 141, 29,800 yuan/vehicle)

39,004

40,763

Jinan

636

700

Cement (425#, 4 yuan/ton)

Truck (Dongfeng 140, yuan/vehicle)

Larch log (yuan/m3 )

119

Wuhan

Xining

Source Zhang (1990), p. 50

The market price was generally 1.5–2 times the planned price. For some products, the market price was even slightly below the planned price. Eventually, the condition to unify the two price tracks was ready. The deepening of price reform also required the unification of the two tracks.

194

7 The Interaction of Theory with Practice in China’s Price Reform

However, the efforts to merge the two tracks into one were met with some resistance from related government departments. For example, in 1991, the supply and demand relationship for some building materials such as cement and glass was relatively coordinated, meaning that the price gap was not large at all. All parties agreed that the conditions to create a unified, market-based price system were mature, and now was the time to take action. However, some relevant authorities went great lengths to block the deal. Some even suggested that the two tracks should merge into one based on the planed price, not on the market price. In 1992, the State Price Bureau revised and promulgated the catalogue of products the prices of which were managed by the central administration. Among them, the number of means of production in the heavy industry and transportation services was reduced to 89 types (33 at national pricing and 56 at national guided pricing), from 47 categories and 737 types in 1991. Nearly 600 types were taken off from the catalogue. The dual price track scheme for vast majority of industrial materials was replaced with a unified, market-based price system. Obviously, it was the right decision. China’s practice shows that to solve the problem of the dual-track price system for industrial production materials, it must reply on reform and must be marketoriented. In this process, we should not focus too much on price determination using complicated calculations. Of course, for the very few products that were to be unified into the planned track, reevaluation was necessary, such as the use of the average of the planned price and the market price. However, most of the products were to be unified into the market price track. For them, once their prices were freely determined in the market, there would be no such thing as unreasonable price. The dual-track price system for industrial production materials came to a satisfactory end.

Price Reform of Resource Products Was Proposed at the Turn of the New Century and Has Been Gradually Pushed Forward During the mid and late 1990s, the market-oriented price reform of industrial and agricultural products had been basically completed. By 1997, more than 80% of the retail sales of social commodities, sales of industrial goods, and purchases of agricultural and sideline products took place in the market. The market price system had been initially established. However, China’s price reform had not yet been completed, for two reasons. The first was that the price reform of resource products was far from being in place. The second was that the market-oriented price reform of factors of production had just kicked off. In 2005, the Fifth Plenum of the 16th CPC Central Committee put forth the Proposal on Formulating the 11th Five-Year Plan for National Economic and Social Development, once again proposing that China must change its mode of economic growth. This was because after more than 20 years of rapid economic growth, the bottleneck constraints associated with resources and environment were becoming more and more prominent and urgent. People had come to realize that China was

7.2 The Main Course of Price Reform and Related Theoretical Research

195

confronted with a shortage of resources. Its arable land as a share of total land was only 40% of the world average; fresh water, 25%; oil, 11%; natural gas, 4.5%; coal, 79%; and iron, copper and aluminum were 1/6, 1/6 and 1/9, respectively. At the same time, resource utilization was inefficient. In 2004, China accounted for 4% of the global GDP, calculated at the market exchange rate, but it consumed 8% of the world’s crude oil, 10% of electricity, 19% of aluminum, 20% of copper, and 30% of steel and coal. The energy consumption per unit output was more than twice the world average. China’s was a typical extensive growth model that was characterized by “high input, high consumption, high pollution and low efficiency.” One reason why it was so hard to fundamentally alter this extensive growth model was that resource prices had long been kept artificially low by the state government. Low prices were prevalent for resources. Take land price first. For a long time, local governments used their administrative power to expropriate land from farmers at a low price. The rights of the land were then sold at a low price to attract investment in the newly established development zones. The price of water was also low. In 2003, it was US$0.15 per cubic meter in cities, and water was almost free for agricultural use. In comparison, the price of water was $0.47 in the South Africa, $0.51 in the United States, and $1.45 in Germany. The price of energy was low, too. For a long time it did not include the cost of environmental damage caused by the exploitation of crude oil and coal. The reason why many high energy-consumption products from China were competitive in the global market was because of the low energy cost. Last but not the least, the price of mineral products was low. In 2005, out of China’s 150,000 mining enterprises, only 20,000 paid for the mining rights. Most of the mining companies were granted free mining rights by the government. The average compensation for mineral resources was 1.18%, compared to 2%-8% around the world. In order to build a resource-saving and environment-friendly society and to form a production mode and consumption mode emphasizing efficient use of energy, land, water and materials, the resource price reform must be deepened so that the prices would well reflect the relationship between market supply and demand, the degree of resource scarcity, and the cost of environmental damage. The general principle was to gradually raise prices, use the price leverage to force enterprises and consumers to save on resources and improve the efficiency of resource utilization. Price reform of resource products was gradually rolled out after 2005, and it has speeded up since the Third Plenum of the 18th CPC Central Committee held in 2013. In 2007, the state government started to gradually increase water prices. In 2013, the state set the minimum fees for water resources. In 2014, the state increased water pollution prevention and control fees by setting a lower limit for sewage treatment fees, and expanded the range of fee charges. Coal prices have already been liberalized to be dictated by the market. The market-oriented price formation mechanism of refined oil has been further improved. The price of refined oil has been pegged to that of crude oil in the international market. In March 2013, the government shortened the price adjustment cycle for refined oil from 22 working days to 10 working days. The

196

7 The Interaction of Theory with Practice in China’s Price Reform

limit that price would not be adjusted unless global oil price changed by more than 4% was removed. The upper and lower limits of price adjustment of refined oil were set—the upper limit at $130 and the lower limit at $40 per barrel. For natural gas, in 2013, the government changed its management target from ex-factory price to citygate price, and adjusted the city-gate price of incremental gas to be 85% of the price of alternative energy. At the same time, the city-gate price of stock gas was increased by 400 yuan per thousand cubic meters, but the price for residential use remained unchanged. The ex-factory price of unconventional natural gas such as shale gas, coal-bed gas and coal-based gas was also deregulated. In 2014, another 400 yuan per thousand cubic meters was raised for the city-gate price of gas for non-residential use. In 2015, the city-gate price for stock gas and incremental gas for non-residential use were merged, after a 40 yuan per thousand cubic meters hike in the former and a 440 yuan per thousand cubic meters cut in the latter. In April 2015, the government liberalized the price of natural gas for direct supply users except fertilizer producers. After that, over 40% of the national gas price was formed by the market. On July 1, 2015, the Shanghai Oil and Gas Trading Center was officially launched after trial operation. The trading volume on the exchange exceeded 15 billion cubic meters in 2016. The Chongqing Oil and Gas Trading Center was launched on January 12, 2017. Comprehensive reform of electricity prices has also accelerated. In 2014, Shenzhen took the lead in launching a pilot reform on the transmission and distribution price. By the end of June 2017, the transmission and distribution price reform had extended to all provincial power grids in the country.9 A progressive price mechanism for residential consumption has been promoted smoothly. This mechanism was implemented in all provinces, autonomous regions and municipalities except Xinjiang and Tibet. The progressive price system for tap water was implemented in 289 cities from 26 provinces, autonomous regions and municipalities. The progressive price system for natural gas was adopted in 58 cities from 14 provinces, autonomous regions and municipalities. Other cities were actively and orderly promoting the practice. Local governments have also rationally adjusted the prices of resources and environmental protection, including water resource fees, sewage charges, sewage treatment fees, and so on. In doing this, they applied different treatments for industries with high energy consumption, high pollution and over capacity, aiming to promote energy conservation and emission reduction, structural adjustment, transformation and upgrading.10 At the same time, the catalogue of products the price of which was set by the central government in accordance with relevant laws and regulations has loosened up. The list of products on the catalogue has been shortened considerably. In October 2015, the National Development and Reform Commission issued the revised Catalogue of Pricing Set by the Central Government, cutting the number of categories (or types) from 13 to 7, and the number of specific items from around 100 to 20. At the same time, the categories the price of which was set by local governments were limited to around 20. Those categories were mainly limited to important public 9

Xu and Ding (2017). People’s Daily, October 16, 2015.

10

7.3 The Price Reform Debates in the 1980s Led to the Confirmation …

197

utilities, public welfare services, and network-based natural monopoly products. On August 23, 2017, the National Development and Reform Commission issued the Opinions on Further Strengthening Price Supervision of Monopoly Industries. The commission called for establishing a scientific pricing system for monopoly industries. This system should be based on cost supervision and review, with the “permitted cost + reasonable markup” structure at the core, and combined constraints with incentives. It also called for building a price oversight framework for natural monopoly industries and public services. China has formed a relatively complete system of price laws and regulations with the Price Law of the People’s Republic of China and the Anti-Monopoly Law of the People’s Republic of China as the core. As of 2015, there were two national price laws, three administrative regulations, 23 rules, and 858 normative documents in the country.11

7.3 The Price Reform Debates in the 1980s Led to the Confirmation of the Goal of Building a Market Price System China’s price reform has progressed smoothly since 1978, often at the forefront of reform and opening up. One important reason for this is that in the 1980s, based on reform practices and theoretical discussions, people came to realize that the goal of price reform was to let price return to the market and to replace the traditional planned price system with the market price system. In 1987, the report of the 13th CPC National Congress made it clear that China “should gradually establish a system in which the prices of a small number of essential goods and services are managed by the state and the prices of a large number of other goods and services are regulated by the market.” What the report referred to was the market price system. The recognition of building a market price system as the goal of price reform was five years ahead the establishment of the goal of the economic reform—i.e., building up the socialist market economy system—set at the 14th CPC National Congress in 1992. From the early days of reform to 1987, economists had extensive discussions and heated debates about the goal of price reform. These deliberations can be broadly divided into three stages, to be discussed as follows. In the late 1970s, many price theorists and practitioners came to realize that reform was needed for the price system, as well as for the entire economic system. However, due to the lack of theoretical research and practical experience, they tended to equate price adjustment to price reform. The remarkable achievements in price adjustment of agricultural products in 1979 only reinforced this notion. Some people even suggested that the goal of price reform was to perfect the existing system by improving the formulation and adjustment of the planned prices. During this period, the economic community focused its work on how to formulate the planned prices and how to estimate the theoretical prices. Several propositions were put forward 11

Peng (2018), p. 13–14.

198

7 The Interaction of Theory with Practice in China’s Price Reform

about the formulation of planned prices, including the production price theory, the two-channel price theory, and the three-channel price theory. These models differed in their assumptions on what rate of profitability to use when formulating the profit component of the planned price, i.e., whether it should be based on capital, labor, cost, or a combination of the three factors. At that time, theoretical prices were estimated to be much higher than the actual planned prices, and there was a tendency to rely on the theoretical prices to straighten out the price system.12 The second stage was around the announcement of the decision by the CPC Central Committee on the economic restructuring reform in 1981. This important decision affirmed that China’s socialist economy was a planned commodity economy. Significant progress was made in the discussions about how to transform the price system and the goal of price reform. At the third price theory seminar sponsored by the China Price Society, held in Changzhou, Jiangsu province, during October 25– 30, 1984, three different opinions were put forth on how to reform the current price management system and what price model should be adopted. The first was a mixture of central pricing, floating price, and free price, with floating price as the mainstay. The second was a mixed system of central pricing, local pricing, and enterprise pricing, with enterprise pricing as the main mode. This model was taken by some people as the market price model under the guidance of planning. The third was the notion that price was to be set by whoever ran the business.13 Some young economists strongly argued that China should abandon the administrative pricing system entirely and take full account of the supply and demand both at home and abroad in price formation. They argued that the country should gradually transition from rigid central pricing to a more flexible market-based, government-guided pricing regime. They further argued that the centralized command price system should give in to the basic principle that price should fully account for the supply and demand in both domestic and foreign markets, on the premise that it complied with national policies and laws.14 Some scholars thought that price reform should be guided by the demand–supply relationship.15 The first author of this chapter wrote “Socialist Price Theory and Price Reform,” a book published by the China Social Sciences Press in April 1987. The book argued that the planned commodity economy entailed a price formation mechanism that should implement freely determined or market prices (p. 132). At the Mount Mogan conference held in 1984, some scholars pointed out that the fundamental goal of China’s economic system reform was to introduce the market mechanism and to establish a new planned economic system with automatic adjustments whereby the planed prices were set based on the law of value. Since the core of the market mechanism was price, the process of price reform was actually the process of forming the market mechanism.16

12

China Price Society (1982). China Price Society (1985a). 14 China Price Society (1985b). 15 Lou and Zhou (1984). 16 Zhang (1984). 13

7.4 Push Forward Price Reforms and Keep Inflation at Bay

199

In the third or last stage, after 1986, as the country pivoted from periodic adjustment of planned prices by the state to price liberalization, many major and bold reform measures were undertaken. For example, in 1985, the prices of major nonstaple food products such as vegetables and meat in urban areas, and the purchasing prices of major agricultural products (except for grains, cotton, cooling oil) beyond contractual orders were liberalized. These reform measure yielded great results. A vast majority of price theorists and practitioners have come to agree that the target mode of price reform is to replace the administrative planned price with the marketbased price, so as to promote the rationalization of the price system. Since 1979, China’s price reform has taken the path of combining price adjustment with price deregulation first, and then gradually pivoting from price adjustment to price deregulation. Alone the way, the state government used its fiscal policy, monetary policy, and legal means to ensure the stability of the general price level. This policy path has gained the support by both price theorists and practitioners in China.17

7.4 Push Forward Price Reforms and Keep Inflation at Bay Since reform and opening up China has undertaken a series of price adjustment and price liberalization measures and achieved remarkable results. The success in price reform has not only helped accelerate the rapid development of industrial and agricultural production, but also enhanced the economic vitality of the whole society. The market has become increasingly active and prosperous. The economic growth has picked up speed since the early 1980s. In years 1981–1987, the annual real GDP growth was, respectively, 5.2%, 9.1%, 10.9%, 15.2%, 13.5%, 8.8%, and 11.6%. At the same time, the task of market-price reform became increasingly prominent. In 1984, the Third Plenum of the 12th CPC Central Committee put forward its Decision on the Economic System Reform, making it clear that the socialist economy was a planned commodity economy based on public ownership. In 1987, the 13th CPC National Congress put forth the task of “gradually establishing the basic framework of a new system of planned commodity economy.” In 1988, the leaders of the Central Committee repeatedly called for the establishment of a new order of the socialist commodity economy. All these required deepening price reform and sorting out the twisted price relationship. However, with rapid economic growth, inflation picked up speed in the mid-1980s. The consumer price index (CPI) was 9.3% in 1985, 6.5% in 1986, and 7.3% in 1987, all exceeding 5%. Little wonder skepticism began to arise on whether price reform could be carried out smoothly under a high inflationary environment. Some economists opined that since inflation could boost economic growth and enlarge the size of the economy, price reform could muddle through in spite of high inflation. Others, however, strongly disagreed with this view. They argued that inflation might stimulate rapid economic growth in the short run, but

17

Zhang (Editor-in-Chief) (1990), pp. 45–47.

200

7 The Interaction of Theory with Practice in China’s Price Reform

could cause many problems that would hinder sustainable economic growth in the long run.18 Xue Muqiao, a renowned senior economist, warned repeatedly that it was very unwise trying to break through the bottlenecks in price reform in an environment of high inflation. In 1987–1988, China was faced with two choices in further deepening price reform. One was to resolutely keep inflation at bay, fighting against soaring prices while simultaneously striving to straighten out prices, so that all reforms, including the reform of the enterprise system, could be implemented smoothly. The other was to acknowledge the difficulties of straightening out prices. Better to circumvent price reform and strive to maintain high-speed growth by reforming the enterprise tax system. Mr. Xue, of course, belonged to the first camp. In June 1988, the State Planning Commission invited a number of economists to discuss the issue. Mr. Xue, citing the experience of stabilizing prices on several occasions since the founding of the PRC, put forward his opinion once again. In his view, the fundamental way to stabilize prices was to stop inflation and gradually digest hidden inflation that had built up over the past few years. He pointed out that stabilizing prices by doling out more fiscal subsidies would create more money supply, akin to adding fuel to the fire. If not used properly, it would lead to a vicious feedback loop of high inflation and increased money supply. Imposing price limits through administrative means was not the right way, either. He likened it to trying to stop boiling in a big cauldron by scooping up some water and pouring it right back to the cauldron, rather than taking away the firewood from under it. Price limits could only worsen the already twisted price system, and hence were not conducive to the reform of the economic system or to maintaining economic stability. The right approach moving forward was to eradicate the root cause of inflation, by tightening up money supply— i.e., removing the firewood from under the boiling cauldron. Mr. Xue recommended spending the next three years to curtail infrastructure investment, even at the expense of economic growth. If growth slowed down to 10% or even 8%, it was still an admirably high speed in the world. He also suggested controlling increases in money supply to within 10 billion yuan each year, and spending three years digesting hidden inflation that had accumulated over the years, so that China could engage in structural price adjustments, gradually liberalize most prices, let the law of value play the role in market regulation, build a new order of the socialist commodity economy, and pave the way for deepening the economic system reform in the future. Mr. Xue’s speech was published on the June 30, 1988 issue of Guangming Daily. In August of the year, news was released in the media that the government was to accelerate price reform. The news caused panic withdrawals of bank deposits and stockpiling of goods by the public in many cities across the country. At this critical juncture, in September, the CPC Central Committee held its Third Plenum, putting forth its new policy of “managing the economic environment, rectifying the economic order, and comprehensively deepening the reform.” The plenum made a resolute decision to slow down the pace of price reform. It decided to shift the focus of reform and construction over the next two years to straightening out the economic environment 18

Cheng (2006a).

7.5 Some Regularities and Basic Experiences of the Price Reform

201

and restoring order.19 China’s reform in the years to come would continue to prove the importance of keeping inflation under control so as to provide a relatively loose environment to push forward price reform.

7.5 Some Regularities and Basic Experiences of the Price Reform Over the past 40 years, China has made remarkable progress in its price reform and accumulated rich experiences in the process. We economists should study these experiences and instill from them the inherent regularities of price reform, so as to deepen the reform more conscientiously, improve the price system and structure, and give full play to the function of the price mechanism in optimizing resource allocation. This section summarizes the main regularities of price reform.

Price Reform Includes Both the Price System and the Price Formation Mechanism. We Should Strive to Promote the Rationalization of the Price System Through the Price Formation Mechanism Reform Price reform in socialist countries is the reform and transformation of the price formation model. The necessity of this reform lies in the fact that the traditional socialist economy implements a planned price system that is highly centralized and dominated by administrative management. Pricing by administrative means inevitably rigidifies prices, making them unable to respond flexibly either to changes in supply and demand or to the degree of resource scarcity. As a result, the price relationship is distorted, the price difference becomes unreasonable, and the price structure is severely deformed. Under the planned regime, price formation is highly administrative, heavily dependent on planning, and completely exclusive of the role of the market mechanism. Once set, prices remain unchanged for a certain number of years, oblivious to any changes in the market supply and demand relationship. Periodic price adjustments might sort out the demand and supply disequilibrium for a while, but it won’t be too long before the demand and supply relationship is twisted once again. Since there are hundreds of thousands of commodities in the economy, it is virtually impossible for the government to adjust prices in a timely and smooth manner. The experience prior to China’s reform and opening up shows that it takes at least three or four years to make a price adjustment. Therefore, it is impossible to straighten out the price relationship through administrative means alone. The most prominent challenge in price reform is to reform the unreasonable price system and structure 19

Xue (1996), p. 415–418.

202

7 The Interaction of Theory with Practice in China’s Price Reform

so as to straighten out the distorted price relationship. To achieve this objective, it is imperative to reform the price formation mechanism and realize the transformation from administrative pricing to market-based pricing. This is because the twisted price system is mainly rooted in the unreasonable price formation mechanism. Through the transformation of the price formation mechanism, the distorted price relationship will be straightened out and a reasonable price structure will be formed; and the price movement will be carried out on a more reasonable track without any new distortion, thus avoiding major “surgical operations” needed to straighten out the price relationship once several years as in the past. Therefore, the focus of price reform is not to reform the price system, but to reform the price formation mechanism. Only in this way can we truly realize the transformation of the price model. Consequently, when determining the goal of the price reform, we should mainly establish the market price system so as to make the price reform move in the right direction.

Price Reform Should be Carried Out Step by Step. In General, China Has Taken the Following Course of Action: Price Adjustment, Price Liberalization, and Gradually Converging to the International Market When price reform was initiated, the government put forward the policy of “adjustment first and liberalization second.” In order to solve the problem associated with the severe distortions under the old price system, it was necessary to straighten out the price relationship through planned price adjustments first, and then liberalize prices so that they can move within a large range. This policy was intended to minimize the impacts of price changes on the vested interests of various parties. For example, if we allowed prices to move within a large range at the very beginning, the most underpriced products would experience substantial price increases, giving their producers and relevant departments a sudden windfall gain. At the same time, the prices of overpriced products would likely remain unchanged or even drop, to the dismay of their producers and relevant departments. This would inevitably increase the resistance against and the difficulty of price reform, endangering its smooth progress. By following the “adjustment first and liberalization second” policy, we could also effectively keep the general price level under control, and thus avoid runaway inflation. Rampant inflation would create unbearable hardships on people’s lives. The impact of price adjustments on the overall price level and the degree of chain reactions could be measured and controlled. In contrast, price liberalization could very likely cause substantial increases in the overall price level and large a chain reaction. For example, in 1979, China increased the purchase price of agricultural products by 24.8% and the prices of eight major non-staple food products by more than 30%. These price adjustments led to a moderate price increase of the retail price index of social commodities, by 6%, in 1980. Moreover, prices remained stable from

7.5 Some Regularities and Basic Experiences of the Price Reform

203

1981 to 1984. The retail price index of social goods and the consumer price index rose by 1–3% each year during this period. In contrast, the liberalization of the prices of agricultural and sideline products in 1985 led to an 8.8% increase in the retail price index of social commodities, and a 9.3% increase in the consumer price index in the same year. Prices continued to move up in 1986, with 6% and 6.5% increases in the two price indexes, respectively. It was estimated that the price liberalization of agricultural products alone contributed three percentage points to inflation. This was despite the fact that the degree of price distortion had been significantly alleviated after years of continued price adjustments. Had the degree of price distortion not been reduced through price adjustments in the previous years, the price liberalization in 1985 would surely lead to a much greater increase in prices. Once prices are liberalized, the next logical step is to ask whether they are in line with the international market. In the early days of reform and opening up, China’s economic development was at a rather low level. In 1978, for instance, China’s share of global GDP was a paltry 1.8%. It was obvious that the country was not ready to fully conform to the international market. If otherwise, its economic activities would be greatly impacted by price fluctuations and capital flows in the international market. With the gradual promotion of reform and opening up, China’s economy took off rapidly and continued to grow at an average of nearly 10% for more than 30 years, the longest sustained high-speed economic growth of any country after World War II. In 2009, China surpassed Japan to become the second largest economy in the world. Its share of global GDP reached 14.8% by 2015, and 15.3% by 2017. An important feature of China’s rapid economic growth since reform and opening up is the full and effective use of the international market. China has taken advantage of cheap labor and grabbed the opportunity of global outsourcing in labor-intensive industries by developed economies to push for large-scale exports, a major driver of its sustained and rapid economic growth. From 1979 to 2012, China’s exports of goods grew, on average, at about 20% each year, eventually becoming the world top trader. With the rapid growth of the economy and foreign trade, the continuous improvement of price liberalization, and the acceleration of economic integration into the globalization process, it has become increasingly important that the domestic prices of goods and services gradually get in line with the international prices, especially for tradable goods and goods with high degree of dependence on foreign imports. China’s accession to the World Trade Organization at the end of 2001 ushered in a new stage of opening up. The decision of the Third Plenum of the 18th CPC Central Committee stated: “to adapt to the new trend of economic globalization, we must promote domestic openness together with openness to the outside world, better integrate the “bring in” and “go global” strategies, stimulate the orderly and free flow of international and domestic factors of production, highly efficient allocation of resources and in-depth market integration, and foster new advantages in participating in and leading international economic cooperation and competition at a faster pace, in order to promote reform through opening up.” Therefore, making more and more products pegged to the international prices has not only become the general trend, it is also the new requirement of deepening price reform.

204

7 The Interaction of Theory with Practice in China’s Price Reform

Price Reform Starts with a Narrow Range of Products and Gradually Expands to Cover a Broad Range of Products, Including the Factors of Production This is an important feature of China’s price reform and an important embodiment of the gradual reform approach in the price field. Traditional socialist economic theory rejects the concept of price in general sense, and does not recognize the necessity and inevitability of commercializing the factors of production such as capital, labor, and land. In the traditional socialist economy, the market mechanism plays no role in the determination of interest rates, wages, land prices, and rents, because they are all formulated and adjusted by the state. With the deepening of the economic restructuring reform and the establishment of the socialist market economy as the goal of reform, more and more factors of production have entered the market, revealing their prices in the process. Consequently, the notion that price reform should cover a broad range of products has been put on the agenda and become widely accepted. Price reform has extended from a narrow range in the early phase to a broad range that includes the various factors of production. This chapter mainly deals with price reform of material products and services. More systematic discussions on price reform of the factors of production will be found in future chapters.

Straightening Out the Price Relationship Through System Transformation While Simultaneously Maintaining Price Stability Has Been the Major Challenge of Price Reform The rich practice of China’s price reform reveals that its major challenge is how to straighten out the twisted price relationship through system transformation while simultaneously keeping inflation under control. The most important lesson learned from China’s price reform is that it’s best to gradually push forward price reform while maintaining the general price level stable. In the traditional system whereby prices were controlled by administrative means, the prices of agricultural products, primary industrial products, and some services were kept artificially low for a prolonged period of time. To reform the price system is to change the twisted situation by raising the prices of underpriced products and reducing the prices of some overpriced products. It is not an easy task. Consequently, price reform would inevitably cause the general price level or inflation to rise by a certain margin. Therefore, in order to carry out price reform, we must break the traditional idea that price stabilization means fixed prices and that the longer the overall price level remains intact, the better. Instead, we should gradually establish the notion that prices in a commodity market economy change frequently and the overall price level tends to rise over time.

7.5 Some Regularities and Basic Experiences of the Price Reform

205

In the process of price reform, whether by price adjustments or by price liberalization, as long as it is limited to changing the twisted price structure and straightening out the price relationship between price comparison and price difference, the increase in the general price level will be moderate. Moreover, the increase is gradually realized over a span of five or ten years, so that the annual price increase can be controlled within 5%, rarely reaching double digits. That is to say, price reform can be implemented while keeping the general price level basically stable or generally stable. In general, China’s price reform over the past four decades has been carried out gradually while the overall price level has been basically stable or generally stable. Double-digit increases in the consumer price index emerged in the late 1980s (1988 and 1989) and the early 1990s (1993, 1994, and 1995), severely hindering price reform. From the perspective of the process of price reform, before 1988, the rise in the price level was caused mainly by the adjustments of the original unreasonable price structure, known as structural price increases. Between 1988 and 1995, on top of the continued structural price increases, the general price level was driven by increases in demand and partly by increases in wages (wage growth exceeded growth in labor productivity) and in prices of imported raw materials. Continuous and rapid rise in prices brings about many negative impacts. It causes psychological anxiety to consumers. Rather than concentrate their efforts on improving technology, management and efficiency, businesses and institutions are keen on hoarding, stock piling, flipping, competing to raise prices, and using monopoly power, privilege and even fraud to pursue abnormal profits. High inflation expectations dampen consumer enthusiasm to save, and encourage short-term, excessive spending. Under such circumstances, the price relationship can only become confused. Even if the price relationship is preliminarily straightened out, it will soon be distorted and fall back to unreasonable levels. Sharp price rises will affect the deepening of price reform by making it more difficult to roll out the planned reform. The pace of reform may slow down out of fear of causing social instability. For example, the government had to postpone the planned steel price adjustments in 1987 (the document had already been printed), and the price and wage reform in 1988. Excessive price increases in 1993–1995 led to a yawning gap between the two interest rate tracks. The market interest rate was more than twice that set by stateowned banks. Such a large gap made it all the more difficult to deepen the reform of the financial system, and to separate policy finance from commercial finance, hindering the industrialization of professional banks. The difficulties and main contradictions of price reform are clear from above discussions. On the one hand, we need to straighten out the price relationship by reforming the price mechanism. On the other hand, in the process of doing this, we must maintain the overall price level basically or generally stable, for the purpose of maintaining economic and social stability. However, when inflationary pressure leading to moderate to high inflation becomes inevitable in the process of reform, the contradiction between straightening out the price relationship and stabilizing the price level can be sharp and even becomes a dilemma. Past experience has taught us that in deepening price reform, we should try to eliminate the compounding interference

206

7 The Interaction of Theory with Practice in China’s Price Reform

of inflation as much as possible. Whenever inflation picks up, we should keep it at bay in a timely manner. The contradiction between straightening out the price relationship and maintaining price stability, to a large extent, dictates and restricts other contradictions in the process of price reform, such as the contradiction between price and finance, the contradiction between price and wage, the contradiction between domestic price level and the RMB exchange rate, and the contradiction between the dual price tracks. These contradictions are relatively easy to solve in the absence of inflation. However, in a high inflationary environment, the economy falls into a vicious pricesubsidy-tax feedback loop. As prices and wages follow each other to climb, more fiscal subsidies are needed. Rising domestic prices will cause the depreciation of the RMB exchange rate. Consequently, the gap between the two price tracks is further widened.20 The basic experiences of China’s price reform can be summarized as follows. (1) Handle well the relationship between reform, development and stability. (2) Follow the law of value, change the price mechanism, and establish a price mechanism based on market formation. (3) Gradually push forward and deepen the reform. (4) All reforms should be coordinated and carried out in an orderly manner. (5) Strengthen the leadership of the Party and the government in price reform to ensure that it moves forward on the right track.21

7.6 Prospects of China’s Price Reform After more than three decades of efforts, China has made significant and substantive progress in its price reform. The reform, however, is not yet completed and far from being perfect. The price relationship has not been fully straightened out. In response, the Third Plenum of the 18th CPC Central Committee in 2013 decided to further improve the mechanism whereby prices are mainly determined by the market. Since the decision was put forth, new progress has been made in price reform. First, the proportion of government pricing has been greatly reduced. The prices for all telecommunication services, non-public hospital medical services, new railway freight and passenger dedicated lines that are invested by private capital, most drugs, and most professional services have been liberalized. Second, the price formation mechanism and regulation system of agricultural products have been continuously improved. Ever since the government stopped setting the purchase price of tobacco leaves in 2014, the prices of all agricultural products have been freely determined in the market. The pilot reform of cotton and soybean target prices has been carried out generally smoothly, the price gap between domestic and foreign markets narrowed, and the market vitality significantly enhanced. Meanwhile, the minimum purchase prices for rice and wheat have been determined at a reasonable level that considers 20 21

Zhang (1987, 1990). Li (2005).

7.6 Prospects of China’s Price Reform

207

not only the basic income of farmers but also the balance between market supply and demand. The preliminary price adjustment plan for pigs has been implemented relatively smoothly. Third, a new round of market-oriented reform of electricity prices has been successfully launched. The price of trans-regional and trans-provincial electricity has been deregulated. The pilot reform of transmission and distribution price has expanded from Shenzhen and Mengxi power grids to all provinces and autonomous regions across the country. In accordance with the price linkage mechanism between coal and electricity, in 2015, the national average on-grid price of coal-fired power was reduced by about 2 cents per kilowatt hour, and the average price of electricity for industrial and commercial users was reduced by about 1.8 cents per kilowatt hour. In 2016, through the price linkage mechanisms between coal and electricity and between transmission and distribution, businesses saved more than 100 billion yuan on electricity expenditure. Fourth, the price formation mechanism of natural gas has been further improved. The prices of stock gas and incremental gas for nonresidential uses have been unified. Policies have been implemented to reduce the price of nonresidential gas, and to reduce the unreasonably high prices of local gas pipeline transportation and distribution prices. These measures contributed to about 100 billion yuan in savings for nonresidential customers. Fifth, the price of railway freight has been basically straightened out. The unified freight rate of national railway was raised by 1.5 cents per ton kilometer in 2013 and 2014 consecutively, and another penny was raised in 2015. The reform goal of maintaining a reasonable price relationship between railway and road freight has been reached. A floating price mechanism for railway freight, intended to provide a more relaxed policy environment for railway transportation enterprises to respond to changes in market environment, has been established, with 10% upper limit but no lower limit. Sixth, a progressive price mechanism for urban residents has been promoted smoothly. Seventh, various charges have been cleared up. A catalogue that lists all sorts of charges is made available to the public. Through clearing up unreasonable charges and cutting down the unreasonably high charging standards, the government helped businesses to save nearly 40 billion yuan in years 2013–2015. Eighth, the prices of resources and environmental protection have been adjusted. All localities have made reasonable adjustments to the prices of resources and environmental protection, including fees for water resource, sewage charges, sewage treatment fees, and so on. In addition, they have implemented different prices of electricity, water, sewage treatments for industries with high energy consumption, high pollution and overcapacity, aiming to promote energy conservation and emission reduction, structural adjustment, transformation, and upgrading. In addition, oversight and investigation have been strengthened on illegal pricing practices and major cases of monopoly pricing. For example, in November 2013, the government filed a lawsuit against Qualcomm, a U.S.-based multinational corporation, accusing it of using market power for monopoly profit. The monopoly case was eventually settled with a fine of more than 6 billion yuan, causing great repercussions at home and abroad.22 22

People’s Daily, October 16, 2015, Hu (2017).

208

7 The Interaction of Theory with Practice in China’s Price Reform

Despite the progress in price reform, there is still room to improve according to the requirements of the market-based price mechanism, for three reasons. First of all, price reform in some key areas and key links lags behind. For example, price reform in energy and transportation has yet to be fully implemented. Price reform of public utilities and public services is at a crucial moment and has not yet been fully implemented. The market-oriented reform of factors of production is relatively backward. As of 2016, for example, institutional barriers such as heavy concentration and lack of competition were prominent in the refined oil industry. The franchising rights of crude oil exploration and development were controlled by a few giant, stateowned companies; five state-owned enterprises were responsible for more than 90% of crude oil imports; and state-owned enterprises accounted for 75% of oil refining and processing. The situation was no better in the wholesale and retail markets. Due to the long-lasting monopoly system in both wholesale and retail of refined oil products, the markets were too concentrated in a few central enterprises. Among the 90,000 plus gas stations in China, close to half were owned by private capital, yet they accounted for only 10% of total retail sales. From the perspective of supply chain, the upstream, middle stream, and downstream business areas were all too concentrated to conduct competitive bidding for new oil fields. While the state set the cap of the retail price of refined oil, the gas stations basically charged the highest price allowed, and the dominant players had no incentive to cut prices. Secondly, the government pricing system is not perfect and needs to be further improved. Finally, the market price behavior needs to be further normalized. It is not uncommon for some businesses to abuse their monopoly power by raising prices to obscene levels. Charges for parking lots are often raised by the owners at will. The market for factors of production is not mature. In short, market-oriented price reform has a long way to go. On October 15, 2015, the CPC Central Committee and the State Council jointly issued Several Opinions on Advancing the Price Mechanism Reform, providing specific guidelines on how to better implement the decision of the Third Plenum of the 18th CPC Central Committee that called for deepening price reform and improving the market price system. The document required that, by 2017, all competitive areas and links would be basically opened to market competition, and government pricing would be limited mainly to important public utilities, public welfare services, and network-based natural monopoly links. By 2020, the market pricing mechanism would be basically completed, the price oversight system that is scientific, standardized and transparent and the anti-monopoly law enforcement system would be basically established, and the price control mechanism would be basically improved. The document provided six key areas in future price reform: (1) improve the price formation mechanism of agricultural products; (2) accelerate the marketization of energy prices; (3) improve the price policy of environmental services; (4) rationalize the price of medical services; (5) improve the price mechanism of transportation; and (6) innovate the price management of public utilities and public welfare services. The

7.6 Prospects of China’s Price Reform

209

document also elaborated on how to improve the government price system, how to strengthen market price oversight and anti-monopoly law enforcement, and how to improve the behavior of market prices. After the important document was issued, relevant government departments moved quickly to implement the requirements of deepening price reform. On November 30, 2015, the National Development and Reform Commission and the National Energy Administration issued six supporting documents regarding the electric power system reform, and making the roadmap of the reform more clear. They are: Implementation Opinions on Promoting the Reform of Transmission and Distribution Prices; Implementation Opinions on Promoting the Construction of the Power Market; Implementation Opinions on the Establishment and Standardized Operation of Power Trading Institutions; Implementation Opinions on the Orderly Liberalization of Power Generation and Utilization Plan; Implementation Opinions on Promoting the Sale-side Reform of Power; and Guiding Opinions on Strengthening and Standardizing the Supervision of Coal-Powered Electricity Plants. According to these new policy measures, private social capital is allowed to establish electricity companies, and clean energy is given priority access to the power grid.23 The minimum purchase price policy for rice and wheat remains intact, and the minimum prices will be readjusted to reflect a reasonable price comparison relationship. Starting from the second half of 2016, the market price reform and the separation of price and subsidies have been promoted in the corn market. In May 2016, the State Council issued the Reform Plan for the Salt Industry, proposing to reform the government price mechanism and liberalize the ex-factory, wholesale, and retail prices of salt starting from January 1, 2017. On the basis of improving the salt monopoly system, four reforms were to be carried out. The first was to reform the restriction of salt production and the wholesale area, and repeal the regulation that required salt production enterprises could only sell to designated wholesale enterprises. The second was to reform government price and liberalize the ex-factory, wholesale, and retail prices of salt. The third was to reform the management of transportation and distribution of industrial salt, eliminate the filing system and the transportation permit system imposed by local governments, eradicate all kinds of restrictions on the entry of small industrial salt and salt products into the market, and open up the market and price of small industrial salt and salt products. The forth was to reform the salt reserve system, and establish a whole society salt reserve system comprising government reserves and corporate social responsibility reserves.24 Meanwhile, local governments across the country have carefully implemented price reform of medical services in light of their own conditions. As of 2016, 13 provinces have issued their own implementation opinions. The reform of medicine prices had achieved full coverage of county-level public hospitals and had been fully launched in 10 provinces. In other provinces, more than 600 public hospitals from 23 24

People’s Daily, December 1, 2015. Economic Information, May 6, 2016.

210

7 The Interaction of Theory with Practice in China’s Price Reform

over 60 cities had carried out pilot projects. Twenty-three provinces had liberalized the prices of medical services that had strong personalized demand and adequate market competition. Additionally, 29 provinces had introduced policies and measures to accelerate the acceptance and review process of new medical services.25 After the 18th CPC National Congress, held in 2012, the government has vigorously enhanced efforts in price oversight and inspection. With most of the pricing power released, the price authorities at all levels have shifted from price management to focus on price oversight and anti-monopoly enforcement. In November 2013, the National Development and Reform Commission issued Opinions on Establishing and Improving the Price Oversight Mechanism, proposing to establish and improve the working mechanism that covers a wide variety of areas, including early warning and prevention, emergency response, whistle-blowing handling, market oversight, fighting monopoly price, special governance, supervision by the society, self-discipline of operators, and cooperation and linkage. As of 2016, the National Development and Reform Commission had investigated 127 cases of price monopoly, with total fine reaching 10.757 billion yuan.26 In places where government pricing is needed, cost supervision and examination has been strengthened. After the 18th CPC National Congress, during the transmission and distribution price reform, the price authorities have strictly supervised and reviewed the cost of power grid enterprises, and eliminated the fees and expenses that should not be included in the cost. It was estimated that these unrelated or unreasonable charges accounted for 14.5%, or 118 billion yuan, of the reported cost.27 In the future, it is necessary to continue to strengthen price oversight and anti-monopoly enforcement, which is also an important aspect of deepening price reform. In his report addressed to the 19th CPC National Congress, General Secretary Xi Jinping called for the Party and the government to accelerate efforts to improve the socialist market economy. Flexible price responses and speeding up the marketoriented reform of factors of production are important aspects of the requirements. Only under fair and orderly market competition can prices be truly flexible. Therefore, we should continue to push forward the price marketization reform, with the focus on energy, agriculture, transportation, and medical services, as well as on factors of production. We should make efforts to further stimulate market vitality and cultivate new momentum for development. We are confident that under the inspiration of the spirit of the 19th CPC National Congress, new substantive progress will be made in these areas in the near future.

25

Hu (2017). Economic Information, September 11, 2017. 27 Economic Information, July 31, 2017. 26

References

211

References Cheng Zhiping. (2006a). Some Understandings on Price and Inflation. In Thirty Years of Price Reform: 1977–2006. China Market Press. Cheng Zhiping. (2006b). Thirty Years of Price Reform: 1977–2006. China Market Press. China Economic System Reform Research Association. (1986). Macroeconomic Management and Reform. Economic Daily Press. China Price Society. (1982). Selected Papers on Price. Vol. 1. (p. 77). China Price Society. China Price Society. (1985a). Selected Papers on Price. Vol. 3. (p. 6). China Price Society. China Price Society. (1985b). Selected Papers on Price. Vol. 3. (p. 251–252). China Price Society. Hu Zucai. (2017). Push Forward Price Reforms in Depth, Improve Price Supervision, and Welcome the Opening of the 19th CPC National Congress with Excellent Performance in Price Reforms. Price Theory and Practice, 1. Joseph Stiglitz. (1998). China’s Second Step Reform Strategy. People’s Daily (Overseas Edition), November 13, 1998. Li Shenglin (Editor-in-Chief). (2005). Price Knowledge. China Market Press. Lou Jiwei and Zhou Xiaochuan. (1984). On the Direction of China’s Price Reform and the Related Modelling Methods. Economic Research Journal, 10. Peng Sen (Editor-in-Chief). (2018). Progress Report on the Economic System Reform since the 18th CPC National Congress. National Academy of Governance Press. The Industrial Policy Research Team of the Research Center for Economic, Technological and Social Development of the State Council. (1987). Optimal Allocation of Resources and the Decision Price System. Cost and Price, 20. Wu Jiaxiang, et al. (1988). Ward off the Idea of One-off Price Liberalization. The World Economic Herald, August 8, 1988. Xu Guangjian and Ding Yuewei. (2017). Pushing Forward the Price Reform in Depth and Improving the Level of Deregulation. Price Theory and Practice, 5. Xue Muqiao. (1996). Memoirs of Xue Muqiao. Tianjin People’s Publishing. Zhang Weiying. (1984). Price Reform Is the Central Link of Reforms. Economic Daily, September 29, 1984. Zhang Zhuoyuan. (1987). Exploration of the Regularities of Price Reform. Finance, Trade and Economics, (Supplement), June 1987. Zhang Zhuoyuan. (1990). Theory and Practice of China’s Price Model Transformation. China Social Sciences Press. Zhang Zhuoyuan (Ed.). (1996). The Relationship between New Pricing Modes and Market Development (p.111). Economic Management Press. Zhou Xiaochuan, Lou Jiwei, and Li Jiange. (1984). Price Reform Does Not Necessarily Lead to Financial Burdens. Economic Daily, September 29, 1984.

Chapter 8

The Theory of Industrial Structure and Industrial Organization

Since the late 1970s, studies on industrial structure have changed dramatically in both methods and subjects. During the lengthy period from the founding of the People’s Republic of China to the eve of reform and opening up, there was barely any reference to the term “industrial structure” in the Chinese economics literature. The contents that are roughly comparable to those studied under contemporary industrial structure were referred to as either reproduction or economic structure. Economic research in this area was based on the reproduction theory of Karl Marx, and the research focus was on the relationship between the two major sectors of the economy, or that between agriculture, light industry, and heavy industry. In the wake of reform and opening up, Chinese scholars began to adopt the industrial structure theories from Western economics in examining the relationship between the three industries or industrial structure, as well as the stage of economic development, economic cycle, and government behavior. Similarly, prior to reform and opening up there was no theoretical research on industrial organization in the modern sense, and the academic discussions in this area were mostly about the division of labor and collaboration. Therefore, in a strict sense, research on the so-called industrial structure and industrial organization in China’s academic society did not start until after the reform and opening up policy. Along with reform and economic growth, research in industrial structure and industrial organization, no matter in content and method, or in breadth and depth, has continued to stride forward. Research in this area over the past forty years can be divided roughly into four periods according to their backgrounds and characteristics.1 The first period started from the inception of reform and opening up and ended in the early 1990s. As China explored its economic restructuring reform, the planned component of the economy continued to decline while the commodity economic activity continued to rise. The most urgent problem facing the country during this 1

The four periods are not strictly distinguished. There may be some overlapping when references are made.

© China Social Sciences Press 2023 Z. Zhang, Handbook of Chinese Economics, https://doi.org/10.1007/978-981-99-0420-4_8

213

214

8 The Theory of Industrial Structure and Industrial Organization

period was the widespread shortage of goods and services. Severe structural imbalances were among the major issues plaguing the national economy. It soon became clear that the existing ideological framework was unable to explain the reality or offer useful policy recommendations. The Chinese academic community began to seek new economic theories in earnest. Western economic ideas were imported to fill this void, and scholars quickly armed themselves with the new ideas in their study of the Chinese reality. During this period, the Chinese government also began to implement industrial policies extensively. For instance, its National Industrial Policy, issued in 1989, encompassed all major sectors in agriculture and industry. The second period ranged from the 14th CPC National Congress to the beginning of the twenty-first century. During this period, China formally established the goal of its reform—namely, to build a socialist market economy. Its price reform was basically completed, the shortage economy came to an end, and a buyer’s market began to take hold. Under such a broad economic backdrop, market research became a topic that academics needed to face directly. Large-scale introduction and application of modern industrial organization theories became a reasonable phenomenon. In terms of policy implementation, the adoption of the Anti-Unfair Competition Law and the reform of the telecommunications industry marked the beginning of the government’s efforts to maintain the effective operation of the market and to promote competition. Towards the end of this period, as it was becoming increasingly obvious that China would soon join the World Trade Organization (WTO), industrial structure under open conditions emerged as a key issue in economic research. In the third period, from China’s accession to the WTO in 2001 to 2012, as the Chinese economy basically reached a well-off level, how to deal with the tide of globalization and how to improve the quality of economic operation became key issues of academic research. The two most frequently used keywords in the industrial structure literature were open conditions and industrialization path. Meanwhile, the study of industrial organization revolved around issues such as business competitiveness and market performance in an open economy. In terms of policy applications, the more significant events included the formulation of national industrial development policies, such as the Automobile Industry Development Policy and the Steel Industry Development Policy, and the enacting of the Anti-Monopoly Law. In the fourth and last period, from the 18th CPC National Congress of the Party held in 2012 to the present, as the Chinese economy entered a state of new normal, it shifted gear from high speed to medium-to-high speed growth, and from high speed-growth to high-quality development. As pointed out by the report of the 19th CPC National Congress, “socialism with Chinese characteristics has entered a new era, and the main social contradictions in our country have been transformed into contradictions between the people’s increasing needs for a better life and unbalanced and inadequate development.” Industrial transformation and upgrading, the role of industrial policy, and industrial organization and anti-monopoly in the internet era have become the hotspots of research. In sum, during these four periods China’s economic system has gradually shifted from central planning to market-based, and from self-reliance to full opening. Research on industrial structure and industrial organization has progressed with the

8.1 Research Progress from the Beginning of Reform and Opening …

215

times. Modern academic research in this area mainly includes five aspects: (1) translation and introduction of Western economic ideas; (2) industrial structure in China; (3) industrial structure policy (most of the contents of China’s industrial policy), (4) industrial organization in China; and (5) industrial organization policy. The rest of the chapter provides a brief review of the academic research on industrial structure and industrial organization in the five aspects during each of the four periods.

8.1 Research Progress from the Beginning of Reform and Opening to the Early 1990s At the dawn of reform and opening up, unbalanced industrial structure and economic structure was among the most daunting problems confronting China. To seek solutions, Chinese scholars looked to Western economic theories, especially those about industrial structure. The most basic was the introduction of new analytical paradigms about the distinction of three sectors of the economy and the recognition of the importance of the non-production sector. More specifically, the economic ideas imported from Western economics included the division of national economy into three different industries, the impacts of changes in industrial structure on employment, income per capita and economic development, and the basis to identify changes in industrial structure. During this period, a common practice in research used by Chinese scholars to introduce the various theories of industrial structure from Western economics and apply them to analyze the status quo, characteristics, problems and direction of adjustments of China’s industrial structure. In addition, due to the impact of the Japanese industrial policy on the Chinese economy, theory and practice in industrial policy in also became important topics in research. At the same time, Chinese scholars began to introduce modern theories of industrial organization. As a result, issues such as competition, monopoly and incentives under low-level of operation for enterprises became active research topics.

Introduction of Western Economic Ideas (1) Translation and introduction of industrial structure theory In 1985, “Introduction to Industrial Economics,” an influential book by Yang Zhi, was published, marking the first time the term “industrial economics” was ever used in China. In the 1980s, a large number of classic works on industrial structure from abroad were translated into Chinese and published in China. The most influential of them included “Economic Growth of Nations: Total Output and Production Structure,” by Simon Kuznets; “Modern Economic Growth: Rate, Structure, and Spread,” also by Simon Kuznets; “Industrialization and Economic Growth: A Comparative Study,” by Hollis B. Chenery; and “Structure Analysis of the Japanese Economy,”

216

8 The Theory of Industrial Structure and Industrial Organization

by Satoshi Riko, a Japanese economist. The translated works on industrial structure cover the following important ideas. The classification of three industries (i.e., the primary, secondary and tertiary industries). In his “Introduction to Industrial Economics,” Yang Zhi offered a systematic introduction to the concept, classification, and performance of the three economic sectors at different stages of economic growth. In the early 1980s, the introduction of the three-sector paradigm was heatedly debated in the Chinese academic community. By the mid-1980s, the academic community had basically recognized the scientific nature and the strong explanatory power of the classification paradigm. Under the original framework, the economy had only two major sectors, both of which concerned with the production of goods, either agricultural or industrial products. The new classification scheme recognized the importance of services, or the tertiary industry, on top of the primary and secondary industries. This opened a new horizon for scholars in China, who quickly applied this new paradigm to examine the country’s economic conditions. It is worth mentioning that, starting from 1988, China’s Statistical Yearbook began to publish official economic data on the three industries. Data availability allowed for statistical and empirical analysis of the three industries of the Chinese economy. The Petty-Clark theory. In the seventeenth century, the British economist William Petty recognized three economic sectors: agriculture and the extraction of raw materials, manufacturing of goods, and providing services. He observed that the main focus of the British economy had evolved as it progressed, first from agriculture to manufacturing, and then from manufacturing to services. Built on Petty’s idea, the economist Colin Clark studied the changes in employment across the three economic sectors in the 1930s. According to the Petty-Clary theory, as per capita income increased, labor force would transfer from the primary industry to the secondary industry, and after industrialization was basically completed, the labor force would transfer from the secondary industry to the tertiary industry. The reason why labor force flowed between industries lied in the relative difference in incomes across industries.2 Evolution of industrial structure under different per capita incomes. Simon Kuznets sought to characterize the differences in industrial structure between rich and poor nations from the perspective of national income and the distribution of labor force across different sectors. His analyses of both cross-sectional data and trends over time revealed that, as countries became wealthier, agriculture’s share of labor force would decline. At low levels of per capita output, though the share of the non-agricultural sector increased significantly, the internal structure (manufacturing vs. services) remained little changed. At high levels of per capita output, the relative share of the agricultural and non-agricultural sectors did not change much, but the share of services in the non-agricultural sector increased significantly.3 Chenery’s structural transformation model and his standard structure. Chenery divided economic development into three stages, and expected structural changes 2 3

Yang (1985). Kuznets (1985, 1989).

8.1 Research Progress from the Beginning of Reform and Opening …

217

in the primary, secondary and tertiary industries. The first stage of economic development was dominated by the production of primary products such as agricultural products. In the second stage, or the industrialization stage, as the manufacturing industry grew rapidly, the production structure transferred rapidly from the production of primary goods to manufactured goods. In the third stage, or the economically developed stage, the demand elasticity of manufactured products began to diminish, and so did its proportion in the economy and employment. The services industry gradually became the main sector driving economic growth. In addition, Chenery provided a standard structure, whereby in the industrialization process, the most significant period of structural change occurred when per capita income was between $400 and $1800 (in 1970 U.S. dollars).4 Huffman theory. Based on empirical research on the evolution of industrial structure in 20 countries, Huffman showed that in the process of industrialization, the ratio of net output of consumer goods to that of the capital goods, known as the Huffman coefficient, declined. This coefficient allowed Huffman to divide the industrialization process into four stages. In the initial stage, the production of consumer goods dominated the manufacturing industry. After the second and third stages, the production of capital goods began to dominate in the fourth stage. This pattern would continue until industrialization was eventually reached.5 Industrial policy. Theorists of industrial policy hold that, on the basis of the regularities concerning changes in industrial structure, government can play an active role in the process of economic development through positive industrial policy initiatives. Therefore, industrial policy is the application of industrial structure theories. The Japanese economist Sanuki Toshio found that the development of Japanese industries after World War II went through three stages in succession, with the development of the power industry in the leading stage, followed by oil, petrochemicals, steel, and ship building in the second stage, and automobiles, home appliances and other consumer products with a high-income elasticity in the last or third stage. Sanuki Toshio believed that the leading industries in the industrial development process took the following path: light industry, raw material industry, and processing and assembly industry. And the corresponding leading products are textile products; petroleum, petrochemical, and steel; and automobile and household appliances.6 (2) The introduction of Western theories on industrial organization Some rudimentary discussions of industrial organization could be found in early translations of Western microeconomics textbooks. “Introduction to Market Power and Economic Welfare,” translated by Xie Peide, was arguably the earliest monologue on this topic ever translated and published in mainland China. In 1985, the School of Economic Development of the World Bank and the School of Economics and Management of Tsinghua University jointly organized a workshop on economic

4

Chenery (1989). Yang (1985). 6 Sanuki (1987). 5

218

8 The Theory of Industrial Structure and Industrial Organization

management. The workshop offered, among other things, a course on industrial organization theory, which was perhaps the first time a specialized, systematic course on this topic was ever offered in China. In the same year, Yang Zhi published his book, titled “Introduction to Industrial Economics,” which had extensive coverage of industrial organization. These books and lectures helped promote the popularization of industrial organization theories in China. In the late 1980s, the works of George Stigler and other Western scholars were translated and published in China. Stigler’s “Industrial Organization and Government Regulation” was a collection of his research papers, including some of his seminal research on economies of scale and what regulators could regulate. “Industrial Organization: Theory, Evidence, and Public Policy,” a book by Clarkson and Miller, was a standard textbook that covered all of the important contents in the field of industrial organization at that time. One important feature of the book was the discussion on the legal issues related to competition and monopoly. These influential books and translations had profound influences on Chinese scholars in that era. Once they had mastered the theories of modern industrial organization in contemporary economics, they immediately started conducting research focused on China’s economic realities. An expansive literature on industrial organization soon emerged, with a number of influential works.7

The Exploration of Industrial Structure (1) Studies about the problems associated with China’s industrial structure In the late 1970s and early 1980s, under the auspices of the Finance and Economic Commission of the State Council, the economic community conducted a large-scale and influential research campaign on China’s economic structure (i.e., industrial structure), producing a number of studies. The research campaign was mainly focused on summing up the experience and lessons over the past three decades since the founding of the People’s Republic of China. The conclusion was that economic structure in China was severely flawed in that the agricultural, light, and heavy industries were ill balanced, and the basic industry and the processing industry were also imbalanced.8 Overly emphasizing the priority of manufacturing and production materials was the major factor contributing to these imbalances. Some scholars pointed out that the light and heavy industries were not well coordinated for three reasons. The first was that the heavy industry had grown too fast relative to the light industry. The second was the big ups and downs in the two industries. The third was that the internal structure of the light and heavy industries were not rational in that the latter leaned too heavily towards self-services while the former leaned too heavily towards providing services for production.9 7

Xie (1980), Stigler (1989), Clarkson and Miller (1989). Hong and Shangqing (1981). 9 Shangqing (1984). 8

8.1 Research Progress from the Beginning of Reform and Opening …

219

Yang Jianbai and Li Xuezheng conducted an in-depth study of the problems associated with the industrial structure in the first three decades after the founding of the People’s Republic of China in 1949.10 In their influential paper, “Historical Experience on the Relationship between Agriculture, Light and Heavy Industries in China,” they attempted to characterize China’s economic structure circa 1980. They concluded that China had transformed itself from an agricultural-industrial economy dominated by agriculture in the 1950s to an industrial-agricultural economy dominated by manufacturing. They divided the past 30 years into several sub periods based on the relative relationship between the three economic sectors. Between 1949 and 1957, the three industries were basically balanced. In years 1958–1962 and 1966– 1976, they were unbalanced. From 1963 to 1965 and from 1977 to the early 1980s, it was in the adjustment mode. Too high accumulation rate, abnormal distribution of national investment, sharp price differences between industrial and agricultural products, and direct destruction of agricultural production were found to be the main reasons for economic imbalance in China. Some studies specifically analyzed the changing characteristics of agriculture in China’s economic structure. They summarized the characteristics of agricultural production from the early days of the founding of the People’s Republic of China to 1984, and concluded that China shared the most salient features of low-income countries—that is, the proportion of agriculture in the economy was unduly large.11 (2) Studies on the adjustment or rationalization of industrial structure But how should China correctly handle the relationship between the agricultural, light and heavy industries? Yang Jianbai and Li Xuezeng suggested that China should stick to its own path to industrialization based on agriculture, and adjust the heavy industry so that it could accommodate the needs of agriculture and the light industry. In other words, China should follow the pecking order of agriculture, the light industry, and the heavy industry.12 Other scholars advocated the following measures to rationalize the structure of the light and heavy industries: achieve a strategic transformation of the light industry to ensure its stable growth, and ensure the priority growth of the heavy industry while at the same time properly controlling its scale and speed.13 Song Zexing examined the industrial structure of Liaoning province and argued that the adjustment of economic structure should pay more attention to the proportion of accumulation and consumption, the weak links in the economic structure, the coordinated development across different departments, and the coordination of local and national economic structures.14 Li Jingwen and others pointed out that, to achieve a high level of industrialization, it was necessary to rely on technological progress to

10

Yang and Li (1980). China Rural Development Research Group (1986). 12 Yang and Li (1980). 13 Shangqing (1984). 14 Song (1983). 11

220

8 The Theory of Industrial Structure and Industrial Organization

promote the rationalization of the industrial structure. In their view, the basic principles of adjusting the industrial structure included the principle of coordinated development, the principle of optimal efficiency, the principle of consumption-oriented development, the principle of technological progress, and the principle of meeting employment demand, among which the first two were the most basic.15 (3) Research on the tertiary industry With the introduction of the three-industry taxonomy in Western economics to the Chinese academic community, more and more scholars came to recognize the necessity and feasibility of the new classification paradigm. Li Jiangfan was among the first group of scholars to study the issue. He proposed to reconsider not only the relative proportion of the agricultural, light and heavy industries in the Chinese economy, but also that of industrial materials and consumer goods and services. In his monograph, “Economics of the Tertiary Industry,” Li Jiangfan used Marxist labor theory to analyze the tertiary industry and to reveal its inherent economic regularities. The book also examined the signs, conditions, time, and channels of the formation of the tertiary industry, as well as its distribution and consumption. In the book, Mr. Li pointed out that the relative value of the non-automated service industry would increase rapidly, and the rise in both supply and demand of services would enhance the relative importance of the tertiary industry in the economy.16

Industrial Policy By the 1980s Chinese scholars had come to realize that it was the implementation of industrial policy that promoted the upgrading of industrial structure and thereby accelerated the economic development in Japan and other countries after World War II. The Chinese government should, therefore, actively use industrial policy to boost economic growth.17 The academic studies soon caught the attention of the government. In 1986, the concept of industrial policy was mentioned and given a prominent position in the Seventh Five-Year Plan. In 1989, China promulgated the National Industrial Policy, which covered all major sectors in agriculture and industry. The national policy legislation put each sub-sector and its products into one of three categories: supported, restricted, or prohibited development. Li Jingwen and others proposed three models of industrial development: inclined development, horizontal development, and coordinated-inclined development. To them, the third model was ideal for the country—and should be adopted by 2000— because it took into account not only the coordinated development of the national economy, but also the inclined development of different regions.18 The academic 15

Li et al. (1988b). Li (1985, 1990). 17 Zhou et al. (1987), Yang (1989), Wang et al. (1989). 18 Li et al. (1988b). 16

8.1 Research Progress from the Beginning of Reform and Opening …

221

community also suggested that China should use industrial policy to encourage the development of certain leading or pillar industries. Based on China’s endowment of resources, some scholars thought that China should give priority to the development of labor-intensive export industries.19 Some scholars asserted that since the bottlenecked industries were the main constraints hindering China’s economic development, priority should be given to the development of basic industries such as energy.20 As the discussions deepened and more and more factors were taken into consideration, so were the differing views from researchers regarding which industries should be given priority of development. There was no consensus on this issue in the academic community, though.

Initial Involvement of China’s Industrial Organization The organizational structure of a business is one of the important issues in industrial organization. In the early 1980s, before the Western theories of industrial organization had yet to be systematically introduced to China, Chinese scholars had already began to examine the characteristics and problems of the organizational structure of China’s enterprises. They found that each enterprise, regardless of its size, was a complete and comprehensive institution. This completeness and comprehensiveness was the main cause for the backward development level of the Chinese economy. An enterprise could be huge in size, but its effectiveness was relatively very low. The unreasonable economic system was another important reason for the unreasonable organizational structure. The backward status of organizational structure in China was a direct reflection of its underdeveloped economy. It was also manifested in the instability of the number of small and medium-sized enterprises and their low economic efficiency. It was the result of underdeveloped commodity economy, wrong economic development strategies, and the current economic system with the lack of incentives and distorted prices.21 The measures taken to decentralize and invigorate state-owned enterprises in the midst of the urban economic system reform in the mid-1980s were met with a dilemma: whenever the government loosened up its control, they became chaotic; but whenever the government tightened its control, they became zombies. Wei Xinghua and others suggested that enhancing business vitality entail establishing and improving various restraint mechanisms to correct the deviations that may occur in the process, and bringing enterprise vitality to the track of national economic planning.22 “Competition and Monopoly: Socialist Microeconomic Analysis,” an influential monograph on China’s industrial organization by Hu Ruyin, had a great impact in the 1980s. The book offered a comprehensive review of monopoly and competition in 19

Huang (1988). Li et al. (1988a). 21 Sun (1984). 22 Wei et al. (1986). 20

222

8 The Theory of Industrial Structure and Industrial Organization

Western economics and Eastern European economics, as well as a systematic analysis of socialist competition. It discussed the various schools of thought on competition and monopoly since the Third Plenum of the 11th CPC Central Committee. Relying on the Marxist microeconomic analysis framework, the author examined the socialist microeconomic operation at the level of industrial organization from various perspectives. The book revealed the characteristics of the multi-level segmentation in the operation of China’s micro-economy in the 1980s. It examined the various restrictions on intra-sector competition, inter-sector competition, spatial competition, and international competition, as well as the corresponding misallocation of resources and ineffectiveness. The most important takeaway from the book was the conclusion that monopoly in the socialist economy was mainly state monopoly and administrative monopoly, and competition in the socialist economy was uneven within a department. Additionally, the various expedient measures or those that provided subsidies to some at the expense of others may help inhibit the uneven competition within the department, but by protecting the backward enterprises they could also hinder the growth of advanced ones, thereby reducing the efficiency of resource allocation.23

8.2 Review of Economic Research in the 1990s By the 1980s, through economic experiments China had finally identified the direction of its reform—that is, to build a socialist market economy. The goal of reform was formally sealed in 1992 at the 14th CPC National Congress. The introduction of Western economic theories on industrial structure to China reached a plateau in the 1980s, only to be followed by the translation and introduction of industrial organization theories in the next decade. In the 1990s, the research topics on industrial structure included the evolution of China’s industrial structure, the rationalization of the industrial structure, the development of industries closely related to the new economy, and the impacts of economic opening on industrial structure. The research on industrial policy examined the various issues confronting the Chinese economy at the time, such as industrial bottlenecks, declining industries, overly competitive industries, and industrial protection. Some scholars reflected on the effectiveness of industrial policy. The research on industrial organization was mainly carried out under the framework of structure-behavior-performance, or conducted as a special study on a certain aspect. The main focus of the policy implication was to rationalize industrial organization by centralizing the decentralized industries to a moderate extent and strengthening competition or implementing effective regulation of monopoly industries.

23

Hu (1988).

8.2 Review of Economic Research in the 1990s

223

Further Introduction of Industrial Organization Theories from Western Economics The 1980s witnessed the peak of introducing Western economic theories of industrial structure to China. Upon entering the 1990s, important works on industrial organization began to be fully translated into Chinese and quickly accepted by Chinese scholars. Among the most influential textbooks were “Industrial Organization Theory” by Jean Tirole; “Modern Industrial Organization,” by Dennis Carlton and Jeffrey Perloff; and “Industrial Economics and Organization: Theory and Practice,” by Donald Hay and Derek Morris.24 Jean Tirole’s book, which was more theoretical, put the discussions of industrial organization within the analytical framework of game theory and information economics. The biggest feature of Dennis Carlton and Jeffrey Perloff’s textbook was a large number of practical cases integrated with theory, and its focus on public policy. The three were all influential textbooks on industrial organization at the time. Together, they covered the important schools of thought and ideas on industrial organization, such as the structure-behavior-performance framework of the Harvard school, the price theory tradition of the Chicago school, and the transaction cost perspective of the new institutional economics. Michael Porter’s competition trilogy was also introduced to China through translation. In “Competitive Strategy,” Porter put forth the five-force model of industrial competition and three basic strategies. In “Competitive Advantage,” he introduced the value chain analysis. In “Competitive Advantages of Nations,” he put forward the diamond theory of national competitive advantage. These analytical frameworks were quickly recognized by Chinese scholars and widely used in their research.25 Starting from the early 1990s, Chinese scholars began to pay attention to industrial organization policies, including antitrust, economic regulation, and social regulation. Masu Uekusa’s “Microeconomics of Regulation” was the first monograph in the field of economics of regulation to be translated into Chinese. The idea of deregulation or reregulation was translated and introduced to China, such as “Regulation, Deregulation, Reregulation: The Future of the Banking, Insurance, and Securities Industries” by Alan Gart. Meanwhile, Chinese scholars such as Yu Hui and Wang Junhao also wrote articles to introduce theories of regulation.26

Studies on Industrial Structure (1) The status quo of China’s industrial structure and direction of adjustments In an influential study, in line with the cross-national results by Chenery, Kuznets, and other Western scholars, Liu Wei conducted a comprehensive analysis of China’s 24

Tirole (1987), Carlton and Perloff (1998), Hay and Morris (2001). Porter (1999, 2002a, b). 26 Uekusa (1992), Gart (1999), Yu (1995), Wang et al. (1998). 25

224

8 The Theory of Industrial Structure and Industrial Organization

economic structure and offered an assessment about its current status.27 In another study, Guo Kesha showed that the deviation of industrial structure and the slow pace of industrial upgrading had negative impacts on maintaining sustainable economic growth and on the quality of growth in the process of industrialization.28 Regarding the direction of industrial structure adjustments, Guo Kesha, by comparing the general characteristics of the industrial structure across different countries, concluded that China’s industrial structure was badly dislocated. In his view, the right approach to promoting industrialization was to accelerate the development of the tertiary industry, so as to absorb the surplus agricultural labor force and increase farmers’ incomes. This would also help overcome the demand constraints caused by the inconsistency between per capita income and proportion of industrial output, push forward industrialization and promote stable and rapid economic growth. At the same time, he suggested, the country should speed up the economic restructuring reform to promote the coordinated development of marketization, urbanization, and industrialization; it should also accelerate the development of the equipment industry to upgrade the industrial structure and promote the improvement of the quality of economic growth.29 Zhang Shixian disagreed, however, believing that the issue of whether there were deviations in China’s industrial structure must be evaluated based on the particularities of China’s national condition and economic development. Since China’s industrial structure had not followed the general mode of the world, the marginal efficiency of industrial investment should be used as the yardstick to rationalize China’s industrial structure.30 (2) Development of industries associated with the new economy The sustained high-speed growth of the U.S. economy in the 1990s and its corresponding new features, hailed as the new economy, have aroused widespread international attention. Built upon the revolution of information technology, not only had the new economy hastened the rapid development of newly emerged industries, the effects had also trickled down to the traditional industries. At the end of the twentieth century, the Chinese academia embarked on extensive discussions on the new economy and the emerging new industries. The New Economy Development Strategy Task Force of the National Information Center believed that although China was faced with a series of challenges in the development of the new economy, there were great opportunities, as manifested in China’s formation of a rather large industrial base, its huge market potential, its comparative advantage in international division of labor, and the second-mover advantage. The task force was very optimistic about the prospects of the development of the new economy in China.31 Xu Xiaonian took a more cautious view and thought that China had a long way to go to develop its own high-tech industry. He suggested 27

Liu (1999a). Guo (2000b). 29 Guo (1999). 30 Zhang (2000). 31 China’s New Economy Development Strategy Task Force, National Information Center (2001). 28

8.2 Review of Economic Research in the 1990s

225

that attention should be paid to building a sound environment and laying out the conditions for the development of the high-tech industry. In this view, it was not wise to dream of catching up with the United States via the development of the high-tech industry.32 (3) Research on industrial structure under open conditions With the increasing influence of foreign investment in the Chinese economy, the impacts of foreign direct investment on the country’s industrial structure has caught the attention of many scholars. Their views were mixed, though. Some were optimistic while others were pessimistic. Wang, Jiang and Lu, for example, held the view that foreign direct investment by giant, technologically advanced multinational enterprises could help upgrade China’s manufacturing industry. However, Song and Chai had differing views. From the perspective of inter-industry and intra-industry trade, they empirically analyzed the status and role of foreign-funded enterprises in foreign trade. They showed that foreign-funded enterprises had occupied a dominant position in China’s foreign trade and in industrial structure adjustments, as domestic enterprises retreated towards labor-intensive and resource-intensive industries. Guo Kesha, too, believed that foreign investment in China had worsened the structural deviation of the three industries and weakened the global competitiveness of domestic industries.33

Industrial Policy (1) Declining industries and industries facing bottlenecks China’s infrastructure industry has been overstretched for a prolonged period of time. Scholars put forward their policy propositions regarding how to deal with the bottlenecks facing the industry from differing angles. To some scholars, the imperfect fundraising mechanism was the root cause. They proposed various channels to raise funds for the infrastructure and basic industries. They included centralizing fiscal expenditure; raising funds for the development of infrastructure and basic industries through the adjustment of the state-owned asset stock structure; using foreign capital; raising funds through financial institutions (including the establishment of policy banks); and using appropriated land use rights or paid transfers.34 Some scholars tackled the issue from the perspective of government regulations, believing that an effective way to break the bottlenecks was to reform the existing government regulatory framework, aimed at improving the industry’s economic efficiency. Drawing on the lessons from the reform of the government regulatory system in Britain’s infrastructure industry, they came to believe that China’s infrastructure 32

Xu (2000). Wang et al. (2000), Song and Chai (1999), Guo (2000a). 34 The Economic Research Center of the State Planning Commission (1994). 33

226

8 The Theory of Industrial Structure and Industrial Organization

industry must separate government from enterprise for the sake of competition. The aim of government regulation was to enhance effective competition and set regulatory prices in accordance with basis economic principles.35 In the 1990s, China’s economy in general shifted from supply constraints to demand constraints. With rapid economic development, it had become imperative to make adjustments concerning industrial structure. Jiang Xiaojuan pointed to two primary reasons for the financial difficulties in some industries and in some cases even an overall loss for the entire industry. One was that the decline of some industries was inevitable due to increase in national income and changes in the consumption structure. Another was that the plight of state-owned enterprises had not only institutional problems but also structural problems, as manifested in the relatively heavy distribution density in certain industries. Jiang Xiaojuan proposed setting up a special fund to achieve an orderly exit of some state-owned enterprises from overly crowded industries, formulating special policies for unemployment and reemployment of impacted employees, providing a complete set of assistance measures for regional adjustments, and combining the adjustment of traditional industries with emerging ones. In short, providing assistance to exiting enterprises should become the focus of China’s industrial policy going forward.36 (2) Industrial protection in an open economy With continued deepening of opening up to the outside world, Chinese scholars became increasingly wary of the safety and protection of Chinese domestic industries. Luo Yuanzheng, for instance, argued that since the 1990s the competitive effect of foreign direct investment in China had outdone the complementary effect. The consequence of the “market-for-technology” strategy in introducing foreign investment was that while the market was lost, technology was not obtained. He urged us to pay attention to the relationship between expanding foreign direct investment and protecting the national economy, and to strengthen policy guidance and management oversight over the introduction of foreign investment in China.37 Wang Zhenzhong argued that truly stateless global companies did not exist, and hence we had to face the problem of protecting national industries. He called for limited market access and not fully opening up to foreign investment, limiting the use of national treatment and instead actively promoting reciprocal treatment; and strengthening the monitoring of foreign companies, among other measures.38 To ensure the safety of national industries, Cheng Enfu suggested that China should provide support to dozens of large state-owned holding companies so that they could compete with the multinational companies already invested in China.39 35

Wang (1997). Jiang (1995). 37 Luo (1997). 38 Wang (1996). 39 Cheng (1998). 36

8.2 Review of Economic Research in the 1990s

227

Some scholars, however, urged that China should take an open attitude towards international competition. Li Yining, a renowned economist, believed that foreign investment in China was not excessive at all. It was a normal phenomenon in market competition that joint ventures and other foreign-funded enterprises came to dominate the market. In his view, protecting backward industries was akin to protecting monopoly, and it would only hinder China’s economic development and technological progress. Xia Youfu and Ma Yu suggested further loosening up the catalogue of foreign-invested industries and the interim regulations, fully opening up the mature industries and general industries, and strongly encouraging investment in infrastructure and basic industries. When industrial protection was necessary, it must be moderate and conform to international practices, and try to use economic means to support domestic enterprises.40 (3) Evaluation of China’s industrial policy Over the years, China has implemented industrial policy in many fields and for a variety of reasons. However, its effectiveness has fallen short of expectations for a long time, indicating that some factors were not fully considered in either expectations or policy effectiveness. Jiang Xiaojuan used the public choice theory to study government behavior in industrial policy. She showed that after entering the 1990s, the government had faced two major changes when formulating its industrial policy. With the notable reduction of shortage industries and the enhancement of market regulation, the requirements for implementing industrial policy were significantly reduced and the factors affecting the economy became more complicated, making policy formulation more challenging. Additionally, with the passage of time, the influence of the factors related to the government’s own interests in its formulation of industrial policy has increased significantly. Jiang Xiaojuan argued that for industrial policy to be effectively implemented, it should meet the following standards: on the premise of contributing to the realization of the industrial policy goals, it should choose policy instruments that were consistent with the interests of the administrative system and the intended subjects or at least had fewer conflicts. She concluded with three thought-provoking points: (1) the existence of industrial structure dislocations was not necessarily a sufficient condition for implementing industrial policy; (2) industrial policy could solve the problems associated with industrial structure, but it could also cause problems; and (3) the design, choice and coordination of industrial policy instruments warranted further, in-depth studies.41

40 41

Xia and Ma (1997). Jiang (1993).

228

8 The Theory of Industrial Structure and Industrial Organization

Expand Research on Industrial Organization (1) Research on market structure and corporate behavior In the area of market structure, “Industrial Organization and Effective Competition: Preliminary Study on China’s Industrial Organization,” a book edited by Wang Huijiong, offered some groundbreaking research on industrial concentration and the minimum scale economy. In “Structure and Behavior: Studies on China’s Industrial Organization,” Ma Jiantang et al. provided a comprehensive inspection of the market operation situation in China at the time. They calculated the degree of market concentration for three major industrial sectors, assessed the economic status of China’s industrial enterprises, and ranked the barriers of entry in forty industrial sectors. They found that the most damaging entry barrier to the optimal allocation of resources was policy barriers, especially the administrative restrictions on entry in some industrial sectors. Using mathematical models and econometric methods, Yang Huixin examined and analyzed the entry and exit of the manufacturing of automobiles and other durable goods. The study provided an in-depth and systematic analysis of excessive entry, exit obstacles, the elasticity of stock assets of enterprises during the transition process.42 Market segmentation has long been a problem in China. The lack of an integrated domestic market created a unique market structure that was characterized by substantial regional differences. This was partly caused by the imbalance of social and economic development across different regions. To some scholars, the segmented market structure was closely related to government behavior, especially that of the local governments, stemming from two sources. The first was the blurring of the government’s administrative function and its economic management function, and the second was the misplaced fiscal powers and responsibilities between the central and local governments. Relying on the path dependence theory as an analysis tool, Yin Wenquan and Cai Wanru demonstrated that local market segmentation was a unique phenomenon in the process of economic transition. Deep-seated institutional segmentation—such as the use of local government fiscal contracts and a large number of local state-owned enterprises masquerading as local ownership, the outdated industrial layout inherited from the traditional economic system, and inappropriate performance evaluation mechanism of local officials have all contributed to local market segmentation.43 In the area of corporate behavior, most scholars proceeded along the “property rights structure—enterprise behavior—property rights reform” framework. Ma Jiantang, for instance, expanded the field of corporate behavior research by simultaneously considering the influence of both the internal structure of an enterprise and the external market structure. He showed no definitive correlation between industry concentration and industry profitability in China. The main reason was

42 43

Wang (1991), Ma (1993), Yang (2000b). Yang (2000a), Yinquan and Cai (2001).

8.2 Review of Economic Research in the 1990s

229

that the state had imposed strict price controls on industries with high concentration.44 Horizontal and vertical integrations and other corporate behaviors aroused the attention of Chinese scholars in the early 1990s.45 Shen Zhiyu analyzed the price policy and price formation in natural monopoly industries such as power, railway, civil aviation, and telecommunications. He concluded that it was typical industry administrative monopoly, and its behavior was also an administrative behavior.46 (2) Research on the operational performance of China’s industries Jiang Xiaojuan and others examined the very different industrial performances caused by different levels of competition during the transition period. For some manufacturing sectors, the efficiency level continued to improve, as products and technologies were rapidly upgraded and industrial production was concentrated in a few dominant companies, significantly enhancing their international competitiveness. Other manufacturing sectors, however, had a very different competition landscape, characterized by decentralized production, repeated construction, reduced efficiency, large-scale enterprise losses and even industry-wide losses. A typical industry where competition had failed to improve its industrial organization was the cotton textile industry. Jiang Xiaojuan attributed the worsening performance for these industries to the distortion of the institutional environment, as well as the industry-specific particularities. She argued that it was not enough to merely use industry concentration as the indicator of whether the industrial organization structure had deteriorated. Attention must also be paid to the impact of the expansion of market size.47 Yin Xingmin examined the relationship between economic performance and industrial concentration since the 1980s and reached a number of conclusions. The economic performance of an industry was positively linked to its industrial concentration. The rapid establishment of small enterprises had actually worsened the allocation of resources and impaired the improvement of the industry’s economic efficiency. The resource allocation mode of China’s industrial economy showed that the economy has not yet escaped the high-speed, inefficient, and extensive development model.48 Qi Yudong found similar results showing that industrial concentration and industrial performance were positively correlated within a certain range. However, he argued that the positive correlation was the result of reduction in unit cost, rather than price factors, and that the deeper causes for this relationship were technological progress and innovation.49 Following the tradition of linking industrial performance with property rights, Liu Xiaoxuan conducted a large-scale cross-sectional analysis of 170,000 competitive enterprises using production function models and econometric methods, based on the 1995 survey data by the National Industrial Census. She found that private enterprises 44

Ma (1993). Wang (1991). 46 Shen (1997). 47 Jiang and Liu (1996), Jiang (1998). 48 Yin (1996). 49 Qi (1998). 45

230

8 The Theory of Industrial Structure and Industrial Organization

had the highest efficiency, followed by foreign-funded enterprises, and then by shareholding companies and collective enterprises, with state-owned enterprises having the lowest efficiency. Additionally, the hierarchy structure in the old system had a negative impact on the economic performance of the enterprises. Non-state-owned enterprises with lower subordinate hierarchies outperformed their state-owned counterparts with higher subordinate hierarchies, implying the loss of economies of scale for the latter.50 Some scholars examined economic performance from the perspective of industrial competition. Drawing on the results of Michael Porter and other scholars, Jin An provided an examination of international competitiveness of China’s industrial products, and put forward a series of indexes and indicators of international competitiveness. Pei Changhong conducted an empirical analysis of industrial competitiveness for various industries including electronics, automobiles, clothing, washing machines, tires, and commercial retails, aiming to unfold how foreign direct investment had impacted China’s domestic industries. Lu Zheng and Cao Jianhai argued that excessive competition occurred in most industries during the transition process, and that the associated loss in both efficiency and economic welfare were caused by institutional reasons. Jiang Xiaojuan attributed the problem of overcapacity and excessive competition in China’s state-owned industrial sectors to the fact that the scale of the state-owned enterprises was incompatible with the market condition. Industrial and geographical distribution and exit barriers were other factors contributing to the problem.51

Government Policies on Industrial Organization (1) The issue of moderate concentration of market structure In the 1990s, as the Chinese economy transformed itself from a seller’s market to a buyer’s market, the market structure for most industries was very undesirable, as manifested in overcapacity and too many enterprises in a given industry. The output level of each enterprise was dismal, compared to the scale of leading global competitors. Wary of such an undesirable market structure, most Chinese scholars agreed that it was necessary to promote industrial concentration and achieve economies of scale through the establishment of large, dominant enterprises and the elimination of obsolete production capacity. Shen Lin, for instance, argued that the market structure was extremely fragmented because of excessive administrative interferences in the operation of enterprises. It happened because there was no clear line of demarcation between the functions of the government and those of an enterprise. Therefore, it was imperative to separate government and enterprise, eliminate the administrative barriers, and increase concentration through competition. Xie Di and 50 51

Liu (2000). Bei (1996), Pei (1998), Lu and Cao (2000), Cao (1999), Jiang (1995).

8.2 Review of Economic Research in the 1990s

231

Qiao Liang echoed by arguing that it was time to rectify the bad rap associated with monopoly and that promoting proper industrial concentration in the main industries was the objective requirement for the economy to transform from extensive growth to intensive growth.52 (2) Antitrust and regulatory policies Chinese scholars generally agreed on the merits of antitrust. In 1997 Zhang Weiying and Sheng Hong, for example, published an influential paper, titled “Antitrust Issues in China’s Telecommunications Industry.” Through detailed analysis of the development process of China’s telecommunications industry, they proposed some basic ideas to reform the industry, such as forming a new national telecommunications regulatory commission, dividing China Telecom, a giant state-owned enterprise, into several smaller companies, and enacting telecommunications law. They pointed out that the primary task of China’s antitrust efforts was to break the administrative monopoly and the restrictions on fair competition. This solution should be not limited only to the telecommunications industry. It should also be applied to other industries such as postal communications, power, and railways. Chen Xiaohong, Zhang Xinzhu and Wang Junhao also published important articles on the issue of monopoly in China’s telecommunications industry.53 A number of studies were published concerning regulatory system and regulatory theory. Yu Hui, for instance, provided a detailed examination of China’s regulatory system. He showed that the existing regulatory system had played a certain positive role in maintaining market order, protecting the interests of consumers and the society, and promoting industrial developments. However, since there was no separation between government and enterprises or between government affairs and business affairs, it was very common for government officials to abuse their administrative power for the interests of their own departments or industries.54 Yang Huixin argued that while in general China should form a regulatory system that would allow for free entry and exit by enterprises, the entry and exit barriers should be set in accordance with the unique characteristics of a particular industry to achieve a rational market structure. For the policy of industrial organization to be effectively implemented, its guidance must be consistent with the market-driven interest of the enterprises.55 In his influential monograph, “Introduction to Regulatory Economics,” Wang Junhao offered comprehensive discussions on various regulatory theories. After examining the regulatory price formation mechanisms of three natural monopoly products— telecommunications, electricity, and water supply, he put forward the goal of price control of natural monopoly products in China.56

52

Lin (1993), Xie and Qiao (1997). Zhang and Sheng (1997), Chen (1999), Zhang et al. (2000), Wang (1998). 54 Yu (1998). 55 Yang (2000b). 56 Wang (2001). 53

232

8 The Theory of Industrial Structure and Industrial Organization

8.3 Research Progress in the Twenty-First Century Since the beginning of the twenty-first century, studies on industrial structure and industrial organization in China has continued to expand along the research line of the previous two periods. The new industrialization path put forth by the 16th CPC National Congress and the increasing importance of China’s heavy and chemical industry (HCI) have caught the attention of researchers. After China joined the WTO, in 2001, the impacts of economic opening on industrial structure, industrial policy, and enterprise competition became urgent problems the country had to face. Needless to say, industrial structure and industrial organization under open conditions were also the focus of research during this period.

Studies on Industrial Structure (1) Summary of historical experience on industrial structure Wu Li and Wen Rui provided a review of China’s policy towards the light and heavy industries since the founding of the People’s Republic of China. They divided the industrialization process into three stages. The first was the stage of seeking strength in years 1949–1978. During this period, developing the heavy industry was the top priority of the government while the light industry was basically ignored. The second was the stage of seeking wealth between 1979 and 1997. In the two decades, the agricultural, light, and heavy industries developed on an equal footing in terms of government policy orientation. The third was the phase of exploring a new industrialization road from 1998 to 2005. During this period, both the government and enterprises were looking for new growth drivers for rapid economic development.57 Regarding the real power driving industrialization, Lin Yifu and Liu Mingxing argued that when formulating development strategies during the industrialization process, developing countries should count on their own comparative advantages. Through empirical analysis, they demonstrated that the transformation of the Chinese government’s development strategy was crucial for the success of industrialization over the past 20 years. Whether in state-owned or non-state-owned industries, whether in rural or urban industries, the development must follow the principle of comparative advantage.58 Wang Dewen and others agreed that China’s industrial structure has become increasingly in line with its resource and factor endowments, and comparative advantage in low labor cost has been continuously exerted. After analyzing the impact of China’s industrial restructuring on production efficiency and employment creation, they concluded that the relatively faster growth 57 58

Wu and Wen (2006). Lin and Liu (2004).

8.3 Research Progress in the Twenty-First Century

233

of the light industry sector and labor-intensive industries has not only improved the overall efficiency, but also played an important role in alleviating the ever increasing unemployment pressure.59 (2) Research on industrial operation and structural adjustment About the operation of China’s industry. Using industrial growth efficiency, industrial structure and industrial environment as indicators of industrial modernization, Chen Jiagui and Huang Qunhui argued that at the end of the twentieth century, China’s industrial modernization process was still in its infancy, at roughly 20% of the level of modern industrialized economies. Using regression analysis, Li Jiangfan and Zeng Guojun analyzed the vertical and horizontal evolution of the four different layers within China’s tertiary industry. They showed that the decline of the first layer and the increase of the second layer in the tertiary industry reflected the direction of the industry’s upgrading. Jiang Xiaojuan and Li Hui examined the development of China’s service industry and its structural changes, and identified important factors affecting the development of the industry.60 Regarding the adjustment of industrial structure in backward regions, Wang Dewen and others opined that, to revitalize and renovate the old, traditional industrial bases, priorities should be given to the development of the light and labor-intensive industries.61 Based on analysis of a large set of data, Lu Zhongyuan showed that, since the 1990s the process of industrial structural adjustment has accelerated significantly in the Western regions, the level of specialization had increased, and the direction of development had been basically correct. However, the industrial competitive advantage was weak and the overall quality of the industrial structure was generally low. In fact, the gap between the Western and Eastern regions had widened.62 Regarding the direction of industrial structure adjustment in China, the basic view held by Chinese scholars was to move towards a new type of industrialization. Jiang Xiaojuan, for example, believed that China’s new industrialization path should reflect the following four characteristics: (1) promoting industrialization in the era of big development of information technology; (2) promoting industrialization in the context of continuous deepening of globalization; (3) paying equal attention to economic development and environmental protection; and (4) promoting industrialization that was conducive to the continuous transfer of agricultural labor force and the improvement of urbanization. Guo Kesha argued that it was necessary to accelerate the industrial upgrading characterized by the rising share of technology-intensive sectors.63

59

Wang et al. (2004). Chen and Huang (2003), Li and Zeng (2003), Jiang and Li (2004). 61 Wang et al. (2004). 62 Lu (2002). 63 Jiang (2002), Guo (2004). 60

234

8 The Theory of Industrial Structure and Industrial Organization

(3) Road for the heavy and chemical industry Liu Shijin argued that since the beginning of the twenty-first century the new leading industries in China have been consumer goods industries such as housing, automobiles, and electronic communications, and capital material industries for steel, nonferrous metals, machinery, and chemical products. These industries shared a common feature in that both the starting and ending points were based on consumption, a feature that has never happened in the past. With the support of strong household consumption, large-scale and long lasting economic bubbles were highly unlikely to happen. Liu Shijin asserted that China’s economy has entered into the heavy and chemical industry development stage that was market-driven, with ever increasing high technological contents and added value, and sustainable growth. The National Bureau of Statistics agreed that China had entered a period of rapid development in the heavy and chemical industry.64 Wu Jinglian contended that China’s one-sided reliance on the heavy industry could be dangerous. For one thing, the extensive growth mode dominated by the heavy and chemical industry had limited ability to create jobs. In addition, China’s natural and capital resources were unable to support the development of the heavy and chemical industry. He emphasized that China’s economic development should not rely on high levels of input, but rather on improving efficiency. Lin Yifu also held the view that the heavy industry did not satisfy the needs of China’s economic and social development. Given China’s huge amount of surplus labor force, more attention should be paid to the development of labor-intensive, rather than capitalintensive industries. Zhao Lifen and Dong Jun claimed that China’s industrialization process should not be judged according to the same criteria as used by developed economies. They pointed out that the rapid growth of China’s heavy and chemical industry in recent years coincided with the rise of the overall economy. Therefore, it was merely a cyclical phenomenon and should not be interpreted as a sign indicating China has entered the stage of the heavy and chemical industry.65 (4) Industrial structure under open conditions The accession to the WTO in 2001 ushered in a brand new environment for China’s national economy. Since then, Chinese scholars have conducted extensive studies on industrial structure under open conditions. Zhu Zhongdi and Bao Xiaohua used the input–output data to provide a quantitative analysis about the impact of anti-dumping measures on China’s chemical industry. Because China’s anti-dumping measures mostly targeted intermediate products, they suggested that the anti-dumping measures should fully consider the interest of the downstream 64

Liu (2002), Liu (2004), Speeches by Li Deshui and Yao Jingyuan from the National Bureau of Statistics at the press conference of the State Council’s Information Office on January 20, 2004. 65 Wu (2004), Lin (2004), Zhao and Dong (2005).

8.3 Research Progress in the Twenty-First Century

235

industries, as well as the public interest.66 There were also studies on changes in the services industry in an open economy. Li Jiangfan believed that the accession to the WTO could affect China’s tertiary industry to varying degrees. He called for speeding up reform of China’s talent policy and industrial policy to support capitaland technology-intensive and emerging service industries.67 Cheng Dazhong tested the Baumol-Fuchs hypothesis for China’s service industry, reaching a number of conclusions. The labor productivity growth of China’s service industry has lagged behind, which was the main reason for the industry’s growing share in total employment. Demand for services and development of the service sector were extremely unbalanced. The lack of price elasticity of demand for almost all kinds of services, together with the steady increases in service prices in recent years, easily led to the so-called cost disease. Services’ share in GDP increased as income went up, but the rate of growth was different for different sectors of services.68

Studies on Industrial Policy Numerous state-owned enterprises were dependent on depleted resources, and many of them were faced with a double whammy of resource shortage and restructuring at the same time. Therefore, the policy on resource-dependent industries was both a theoretical issue and an urgent need. Yu Li and others investigated the practice of Fuxin, a city from Liaoning province, and systematically analyzed the types of exit barriers and exit paths of state-owned enterprises that relied on exhausted resources.69 As for industrial policy in an open environment after China’s accession to the WTO, Guo Kesha suggested that the adjustment of industrial development policies should aim to form a new pattern centered on industrial structure policy, complemented with the policy adjustments on foreign trade and foreign direct investment. Dealing with the problem of appropriate and effective government intervention would be the key to industrial development policy in the new era. Wang Ping and Qian Xuefeng examined the types of technological progress and the impact of policy proclivity on the terms of trade. In their view, the long lasting export-oriented technological progress had become the root cause of the deterioration of China’s terms of trade. To reverse this trend, they suggested that China should lean towards policies encouraging the import of middle or high-level technologies. Ma Jie and Zhou Jidong argued that the optimal policy intervention and whether it could eliminate the efficiency loss caused by asymmetric information depended on the type of competition, rather than on the information structure. Through analysis of the various models of international multi-market oligopoly, Ma Jie concluded that China’s export tax

66

Zhu and Bao (2004). Li (2001). 68 Cheng (2004). 69 Yu et al. (2003). 67

236

8 The Theory of Industrial Structure and Industrial Organization

rebate policy would only aggravate the distortion of the domestic market and may not necessarily improve the welfare of the country.70

Studies on Industrial Organization (1) Market operation Liu Xiaoxuan examined the behavior of China’s state-owned enterprises under different market frameworks. He found that in the monopolistic market, their main goal was to maximize sales, while in the generally competitive market, the main goal was to minimize expenses.71 Price competition was a common strategy adopted by Chinese enterprises. An Tongliang and others used the color TV industry to unveil the common characteristics of those industries that were prone to price competition, from six angles: product features, stage of the industry life cycle, scale of industrial production, market concentration, exit barriers, and market power of downstream enterprises.72 (2) Industrial competitiveness Using marginal analysis, Sun Luoping demonstrated that the competitiveness of an industry had nothing to do with the scale of enterprises in the industry. He pointed out that the phenomenon of industrial clusters in a number of small and mediumsized cities and towns in China was a typical example of enhancing competitiveness via division of labor by the market.73 Lin Hanchuan and Guan Hongxi provided an evaluation of the competitiveness of small and medium-sized enterprises across different industries based on four criteria: external competitive environment, shortterm survival strength, medium-term growth capability, and long-term development potential. They showed that the order of competitiveness from strongest to weakest was as follows: electronic and electrical industry; chemical industry, light industry, business service industry; food, machinery, metallurgy, construction, and building materials industries; and textile industry.74

Government Policy on Industrial Organization (1) Antitrust policy

70

Guo (2004), Wang and Qian (2007), Ma and Zhou (2001), Ma (2002). Liu (2003). 72 An and Yang (2002). 73 Sun (2004). 74 Lin and Guan (2005). 71

8.3 Research Progress in the Twenty-First Century

237

Monopoly in China was largely administrative monopoly. This kind of monopoly has not only led to high profitability for state-owned enterprises, but also formed a huge vested interest group. It has become the largest institutional bottleneck of China’s economy, which manifested itself in both economic corruption and political corruption. After analyzing enterprise behavior in the process of China’s economic transition, Liu Xiaoxuan claimed that in competitive markets the top priority was to solve the problem associated with property rights, but in monopolistic markets, breaking administrative monopoly was the most critical. In her opinion, antitrust was an urgent and long-term task during the transition process.75 Zheng Jie and others constructed a dual-product dominant monopoly model in accordance with the characteristics of China’s telecommunications industry. They showed that the various behaviors of the dominant enterprise caused a myriad of ill effects. In particular, forward and vertical control led to a decline in profitability of the industry.76 Some scholars thought it was necessary for certain industries to maintain a centralized market structure. Liu Wei and Huang Guitian, for instance, argued that since countries differed in how financial assets were allocated and in the organization structure of the banking industry, a relatively concentrated banking industry composed of large-scale banks did not necessarily lead to a decline in competition. Therefore, the high concentration of China’s banking industry was not a concern for the industry’s competition. Even after the banking industry has greatly increased its commercialization, its industrial structure should not be excessively dispersed. Maintaining a relatively concentrated industrial structure may be more conducive to improving the efficiency of financial asset allocation.77 (2) Research on government regulation Research on government regulation of monopoly industries has produced a series of published results. Yu Liangchun examined the telecommunications and power sectors to provide a characterization of the natural monopoly industries, as well the basic regulatory theories and policies how to effectively introduce competition mechanisms and how to regulate the competitive business and the natural monopoly business. Li Yufang conducted an in-depth study of government’s micro-regulation in conjunction with the reality of economic development during the transition period. The monographs by Zhang Xinzhu, Wang Xueqing and others were also influential.78 Many scholars offered reflections on the effectiveness of China’s regulatory policies. Bai Rangrang and Yu Yihong put forward a new explanation for the initial inducement of deregulation. They argued that deregulation was an endogenous phenomenon of technological progress, changes in demand structure, and product specialization, industrial organization structure and power structure arrangement under the original regulation. Deregulation induced by marginal entry was a gradual

75

Hu (2003), Liu (2003). Zheng et al. (2001). 77 Liu and Huang (2003). 78 Yu (2003), Li (2003), Zhang (2004), Wang (2004). 76

238

8 The Theory of Industrial Structure and Industrial Organization

win–win outcome and would not cause disorderly regulation or even lack of regulation, as in the case of mandatory deregulation. Jiang Feitao and others reconsidered China’s control policy on investment in the steel and iron industry since 1994, which was aimed at preventing overcapacity in the industry. They pointed out three shortcomings in the government’s investment control policy. First, it was impossible to fundamentally control overcapacity. Second, it was impossible for relevant departments of the government to accurately predict and formulate a satisfactory investment plan. Third, this policy had interfered the market, causing undesirable consequences. In short, they argued, government regulatory policies impeded the spontaneous adjustments of the market on fixed asset investment, resulting in some undesirable policy consequences. Such policies should be adopted with caution.79

8.4 Economic Research and Exploration in the New Era With the gear of growth shifting from high-speed to medium–high speed, the Chinese economy has entered a new normal in which high-quality development takes over high-speed growth. The report of the 19th CPC National Congress put it squarely that “socialism with Chinese characteristics has entered a new era, and the main contradictions in our society have been transformed into contradictions between the people’s increasing needs for a better life and unbalanced and inadequate development.” High-quality development heralded structural transformation and upgrading. With the extensive growth mode behind us, people have begun to reflect on the past polices.

Industrial Structure (1) Summary of historical experience on industrial structure After 40 years of reform and opening up, China has achieved the largest industrialization in human history. Jin Bei reflected on the mission and value of industrialization, believing that technology was the soul of industry, and industry embodied technology. The direct manifestation of industrial development towards a higher civilization was continuous innovation. The current industrial transformation was the readjustment of the internal relationship between the utility of industry and its substance of value, as well as the emancipation of industrial innovation capabilities. Information technology and artificial intelligence were the logical steps of industrial development. Huang Qunhui summarized the achievements of China’s industrial development and industrialization in the past 40 years, and characterized the logic and experience of

79

Bai and Yu (2004), Jiang et al. (2007).

8.4 Economic Research and Exploration in the New Era

239

the China Plan of industrialization. The core experience of the China Plan of industrialization lied in how to deal with six relationships: (1) the relationship between reform, development and stability, to ensure continued stable growth and deepening of the industrialization process; (2) the relationship between the government and the market, to continuously improve industrial efficiency and promote the industry towards the high-end; (3) the relationship between the central government and local governments, to promote the rational layout of industries and coordinated regional development; (4) the relationship between marketization and industrialization, to cultivate a comprehensive and sustainable industrial development dynamic mechanism; (5) the relationship between globalization and industrialization, to form a modern industrial system that is comprehensively open and developing; and (6) the relationship between urbanization and industrialization, to improve the efficiency of industry and population agglomeration and promote coordinated development of the wellbeing of the society and people’s livelihoods.80 (2) The optimization, transformation, and upgrading of industrial structure The fundamental path to optimize industrial structure lies in technological upgrading. More specifically, as pointed out by Fu Yuanhai and others, optimizing manufacturing structure through technological progress required upgrading and rationalizing the manufacturing structure through independent innovations aided with the absorption of foreign technology, improving the technological capabilities of the local industry, and accelerating the process of marketization and the spillover of foreign technology, eventually resulting in the upgrading of the manufacturing structure. Industrial structure optimization should also lean towards low carbonization. The low-carbon development of China’s industrial system was driven directly by structural changes in the energy sector. Because energy-based output and energy consumption were disproportionately large in the national economy, China’s energy consumption efficiency was mainly affected by its secondary industry. A unique backdrop of China’s ongoing industrial structure optimization was the aging of population. Wang Wei and others did a multi-factor regression analysis using cross-province data. They concluded that population aging has not only boosted optimization of the relative shares of the primary, secondary and tertiary industries, but also promoted optimization of the internal structure of the manufacturing and service industries. With the aging of the population, the cost of labor kept increasing, forcing companies to gear up the accumulation of human capital and to replace labor with capital and technology, which in turn led to upgrading of the industrial structure.81

Discussions About Industrial Policy (1) Case studies of industrial policy 80 81

Bei (2014), Huang (2018). Huang (2015), Fu et al. (2014b), Zhang et al. (2016), Wang et al. (2015).

240

8 The Theory of Industrial Structure and Industrial Organization

In the past, China implemented extensive but different industrial policies over different periods of time. In particular, after China decided to put a premium on the development of strategic, emerging industries in 2009, it has implemented a large number of industrial policies. This provides a natural experiment field to test policy effectiveness. The academic community has taken advantage of this opportunity to conduct extensive research on the effectiveness of the policies. Yu Donghua and Lu Yinan explored the causes for overcapacity in China’s emerging strategic industries. They put forward the notion that the government should not intervene at all. Using the photovoltaic industry, they showed that the industry not only exhibited structural overcapacity but also institutional overcapacity. It was the improper intervention by the government that caused and exacerbated overcapacity in the photovoltaic industry. In the areas where government intervention ran deeper, excess capacity became more prominent. To resolve the overcapacity problem in emerging strategic industries, the government should readjust its traditional support policies to avoid inappropriate government intervention and further promote the reform of the market for factors of production. Zhou Yahong and others argued that at the initial stage of an emerging industry, government subsidies could boost the industry’s overall profitability. But as the industry expanded, government supports would discourage enterprises from investing in R&D, leading to homogeneous overcapacity. Therefore, the right industry policy going forward for new industries should be one that would stimulate original innovation and cultivate demand. Bai Xuejie and Meng Hui used China’s new energy vehicle industry to illustrate the prominent twin principal-agent relationships in the formulation and implementation process of industrial policy, and the corresponding moral hazard and adverse selection problems due to the lack of incentive constraints. To mitigate the inherent flaws caused by the lack of incentive constraints, they proposed that government policies for emerging industries should build a multi-agent policy implementation mechanism according to the characteristics of the industrial development stage and the differences in policy objectives, and make necessary adjustment or even withdraw altogether.82 (2) The economic consequences of industrial policy Researchers have used normative analysis to derive the impact of industrial policy on the real economy, such as the capital market, corporate behavior, and ownership changes. Han Qian and Hong Yongmiao examined the impacts of China’s emerging strategic industrial policies on securities prices and investor behavior using transaction data from the Shanghai Stock Exchange. They found that announcements of industrial policy were associated with positive abnormal returns in the short term, but no significant effects in the medium or long term. Wang Kemin and others conducted research on the relationship between policy uncertainty and corporate investment behavior, and between industrial policy and corporate decision-making. They found that local governments aiming to promote regional economic development tended to provide financial supports to companies in the region based on national industrial 82

Yu and Lu (2015), Zhou et al. (2015), Bai and Meng (2018).

8.4 Economic Research and Exploration in the New Era

241

policies. However, information asymmetry between the government and companies may reduce the efficiency of resource allocation and cause companies to overinvest. Li Wengui and Shao Yiping examined the economic consequences of industrial policy from the perspective of changes in property rights. They found that those private enterprises that were encouraged or supported by industrial policy were more likely to be nationalized. Li Wenjing and Zheng Manni analyzed the impacts of China’s industrial policy on corporate innovation and its internal mechanism. They found that selective industrial policy only encouraged tactical innovation by enterprises. That is, enterprises increased the “quantity” of innovation because it qualified them for more government financing support, but the quality of innovation did not improve much.83 (3) The effectiveness of industrial policy The effectiveness of industrial policy has always been the focus of debate among Chinese scholars. Its proponents believe that the Chinese economic growth miracle is the result of the implementation of industrial policy, whereas its opponents argue that government interference distorts the optimal allocation of resources, causing structural dislocation and overcapacity. The dispute between the two schools of thought culminated in the 2016 open debate between two renowned economists: Lin Yifu and Zhang Weiying. Lin Yifu argued that almost all successful economies had used industrial policies in their economic development, such as Britain in the sixteenth century; the United States, Germany, and France in the mid-nineteenth century; and Japan and the Four Asian Tigers—Taiwan Region, South Korea, Hong Kong (SAR) and Singapore—after World War II. These economies had five characteristics in common: open economy, macro stability, high savings and investment, efficient markets, and an active government. Lin Yifu asserted that an economy became successful largely because the government had actively formulated policies to promote the development of new industries. Economic development depended on comparative advantage. The role of the government was to ensure that this advantage was fully utilized, and its industrial policy played just such a role. Zhang Weiying, however, contended that industrial policy was basically ineffective. It failed badly because of the limit in human cognitive ability and because of the distortion of incentives. The innovation process was full of uncertainties, and there was hardly any statistical regularity to follow. Centralized decision-making such as the formulation of industrial policy, therefore, was a big gamble. By aggregating the probability of making mistakes by individual decision-makers, it increased the probability of collective mistakes. Thus, the probability of success was small, and failure was almost doomed to happen. Additionally, government policies tended to treat a variety of industries and companies differently in terms of market access, taxes and subsidies, financing and credit, land uses, permits for imports and exports, and so on. This would inevitably lead to rent seeking by businesses and government officials. Put simply, the introduction of

83

Han and Hong (2014), Wang et al. (2017), Li and Shao (2016), Li and Zheng (2016).

242

8 The Theory of Industrial Structure and Industrial Organization

a specific industrial policy was not so much the result of science and cognition as that of a game played by vested interest groups.84 In addition to this debate, many scholars have analyzed the effectiveness of industrial policy. Sun Zao and Xi Jiancheng, while recognizing the realistic rationality of implementing industrial policy in developing countries, pointed out that the effectiveness of the Chinese-style industrial policy not only depended on the dual missions of local governments entrusted upon them by the central government, but was also constrained by the level of regional economic development and the marketization process. The change in the central government’s assessment of local governments from economic growth to economic transformation has greatly affected how local governments allocated their efforts between the implementation of industrial policy and the pursuit of short-term economic growth. The increase of marketization also helped enhance the incentives for local governments to implement industrial policy. Chen Zhao and Xiong Ruixiang thought that industry policy has shown positive effect in industries with comparative advantages and the effect has grown steadily over time, but the effect was not significant in industries without any comparative advantages. There was no pre-selection of winners or losers in the formulation of industrial policy. Wang Wen and others argued that an effective industrial policy must meet two basic conditions: ensure appropriate competitiveness of the target industry, and ensure a broad group of beneficiaries. Han Yonghui and others found that the introduction and implementation of industrial policy significantly promoted the rationalization and upgrading of regional industrial structure. Shu Rui showed that while industrial policy helped boost growth of industrial output, it failed to enhance production efficiency. Jiang Feitao and Li Xiaoping proposed that under the new industrial policy model as represented by functional or horizontal industrial policies, the market should play the dominant role and the government should play a key role in providing the necessary market infrastructure for the effective operation of the market mechanism. Moreover, in areas such as environmental protection, public infrastructure, basic scientific research, public infrastructure and services for science and technology, and education and labor training, the government should supplement whatever the market lacks. Under the new industrial policy model, the market and the government should complement each other in a coordinated manner. Gu Xin and Zhang Jianjun contended that the issue was not whether industrial policy was required, but rather how it could compensate for market deficiencies and correct market failures in a way to enhance the market, instead of replacing the market to dictate resource allocation or letting the government select winners. Song Lingyun and Wang Xianbin found that local governments’ policies on key industries had significantly improved the productivity of local industries as a whole, but the impact varied significantly across different types of industries. Additionally, they found that the degree resources were directed to companies with higher productivity growth led

84

Yin et al. (2016).

8.4 Economic Research and Exploration in the New Era

243

to differing effects of resource reallocation through industrial policy across different industries.85

Industrial Organization (1) Market operation The core topics in traditional theories of industrial organization are market structure, enterprise behavior, and market performance. Zhou Mo and Wang Lu proposed a method for measuring market power and monopoly-induced loss in a market with heterogeneous products, one that overcame the effects of unobservable product heterogeneity and technological shocks. Using data of industrial enterprises with certain scales, they estimated the market power premium of the liquor manufacturing industry, which had very large product differentiations, and on this basis, calculated the net welfare loss caused by the market power premium. Zhong Zhen and Kong Xiangzhi constructed a causal relationship between the mode of industrial organization and the quality and safety of agricultural products from the two dimensions of production and transaction. Based on empirical analysis of the survey data from the dairy industry, they showed that the mode of production and the mode of transaction both had significant impacts on food quality and safety. After all other independent variables were controlled for, quality was more significantly affected by the mode of production while quality was more significantly affected by the mode of transaction. In another empirical study, Li Lin and Guo Hongdong categorized the vegetable industry into four distinctive organization models: complete market transaction, partial horizontal cooperation, complete horizontal cooperation, and vertical collaboration. They then analyzed the impacts of different industrial organization models on farmers’ net income from vegetable cultivation. They found that relative to the complete market transaction model, both the partial and complete horizontal cooperation models brought significantly higher net incomes to vegetable farmers, while the vertical collaboration model had no significant advantage in promoting vegetable farmers’ incomes. Kou Zonglai and Gao Qiong conducted an empirical analysis of the factors affecting R&D intensity, using 2004–2007 data for industrial enterprises above a state designated size. They found a significant inverted Ushaped relationship of R&D intensity with enterprise size and market concentration, meaning that within a certain range, growth in size and increased competition were conducive to innovation. From the perspective of property rights, compared with other ownership structures, joint-stock and limited liability companies had greater incentives to innovate. However, other things equal, there was no significant difference between state-owned enterprises and private enterprises. In addition, the greater the company’s market share, the higher its R&D expenditure would be, indicating 85

Sun and Xi (2015), Chen and Xiong (2015), Wang et al. (2014), Han et al. (2017), Shu (2013), Jiang and Li (2018), Gu and Zhang (2014), Song and Wang (2013).

244

8 The Theory of Industrial Structure and Industrial Organization

that R&D demonstrated certain economies of scale. Finally, market performance also affected the intensity of R&D spending by enterprises.86 (2) Industrial organization of the internet economy One of the most important features of the new era is the vigorous development of internet technologies. With the invention and popularization of smart phones, China has rapidly entered the era of mobile internet. The industrial organization of the internet economy is a brand-new research field. Yang Deming and Liu Yongwen thought it was necessary to promote deep integration of the internet with the real economy, and more effective implementation of the “Internet+” national strategy in traditional enterprises. In the internet economy, while differentiation could still help companies gain competitive advantage for better performance, cost leadership made it difficult for companies to gain competitive advantage. Luo Lang and Li Liangyu held the view that in the internet era, supply-oriented business models in the traditional value chain would gradually phase out, while demand-oriented internet business models and value creation would emerge. They put forward the concept of business model in the internet era and described its key elements such as community, platform, cross-border, resource aggregation and product design. They expounded the importance of connection in the internet era, pointing out that connection meets the deeper needs of customers. They then revealed that the business model of the internet era was to chase the connection dividends. Based on the essential characteristics of the internet economy, Fu Yu and others deduced the market incompatibility between technological progress and business model innovation. Under the constraints of network incompatibility of different manufacturers and platform strategies, a monopolistic competitive structure would emerge. However, monopolistic competition itself would not hinder the efficiency of competition. They also provided a theoretical explanation for anti-monopoly lawsuits. By introducing the intra-group network effect to the two-sided market model, Cheng Guisun examined the pricing strategy in a two-sided market—consumers on one side and software developers and advertisers on the other— under the combined effect of intra-group and inter-group networks, with a focus on the impact of intra-group network effect on the pricing strategy of the two-sided platform. They found that the impact of the intra-group network externalities on consumer prices and vendor prices depended on the market structure once users from both sides joined the platform.87

Government Policy on Industrial Organization (1) Antitrust policy The academic community generally believes that the traditional classic analytical perspective is inappropriate for antitrust regulations of the internet world. In a recent 86 87

Zhou and Wang (2012), Zhong and Kong (2012), Li and Guo (2017), Kou and Gao (2013). Yang and Liu (2018), Luo and Li (2015), Fu et al. (2014a), Cheng (2010).

8.4 Economic Research and Exploration in the New Era

245

paper, Sun Baowen et al. pointed out that the traditional method of defining monopoly was based on the industrial economy, and it was difficult to apply the same method to the internet industry. They provided a critical review of the necessity of antimonopoly of the internet industry from three perspectives: the definition of relevant market structure, the measurement of monopoly power, and the theoretical analysis of welfare changes. They found that the market structure of ecological competition and hierarchical monopolistic competition at the micro level of the industry made the concept of “relevant markets” unsuitable and, therefore, the antitrust process should not pay much attention to this concept. They further argued that despite the monopolistic structure, the industry did not have much monopoly power or exhibit actual monopoly behavior. Additionally, the industry’s welfare effect has not decreased significantly, and consumers may even have benefited from it. They concluded that anti-monopoly regulation of the internet industry was not necessary, and called for a relatively loose regulatory environment for the industry. Xu Jun and Su Yinshan combined network externalities and the two-sided market theory to analyze the business models of two internet firms—Tencent and Qihoo, and unveiled the economic motives behind their business models. The idiosyncrasies of their industry made it all the more difficult to enforce antitrust regulations, compared to the traditional industries. Yang Wenming argued that the view that free pricing of the internet platforms should be regarded as predatory pricing was a pseudo proposition. As far as the market structure was concerned, the market for free products was difficult to define, so it was hard to prove whether an enterprise offering free products had any dominant market power. Whether using the cost standard or the loss compensation standard, offering free products hardly met the general definition of predatory pricing. Free pricing did not affect the competitiveness of its rivals of equal efficiency, and could actually increase the welfare of consumers and the society. From the perspective of excluding rational defenses, free pricing has become a unique business model in the internet world and the prerequisite for the operation of the internet platforms. Wang Huiwen and others proposed three anti-monopoly measures for China’s internet industry: strengthen control over abuse of market dominance, improve the various measures intended to protect property rights, and provide support for internet startup companies. Qu Chuang and Liu Chongyang argued that in two-sided markets, characteristics such as network externalities and asymmetric pricing compounded the relationship between the market power and the market share of a platform operator, and therefore the traditional market power assessments were prone to misjudgments. After examining the Chinese search engine market, they found that market power did not lead to corresponding market share, and platform operators with the largest share did not necessarily have the strongest market power.88 There are a number of typical antitrust cases in the traditional industries, such as CocaCola’s acquisition of Huiyuan Juice and the telecommunications antitrust lawsuit. Li Qingyuan et al. studied the proposed acquisition of Huiyuan Juice by CocaCola, which was denied by the government, becoming the first unapproved merger 88

Sun et al. (2017), Xu and Su (2012), Yang (2015), Wang et al. (2016), Qu and Liu (2016).

246

8 The Theory of Industrial Structure and Industrial Organization

and acquisition case since the implementation of China’s anti-monopoly law. The empirical evidence from the capital market was consistent with the efficiency theory, rather than with the market power theory. The market expected the acquisition of Huiyuan by Coca-Cola to produce a synergy effect, rather than collusion, because it would trigger more intense competition in the downstream market. At the same time, the Chinese firm, hoping to move its business focus upward through the sale of its shares, would also intensify competition in the upstream market. Further analysis alone the line of the efficiency theory showed that Coca-Cola and Huiyuan had various forms of synergy in management, operation, and finance. The research results of Huang Kun and Zhang Xinzhu showed that this acquisition case caused a more pronounced effect on the fruit juice market, because carbonated drinks and fruit juice belonged to two separate, though related, markets. They reckoned that although the Ministry of Commerce’s rejection of the acquisition was a reasonable decision, the damage to competition did not come from the questionable synergy effect, but rather from the unilateral effect on the juice market. Bai Rangrang and Wang Guangwei found that the reorganization of China’s telecommunications industry in 2007 created an asymmetric oligopoly structure, enabling some integrated operators to gain a certain degree of monopoly power in the access and interconnection links. Through price or quality discrimination, these operators had caused a market foreclosure effect on both upstream and downstream competitors. Since this kind of behavior was permitted by industry regulators, the scope and effectiveness of the anti-monopoly regulation was limited.89 (2) Competition policy Competition policy has long been recognized in major developed countries as a useful tool to boost fair competition in the market, which in turn plays the decisive role in resource allocations. The promulgation of the Anti-Monopoly Law marked the initial exploration of China’s competition policy. However, another important component of competition policy, that is, the competition oversight system, lagged far behind. In 2016, after years of deliberation, the State Council put forward the Opinions on Establishing a Fair Competition Oversight System in the Construction of the Market System, marking the official introduction of the fair competition oversight system in China. The policy stipulated the main contents of the oversight system, including the subjects, methods, standards, exceptions, and safeguarding measures. A fundamental problem of competition policy is how to coordinate the various industrial policies. Since its inception in the 1980s, industrial policy has been widely used in China, and become deeply rooted in the economy, hampering fair competition in the market. In 2013, the Third Plenum of the 18th CPC Central Committee put forth its Decision on Several Major Issues Concerning Comprehensively Deepening Reform, stating that “We will reform the market oversight system, implement uniform market oversight, tidy up and annul all sorts of regulations and methods that impede the national unified market and fair competition, strictly ban and punish all

89

Li et al. (2011), Huang and Zhang (2010), Bai and Wang (2012).

8.5 Several Comments

247

unlawful acts extending preferential policies, combat regional protection, and oppose monopoly and unfair competition.” The State Council’ Opinions on Establishing a Fair Competition Review System in the Construction of the Market System stipulated that, effective on July 1, 2016, all government policies would be subject to a fair competition review prior to implementation, in order to prevent abuses of administrative power and eliminate restrictions on competition. This legislation provides a legal assurance that competition policy takes precedence over industrial policy, thereby establishing the basic role of competition policy. The implementation of a fair competition oversight system is a powerful measure against administrative monopoly and a breakthrough of economic deregulation. It reflects the market rule that competition is superior to protection, and is conducive to the establishment of a unified, open, and orderly market.90

8.5 Several Comments The most important feature of the research on China’s industrial structure and industrial organization over the past forty 40 years has been the close integration of theoretical research with the real economy. This is first manifested in the fact that the reality is the basic driving force for theoretical research. Take the translation and introduction of foreign economic ideas. The 1980s witnessed the rising tide of the introduction of theories of industrial structure, while the 1990s saw the high tide of the introduction of theories of industrial organization. Similarly, the rapid ascent of mobile internet in the twenty-first century spawned a large number of studies on industrial organization of the new economy. These should not be considered as merely the shift of research interests. They should also be considered in the broad context of changes in the social and economic conditions. A new economic phenomenon creates theoretical demand. The combination of theory and practice is also reflected in the influence of research on actual policies. Studies of industrial structure and industrial organization are largely pragmatic, with economic reality as the starting point and policy implications as the ending point. Various government regulations intended for maintaining fair and stable market operations, such as the Anti-Unfair Competition Law, the Anti-Monopoly Law, and the Opinions on Establishing a Fair Competition Review System in the Construction of the Market System, and industrial development policies such as the Automotive Industry Development Policy and the Steel Industry Development Policy, all owed their intellectual debt to the academia. In retrospect, the research in industrial structure and industrial organization over the past forty years has progressed in the following way. The first is the transformation of research paradigm. Research on industrial structure has evolved from the “two major categories” and the “agricultural, light and heavy industries” to the “three industries” in the early stage of reform and opening up. At the same time, research on industrial organization has changed from scattered, case-by-case studies 90

Xu (2013).

248

8 The Theory of Industrial Structure and Industrial Organization

to a new research paradigm that follows the line of “structure—behavior—performance” or is based on price theory. The second is the enrichment of research methods. Early research is dominated by qualitative analysis. As research deepens, more and more quantitative research have been conducted. Static comparison analysis and dynamic research method are adopted in research, and some research is pure theoretical modelling. The third concerns the depth and breadth of research, which have been continuously expanded. As research progresses, more attention has been paid to the diversity and complexity of the variables, more conditions taken into account, and a broader context examined. The fourth is the introspective spirit of research. For example, in the early days of reform and opening up, it was generally believed that the government could play an active role in rationalizing the industrial structure or industrial organization. Gradually, some scholars began to have different opinions. Putting aside the issue of which side is more reasonable, the fact that there are different voices at least demonstrates independent thinking, which makes research more scientific. It should be noted that there are also areas for improvement in the study of industrial structure and industrial organization in China, mainly because the degree of specialization in the field of research is not enough. Most researchers are more like interdisciplinary experts, who are rarely able to focus on and track a specific narrow field for long, making it difficult to establish in-depth, systematic research fields. Since there is no professional division of labor, a hot research area often becomes overcrowded, leading to a large number of articles with similar views or results over a certain period of time. However, there are few high-level discussions in the basic field. The low level of professional division of research in China has produced research studies that might be influential at the time of publication, but there are rarely first-class research from a historical perspective. Increasing professionalism of academic research is the trend of future development.

References Alan Gart. (1999). Regulation, Deregulation, Reregulation: The Future of the Banking, Insurance, and Securities Industries. Economic Science Press. An Tongliang and Yang Yuyun. (2002). Features of Industries Prone to Price Competition and Enterprise Strategies. Economic Research Journal, 6. Bai Rangrang and Wang Guangwei. (2012). Structural Restructuring, Lagged Regulation and Vertical Foreclosure—Thoughts on Antitrust Cases against China Telecom and China Unicom. China Industrial Economics, 10. Bai Xuejie and Meng Hui. (2018). Emerging Industries, Government Support, and Lack of Incentive Constraints: The Case of New Energy Vehicle Industry. Economist, 1. Bai Rangrang and Yu Yihong. (2004). Marginal Entry under Price and Entry Control. Economic Research Journal, 9. Dennis Carlton and Jeffrey Perloff. (1998). Modern Industrial Organization. Shanghai People’s Publishing House. Cao Jianhai. (1999). An Empirical Analysis of Excessive Competition in China’s Industries. Reform, 4.

References

249

Chen Xiaohong. (1999). China’s Telecommunications Industry: Changes in Policy and Industrial Organization and Several Suggestions. Management World, 1. Chen Jiagui and Huang Qunhui. (2003). Indicators and Measurements of Industrial Modernization and Preliminary Evaluation of Chinese Industry. Chinese Social Sciences, 3. Chen Zhao and Xiong Ruixiang. (2015). Comparative Advantages and Effects of Industrial Policy: Evidence of Quasi-experiment in Export Processing Zones. Management World, 8. Cheng Enfu. (1998). Foreign Direct Investment and Security of National Industry. Financial Studies, 8. Cheng Dazhong. (2004). Features, Causes and Impacts of the Growth of China’s Service Industry. China Social Sciences, 2. Cheng Guisun. (2010). Analysis of the Impact of Intra-group Network Externality on Bilateral Market Pricing. Management Science, 2. China Rural Development Research Group. (1986). On the Macro-environment of Rural Development in a New Growth Stage of National Economic Structural Reform. Economic Research Journal, 5. China’s New Economy Development Strategy Task Force, National Information Center. (2001). The New Economy: Opportunities and Challenges Facing China. Seeking Truth, 5. Donald Hay and Derek Morris. (2001). Industrial Economics and Organization: Theory and Practice. Economic Science Press. Fu Yu, Sui Guangjun, and Zhao Zile. (2014a). Monopolistic Competition: A New Market Structure Theory Based on Internet Platform Enterprises. China Industrial Economics, 1. Fu Yuanhai, Ye Xiangsong, and Wang Zhanxiang. (2014b). Path Selection in Technological Progress for Manufacturing Structure Optimization: An Empirical Analysis Based on Dynamic Panel Data. China Industrial Economics, 9. Gu Xin and Zhang Jianjun. (2014). Choose Winners or Provide Services? Institutional Basis and Policy Choices of Industrial Policy. Comparison of Economic and Social Systems, 1. Guo Kesha. (1999). Changes in China’s Industrial Structure and Policy Implications. Management World, 5. Guo Kesha. (2000a). A Study of the Impacts of Foreign Direct Investment on China’s Industrial Structure. Management World, 2. Guo Kesha. (2000b). The Process, Problems and Outlook of China’s Industrialization. Chinese Social Sciences, 3. Guo Kesha. (2004). The Choice of China’s Industrial Development Strategy and Policy. China Social Sciences, 1. Han Qian and Hong Yongmiao. (2014). National Industrial Policy, Asset Prices and Investor Behavior. Economic Research Journal, 12. Han Yonghui, Huang Liangxiong, and Wang Xianbin. (2017). Does Industrial Policy Promote the Upgrading of Local Industrial Structure? A Theoretical Explanation and Empirical Tests Based on Developing Local Governments. Economic Research Journal, 8. Hollis B. Chenery. (1989). Industrialization and Economic Growth: A Comparative Study. Shanghai Sanlian Publishing Press. Hu Angang. (2003). Anti-administrative Monopoly Is Also Anti-corruption in the Socialist Market Economy System. Economic Reference Daily, July 7, 2001. Hu Ruyin. (1988). Competition and Monopoly: Socialist Microeconomic Analysis. Shanghai Sanlian Publishing. Huang Yiyi. (1988). On the Choice of China’s Industry Priority in this Century. Management World, 3. Huang Liangxiong. (2015). Regional Interaction in China’s Industrial Structure Adjustment: Horizontal Inter-provincial Competition and Vertical Local Follow-up. China Industrial Economics, 8. Huang Qunhui. (2018). Forty Years of Industrial Development and Industrialization Process in China. China Industrial Economics, 9.

250

8 The Theory of Industrial Structure and Industrial Organization

Huang Kun and Zhang Xinzhu. (2010). Analysis of Damage to Competition in Coca-Cola’s Proposed Acquisition of Huiyuan. China Industrial Economics, 12. Jean Tirole. (1987). Theory of Industrial Organization. China Renmin University Press. Jiang Xiaojuan. (1993). Public Choice in China’s Promotion of Industrial Policy. Economic Research Journal, 6. Jiang Xiaojuan. (1995). Overcapacity, Exit and Exit Assistance Policy. Economic Research Journal, 2. Jiang Xiaojuan. (1998). Inefficient Competition Practices in the Process of Marketization: The Case of the Cotton Textile Industry. Economic Research Journal, 3. Jiang Xiaojuan. (2002). The Only Way for New Industrialization to Realize a Well-off Society. People’s Forum, 12. Jiang Xiaojuan and Li Hui. (2004). The Service Industry and Chinese Economy: Correlation and Accelerated Growth Potential. Economic Research Journal, 1. Jiang Feitao and Li Xiaoping. (2018). Market and Government in Industrial Policy: Review and Comment on the Debate between Lin Yifu and Zhang Weiying on Industrial Policy. Finance Research, 1. Jiang Feitao, Chen Weigang, Huang Jianbai, and Jiao Guohua. (2007). Defects and Adverse Effects of Investment Regulation Policies: The Case of China Steel and Iron Industry. China Industrial Economics, 6. Jin Bei. (1996). Industrial International Competitiveness. Economic Research Journal, 11. Jin Bei. (2014). Industry’s Mission and Value: The Theoretical Logic of China’s Industrial Transformation and Upgrading. China Industrial Economics, 9. Kenneth W. Clarkson and Roger Leroy Miller. (1989). Industrial Organization: Theory, Evidence and Public Policy. Shanghai Sanlian Bookstore Publishing. Kou Zonglai and Gao Qiong. (2013). Market Structure, Market Performance, and Enterprise Innovation Behavior: Panel Data Analysis of Chinese Industrial Enterprises. Industrial Economic Research, 5. Li Jiangfan. (1985). Production Scale and Development Trend of Services and Consumer Goods. Economic Theory and Economic Management, 2. Li Jiangfan. (1990). Economics of the Tertiary Industry. Guangdong People’s Publishing. Li Yufang. (2003). Government Micro Regulation Behavior During System Transition. Economic Science Press. Li Lin and Guo Hongdong. (2017). Impacts of Industrial Organization on Vegetable Farmers’ Incomes: Evidence from Hebei and Zhejiang. China Rural Economy, 9. Li Wengui and Shao Yiping. (2016). Industrial Policy and Nationalization of Private Enterprises. Financial Research, 9. Li Jiangfan and Zeng Guojun. (2003). Analysis of the Upgrading Trend of the Internal Structure of China’s Tertiary Industry. China Industrial Economics, 3. Li Wenjing and Zheng Manni. (2016). Substantial Innovation or Tactical Innovation? Impact of Industrial Policy on Corporate Innovation. Economic Research Journal, 4. Li Boxi, Xie Fuzhan, and Li Peiyu. (1988a). Analysis and Countermeasures for the Development of Industries Facing Bottlenecks. Economic Research Journal, 12. Li Jingwen, et al. (1988b). Technical Progress and Industrial Structure Research. Quantitative Technical Economic Research, 1. Li Qingyuan, Tian Chenyang, Tang Jianxin, and Chen Xiao. (2011). Motivation of Horizontal Merger and Acquisition: Efficiency Theory or Market Power Theory—Case Study from Huiyuan Juice and Coca-Cola. Accounting Research, 5. Lin Yifu. (2004). The Current Heavy Industry Fever Is Not Consistent with China’s National Conditions. Economic Reference Daily, December 23, 2004. Lin Hanchuan and Guan Hongxi. (2005). Evaluation and Comparison of the Competitiveness of Small and Medium-sized Enterprises across Different Industries in China. China Social Sciences, 3.

References

251

Lin Yifu and Liu Mingxing. (2004). Economic Development Strategy and China’s Industrialization. Economic Research Journal, 7. Liu Wei (Chief author). (1999a). Studies on Industrial Structure during the Process of Industrialization. China Renmin University Press. Liu Zhongli. (1999b). The Foundation—50 Years of New China Economy. China Financial and Economic Publishing Press. Liu Xiaoxuan. (2000). Effect of Ownership Structure on Efficiency of Chinese Industrial Enterprises. Economic Research Journal, 2. Liu Shijin. (2002). China Is Entering a New Stage of Heavy and Chemical Industry. Shanghai Securities, October 24, 2003. Liu Shijin. (2004). China Is Entering a New Stage of Heavy and Chemical Industry and the Impact on the Macro economy. Economic Perspectives, 11. Liu Wei and Huang Guitian. (2003). Concentration, Competition and Performance of the Banking Industry. Economic Research Journal, 11. Lu Zheng and Cao Jianhai. (2000). Is Competition Is Always Efficient? Also on the Theoretical Basis of Excessive Competition. Chinese Social Sciences, 6. Lu Zhongyuan. (2002). Trend of Changes in Industrial Structure and Environmental in the Western Region and Ideas for Adjustment. Economic Research Journal, 3. Luo Yuanzheng. (1997). Active Use of Foreign Capital and Protection of National Industry Can Go Hand in Hand. Democracy, 11. Luo Rui and Li Liangyu. (2015). Business Model Innovation in the Internet Era: From the Perspective of Value Creation. China Industrial Economics, 1. Ma Jiantang (Chief author). (1993). Structure and Behavior—Research on China Industrial Organization. China Renmin University Press. Ma Jie. (2002). Trade Policy and Industrial Policy under International Multi-Market Oligopoly. Economic Research Journal, 5. Ma Hong and Sun Shangqing (Editors). (1981). Research on China’s Economic Structure. People’s Publishing House. Ma Jie and Zhou Jidong. (2001). Optimal Import Policy and Industrial Policy under Imperfect Competition and Asymmetric Information. Economic Research Journal, 7. Masu Uekusa. (1992). Microeconomics of Regulation (translated by Zhu Shaowen et al.). China Development Press. Michael Porter. (1999). Competitive Strategy: Techniques for Analyzing Industries and Competitors. Huaxia Publishing. Michael Porter. (2002a). Competitive Advantage: Creating and Sustaining Superior Performance. Huaxia Publishing. Michael Porter. (2002b). Competitive Advantage of Nations. Huaxia Publishing, 2002b. Pei Changhong. (1998). Utilization of Foreign Capital and Industrial Competitiveness. Social Science Literature Press. Qi Yudong. (1998). Empirical Analysis of the Relationship between Industrial Concentration and Economic Performance in China. Management World, 4. Qu Chuang and Liu Chongyang. (2016). Market Power Measurements for the Search Engine Market. China Industrial Economics, 2. Research Group on Rural Development in China. (1986). On the Structural Reform of the National Economy: The Macro Environment for Rural Development in the New Growth Stage. Economic Research Journal, 5. Sanuki Toshio (1987). Structure Analysis of Japanese Economy. Liaoning People’s Publishing House. Shen Zhiyu. (1997). Analysis of the Market Behavior of Natural Monopolistic Organizations in China. China Industrial Economics, 12. Shu Rui. (2013). Is Industrial Policy Necessarily Effective? An Empirical Analysis Based on Industrial Data. Industrial Economic Research, 5.

252

8 The Theory of Industrial Structure and Industrial Organization

Simon Kuznets. (1985). Economic Growth of Nations: Total Output and Production Structure. The Commercial Press. Simon Kuznets. (1989). Modern Economic Growth: Rate, Structure and Spread. Beijing Economic Institute Press. Song Zexing. (1983). Realize the Strategic Goal of Economic Development and Adjust the Economic Structure Reasonably. Journal of Social Sciences, 3 (Economics Supplement). Song Hong and Chai Yu. (1999). Foreign-funded Enterprises and China’s Industrial Structure Adjustment: An Empirical Analysis from the Perspective of Foreign Trade. Management World, 6. Song Lingyun and Wang Xianbin. (2013). Key Industrial Policy, Resource Replacement and Industrial Productivity. Management World, 12. George Stigler. (1989). Industrial Organization and Government Regulation, Shanghai Sanlian Bookstore. Sun Shangqing (Editor-in-Chief). (1984). On Economic Structure Countermeasures. China Social Sciences Press. Sun Luoping. (2004). Why Competitiveness Has Nothing to Do with Enterprise Scale. Economic Research Journal, 3. Sun Zao and Xi Jiancheng. (2015). Implementation Effects of Chinese-style Industrial Policy: Industrial Upgrading or Short-term Economic Growth. China Industrial Economics, 7 Sun Baowen, Jing Wenjun, and He Yi. (2017). Reconsider the Necessity of Anti-monopoly Regulation in the Internet Industry. Economic Perspectives, 7. The Economic Research Center of the State Planning Commission. (1994). Financing for the Basic Industries and Infrastructure in China. China Industrial Economics, 6. Wang Huijiong (Editor-in-Chief). (1991). Industrial Organization and Its Effective Competition: A Preliminary Study of Chinese Industrial Organization. China Economic Press. Wang Zhenzhong. (1996). Protection and Development of National Industry under Open Conditions. Reform, 6. Wang Junhao. (1997). Some Thoughts on Reforming the Government Regulation System of China’s Infrastructure Industry. Economic Research Journal, 10. Wang Junhao. (1998). Comparison of Government Regulation Reform in the Telecom Industry between China and Britain. China Industrial Economics, 8. Wang Junhao. (2001). Introduction to Government Regulation Economics. Commercial Press. Wang Xueqing. (2004). Government Regulation of Monopolistic Industries. China Water Resources and Hydropower Press. Wang Ping and Qian Xuefeng. (2007). Industrial Policy Orientation of Technology Progress from the Perspective of the Terms of Trade. China Industrial Economics, 3. Wang Huijiong, et al. (1989). Studies on China’s Industrial Policy. China’s Financial Economy Press. Wang Junhao, et al. (1998). Review and Evaluation of the Regulatory Capture in Western Countries. World Economy, 4. Wang Luolin, Jiang Xiaojuan, and Lu Shengliang. (2000). The Impact of Foreign Direct Investment by Large Multinational Corporations on China’s Industrial Structure, Technological Progress, and Economic Internationalization. China’s Industrial Economy, 4. Wang Dewen, Wang Meiyan, and Chen Lan. (2004). Structural Adjustment, Efficiency and Labor Allocation in China’s Industries. Economic Research Journal, 4. Wang Wen, Sun Zao, and Niu Zedong. (2014). Industrial Policy, Market Competition and Resource Mismatch. Economist, 9. Wang Wei, Liu Yufei, and Peng Dongdong. (2015). The Effects of Population Aging on Industrial Structure Upgrading. China Industrial Economics, 11. Wang Huiwen, Huang Chengqing, and Wei Wei. (2016). A Study on Anti-monopoly in the China’s Internet Industry. Journal of Beijing University of Aeronautics and Astronautics (Social Science Edition), 11

References

253

Wang Kemin, Liu Jing, and Li Xiaoxi. (2017). Industrial Policy, Government Support and Rate of Return on Corporate Investment. Management World, 3. Wei Xinghua, Hong Yinxin, and Wei Jie. (1986). Enterprise Vitality and Behavior Restriction Mechanism. Academic Monthly, 4. Wu Jinglian. (2004). Pay Attention to the Transformation of the Economic Growth Mode and Be Wary of the Tendency of One-sided Pursuit of Heavy Industry during the Structural Adjustment Process. National Research Network, November 16, 2004. Wu Li and Wen Rui. (2006). A Review of the Relationship between the Light and Heavy Industries in China’s Push for Industrialization Since 1949. Economic Research Journal, 9. Xia Youfu and Ma Yu. (1997). Foreign Investment and Moderate Protection of China’s Leading Industries and Infant Industries. Reform, 3. Xie Peide. (1980). Introduction to Market Power and Economic Welfare. Commercial Press. Xie Di, and Qiao Liang. (1997). Correcting Names for Monopoly and Antitrust. Economic Research Journal, 9. Xu Xiaonian. (2000). Is the New Economy the New Great Leap Forward? Zhejiang Finance, 7. Xu Kunlin. (2013). Gradually Establish the Basic Position of Competition Policy. Price Theory and Practice, 10. Xu Jun and Su Yinshan. (2012). The New Challenges in Internet Industry Anti-monopoly: Analysis Based on Lawsuits against Tencent QQ and Qihoo 360. Financial Issues Research, 9. Yang Zhi. (1985). Introduction to Industrial Economics. China Renmin University Press. Yang Canming. (2000a). Local Government Behavior and Regional Market Structure. Economic Research Journal, 11. Yang Huixin. (2000b). Enterprise Entry and Exit and Industrial Organization Policy. Shanghai People’s Publishing House. Yang Jianbai and Li Xuezeng. (1980). Historical Experiences on the Relationship between Agriculture, the Light and Heavy Industries in China. Chinese Social Sciences, 3.. Yang Jianbai and Li Xuezeng. (1980). Historical Experiences on the Relationship between Agriculture, the Light and Heavy Industries in China. Chinese Social Sciences, 3. Yang Deming and Liu Yongwen. (2018). Why Does Internet + Create Value? China Industrial Economics, 5. Yin Xingmin. (1996). Industrial Concentration and Resource Allocation of China’s Manufacturing Industries. Economic Research Journal, 1. Yinquan Canming and Cai Wanru. (2001). The Causes and Governance of China’s Local Market Segmentation. Economic Research Journal, 6. Yin Xin, Xu Hao, and Chen Weishan. (2016). Lin Yifu vs Zhang Weiying: The Industrial Policy Century Debate. China Economic Weekly, 44. Yu Hui. (1995). Economic Theory of Regulation and Analysis. Economic Research Journal, 5. Yu Hui. (1998). China’s Government Control System. Reform, 3. Yu Liangchun. (2003). Natural Monopoly and Government Regulation: Basic Theories and Policies. Economic Science Press. Yu Donghua and Lu Yinan. (2015). Government Improper Intervention and Overcapacity in Strategic Emerging Industries: The Case of China’s Photovoltaic Industry. China Industrial Economics, 10. Yu Li, Meng Tao and Jiang Chunhai. (2003). Analysis on Exit Barriers and Exit Paths of Exhausted Resource Dependent State-owned Enterprises. China Industrial Economics, 10. Zhang Zhuoyuan (Editor-in-Chief). (1999). Disputes and Development: Fifty Years of Chinese Economic Theory. Yunnan People’s Publishing House. Zhang Shixian. (2000). An Empirical Study on Industrial Investment Efficiency and Changes in Industrial Structure. Management World, 5. Zhang Xinzhu. (2004). Theory and Policy of China’s Railway Regulation and Competition. National Academy of Administration Press. Zhang Weiying and Sheng Hong. (1997). From the Telecommunications Industry to See China’s Antitrust Issues. Reform, 9.

254

8 The Theory of Industrial Structure and Industrial Organization

Zhang Wenmin, Song Guangmao, Zheng Hongliang, Zhan Xiaohong, and Wang Limin. (1996– 2005). China’s Great Economic Debates. Economic Management Press. Zhao Lifen and Dong Jun. (2005). Reflections on Debates about China’s Heavy and Chemical Industrialization. Reform, 4. Zheng Jie, Yi Weiping and Yu Yihong. (2001). Research on the Main Monopoly Effect of China’s Telecommunications Industry. Economic Research Journal, 6. Zhong Zhen and Kong Xiangzhi. (2012). Impacts of Industrial Organization on Agricultural Product Quality and Safety: Evidence from the Dairy Industry. Management World, 1. Zhou Mo and Wang Lu. (2012). Estimate of Market Power and Monopoly-induced Losses under the Condition of Product Heterogeneity: An Analysis of the Liquor Market Using a New Empirical Industrial Organization Method. China Industrial Economics, 6. Zhou Shulian, et al. (Editors). (1987). Exploration of Industrial Policy Issues. Economic Management Press. Zhou Yahong, Pu Yulu, Chen Shiyi, and Fang Fang. (2015). Government Support and New Industry Development: Example of New Energy Industry. Economic Research Journal, 6. Zhu Zhongdi and Bao Xiaohua. (2004). Impacts of Anti-dumping Measures on Associated Industries: An Input-Output Analysis of the Price Effects of Anti-dumping Duties. Economic Research Journal, 1.

Chapter 9

Macroeconomic Management Theory with Chinese Characteristics

When in 1992 the 14th CPC National Congress affirmed that the goal of China’s economic restructuring reform was to build a socialist market economy, it also made it a clear that market-based allocation of resources and macroeconomic management (or macroeconomic regulation and control) were complementary to each other and were both organic parts of the socialist market economy. Under the traditional socialist economic system where mandatory planning was implemented and distribution of goods was rationed, the government had direct control over the production and operation of state-owned enterprises. While this type of macroeconomic management by administrative means could effectively control the economic operation, it came with a hefty price tag: the lack of incentives and enthusiasms on the part of enterprises and the public led to low efficiency and a dearth of competition. The transition to the market economy has drastically increased competition and energized the microeconomic entities, which now are forced to compete against each other for better performance. But the market has its own flaws or shortcomings and is associated with certain negative aspects. It is, therefore, necessary to strengthen and improve government’s macroeconomic regulation and control. But the macro-control should pivot away from direct management to indirect management. That is, the government should use mainly economic and legal means, and supplement them with necessary administrative means, to regulate and control the aggregate economic variables and the major economic structure, so as to ensure the stable and healthy operation of the national economy. With the advancement of market-oriented reforms and the accumulation of practical experience, researchers have made significant progress in this field. The progress and innovation of theoretical research, in turn, provides the intellectual spring for the improvement of national macroeconomic regulation and control.

© China Social Sciences Press 2023 Z. Zhang, Handbook of Chinese Economics, https://doi.org/10.1007/978-981-99-0420-4_9

255

256

9 Macroeconomic Management Theory with Chinese Characteristics

9.1 The Bashan Boat Conference in 1985 Embarked on a New Stage in Macroeconomic Management in China During the week of September 2–7, 1985, a symposium of historic importance was held on a boat named “Bashan Boat” sailing down on the beautiful Yangtze River from Chongqing to Wuhan. The International Symposium on Macroeconomic Management was jointly sponsored by the Chinese Academy of Social Sciences, the Institute of Chinese Economic System Reform, and the World Bank.1 Some renowned economists from the West and Eastern Europe attended the symposium, including James Tobin, a Nobel Prize laureate from Yale University; Sir Alec Cairncross, former president of the Royal Economic Society; Janos Kornai, an Hungarian economist; and Vladimir Bruce, from Poland. Their Chinese counterparts, including Xue Muqiao, Ma Hong, An Zhiwen, Liu Guoguang, Wu Jinglian, and Gao Shangquan, to name a few, also attended. The participants held extensive discussions on various issues regarding macroeconomic management in general and the most urgent macroeconomic management issues encountered in China’s economic reform in particular. During the week-long conference, the foreign experts provided systematic introduction to the theories, policies, and experiences in macroeconomic control of the developed economies. They exchanged views with their Chinese counterparts on how to improve China’s macroeconomic management in the process of its marketbased reform, and reached some consensus between them. It can be said without exaggeration that the “Bashan Boat” conference not only unveiled a new stage of macroeconomic management, but also ushered in a new research agenda in this area. At the core of the macroeconomic management system reform was the shift from direct management to indirect management. This was also the consensus among the participants at the “Bashan Boat” conference. It marked a big leap forward in the understanding of macroeconomic management theory by the Chinese economic community. The conference had a busy agenda and deliberated a plethora of issues, to be discussed below. The first issue was about direct vs. indirect control in macroeconomic management. Experts at the conference generally agreed that the direction of China’s economic reform was to gradually pivot from direct control to indirect control, and rely mainly on economic rather than administrative means to regulate and control the economy. To be sure, they acknowledged that some administrative measures were necessary and indispensable. This was especially true in the transition process of replacing the old system with a new one, where necessary administrative measures must be strengthened to ensure the normal function of the economic life and orderly reform. Three reasons were cited for imposing administrative control. First of all, the success of monetary control relied on highly developed financial institutions. With few banks and a lack of a perfect financial market, monetary policy was rendered 1

The Institute of China Economic System Reform Research Association (Ed.). (1986).

9.1 The Bashan Boat Conference in 1985 Embarked on a New Stage …

257

powerless, and budgetary control had very limited impact. Under this circumstance, government administrative control was indispensable. Second, since market power depended mainly on the influence of price on supply and demand, if price elasticities of supply and demand were too sticky, then administrative means could play a role where price stimulus failed. Third, one necessary condition for effective indirect control was that the market was perfectly competitive. However, if there was insufficient or even lack of competition in the market, then administrative control should be adopted instead. The second issue was on the implications of central planning. Some participants at the conference suggested that central planning should not be treated as equal to administrative control. In fact, central planning had two implications. One was direct administrative control, such as mandatory planning, while the other was to explore the prospects of economic development, get ready for decision-making, and coordinate all interests of the society. Planning in the latter sense did not contradict market coordination. On the contrary, it could ensure the smooth realization of market coordination. The third issue concerned fiscal policy and its policy instruments. Experts at the symposium proposed that before macroeconomic management was transferred to indirect control, the balance between aggregate supply and aggregate demand must first be maintained. Since it was more difficult to implement centralized control over aggregate supply, the focus of macroeconomic management should be on adjusting aggregate demand. Indirect control of aggregate demand was achieved mainly through fiscal and monetary policies. And the main instruments of fiscal policy were government expenditures, taxes, and subsidies. In the short run, the government could increase or reduce its expenditures to adjust aggregate demand by running a balanced, surplus, or deficit budget. However, the government should not rely on overdrafts or loans from the central bank as resources of funding. It should instead focus on improving the taxation system, and if necessary, issue bonds to the public to finance its budget shortfall. However, the government should not sell bonds to the public through mandatory subscriptions. The fourth issue was about monetary policy. Participants at the conference suggested that monetary and financial policies should also play an important role after the transition from direct to indirect macro control. The core of indirect macrocontrol through monetary policy was to control the total supply of money. Total money supply can be measured by M0, Ml, or M2. Some participants reckoned that since it was more difficult to use M0 or Ml as the main yardstick of money supply in China, it was reasonable to use the total amount of credit as a measure of total money supply. In general, a central bank could use three ways to control money supply: (1) stipulate the reserve requirements for commercial banks to be deposited with the central bank, (2) adjust the discount rate, and (3) buy or sell securities in the open market. At the time, the third option was not feasible because the country did not have a liquid and mature financial market. The fifth issue was regarding the coordination between fiscal and monetary policies. The experience of developed market economies showed that it was difficult to achieve the intended objectives of regulation and control by simply using fiscal

258

9 Macroeconomic Management Theory with Chinese Characteristics

policy or monetary policy alone. The two policies must be used in a coordinated manner to obtain the desired objectives. According to the foreign scholars participating at the conference, there were four combinations of fiscal and monetary policies in developed market economies. The first was the combination of loose fiscal policy and loose monetary policy. This combination was intended to stimulate economic growth and expand employment, but it often led to inflationary pressure. The second was a tight fiscal policy combined with a tight monetary policy. This policy mix was implemented to impose austerity policy and curb demand-induced inflation. The third was the combination of a tight fiscal policy but a loose monetary policy. The fourth was the combination of a loose fiscal policy and a tight monetary policy. Each of the policy combinations was quite instructive for the study of China’s fiscal and credit balance. In 1985, China was confronted with simultaneous investment hunger and consumption hunger, which caused tremendous pressure on inflation. The foreign experts generally believed that a mix of tight fiscal policy and tight monetary policy was the right prescription for China to keep inflation at bay. In addition, participants at the conference believed that in order for China to establish an effective indirect macroeconomic control system, microeconomic entities need to respond in a timely and flexible manner to macro-control measures. Towards this end, the government should heighten the budget constraints on enterprises, establish and improve the market system, actively and decisively reform the price system and the price formation mechanism, and establish and improve the economic information and economic oversight system.2 In short, the Bashan Boat conference provided the framework and theoretical basis for China’s transition from direct to indirect macroeconomic management.

9.2 Research on Macroeconomic Management Since the Goal of the Socialist Market Economic System Reform Was Established The 14th CPC National Congress, held in 1992, proposed to make the market play the fundamental role in the allocation of resources under socialist macro-control. Its report emphasized the importance of strengthening macroeconomic regulation and control because the market had its own flaws and was associated with certain negative aspects. It urged the country to vigorously develop a unified nationwide market and further expand the role of the market. In addition, the government must better use its economic policies, regulations, planning guidance, and necessary administrative management in accordance with the requirements of the objective laws, so as to guide the healthy development of the market. Around the time, Chinese economists conducted extensive research on issues concerning macroeconomic management and achieved fruitful results. 2

Liu et al. (1985).

9.2 Research on Macroeconomic Management Since the Goal …

259

First of all, a large number of academic works on macroeconomics were published, including “Socialist Macroeconomics” (China Financial and Economic Publishing Press, 1986) by Dai Yuanchen; “Socialist Macroeconomic Analysis” (Xuelin Publishing Press, 1986), by Fu Gangzhan, Shi Zhengfu and Jin Chongren; and “Outline of Macroeconomic Theory of Public Ownership” (Shanghai Sanlian Publishing, 1990), by Fan Gang (lead author) and Zhang Shuguang (associate lead author). Thy covered a wide range of essential topics in macroeconomic management, including aggregate demand and aggregate supply, aggregate structural balance, equilibrium and non-equilibrium analysis, and economic cycles and fluctuations. Indeed, these seminal works had huge influences on future studies regarding how to improve China’s macroeconomic management. Second, the task of macro-control in the socialist market economy was examined extensively. In 1993, the Third Plenum of the 14th CPC Central Committee put forth the Decision on Several Issues Concerning the Establishment of a Socialist Market Economic System, stating that “the main tasks of macroeconomic regulation and control are to maintain the basic balance between aggregate demand and aggregate supply, promote the optimization of the economic structure, guide sustained, rapid and healthy development of the national economy, and promote overall social progress.” According to the decision, macroeconomic regulation and control would rely mainly on economic means, and major steps would be taken to reform the fiscal, taxation, financial, investment, and planning systems. Here, the goal was to establish a mechanism where planning, finance, and fiscal policy were coordinated and mutually constrained so as to strengthen the comprehensive coordination of economic operations. Over a period of time leading up to the plenum, there had been extensive discussions and debates regarding whether the task of macro-control should include structural optimization and whether macro-control should also use planning means in addition to fiscal and monetary policies. The plenum’s decision gave a positive answer to these questions. It turned out to be the right choice, given China’s specific national conditions. The report of the 16th CPC National Congress further proposed that the main tasks of macro-control were to promote economic growth, maximize employment, stabilize prices, and maintain a balance in international payments. This report indicated that macroeconomic management theories and policies with Chinese characteristics had been gradually established. Third, the notion that macroeconomic regulation and control must be held in the hand of the central government was firmly established. The decision by the Third Plenum of the 14th CPC Central Committee clearly stated that the power of macroeconomic regulation and control, including the issuance of currency, the determination of the benchmark interest rates, the adjustment of exchange rates, and the adjustment of important tax rates, must be tightly held by the central government. This was needed to ensure the overall balance between the macroeconomic aggregates, the optimization of the economic structure, and the unification of the national market. Of course, given China’s gargantuan size and population, local governments at the level of province, autonomous region or municipality must be given certain power, enabling them to formulate regional regulations, policies, and plans in accordance with the national laws, regulations, and macro policies; adjust economic activities in

260

9 Macroeconomic Management Theory with Chinese Characteristics

their own regions through local taxes and budgets; and make full use of local resources to promote regional economic and social developments. Regarding whether local governments could and should run their own cities, there were differing opinions. Some argued that local governments could and should run their own cities, because this would greatly arouse the enthusiasm of the local governments to develop the local economy. After all, regional competition between local governments was one of the sources of the rapid growth of the Chinese economy. Others, however, asserted that it was undesirable for local governments to run cities. The rationale was that vicious competition between local governments would inevitably cause serious and devastating consequences such as the widening regional gaps, wasting of resources, and deterioration of the environment. In reality, the first opinion prevailed. Fourth, there were two glaring scenarios about China’s macroeconomic imbalance: excess total demand and inadequate total demand. Some scholars divided China’s macroeconomic operation into three phases according to the relationship between aggregate supply and aggregate demand. In the planned economic regime, from the establishment of the People’s Republic of China to the inception of reform and opening up, excess aggregate demand was the problem. In fact, the problem persisted all the way through 1996. From 1996 on, the situation gradually reversed itself and, by the end of the twentieth century, inadequate aggregate demand (or excess aggregate supply) began to take hold.3 There were different views regarding whether there was deflation and regarding the severity of deflation in China during the third period. There were three schools of thought about deflation, depending on the number of factors. The single-factor school referred to deflation as the continuous decline in the overall price level. The two-factor school viewed deflation as the continuous decline of both the overall price level and money supply. The three-factor school added yet another factor, i.e., economic recession, together with the continuous decline of the overall price level and money supply, as indicators of deflation.4 Different views about deflation led to differing assessments about the severity of deflation that occurred in China in the late 1990s.5 Some reckoned that only mild deflation took place, while others contended deflation was deep and comprehensive.6 Fifth, whether China experienced overheating after 2004 was heatedly debated. In the four years from 2004 to 2007, China’s GDP grew at more than 10% each year, while annual growth in fixed asset investment exceeded 20%. Chinese economists had differing views regarding whether the economy was overheated during this period of time. To some economists, double-digit GDP growth had exceeded the country’s output potential, and hence was not sustainable. By the second half of 2007, the consumer price index (CPI) rose more than 5%, indicating that the Chinese economy had fallen into an overheated state, but the cooling measures had yet to become effective. Scholars holding this view believed that the root cause of economic overheating was the low efficiency of investment. The incremental capital output rate, at around 2, 3

Fan (1997). Hu (2000). 5 Li (1999). 6 Hu (1999). 4

9.2 Research on Macroeconomic Management Since the Goal …

261

was rather low in the early 1990s. The ratio rose sharply after 1995, to 5–7 in years 2000–2003, meaning that 5–7 yuan of capital investment was needed to generate 1 yuan of GDP output. Under this circumstance, the government should focus its efforts on reforms to improve the market economy, enhance the efficiency of resource allocation, and achieve sustainable and stable high-speed development in line with continuous improvement of the overall efficiency of the economy.7 Some economists, however, argued that after several years of macro-control by the government, despite the three “excessives”—that is, excessive growth in fixed asset investment, excessive credit issuance, and excessive trade surplus, the overall economy was not overheated at all. In December 2007, the Central Economic Working Conference put forward dual preventions as the central task of macro-control—to prevent economic growth from becoming overheated and to prevent price evolution from structural rise to inflation. The key message from the economic working conference was that the central decision-makers did not think the economy was overheated yet, but it may risk becoming overheated. Scholars in this camp believed that the Chinese economy was afraid of being cold, but not of being heated. The economy becoming slightly heated was not a problem at all. But once the economy cooled down, all sorts of hidden problems began to emerge. Though neither overcooling nor overheating was desirable, a little bit overheating would not do any damage to the Chinese economy. Another sign indicating that the economy was not overheated at that time was low inflation. The price of consumer goods rose by only 1%.8 Sixth, macro-control should not be overly generalized. Some researchers emphasized that macro-control did not mean the government would intervene in the overall economy extensively. Rather, macroeconomic regulation and control was an economic concept with a specific connotation in the modern market economy. It was to adjust the balance between the aggregate demand and the aggregate supply through either fiscal policy or monetary policy alone, or a combination of both policies in a coordinated manner, with a certain degree of strength and intensity. Nor should “structural adjustment” be viewed as a component of macro-control, otherwise the government’s economic functions that were carried over from the planned economy era would become long lasting and institutionalized. The policy of “guarantee and pressure” embodied government interventions in the micro-economy, not government interventions in the macro-economy, or macro-control.9 Seventh, regarding macro-control and the transformation of government function, under the conditions of a socialist market economy, the implementation of macrocontrol must be combined with the transformation of governmental functions. As for how to transform government functions, however, there were different voices. Some argued that the government functions should be transformed in five aspects. First, the state’s economic function and the function as asset owner, indistinguishable in the past, should be gradually separated. In other words, the government should no longer perform the function as asset owner. Second, the state’s macro-control 7

Wu (2004). Li (2004). 9 Tang (2006). 8

262

9 Macroeconomic Management Theory with Chinese Characteristics

should focus on aggregate economic variables, rather than on specific variables as it used to do in the past. Third, the target of national macro-control should shift from the aggregate measured by the physical amount of goods to that measured by the value of the goods. Fourth, national macro-control should use economic means, rather than administrative means. Fifth and lastly, the macro-control process should go from being static to being dynamic and flexible.10 Some scholars believed that the administrative organs of the government should change from direct management to indirect regulation and control. It mainly referred to the separation of administrative management from macroeconomic management, and the gradual elimination of mandatory planned indicators. More specifically, the government agencies in charge of planning were only responsible for planning, forecasting and guiding, but not for the distribution of money, investment, and products. The financial departments were mainly responsible for redistributing national income. Meanwhile, the main function of the central bank was to stabilize the value of the Chinese currency and to ward off inflation.11 Eighth, there were three different views about what constituted a better macroeconomic environment for China’s reform and development. The first view advocated an accommodating environment in which the aggregate supply slightly exceeded the aggregate demand to form a limited buyer’s market and create healthy conditions for reform and for improving the quality of growth. In terms of regulation and control objectives, it opposed the use of inflation to promote economic growth, and supported a stabilized growth mode.12 The second view called for coordinated market-oriented reforms. To this end, the government should have sufficient means and power for macroeconomic adjustment. In terms of policy orientation, it advocated adopting tight macroeconomic policies to create a sound environment in which macroeconomic relations were more harmonious.13 The third view was for unbalanced development. According to this view, the market mechanism would make fundamental adjustments in economic operation, and the government would make the second adjustment afterwards. In terms of policy orientation, people belonging to this school believed that a certain degree of inflation was inevitable, and it would contribute to economic growth. To them, priority should be given to solving unemployment problems through demand management policies.14 In sum, the extensive studies and debates by Chinese economists have important practical implications on how to strengthen China’s macroeconomic regulation and control and how to promote the stable operation of the socialist market economy.

10

Wang (1993). Liao (1989). 12 Liu (1988a). 13 Wu (1999). 14 Li (1992). 11

9.3 Studies and Debates About Inflation

263

9.3 Studies and Debates About Inflation Inflation is one of the most important issues in macroeconomic regulation and control. Since the inception of reform and opening up, China has suffered two bouts of severe inflation. In 1988 and 1989, the Consumer Price Index (CPI) jumped by 18.8% and 18% respectively. In years 1993 to 1995, the CPI shot up by 14.7%, 24.1% and 17.1%, respectively. During this extended period, economists in China had heated debates about inflation and came up with many good policy suggestions on how to keep inflation at bay, some of which were adopted by the government. Inflation picked up in the second half of 2007, with the CPI rising by more than 5% on a per annum basis. In the first half of 2008, the CPI continued to rise, by 7.9% year-over-year. The rise of inflation attracted the attention from all quarters of the society, including economists. In fact, it became the primary concern at both the National People’s Congress and the Chinese People’s Political Consultative Conference, both held in the spring of 2008. Since reform and opening up, Chinese economists have studied and discussed issues related to inflation in the following areas. The first was about the different categories of inflation, generally defined as continued rise in prices. One study divided inflation into several categories, depending on its severity. Inflation at below 7% was considered as moderate inflation; between 7 and 10%, moderate to high inflation; between 10 and 20%, severe inflation; over 20% but below 100%, vicious inflation; and over 100%, hyperinflation.15 Another study divided the economy into three states according to the level of inflation: equilibrium period (less than 1%), slow rising period (between 1.1% and 4%), and fast rising period (above 4%).16 The second was about the causes of inflation in the second half of the 1980s. From 1985, inflation picked up in China, reaching 18.8% by 1988, as measured by the CPI. There was no consensus among economists on why such high inflation occurred at that time. Until April 1988, the notion that “if the primary objective of macroeconomic regulation and control is to maintain economic growth, then inflation to a certain extent is not necessarily a bad thing” was still well alive. Over the next three years, those holding this view argued, in terms of macro-control, the country should shift from demand-side policies aimed for stabilizing prices to supply-side policies aimed for maintaining economic growth and structural adjustment. Not only should fiscal austerity or credit tightening not be implemented, moderate expansionary policies should be maintained instead.17 Under this backdrop of understanding, in the autumn of 1988, the government even attempted to continue with its price reform by overcoming the barriers, only to witness a wave of panic buying and deposit withdrawals by the public. Before long, the Party and the government halted the attempt and resorted to policies focused on curbing inflation. Many economists wrote articles to express their objections to the erroneous understanding and the resulting policy 15

Wu (1991). Zhang (1988). 17 People’s Daily, April 8, 1988. 16

264

9 Macroeconomic Management Theory with Chinese Characteristics

propositions. They believed that the implementation of the inflationary policy was not conducive to sustained and healthy economic growth, nor was it conducive to the smooth progress of the economic reform, let alone breaking through barriers in price reform.18 In his book, The Process of China’s Economic Reform, published in 2018, the economist Wu Jinglian offered vivid recollections of his personal involvements in the inflation debate in 1988. In early May 1988, upon the proposal by Zhao Ziyang, then the General Secretary of the Party, the Standing Committee of the Political Bureau of the CPC Central Committee decided to carry out price and wage reforms over the next five years to “break through the barriers” and to achieve price marketization. At the time, some economists expressed their concerns about the timing of this decision. At a high-level meeting held during May 25–27 to discuss the implementation of this decision, the two economists attending the meeting, Liu Guoguang and Wu Jinglian, both thought it very inappropriate to initiate price reform at a time when inflation was about to implode following a period of expansionary macroeconomic policies. They argued that price reform should be postponed till after the monetary expansion had been halted and the macroeconomic environment cleared up. They opposed to “breaking through the barriers” of price reform under unfavorable macroeconomic conditions at that time, for four reasons. First, the wave of price hikes in agricultural products in the fourth quarter of 1987 was quickly spreading to other economic fields. Second, the bottleneck constraints in transportation and the supply of production materials were worsening. Third, sporadic panic buying had occurred in various places across the country. Fourth, household savings showed signs of negative growth in April. All these were flash points indicating that inflationary pressure was at a high level. If this macroeconomic environment was not kept under control, once price reform was rolled out, the public would form expectations of high inflation going forward. This would become self-fulfilling, leading to actual inflation and high economic volatility. The two economists, therefore, recommended spending the next three years to cool down the economic environment and keep money supply under control. Only then could most prices be liberalized and the market play the regulatory role. Unfortunately, their opinions were shrugged off by the senior official presiding over the meeting. The official, convinced by a report submitted to him by several economists who had just come back from a visit to Brazil and other Latin American countries, alluded that even inflation at nearly a thousand percent had not deterred economic prosperity in these Latin American countries. He was confident that the proposed price reform would break through successfully under the high growth and high inflationary environment. Xue Muqiao, a respected senior economist, published an article in a magazine in June, warning that it was not a correct approach to carrying out price reform when hidden inflation was about to implode. His warning, however, did not receive a positive response from the central decision makers. The development over the next three months was completely the contrary to their optimistic estimates. Shortly after the Politburo meeting of the CPC Central Committee formally announced price and wage reforms in early August, the 18

Xue (1996), Liu (1988b).

9.3 Studies and Debates About Inflation

265

public, in anticipation of high inflation in the future, rushed to banks to withdraw their deposits and engaged in panic buying all over the country. In the second half of 1988, the retail price index increased by a staggering 26.7 percent year over year. In August, monthly sales of goods went up by 38.6% despite the fact that most staple consumer products were still rationed and could only be bought with coupons. A nationwide panic buying spree had broken out, to the dismay of the policy-makers.19 The third area was regarding the relationship between inflation and economic growth. It is generally believed that while moderate inflation promotes short-term economic growth, it is not conducive to sustainable long-term economic growth. One study examined the supply curve effect based on changes in total demand in years 1978 to 1989, and made four conclusions. First, when inflation was below 6%, the slope of the supply curve was steep, meaning that the opportunity cost of real supply growth was low, and the cost of high growth was relatively small. Secondly, after inflation exceeded 6%, the slope of the supply curve began to drop, the opportunity cost of real supply growth started to rise, and so did the cost of high growth. Thirdly, when inflation rate was below 3%, the slope of the supply curve was close to infinity, and the opportunity cost of real total supply growth gradually approached to zero. Lastly, when inflation reached double digits, at 10.5–12.3%, the slope of the supply curve was close to zero. In this case, the opportunity cost of real total supply growth rose rapidly, and low economic growth must be achieved at a higher inflation rate.20 Some scholars further analyzed the effects of different economic growth models on inflation. For example, in the extensive growth model in which economic growth was driven mainly by increases in factor inputs, inflation was likely to rise. This was because this model, relying mainly on economic expansion, would cause structural imbalance between supply and demand, leading to a relative shortage of important products, especially agricultural products, and hence the rise of the general price level.21 Differing views also existed in terms of whether inflation had any positive effects on economic growth. Some scholars thought that inflation was negatively related to economic growth. In the short run, the upward shift of the aggregate supply curve could lead to “stagflation”. In the long run, it had many other negative effects. To them, inflation would not boost growth, nor would it increase employment. In the case of hyperinflation, it could also cause high unemployment.22 Other researchers argued that inflation might have some positive effects. If inflation was driven by investment demand, it could help adjust the industrial structure. Inflation could play a role in redressing the unreasonable distribution pattern between state-owned enterprises and their employees. Inflation, to a certain extent, could rectify the unreasonable distribution pattern between the government and the micro-economy, and help the government to maintain a balanced fiscal balance. Inflation could play a certain role in maintaining credit balance in the banking industry and in stabilizing the 19

Wu (2018), pp. 120–121. Liu (1998). 21 Shi (1995). 22 Zhang (1996a). 20

266

9 Macroeconomic Management Theory with Chinese Characteristics

financial system.23 It should be pointed out that many economists disagreed with the notion that inflation was harmless, emphasizing that inflation would bring about bad social consequences, such as worsening the unbalanced industrial structure, destabilizing the market, causing waste of social resources, and lead to unfair income distribution.24 Some scholars pointed to a plethora of harmful effects inflation could bring on to economic reform and economic development. Inflation could seriously distort market signals, impair the basic role of the market in resource allocation, increase the cost and risk of reform, and negatively affect the deepening of the economic system reform. Inflation would not bring substantial stimulus to economic development. High economic growth with high inflation was essentially a sign of overheating, which would inevitably cause distortion of resource allocation, and eventually big swings in economic activities, damaging the healthy growth of the economy. To prevent the economy from overheating, inflation must be kept under control. In essence, inflation was redistribution of monetary income, which would aggravate the unfair social distribution, damage the interests of the Chinese people, and trigger speculative activities. A bubble, once formed, would eventually burst, causing political, economic, and social instabilities.25 The fourth area was about the causes of inflation. After reform and opening up, China began its transition from a planned economy to a socialist market economy. Many economists pointed out that hidden inflation had accumulated over the years and the price system had been seriously distorted under the planned economic regime. With the advancement of the market-oriented price reform, hidden inflation was gradually emancipated, causing increases in the overall price level. Since reform was carried out gradually, rather than in a one-off big step, as long as price increases were contained (not exceeding double digits) so as not to impede the improvement of the price structure, the release of hidden inflation should be regarded as the cost of price reform. However, in reality, the rise in the overall price level in the reform process was not limited to the release of hidden inflation. It was also the result of excessive credit and excessive money supply.26 Hikes in inflation in both the 1988–1989 and 1993–1995 periods fell into this category. The same happened with inflation in the second half of 2007. There were studies that examined the causes of inflation from other perspectives, including inflation driven by excess demand, by cost increases, by structural changes, and by a mix of these factors. The fifth area was about how to keep inflation under control. One view emphasized the importance of controlling demand. People holding this view believed that supply was constrained by many factors, not least because some products faced an insurmountable product cycle. Therefore, the key to keeping inflation checked was to curtail total demand, especially demand for fixed asset investment.27 Some scholars

23

Yang (1996). Zhao (1989). 25 Li (July 8, 1994). 26 Liu (1990), Zhang (1990). 27 Xiang et al. (1988). 24

9.4 New Developments in the Theory and Policy of Macroeconomic …

267

opined that a relatively balanced development of industry and agriculture was imperative to control inflation.28 Some scholars advocated increasing effective supply and promoting economic growth to suppress inflation. They further proposed to transform the mode of economic growth from extensive growth to intensive growth; implement a stable monetary policy to make money supply more accommodating to economic growth; implement investment policies that could fix the weak links to eliminate the bottleneck constraints on economic growth; establish and open the labor markets to ease inflationary pressure; and reduce corporate tax burdens to increase effective supply.29 Some scholars recommended adopting tight fiscal and monetary policies to control economic aggregates, such as the expansion of investment and consumption, and the increase of monetary base and credit.30 Some scholars called for the use of interest rate policy to rectify the abnormal phenomenon of negative real interest rates by raising interest rates on deposits and loans. They suggested that in order to suppress accelerated development of inflation, monetary policy should focus on raising short-term interest rates, or promoting interest rate liberalization through deregulation.31 Years of research and debates have made it clear that keeping inflation at bay entails a comprehensive approach, and the key is to restore balance between total supply and total demand. To this end, it is necessary to implement a combination of moderate fiscal and monetary policies. In the process of economic reform, these policies must be combined with the need for deepening reforms to render government’s macro-control policies more effective.

9.4 New Developments in the Theory and Policy of Macroeconomic Management Since the 18th CPC National Congress Since the 18th CPC National Congress, new developments in China’s macroeconomic control theory and policies have emerged. In 2013, the decision of the Third Plenum of the 18th CPC Central Committee proposed to make the market play a decisive role in the allocation of resources. The decision also provided comprehensive elaborations on how to improve the macrocontrol system, stating that “the major tasks of macro control are to maintain balanced economic aggregates, coordinate major economic structures, optimize the distribution of the productive forces, mitigate the impact of periodic economic fluctuation, defuse regional and systematic risks, stabilize market expectations, and realize sustained and sound economic development. We should improve the macro control system guided by the national development strategy and plans mainly through fiscal and monetary policies; institutionalize the formulation of macro control objectives 28

Yan and Yang (1997). Zhang (1996b). 30 Huang et al. (1996). 31 Zhang (1994), Jin (1988). 29

268

9 Macroeconomic Management Theory with Chinese Characteristics

and the implementation of policy measures, and enhance the coordination of fiscal, monetary, industrial and pricing policies. We will improve the discretionary monetary policy and ensure that macro control is more proactive, pertinent and coordinated. We will establish a mechanism of participating in international macroeconomic policy coordination, and improve the overall global economic governance structure.” In 2017, the report of the 19th CPC National Congress made the following statement: “We will develop new methods to improve macro-regulation, give full play to the strategic guidance of national development plans, and improve mechanisms for coordinating fiscal, monetary, industrial, regional, and other economic policies. We will improve systems and mechanisms for stimulating consumer spending, and leverage the fundamental role of consumption in promoting economic growth. We will deepen reform of the investment and financing systems, and enable investment to play a crucial role in improving the supply structure. We will expedite the creation of a modern public finance system, and establish a fiscal relationship between the central and local governments built upon clearly defined powers and responsibilities, appropriate financial resource allocation, and greater balance between regions. We will put in place a comprehensive, procedure-based, transparent budget system that uses well-conceived standards and imposes effective constraints; and we will implement performance-based management nationwide. We will deepen reform of the taxation system, and improve the local tax system. We will deepen institutional reform in the financial sector, make it better serve the real economy, increase the proportion of direct financing, and promote the healthy development of a multilevel capital market. We will improve the framework of regulation underpinned by monetary policy and macro-prudential policy, and see that interest rates and exchange rates become more market-based. We will improve the financial regulatory system to forestall systemic financial risks.” A comparison between the two important documents of the Party reveals that, in contrast to the decision of the Third Plenum of the 18th CPC Central Committee, the report of 19th CPC National Congress no longer mentioned price policies in the macro-control system in terms of coordination and integration of fiscal and monetary policies and other policy measures, but it added regional policies. This was because price reform had made remarkable progress over the past few years. As of 2017, more than 97% of the prices of goods and services had been liberalized and were determined by market forces, while the remaining 3% was limited to government pricing of important public utilities, public welfare services, and network-based natural monopoly links, where it was difficult to use price policy in macro-control. The addition of regional policies was out of necessity. China is such a big country that coordinated development of regional economies is one of the requirements in the optimization of major structures, and promoting the coordination of major economic structures and the optimization of the layout of productive forces is one of the main tasks of macro-control. The report required that efforts should be made to build an economic system that has an effective market mechanism, viable micro-entities, and moderate macro-control, so as to continuously enhance China’s economic innovation and overall competitiveness. Moderate macro-control was a new narrative, and an important condition for the first two. It required that government’s macro-control

9.4 New Developments in the Theory and Policy of Macroeconomic …

269

should not be overdone, nor should it be inadequate. The report specifically proposed a two-pillar regulation framework to improve monetary and macro-prudential policies, a notable and important development. Since the main focus of the monetary policy is on price stability, it has been controversial whether monetary policy should also focus on asset prices. Prior to the outbreak of the global financial crisis in 2008, while consumption and production prices were stable in the United States, asset prices were not. Prices of financial assets had gone up substantially leading up to the crisis. In the aftermath of the crisis, people began to realize that it was not enough for monetary policy to heed only inflation. And macro-prudential policy was equally important. Under this backdrop, the National Financial Work Conference, held during July 14–15, 2017, proposed a two-pillar macro regulation and control framework. According to authoritative sources, the macro-prudential framework included three main aspects.32 The first was the dynamic adjustment mechanism for differential reserves, which was formerly introduced in 2011, requiring that financial institutions should have adequate capital to back up their operations. In 2016, this dynamic adjustment mechanism was upgraded to form a macro-prudential assessment system by including more financial activities and behaviors into the management system, and to implement counter-cyclical adjustments. The second was to incorporate crossborder capital flows into the macro-prudential assessment system, aimed to stabilize cross-border capital flows. The third was to continue to strengthen the macroprudential management of the real estate market. Here, the core was to formulate a macro-prudential management framework for housing finance that took into account a city’s specific conditions and offered differentiated housing credits.33 Another important issue often encountered in China’s macroeconomic regulation and control is how to deal with the relationship between industry policy and competition policy. In October 2015, the CPC Central Committee and the State Council jointly put forth Several Opinions on Promoting the Reform of the Price Mechanism, stating clearly that the country should “strengthen market price oversight and anti-monopoly law enforcement, and gradually establish the basic position of competition policy.” The positioning of competition policy this way was a major adjustment and improvement in China’s economic policy, which was of great significance for building a perfect socialist market economic system and improving the modern market system. But this naturally led to the issue of how to understand the relationship between competition policy and industrial policy. In the past, China had always emphasized the guiding role of industrial policy and used policy inclinations to speed up the development of certain industries. Some industrial policies have proved to be successful, having promoted the rapid development of emerging strategic industries such as aerospace, high-speed rail, nuclear power, and so on, which have been elevated to international advanced levels. However, other industrial policies have been less successful, to say the least, and even caused overcapacity. The market is usually the best mechanism to choose advantageous industries and industries with development prospects. Government’s capability to choose is 32 33

Economic Reference, October 20, 2017. Zhang (2017).

270

9 Macroeconomic Management Theory with Chinese Characteristics

limited and often wrong due to its limited understanding, incomplete information, and untimely absorption of shocks. In addition, excessive implementation of industry policy often disrupts normal market operation and impedes the formation of a level playing field. China has decided to transform itself to an economy with high quality and efficiency, accelerate the transformation of its economic growth and development mode, exert forces from the supply-side structural reform, and improve the efficiency of resource allocation. To this end, it must emphasize the role of competition, gradually weaken the role of industry policy, and make better use of the function of market-oriented resource allocation.34 It is also necessary to draw on the experience and lessons from the China’s implementation of industry policy over the past 30 years, and accelerate the transformation so that more focus can be put on competition, rather than industry policy, and the market can play a decisive role in resource allocation.35 According to some scholars, economic globalization has promoted the global allocation of resources and, to a certain extent, has weakened the ability of sovereign states to directly control their own resources, thus leading to the invalidation of industry policy. Therefore, for developing countries such as China, in order to promote industrial development and improve the competitiveness of enterprises, competition policy is becoming more effective than industry policy and hence the former should be given the priority.36 Some scholars suggested replacing selective industry policies with functional industry policies, shifting focus from promoting the growth of specific industries to improving the quality of industrial development, and from selective preferential industry supports to inclusive policies that maintain competition and encourage innovation.37 Some scholars suggested that while implementing functional industry policies, the government should also formulate and improve competition policy, relax restrictions on the participation of various economic entities in market competition, and regulate the competitive behavior of market entities, so as to build up a fair, orderly, and competitive market that is based on equal exchanges and honesty.38 These propositions all require transforming China’s economic policies for industrial development from being focused on industry policy to competition policy.

References Fan Gang. (1997). System Reform and Macro Stability. Zhejiang People’s Publishing House. Hu Angang. (1999). Characteristics and Countermeasures of Deflation in China. Management World, 3. Hu Shuzhen. (2000). Research Report on China’s Economic Hotspots. Social Science Literature Press. 34

Wu (2016). Wu (2017). 36 Zhang (2005). 37 Wang and Zhou (2017). 38 Jin (2005). 35

References

271

Huang Guitian, et al. (1996). Review of Academic Studies on Inflation. Price Theory and Practice, 1. Jin Li. (1988). Interest Rate Reform and Inflation. China Finance, 10. Jin Bei. (2005). Competition Order and Policy. Social Science Literature Press. Li Yining. (1992). China’s Unbalanced Economy. Economic Daily Press. Li Tieying. (July 8, 1994). Controlling Inflation. In Exploration of Reform and Opening up (2008). China Renmin University Press. Li Zhong. (1999). Several Judgments on China’s Deflation by the Theoretical Community. Macroeconomic Research, 8. Li Yining. (2004). The Chinese Economy Is Afraid of Being Cold, Not of Being Heated. In the Economic Committee of the National Committee of the Chinese People’s Political Consultative Conference (Ed.). Communications of Economic Commissioners, 2. Liao Jili. (1989). The State Regulates the Market and the Market Guides Enterprises. Economic Research Journal, 3. Liu Guoguang, et al. (1985). Economic System Reform and Macroeconomic Management: Comments on the International Symposium on Macroeconomic Management. Economic Research Journal, 12. Liu Guoguang (Editor-in-Chief). (1988a). Research on the Models of China’s Economic System Reform. China Social Sciences Press. Liu Guoguang. (1988b). Facing the Problem of Inflation. Economic Daily, April 5, 1988b. Liu Guoguang (Editor-in-Chief). (1990). Stable Economic Growth in System Reforms. China Planning Press. Liu Yingqiu. (1998). High Growth, Low Inflation: The Goal and Destination of Macro-control. Economic Research Journal, 1. Shi Jinchuan. (1995). China’s Economic Growth Model and Inflation. China’s Economic Issues, 3. Tang Zaixin. (2006). Set the Record Straight for Macro Control. The Economist, 1. The Institute of China Economic System Reform. (1986). Macroeconomic Management and Reform. Economic Daily News Publishing Press. Wang Yu. (1993). Basic Ideas for Establishing a Socialist Market Economic System. In Famous Scholars on Socialist Market Economy. People’s Publishing House. Wang Jun and Zhou Zhen. (2017). A Review of the Transformation of China’s Industrial Policy. Comparison of Economic and Social Systems, 1. Wu Xiaoqiu. (1991). Measurement and Analysis of China’s Hidden Inflation. Economic Research Journal, 1. Wu Jinglian. (1999). Contemporary Chinese Economic Reform: Strategy and Implementation. Shanghai Far East Publishing. Wu Jinglian. (2004). The Chinese Economy Is Overheated. In the Economic Committee of the National Committee of the Chinese People’s Political Consultative Conference (Ed.). Communications of Economic Commissioners, 2. Wu Jinglian. (2016). A Critical Step to Establish the Basic Position of Competition Policy. People’s Daily, June 26, 2016. Wu Jinglian. (2017). China’s Industrial Policy: Not Saving or Discarding, but Restructuring. China Circulation Economy, 11. Wu Jinglian. (2018). The Process of China’s Economic Reform. China Encyclopedia Press. Xiang Jingquan, et al. (1988). Damage, Causes and Countermeasures of Inflation. Financial Research, 1. Xue Muqiao. (1996). Memoirs of Xue Muqiao. Tianjin People’s Publishing House. Yan Honghe and Yang Wansu. (1997). An Empirical Study on Inflation Caused by Unbalanced Growth. Reform Strategy, 4. Yang Changchang. (1996). Positive and Negative Effects of Inflation. Finance and Trade, 2. Zhang Shuguang. (1988). Preliminary Analysis of Inflation in China. China: Development and Reform, 3.

272

9 Macroeconomic Management Theory with Chinese Characteristics

Zhang Zhuoyuan (Editor-in-Chief). (1990). Theory and Practice of China’s Price Mode Transformation. China Social Sciences Press. Zhang Zhuoyuan. (1994). Inflation Momentum Is Getting Tough, Increasing the Difficulty of Regulation and Control. Economic Perspectives, 6. Zhang Xin. (1996a). From Inflation-induced Growth to No-inflation Growth: Recognition Changes in Western Economics. Shanghai Economy, 1. Zhang Zongbin. (1996b). The Implications of Western Stagflation Theory to Us. World Economy and Politics, 9. Zhang Dongjiang. (2005). WTO Competition Policy Negotiations and the Choice of Developing Countries. China Social Sciences Press. Zhang Zhuoyuan. (2017). New Measures for Economic Reform in the New Era. Economic Research Journal, 11. Zhao Haikuan. (1989). Inflation Is Harmlessness: Comments. People’s Daily, September 1989.

Chapter 10

The Reform of China’s Fiscal and Taxation System

From the very beginning, the reform of the fiscal and taxation system has been an integral component of China’s reform and opening up policy. With the advent of its 40th anniversary, a systematic review of the historical process of the fiscal and taxation system reform is put on the agenda. While the timing is propitious, the task is challenging. For one thing, over the past 40 years, the challenges facing the fiscal and taxation system reform have been so complicated, the zigzags so dreadful, the burdens of the mission undertaken so heavy, the changes so profound, and the results achieved so remarkable, that not only for China, but in the history of world public finance as well, the reform is extremely exceptional. On the other hand, as China enters the new era after four decades of reform and opening up, a review and synopsis that rests at the level of merely enumerating past achievements or reproducing historical facts and events is not enough. It must also, from the vantage point of standing at the starting point of the new era, sum up the basic experience and tease out the fundamental laws and regularities inherent with the reform. Towards this end, we have to follow its main trajectory step by step, and ponder the following inevitable questions. Due to space limit, it is impossible to recollect all the details about the fiscal and taxation reform over the past four decades. We have to take some and give some. But what to take? Of course, we must take the main thread of the reform. And what to give? Naturally, we should discard those twigs and branches that are not directly related to the main thread. The question is: What is the main thread? Can we find a main thread for the reform that early on “crossed the river by feeling the stones,” only to be gradually deepened as its trajectory became clearer? The reform of the fiscal and taxation system has long been touted as an integral part of the economic system reform. The Third Plenum of the 18th CPC Central Committee further entrusted it with a new mission to be the foundation and an The basic views and main contents of this chapter are published in the 3rd issue of Economic Research Journal in 2018. © China Social Sciences Press 2023 Z. Zhang, Handbook of Chinese Economics, https://doi.org/10.1007/978-981-99-0420-4_10

273

274

10 The Reform of China’s Fiscal and Taxation System

important pillar of national governance. From then on, it has become one of the basic and key projects in the campaign of comprehensively deepening reform. If the main trajectory of the decades-long reform and opening up is one that starts with the market-oriented economic system reform, and then moves on to comprehensively deepening reform with the purpose of modernizing national governance, then does the fiscal and taxation system reform have its own goal orientation? If so, what is it? The events that have occurred in the process of the fiscal and taxation system reform over the past four decades were not merely countless, but also intertwined. When putting the pieces together to solve the puzzle, where should we put the individual events that took place at a particular time, on a particular occasion, or formulated and put forward from a particular perspective or angle, on the big board of the fiscal and taxation system reform? What are their roles and how are they related to the big picture—i.e., the fiscal and taxation system reform? Once the basic trajectory is sorted out and the basic experience summarized, the ultimate purpose is to distill the fundamental laws of the reform. Otherwise, the Chinese miracle will only stay at the empirical level and will not rise up to the theoretical level. Doing this entails theoretical abstraction. But can such an abstraction be carried out? If yes, then how to carry out? Has the fiscal and taxation system reform so far reached a level high enough to deserve a theoretical analysis framework for it? There is no doubt that the achievements of the fiscal and taxation system reform are remarkable and immense, but these achievements can only be assessed in light of the requirements of building a socialist market economy and modernizing national governance. Admittedly, the reform in this area is a long shot. Once we have a clear understanding of its main trajectory, basic experience, and fundamental laws, how should we pinpoint the direction as the fiscal and taxation system reform moves forwards? This chapter intends to provide answers to these questions.

10.1 The Five Stages of Reform: A Sketchy Outline China’s fiscal and taxation system reform over the past four decades can be roughly divided into five independent, though sometimes overlapping, stages, according to the intended goal of each stage.

Stage 1: Paving the Way and Building the Bridge for the Overall Economic Reform (1978–1994) China’s economic reform began with the distribution system in 1978. The initial theme was “decentralization of certain rights and concession of certain revenues,” aimed to stimulate the enthusiasm for reform in various fields and revitalize the national economy, which had been suffocated under the traditional economic regime for so long.

10.1 The Five Stages of Reform: A Sketchy Outline

275

In the early days of the reform, the rights that the central government could delegate and actually did were mainly the financial management rights. By the same token, the revenues the central government could forgo and actually did came mainly from its share in national income. The traditional institutional framework was replete with excessive centralization of financial power, unified revenue and expenditure distribution, and lack of diverse taxes. This overall idea and task of the fiscal and taxation system reform was to restructure the outdated framework through decentralization of financial power and concession of financial resources. To this end, the government has taken the following reform measures (The Fiscal and Taxation System Reform Department of the Ministry of Finance 1989; Gao and Wen 2001). (1) Cut corporate taxes and let state-owned enterprise retain more share of their profits. Since 1978, the state government has successively introduced a series of reform schemes, such as enterprise funds, profit retention, tax payments in lieu of profit submission, profit and loss responsibility contract, and operating responsibility contract. (2) Separate central government finance from local government finance. Starting in 1980, the state successively launched a series of dazzling redistribution schemes between the central and local governments, ranging from “clarifying revenues and expenditures, and each level of the government being responsible for its own finances” and “dividing tax types, reassessing revenues and expenditures, and each level of government being responsible for its own finances,” to “incremental income contracting, distribution of total amount, distribution of total amount plus incremental share, upper incremental contract, fixed amount contract, and fixed subsidies.” (3) Implement a complex taxation system with a myriad of taxes. Since 1980, through the establishment of foreign-related tax, income tax for domestic-funded enterprises, and personal income tax, comprehensive adjustment to the industrial and commercial taxation system, restoration and improvement of the tariff system, and reform of agricultural tax, China has gradually transformed its taxation system from a relatively simple one to a complex, multilayer, multilink system that relies mainly on turnover taxes and income taxes, supplemented with many other types of taxes. (4) Provide large amounts of financial support to pave the way for reforms in price, wages, technology, education, and other related fields. These reform measures laid the foundation for the smooth introduction of various reform policies and for the smooth progress of the overall reform. However, both decentralization of rights and concession of revenues inevitably led to a reduction in fiscal revenues and an increase in expenditures on the part of the central government. Consequently, the decentralization-and-concession-based reform resulted in imbalances between fiscal revenues and expenditures, putting the central government in a difficult financial position. Take revenue first. With the implementation of the various decentralization and concession measures, both total fiscal revenue as a percentage of GDP and the proportion of central fiscal revenue in total fiscal revenue declined sharply. The former dropped from 31.1% in 1978 to 25.5% in 1980, 22.2% in 1985, 15.7% in 1990, and 12.3% in 1993. The latter rose first from 15.5% in 1978, to 24.5% in 1980 and 38.4% in 1985, then fell to 33.8% in 1990. It dropped further to 22.0% in 1993.

276

10 The Reform of China’s Fiscal and Taxation System

Meanwhile, fiscal expenditures did not fall with revenues. Instead, they were on the rise with the implementation of the decentralization and concession policy.1 From 1978 to 1993, the total fiscal expenditure increased fourfold, from 112.209 billion yuan to 464.22 billion yuan. During this period, the financial operation mechanism encountered numerous disturbances. Arbitrary tax reductions and exemptions, withholding and misappropriating fiscal revenues, overspending, circulation of fiscal funds outside the fiscal system, and interference by the non-financial departments in fiscal allocation were quite common and widespread across the country. The concurrence of decline in fiscal revenues and rise in expenditures, together with these disturbances, directly contributed to the ever widening budget deficit and government debt, impairing the central government’s capability to implement macro-control of the national economy. From 1979 to 1993, the central government had a fiscal deficit every year (except for a brief, small budget surplus in 1985) and the magnitude of the deficit kept increasing, jumping from 6.89 billion yuan in 1981 to 14.69 billion yuan in 1990. In 1993, the budget deficit reached 29.335 billion yuan. If, following the commonly accepted practice abroad, government debt issued in the year was included, the fiscal deficit in 1993 would amount to a staggering 97.858 billion yuan. In 1979, the Chinese government issued U.S. dollar-denominated bonds for the first time in twenty years. In 1981, it began to raise funds in the domestic market in the form of treasury bills. It went on to issue bonds in various names: key construction bonds, fiscal bonds, national construction bonds, special purpose national bonds, and inflation-protected public bonds. In 1993, China’s central government raised a total of 73.922 billion yuan through debt issuance. New debt offering as a percentage of total fiscal expenditure (including debt payments), a yardstick of the central government’s dependence on debt, reached 59.63% in 1993, a level rarely seen in the whole world. This meant that close to 60% of central government spending in the year was financed with newly borrowed money.2

Stage 2: Embarking on the Road of Institutional Innovation (1994–1998) The dire budgetary situation was a wakeup call. People basking in the initial success of the reform began to realize that the decentralization and concession policy, which had lasted for more than a decade, was not sustainable, and the fiscal and taxation

1

This includes price subsidies to agricultural and sideline products and the special funds earmarked to increase the wages of employees working for the government and other administrative institutions. 2 Department of Comprehensive Planning, Ministry of Finance (1992), China Financial Yearbook Editorial Committee (2007).

10.1 The Five Stages of Reform: A Sketchy Outline

277

system reform on this path required major adjustments. Reform measures focused on redistribution were not enough. A brand new system was needed. It was no coincidence that the 14th CPC National Congress, held in October 1992, formally affirmed that the objective of the economic reform was to build a socialist market economy system. One year later, in November 1993, the Third Plenum of 14th CPC National Congress passed the Decision on Several Issues of Establishing the Socialist Market Economic System. Since then on, the fiscal and taxation reform has embarked on the path of institutional innovation to make it adaptable to the socialist market economy (Xiang 1994). The bell on New Year’s Day of 1994 had barely struck before the Chinese government launched a series of major measures to reform the fiscal and taxation system, to be discussed below. (1) In the spirit of “unifying the tax law, making tax burdens fair, simplifying the taxation system, and decentralizing reasonably,” the government decided to comprehensively reform the old taxation regime and establish a new one through a series of actions—establishing a turnover taxation system that was based mainly on value-added tax and supplemented by consumption tax and business tax, unifying domestic corporate income tax, establishing a unified personal income tax system, expanding the scope of tax collection, levying land value-added tax, and establishing basic tax regulation to meet the needs of the socialist market economy.3 (2) On the premise that responsibilities for fiscal expenditures at all levels were clarified between the central and local authorities, tax revenues would be divided into three parts: one part would belong to the central government, another would go to the local government, and the remainder would be shared between the two levels of government. The central tax authority and its local tax counterparts were to be established separately. A basic framework of tax-sharing financial management system would be established whereby the central government would give tax refunds and handle transfer payments to the local governments.4 ,5 (3) In line with the basic requirements for the establishment of a modern enterprise system, the government decided to reduce the income tax burden on state-owned enterprises, and abolish the key construction fund for energy and transportation and the budget adjustment fund. All state-owned enterprises would be taxed at a unified, flat rate of 33%, aimed to comprehensively reform profit distribution of state-owned enterprises. (4) The government decided to completely abolish overdraft or borrowing from the central bank. Any budget shortfall would be covered through new debt issuance, a measure intended to cut off the link between budget deficit and inflation. This was a very important turning point. The reform measures launched before had mostly revolved around adjustments to the interest pattern. Moreover, they were formulated and implemented when the overall reform goal had yet to be clarified. The significance of this round of reform was that, by breaking through the constraints of the previous theme of decentralization and concession, it embarked on the road of transformation and institutional innovation. Starting from restructuring the fiscal and 3

Guofa (1993a). Guofa (1993b). 5 Guobanfa (1993). 4

278

10 The Reform of China’s Fiscal and Taxation System

taxation system to make it suitable to the socialist market economy, it not only made appropriate adjustments of the interest pattern, but also pushed for the establishment of a new fiscal and taxation system. Indeed, transforming the fiscal and taxation system and its operating mechanism was the main focus of the 1994 reform. The 1994 reform put fiscal revenue on a track of continuous rapid growth. Both fiscal revenue as a percentage of GDP and the share of central government revenue in total fiscal revenues have improved fundamentally. The macro-control function of public finance has strengthened, and the profit distribution relationship between the state and state-owned enterprises has been standardized. Today, as we pride ourselves in the transitional changes and achievements in China’s fiscal and taxation system, we should not forget that these achievements are all beholden to the 1994 fiscal and taxation reform. It was the 1994 reform that helped establish a basic framework for the fiscal and taxation system and its operating mechanism compatible with the socialist market economy.

Stage 3: Constructing a Framework of the Public Finance System (1998–2003) While the 1994 reform of the fiscal and taxation system brought on institutional innovation, it did not solve all the problems. In the final analysis, the 1994 reform only covered government revenues and expenditures that were included in the national budget. The items outside the budget system were not on the cards. Moreover, the institutional innovation emphasized by the reform touched upon mainly the revenue side of the budget. The other side, i.e., the adjustment of fiscal expenditures, was not carried out as a priority. At the same time, the twin constraints of vested interests and incentives to increase fiscal revenues got in the way of the reform to varying degrees, making some practices obviously transitional or tactical. As the 1994 reform took hold and blossomed, the various contradictions inherent in government revenues and expenditures outside the budget system began to emerge, eventually reaching to the point that began to disturb national income distribution and government budgetary operation. To break this bottleneck, in the late 1990s the government implemented reform to turn fees into taxes and reform on the fiscal expenditure management system, with the main purpose of regulating the government revenue and expenditure behavior and mechanism. With the two reforms successively entering the center of gravity of the fiscal and taxation system reform, the direction became clear: restructure the overall framework of the fiscal and taxation system to build an institutional framework of public finance. At the first press conference held after presiding over the work of the State Council, on March 19, 1998, Premier Zhu Rongji said: “A problem at present is that fees are more burdensome than taxes. Many government agencies and departments charge and collect fees in various names outside of the state regulation. The fees are so

10.1 The Five Stages of Reform: A Sketchy Outline

279

heavy that people’s grievances are boiling. This must be rectified and reformed.”6 The government grasped this opportunity to embark on the fees and taxes reform. In fact, before the nationwide taxes and fees reform was formally launched, there had been attempts to get a handle on arbitrary charges imposed by some government departments. The original formulation was the so-called “taxes for fees” reform (Liu et al. 1998). The main intention was to reduce the burden on enterprises and households by turning the various fees and charges into taxes. Later on, with the deepening of the reform and the broadening of the horizon, it was gradually discovered that the various drawbacks associated with existing government fees were not due to the fees themselves. The problem was that a large amount of the charges and fees were not reviewed or approved by the People’s Congress. In other words, they were not included in the national budget system. Instead, they were imposed and collected by the various government departments and local governments. The fees they collected this way were counted either as non-budgetary items, or as income from outside the system, and were deposited to the “little treasury,” a coffer directly controlled by the collectors. They were essentially non-standard sources of government revenue. The purpose of the “taxes for fees” reform, therefore, was not intended to change all the original government fees to taxes, but rather to use it as a means to bring nonregular government revenues to the standardized track. As a result, the “taxes for fees” reform was not merely a corresponding adjustment routine. It was also hooked up with the entire government income picture. It was under this backdrop that the term “taxes for fees” was later replaced by “taxes and fees.” The new term was given a special connotation of regulating government revenue behaviors and mechanisms. While the “taxes and fees” reform was undergoing and achieving initial results, the reform of fiscal expenditures, the other side of the fiscal budget, kicked off into full swing. The following reform schemes successively entered into the horizon: expand the fiscal expenditure structure from focusing on production and construction to the optimization and adjustment of the entire public services area; implement the “department budget system” that would standardize the budget and classification methods, and comprehensively reflect the state government’s revenues and expenditures; implement a “centralized treasury collection and payment system” whereby the fiscal (or treasury) department would collect all government revenues including budgetary and external revenues, and make payments on all government expenditures from a single account of the treasury; and promote a government procurement system that would gradually use open bidding to the public for all direct government purchases. However, whether it was the adjustment on the expenditure side of the budget or the reform of the revenue side through taxes for fees, what were involved, after all, covered only part of the fiscal and taxation system and its operating mechanism, rather than the overall system. When the limitations on both sides of the fiscal budget gradually became apparent, the following consensus was finally reached. That is, while piecemeal adjustments here and there were certainly important and needed, without a complete retooling of the entire fiscal system and its operating mechanism, 6

Zhu (2000).

280

10 The Reform of China’s Fiscal and Taxation System

the piecemeal adjustments were just piecemeal and would not help build a fiscal and taxation system and its operating mechanism that would suit the socialist market economy. Therefore, building such a framework—touted as a systemic project— was put on the agenda, a framework into which all aspects of the fiscal and taxation system, including revenues, expenditures, and operating mechanism, were integrated. There is no other term more suitable than “public finance,” a term adopted by the academic community at that time, that could lead all the clues and cover all matters concerning the fiscal and taxation reform. Therefore, on the basis of conferring the significance of public finance with Chinese characteristics, and taking the opportunity of the National Financial Work Conference, held on December 15, 1998, the decisionmakers made an important and epoch-making decision, namely, to build a basic framework for public finance (Li 1998).7 From then on, the construction of the public finance framework officially entered the track of the fiscal and taxation reform.

Stage 4: Further Improving the Public Finance System (2003–2012) Just like the socialist market economic system which has undergone a spanning process from construction to perfection, with the steady advancement of the various fiscal and taxation reform measures intended to construct the public finance framework, the reform gradually waded in deep water areas and encountered even more challenging tasks. Five years later, in October 2003, the Third Plenum of the 16th CPC Central Committee adopted the Decision on Several Issues Concerning the Improvement of the Socialist Market Economic System. In this historical decision, based on the judgment that the public finance system had been initially established, a strategic plan was made to further improve and perfect the system (CPC Central Committee 2003). Recognized as an important piece, the public finance system was placed on the chessboard of the socialist market economic system. Under this big framework, the government rolled out a series of campaigns aimed at further improving the public finance system (Xie 2007). The taxation system reform was the first to enter into the operation procedure. According to the deployment, several reforms were successively carried out: reforming export tax rebates, increasing the deduction standard for personal income taxes and implementing self-filing by high-income earners, abolishing all agricultural taxes, converting the base of value-added tax from production-based to

7

At that meeting, Li Lanqing, then member of the Politburo Standing Committee of the CPC Central Committee and Vice Premier of the State Council, proposed, on behalf of the CPC Central Committee, to “actively create conditions and gradually establish a basic framework for public finance”.

10.1 The Five Stages of Reform: A Sketchy Outline

281

consumption-based, and unifying the corporate tax rates for domestic and foreign enterprises. Almost at the same time, reforms on fiscal expenditures and the fiscal management system were put into operation. It should be pointed out that the reform coincided with the unveiling of major strategic thinking from the top leadership, i.e., the Scientific Development Outlook and the goal of building a socialist harmonious society. As a result, reform measures were rolled out at a rapid pace. By abolishing agricultural taxes and breaking the original rural public services supply system, the public finance system gradually extended to all rural areas. Reform of fiscal expenditures increasingly leaned towards the basic issues concerning people’s livelihoods, such as education, employment, medical care, social security, and housing. Aimed at promoting uniformity of basic public services across regions, fiscal transfer payments were enhanced and the transfer payments system was adjusted accordingly. Starting with incorporating all government revenues and expenditures into the budget and fine-tuning the classification of the budget items, the budget oversight and management system was strengthened, further promoting the standardization of government revenue and expenditure behaviors and mechanisms.

Stage 5: Establishing a Modern System of Public Finance (2012 to Present) The year 2012 marked an important turning point in the modern history of China’s development. In this year, the 18th CPC National Congress was convened, ushering the journey of socialism with Chinese characteristics into the new era. The pace of economic growth, the structure, and drivers of the economy that had lasted for many years all went through significant changes. From this year onwards, reform and opening-up entered into a tough period and the deep-water areas. At this new starting point, a choice of historic proportion loomed on the horizon: how to comprehensively deepen reforms and how to realize the dynamic linkage of the reforms in the economic, political, cultural, social, and ecological civilization systems. In November 2013, the Third Plenum of the 18th CPC Central Committee adopted the Decision on Several Major Issues Concerning Comprehensively Deepening Reforms. As an integral part of the macro game of comprehensively deepening reforms, the fiscal and taxation system reform in the new era has taken off, with the goal of establishing a modern system of public finance (The CPC Central Committee 2013; Lou 2014). As far as the reform of the budget management system was concerned, unlike the previous reform plan that revolved around the general public budget (also known as the fiscal budget), the vision of the budget management system reform in the new era has expanded to all government revenues and expenditures, including general public finances, government funds, state-owned capital, and the social security funds. The

282

10 The Reform of China’s Fiscal and Taxation System

goal was to establish a modern budget management system that was “comprehensive, standardized, open, and transparent” on the premise of covering all government revenues and expenditures. The deployments for the goal were spelt out in the decision of the Third Plenum of the 18th CPC Central Committee: “Improve the budget management system. Implement a comprehensively standardized, open and transparent budget system. Extend the focus of budget auditing from a balanced budget and the scale of deficit to expenditure budgets and policies. Sort out the link between key expenditures and increases in revenues and gross national product. In general no such link shall be adopted. Establish an inter-annual budget balance mechanism, establish a comprehensive government financial reporting system, and establish a standardized and rational central and local government debt management and early risk warning mechanism.” As far as the taxation system reform was concerned, unlike previous reform practices that were formulated based on the increase or decrease of total tax revenues, the premise of the taxation reform in the new era was to stabilize the tax burden. Based on this premise, the goal was to optimize the tax revenue structure and establish a modern taxation system by gradually increasing the proportion of direct taxes. The deployments made in accordance with this goal were stated in the decision of the Third Plenum of the 18th CPC Central Committee: “Deepen the reform of the taxation system, improve the local taxation system, and gradually increase the proportion of direct taxes. Promote the reform of value-added tax, and appropriately simplify the tax rate. Adjust the collection scope, links, and tax rates of consumption tax, and impose taxes on consumer products with energy consumption and pollution and some luxury products. Gradually establish a comprehensive and classified personal income tax system. Accelerate real estate tax legislation and promote reform in a timely manner. Accelerate the reform of resource taxes and promote environmental protection fees for taxes reform.” As for the fiscal relationship between the central and local governments, again it was different from the previous reform plans that were formulated according to the increase or decrease of central or local financial resources. In the new era, the goal was to build a new pattern of modern central and local fiscal relation by giving full pay to “two enthusiasms,” rather than “one enthusiasm.” To this end, the decision of the Third Plenum of the 18th CPC Central Committee laid out the specific measures: “Establish a system in which authority of office and expenditure responsibilities are compatible. Properly strengthen the central authorities and expenditure responsibilities to include national defense, diplomacy, national security, and uniform national market rules and regulations; some social securities and the construction and maintenance of cross-regional major projects are joint responsibility of the central and local governments, but the responsibilities shall be gradually straightened out; regional public services are local responsibilities. The central and local authorities assume corresponding expenditure responsibilities according to the division of their authorities. The central government can delegate some expenditure responsibilities to local governments through transfer payments. For cross-regional public services that have a great impact on other regions, the central government assumes part of

10.1 The Five Stages of Reform: A Sketchy Outline

283

the local authority expenditure responsibilities through transfer payments. Maintain the generally stable pattern for both central and local financial resources, and further rationalize the division of revenues between the central and local governments through the taxation reform and based on nature of tax types.” From November 2013 to the 19th CPC National Congress, held in 2017, the fiscal and taxation system reform in the new era made corresponding progress in the following fields. In the field of budget management, the new budget law with the main focus on covering all government revenues and expenditures was formally promulgated and implemented in January 2015.8 Based on the new law, a series of new policy measures aimed at regulating government revenue and expenditure behaviors have been formulated and implemented. On this basis, several basic concepts of the modern budget management system have been established. An all-inclusive government budget system constructed with four budgets has been established. Certain results have achieved regarding open and transparent budgets and the final accounts. In the field of taxation, as an important element of the indirect taxation system reform, value-added tax (VAT) was pushed forward comprehensively, and the VAT rate was simplified. The reform of resource taxes proceeded smoothly, the consumption tax collection scope was gradually expanded, and the environmental protection tax was officially levied. At the same time, the reform of the tax collection and management system was rolled out with the promulgation of Deepening the Reform Plan for the Collection and Management System of National and Local Taxes.9 In an effort to straighten out the fiscal relationship between the central and local government, in May 2016 the State Council announced the Transition Plan for Adjusting the Distribution of VAT Revenue between Central and Local Governments after the Pilot VAT Reform.10 As a transition plan for the next 2–3 years, using 2014 as a benchmark, the value-added tax revenue would be divided evenly between the central and local governments. In August 2016, the State Council issued its Guiding Opinions on Promoting the Reform of Dividing the Central and Local Financial Authorities and Expenditure Responsibilities, proposing to complete the reform in the main areas and make it gradually standardized and legalized to form a framework that would clarify the financial authorities and expenditure responsibilities between the central and local governments by 2020.11

8

Budget Law of the People’s Republic of China (Amended in 2014). Available at the website of the Ministry of Finance. 9 The Central Leading Group for Comprehensively Deepening the Reform (2015). 10 Guofa (2016a). 11 Guofa (2016b).

284

10 The Reform of China’s Fiscal and Taxation System

10.2 From Building a Public Financial System to Establishing a Modern Public Finance System With the benefit of hindsight, we can sketch the basic trajectory of China’s fiscal and taxation reform over the past forty years in broad strokes. It all started with a focus on paving the way for the overall economic reform, with decentralization of power and concession of revenues as its main theme. It then moved on to the 1994 reform, aimed to establish a new fiscal and taxation system and a new operating mechanism, and putting the reform on the road of institutional innovation. It proceeded from the taxesand-fees reform, intended mainly to control government revenue and expenditure behaviors and its mechanism, to the reform of the fiscal expenditure management system, and to the establishment of the goal of the entire fiscal system reform. It moved from building a basic framework of the public finance system to establishing the goal of the fiscal and taxation reform, which was to establish a modern fiscal system so that it could play a fundamental and supporting role in advancing the modernization of the national governance system and governance capabilities. Once we have grasped the basic trajectory, the ensuing question is whether there exists a main coherent thread running through the piecemeal reforms of the fiscal and taxation system over the past four decades. Or put another way, has China’s fiscal and taxation system reform so far been following an objective law that is independent of man’s will?

The Main Thread of the Fiscal and Taxation System Reform: Always Obey and Serve the Requirements of the Overall Economic Reform The previous section unfolds the most prominent feature of China’s fiscal and taxation system reform. That is, as an essential component, the fiscal and taxation system reform has always tied to, obeyed, and served the overall economic reform. If the basic trajectory of China’s reform and opening up over the past four decades is from the economic system reform to comprehensively deepening reform, and their respective goals are economic marketization and modernization of national governance, then the reform of the fiscal and taxation system has, in essence, been a process that gradually conforms to the requirements of economic marketization and modernization of national governance. This process can be succinctly summarized as matching fiscal publicizationwith economic marketization, and matching fiscal modernization with national governance modernization. More specifically, it is to make the public finance system compatible with the socialist market economy, and the modern fiscal system compatible with modern governance and governance capacity.

10.2 From Building a Public Financial System to Establishing a Modern …

285

Matching Fiscal Publicization with Economic Marketization The most popular narrative regarding the orientation of China’s economic system reform has been that of marketization reform. If the reform of the economic system follows a fairly regular path of realizing economic marketization, then inevitably the basic orientation of the reform of the fiscal and taxation system is leaning towards fiscal publicization—that is, building a public finance system. (1) Starting from the non-public fiscal and taxation structure and system The fiscal and taxation system reform, of course, began with the outdated framework of fiscal and taxation operation under the traditional planned economic system. We can characterize the outdated framework from varying angles. Here, we shall follow three clues: (1) income—where does the revenue come from; (2) expenditure— where does the money go; and (3) policy orientation—the objectives embodied in the income and expenditure arrangements. Under the traditional economic regime, fiscal revenues came mainly from the state-owned sector, fiscal expenditures were mainly invested in the state-owned sector, and fiscal policies were formulated in favor of the state-owned sector over the non-state-owned sector. In 1978, for instance, 86.8% of the fiscal revenues came from the state-owned sector, and 85.6% of fiscal expenditures were spent on the same sector. If the contribution by the so-called collective economic units with quasi-state nature and the corresponding expenditures on them were included, then each of the two figures would exceed 90%.12 Such a framework was designed to serve but one policy objective, namely, developing and strengthening the state-owned economy while weakening or even eradicating the private sector. This type of fiscal and taxation operation was, of course, the result of the singular pattern of economic activity and the dual-sector economic and social institutional environment implemented during that period. Almost all GDP activities came from either the state-owned or the collective-owned economic sectors. As an important component of the dual-sector economic and social system, the fiscal and taxation system was naturally designed in line with the same dual-sector model: treat different ownership sectors differently, and treat urban and rural areas differently. State-owned finances. There was a clear demarcation line between the state-owned sector and the non-state owned sector. Fiscal revenue and expenditure activities were mainly accomplished within the state-owned sector, while the non-state owned sector was either not covered at all in the national fiscal system, or lied on its periphery. Urban finances. There was a distinctive boundary separating urban and rural economies. Government fiscal revenue and expenditure activities were mainly conducted within the urban areas. The vast rural regions were either excluded in the national fiscal coverage or at best on the margin. Production and construction finances. The distinction in fiscal expenditures was also significant in that fiscal expenditure activities mainly revolved around the field 12

Department of Comprehensive Planning, Ministry of Finance (1992).

286

10 The Reform of China’s Fiscal and Taxation System

of production and construction. The non-productive or non-constructive expenditure items—such as spending on public services to improve people’s livelihoods—were often placed in a subordinate position or on the fringe. In other words, the scope covered by the dual-sector fiscal and taxation system was selective, rather than comprehensive. Financial treatment in the dual-sector model was not equal at all, but with clear favoritism. Fiscal expenditures in the dual-sector system were not focused on the entire public services, but rather on production and construction. As a result, enterprises and residents from the same country and under the jurisdiction of the same government were treated differently in terms of public finances, depending on which region they came from and which sector they belonged to. The fiscal and taxation framework of the old economic regime was selective rather than comprehensive in fiscal coverage, offered favoritism rather than equal financial treatment, and focused on production and construction rather than the entire public services field. Such a system cannot be said to be “public” in nature.13 It should, to say the least, be discounted at its face value. In fact, the leaning of public finances towards the state-owned sector, urban areas, and production and construction highlighted the “non-public” nature and the characteristics of the dual-sector model of the traditional economic system. What this means was that the “non-public” structure and the system behind it were the starting point of China’s fiscal and taxation system reform. Put another way, it was this “non-public” nature of the fiscal and taxation operation pattern and its incompatibility with the basic requirements of economic and social development that pushed China on the road of the fiscal and taxation system reform in the first place. (2) Gradually moving from being non-public to being public On the whole, the first result of the marketization process of the Chinese economy was the diversity of economic sectors. The grand change in economic components gradually trickled down to the fiscal and taxation operation pattern, from collecting money from one’s own pockets to collecting from everyone’s. The diversity of sources of fiscal revenue has greatly enhanced. By 2006, for example, the contribution by the state-owned sector to national tax revenues had retreated to only 22.2%, with the rest, or 77.8%, coming other ownership sectors.14 The expansion of the sources of fiscal revenue in turn promoted the extension of public spending, as it moved from “taking care one’s own business” to “taking care everybody’s business.” In 2006, the share of three expenditure items that were specifically appropriated for the state-owned economic units—i.e., capital construction, additional earmarks for enterprises’ working capital, special funds for innovation and science and technology—dropped to 15.87% of total fiscal expenditures. By way of comparison, the figure was 52.7% in 1978. Meanwhile, the share of social security expenditures such as subsidies on the social security funds, subsidies 13 14

Or, put another way, this system cannot be said to benefit everybody. China Tax Yearbook (2007; p. 692). China Taxation Press.

10.2 From Building a Public Financial System to Establishing a Modern …

287

on the basic living guarantees for laid-off workers from state-owned enterprises, subsidies on urban residents’ minimum living guarantees, and pensions and social welfare relief expenses rose to 11.25%; that of spending on cultural, educational, scientific and health undertakings amounted to 18.69%; and that of policy-oriented subsidies accounted for 3.58%. Moreover, many of these undertakings were started from scratch.15 The expansion of the fiscal revenue sources has also helped pivot fiscal policy orientation from differential treatment to uniform national treatment throughout the society. The changes as manifested in the pattern of fiscal and taxation operations, of course, coincided with the transformation to the public nature of the fiscal and taxation system. Without the reform of the fiscal and taxation system oriented towards the public, there would be no public-oriented fiscal and taxation operations. These changes were also the results of a process aimed to conform to the marketization of the economy and the transition of the economic and social system from the dual-sector model to the single-sector model, in following ways. From state-owned finances to a variety of ownership finances. Fiscal coverage was no longer divided by the nature of ownership, as it went beyond the limit of the state-owned sector by including a variety of ownership sectors such as the non-state owned sector. From urban finances to integrated urban and rural finances. Fiscal coverage was no longer limited to urban economies, but extended to all Chinese territories and all members of society. From production and construction finances to public service finances. Fiscal expenditure was no longer concentrated on production and construction, but extended to cover many public services, such as infrastructure construction, social management, economic regulations, and improvement of people’s livelihoods. The transitional changes in the fiscal and taxation system were focused on continuous expansion of its coverage, as attested by the leap from “state-owned finances + urban finances + production and construction finances” to “multi-ownership finances + urban–rural integrated finances + public services finances.” It was a process of continuous expansion in fiscal coverage and the gradual implementation of nondiscriminatory fiscal treatment. What this process has gradually unfolded is the inherent “public” nature of public finances. (3) From “crossing the river by feeling the stones” to aiming at “fiscal publicization” in the cross hairs The fiscal and taxation reform has had a very similar experience as the economic system reform. Its goal was not clarified at the start, but became clearer and clearer through “crossing the river by touching the stones,” and was eventually established firmly. 15

Here, the figures for 2006 were used instead of more recent years because China has implemented a new fiscal revenue and expenditure classification scheme after 2007. This change makes impossible to directly compare the 1978 data with the post-2007 data.

288

10 The Reform of China’s Fiscal and Taxation System

In the early days of the fiscal and taxation reform, there was no orientation toward fiscal publicization, nor was there a narrative of building a public financial management system. At the time, almost all reform measures were targeted at enhancing economic vitality and revolving around the mantra of “decentralization of power and concession of revenues.” However, it was precisely these measures, which started with the decentralization of fiscal resources and financial power and aimed at paving the way for the overall economic reform, that helped break the traditional institutional structure—characterized by overly centralized financial power, unified distribution of revenues and expenditures, and excessive reliance on very few types of taxes— and bring the operating pattern on track toward a diversity of income sources and expenditures. As the inevitable result of these efforts, the publicization process of the fiscal and taxation system kicked off. When it became clear that the course of the reform must be adjusted and a new fiscal and taxation system reform plan must be formulated on the chessboard of the socialist market economic system, people may not be aware of the close association between economic marketization and fiscal publicization. Regardless, almost all policy measures were formulated based on the notion that the pattern of fiscal operations had changed and was irreversible. Naturally, under such a situation, the fiscal system arrangements to be dovetailed with the socialist market economic system and the clarification of related principles were inseparable from economic marketization. The conflation of various factors, ideas, rules, systems and the like that were inherent in the blood of the market economy has not only spawned the concept of public finance and its related practice. It has also shifted the focus of the reform increasingly toward the direction of public finance. Later on, as reforms deepened, local reforms were gradually extended to the entire economy, to the point where it was imperative to have an overall positioning of the goal of the fiscal and taxation reform. Perhaps it was a natural choice, but anyway the goal of building a basic framework of public finance loomed from the horizon. Since then on, almost all the clues leading to the reform of the fiscal and taxation system, including fiscal revenue, expenditure, and management system, have been attributed to this main thread and covered under the umbrella of this overall reform goal. Moreover, the goal of China’s fiscal and taxation system reform, whether in academia or in practice, has increasingly focused on the expression or elaboration of “building a public finance system” or “constructing a public finance regime.” With the formation and establishment of the goal of building a socialist market economic system, the direction of the fiscal and taxation system reform has gradually leaned towards building a sound public finance system. Therefore, narratives such as “further improve and perfect the public finance framework” and “improve the public finance system”—generalizations or expressions that advanced with the times—have successively entered into the decision of the Third Plenum of the 16th CPC National Congress, the government’s 11th Five-Year Plan, the report of the 17th CPC National Congress, and other important documents of the Party and the government, as well as in reform practices. At the same time, the term, idea and spirit of public finance have become deeply integrated into academic research of important economic and

10.2 From Building a Public Financial System to Establishing a Modern …

289

social issues concerning government functions, public services, social undertakings, as well as the daily lives of ordinary folks. (4) A regularity in China’s fiscal and taxation reform In a nutshell, the main thread of China’s progressive reform of its fiscal and taxation system in the context of the economic system reform can be summarized succinctly as follows. It started from the “non-public” nature of fiscal and taxation operation, moved along the path of “fiscal publicization,” gradually approached the “public” fiscal operation pattern, and eventually established the goal to build a public fiscal system. The so-called “fiscal publicization” process that has gradually transformed from being non-public to being public is the most commendable major challenge that the fiscal and taxation system reform has experienced so far. What this essentially means is that economic marketization and fiscal publicization are the two sides of the same coin. The former inevitably brings about the latter. A market economy entails public finance. This is a regularity in the reform of China’s fiscal and taxation system.

Matching Fiscal Modernization with State Governance Modernization The overall goal of comprehensively deepening reform that involves the economic, political, cultural, social, and ecological civilization systems has been established, which is to develop socialism with Chinese characteristics and promote modernization of the national governance system and capacity (Central Committee of the Communist Party of China 2013). Now that the economic system reform has entered the next step, the fiscal and taxation system reform in the new era has to step out of the previous paradigm of following a reform plan that compatible with the economic system reform. It has to reposition itself in the overall game of comprehensively deepening reform, and embark on the road of fiscal modernization—that is, to establish a modern public finance system. (1) New positioning of public finance and the fiscal and taxation system The Third Plenum of the 11th CPC Central Committee put forward a new positioning for the fiscal and taxation system in the new era, stating that “Finance is the foundation and an important pillar of state governance. Good fiscal and taxation systems are the institutional guarantee for optimizing resources allocation, maintaining market unity, promoting social equity, and realizing enduring peace and stability” (Central Committee of the Communist Party of China 2013). This completely new assertion has historic and theoretical importance. One of the most prominent changes is that finance has been elevated from the economic category to the national governance category; and the fiscal and taxation system, from a component of the economic system to be part of the national governance system.

290

10 The Reform of China’s Fiscal and Taxation System

The key issue here is that this change, although initially presented itself at the level of human cognition, is actually not subjective, but rather the result of the objective law. For the first time in the history of China’s fiscal and taxation reform and development, the true meaning of the fiscal and taxation system is fundamentally reinstated. It is an inevitable result in the new stage of comprehensively deepening reform with the goal of modernizing national governance. Because of the close association of finance with national governance and that of the fiscal and taxation system with the national governance system, planning and advancing the reform of the fiscal and taxation system in the broad context of national governance has become the proper embodiment of the problem. (2) From fiscal publicization to fiscal modernization It may sound tautological, but it is worth mentioning that the notion that “finance is the foundation and an important pillar of national governance” is linked to national governance. Finance and national government have entered into the national narrative as inseparable twins for the first time. Without state governance, or putting the modernization of state governance on the agenda, there would be no new positioning of the fiscal and taxation system. Likewise, without the new positioning of the fiscal and taxation system, there would be no state governance, let alone the modernization of it. Judged from their mutual reinforcing and reciprocal relationship, one thing is clear. That is, such a change is no coincidence. It signifies that on the basis of initial stabilization of fiscal publicization, China’s fiscal and taxation system reform has entered a new stage characterized by fiscal modernization. Historically, the most prominent feature of the traditional planned economy is that almost all social resources are in direct control of the government. Since the will of the governor rules everything, the concept of governance is never mentioned on the agenda, let alone state governance. In the early days when reform was mainly focused on the economic system and economic development, the goal of building a modern state was beyond the question, and so was the proposition of modernizing state governance. Only after China has basically established the framework of the socialist market economy system and has become the second largest economy, and after it has the qualification, basis, foundation, and conditions to create the general institutions required of a modern country, can it put forth the goal of advancing the modernization of state governance and capacity, and reposition the fiscal and taxation system in the broad context of national governance. Put another way, the process of the market-oriented economic reform is also the process of profound changes in the social fabric and interest patterns. Not only have the existing classes and interest groups become more differentiated. Some new classes and interest groups have emerged, and the society has shown a complex, multi-layered pattern of interest relationships. Unlike the previous social structure and interest pattern in which the economic and social subjects were relatively uniformed and the interest relationships relatively simple, as different social classes and interest groups have gradually emerged, economic and social subjects have become increasingly diverse and diversified, substantially increasing the possibility of conflicts among different interest groups.

10.2 From Building a Public Financial System to Establishing a Modern …

291

The traditional way of national governance is unable to accommodate these changes. A modern state governance structure compatible with the modern market economy and the modern social structure is urgently needed. This modern state governance system will be able to mitigate potential conflicts of interest, accommodate the ever more complex relationships among various interest groups, and standardize the handling of responsibilities, powers and interests that have become more and more difficult to handle, thus forming a shared interest community that is jointly conceived and constructed by the whole society, as to ensure sustainable economic development and social progress. It is precisely because China’s economic and social development has reached this stage that public finance leaps into the realm of national governance, and the fiscal and taxation system becomes an integral part of the national governance system. The implication is that as China has entered the stage of comprehensively deepening reform and has established the goal of modernizing national governance, the fiscal and taxation system, which has always been an integral part of, subject to, and served the needs of the overall reform, must now be reformed so that it can satisfy the requirements of the modernization of state governance. The entails the establishment of a modern fiscal system to match state governance modernization with fiscal modernization. (3) Some profound changes Consequently, a barrage of profound changes have occurred in the reform of the fiscal and taxation system. These changes are drastically different from what happened before. In the past, the reform of the fiscal and taxation system was mostly deployed as a piece on the chessboard of the economic restructuring reform. Its advancement had closely followed the reform process of the economic system, and its progress had been judged using the yardstick whether it had adapted to or matched with the socialist market economic system. In contrast, the reform of the fiscal and taxation system in the new era is treated as an integral component of comprehensively deepening reform, and has been deployed as such. Therefore, the reform of the fiscal and taxation system should closely follow not only the process of economic system reform, but also the reform process of the political, cultural, social, and ecological civilization systems. It must be evaluated against such benchmarks as whether or not it has adapted to and matched with the linkage of reforms in various fields; whether or not it has adapted to and matched with the overall effect of reform; and whether or not it has adapted to and matched with the overall goal of modernizing the country’s governance system and governance capacity. In the past, the reform of the financial and tax system was formulated on the basis of considering finance as an economic category and the fiscal and tax system as an economic system arrangement. Despite the immense scale of its impact, the broad scope of its involvement, and the fact that its actual impact was by no means limited to the economic field, on the whole, its subjective intention had not broken away from the outdated notion of treating finance as an economic category and the fiscal and tax system as an economic system arrangement. The reform of the

292

10 The Reform of China’s Fiscal and Taxation System

fiscal and taxation system in the new era is to regard finance as a comprehensive category that spans multiple disciplines and extends to all fields, and the fiscal and taxation system as a comprehensive institutional arrangement that touches upon all aspects, including economy, politics, culture, society, and ecological civilization. No longer merely an economic institutional arrangement in the general sense, the fiscal and taxation system reform must be formulated from the overall perspective of state governance. Public finance must be taken as the basic and supporting element of state governance and, by the same token, the fiscal and taxation system as a comprehensive institutional arrangement covering the whole process of state governance, as well as all other fields. In the past, the reform of the fiscal and taxation system was focused mostly on the attributes of the system and pursued the match of the attributes between public finance and the socialist market economy. The basic goal then was to establish a public finance system that would accommodate the socialist market economic system. In contrast, the reform of the fiscal and taxation system in the new era is focused on the characteristics of the times and seeks the match in modernization between public finance and state governance. Therefore, it is neither a simple continuation of the previous reform goal, nor is it a new start or reinvention. It is intended, on the basis of breakthroughs in the construction of the public finance system, to match the overall process of the modernization of state governance, lay out the reform based on finance modernization, and build a modern public finance system which conforms to the historical laws, reflects the trend of the times, represents the direction of future development, and accommodates China’s national conditions. In this sense, the modern finance system and the public finance system converge to one continuous line, the essence of which is finance modernization based on public finance. (4) Another regularity in the fiscal and taxation system reform In a nutshell, standing on the shoulders of fiscal publicization and advancing in accordance with new concepts, ideas and strategies, the reform continues to follow the path of fiscal modernization, aiming to establish a modern finance system that accommodates the requirements of the modernization of state governance. Such is the main thread of China’s progressive fiscal and taxation system reform under the backdrop of comprehensively deepening reform. It can also be said that the socalled finance modernization process—from the public finance system to the modern finance system—is the most commendable major challenge facing the reform of the fiscal and taxation system at this stage. This essentially means that the modernization of state governance and the modernization of public finance are the two sides of the same coin. The former inevitably entails the latter. To push forward the modernization of state governance and capacity, it is imperative to build a modern fiscal system as the foundation and important pillar. This is another regularity in the reform of China’s fiscal and taxation system.

10.3 The Direction of Reform: Expediting the Establishment of a Modern …

293

10.3 The Direction of Reform: Expediting the Establishment of a Modern Public Finance System The Third Plenum of the 11th CPC Central Committee unleashed the campaign of comprehensively deepening reform with a timetable: “By 2020, decisive results will have been achieved in the reform of important areas and crucial segments, and institutions and systems that are structurally complete, scientifically standardized and effective in operation are to be formed, to ensure that institutions in all areas become more mature and complete” (The CPC Central Committee 2013). As an important component of the overall reform, the fiscal and taxation system reform in the new era has entered the final countdown. The urgency of advancing the reform is self-evident, due to, on top of the 2020 deadline, its position in the basic and key projects in the campaign of comprehensively deepening reform.

Tackle the Tough, Difficult and Painful Issues In view of the new historical position of socialism with Chinese characteristics in the new era, the 19th CPC National Congress, held in October 2017, upon systematically evaluating the reform progress of the fiscal and taxation system since the Third Plenum of the 18th CPC Central Committee, put forward the following tasks for the next round of the reform in this area: “We will expedite the establishment of a modern public finance system, and establish a fiscal relationship between the central and local governments built upon clearly defined powers and responsibilities, appropriate financial resource allocation, and greater balance between regions. We will put in place a comprehensive, procedure-based, transparent budget system that uses well-conceived standards and imposes effective constraints; and we will implement performance-based management nationwide. We will deepen reform of the taxation system, and improve the local taxation system” (Xi 2017). Compared with the deployments laid out by the Third Plenum of the 18th CPC Central Committee, profound changes have been made regarding the fiscal and taxation system reform. While the Third Plenum of the 18th CPC Central Committee proposed to “establish a modern public finance system,” the 19th CPC National Congress proposed to “expedite the establishment of a modern financial system.” The change from “establish a modern public finance system” to “expedite the establishment of a modern financial system” reflects the urgency of the reform in the new era. The blueprint for the fiscal and taxation system reform, drawn by Third Plenum of the 18th CPC Central Committee, has become an urgent requirement for the new era of socialism with Chinese characteristics. Among the three aspects of the fiscal and taxation system reform deployed by the Third Plenum of the 18th CPC Central Committee, the pecking order of priority was the budget management system, the taxation system, and the central and local fiscal

294

10 The Reform of China’s Fiscal and Taxation System

relationship. The 19th CPC National Congress made adjustments in the order: the fiscal relationship between the central and local governments became the top priority, followed by budget management system and taxation system. This adjustment indicates changes in the relative importance of the three aspects of the reform. To build socialism with Chinese characteristics and to ensure success in the reform of the fiscal and taxation system in the new era, China must break through the bottleneck caused by the fiscal relationship between the central and local governments. The decision of the Third Plenum of the 18th CPC Central Committee used nearly a thousand Chinese characters to provide a systematic and complete description of the fiscal and taxation system reform. In comparison, the report of the 19th CPC National Congress spent only 78 Chinese characters of the sort of finishing touches. For example, the goal of straightening out the central and local fiscal relationship was to “establish a fiscal relationship between the central and local governments built upon clearly defined powers and responsibilities, appropriate financial resource allocation, and greater balance between regions.” The goal of the budget management system reform was to “put in place a comprehensive, procedure-based, transparent budget system that uses well-conceived standards and imposes effective constraints; and implement performance-based management nationwide.” The focus of the taxation system reform was on “improving the local taxation system.” These concise but highly targeted statements highlight the key contents and key segments of the fiscal and taxation system reform in the new era. The fact that the key contents and key segments are called out from among the many reform issues and clues, especially after a systematic evaluation of the reform process over the past four years attests to their importance. In fact, they are the most fundamental issues—and also the most difficult issues and pain points—that must be tackled in the fiscal and taxation system reform in the new era. In essence, it is a definitive signal sent by the 19th CPC National Congress, urging the country to fight a tough battle against the fundamental but tough issues to accelerate the establishment of a modern public finance system and to complete the blueprint drawn for the fiscal and taxation system reform in the new era. The following is the list of the tough issues and pain points.

The Fiscal Relationship Between the Central and Local Governments: The Highlight of the Fiscal and Taxation System Reform in the New Era During the period from the Third Plenum of the 18th CPC Central Committee to the 19th CPC National Congress, two major reforms in the fiscal relationship between the central and local governments were launched, in line with two documents. One was Comprehensively Implementing the Transition Plan for Adjusting the Division of Value-Added Tax Revenues between the Central and Local Governments after

10.3 The Direction of Reform: Expediting the Establishment of a Modern …

295

Operating Tax Has Been Changed to Value-added Tax. Another was Guiding Opinions on Promoting the Reform of the Division of Financial Powers and Expenditure Responsibilities between the Central and Local Governments. It should be noted that the first reform was to be deployed over the next 2–3 years. It was obviously an expedient measure, rather than an institutional arrangement for further rationalizing the division of fiscal income between the central and local governments. It should also be noted that after the reform of changing operating tax to value-added tax, the share of value-added tax in total tax revenue exceeded 50%. Given the magnitude of the value-added tax revenue, the reform had the smack of dividing money, rather than an arrangement of dividing taxes. As for the second reform, its goal was set by the Third Plenum of the 18th CPC Central Committee to “establish a system in which powers and expenditure responsibilities are compatible.” The guiding opinions in the second document added the word financial ahead of powers and expenditure responsibilities. The intention was to use the division of financial powers and expenditure responsibilities as a breakthrough to pave the way for the division of the overall authorities and expenditure responsibilities. Nevertheless, since the scope of application was reduced, it was essentially a shrunk version. The reason why the reform process of the central and local fiscal relationship has been in such a state is directly related to its own complexity, as well as the difficulty of the reform. Needless to say, the relationship between the central and local governments is one of the most important links in modern state governance. And the fiscal relationship between them is among the most basic and supportive elements and, as such, has the most knock-on effect. Reforms surrounding it not only concern the overall development of the cause of the Party and the government, but also affect the entire reform of the fiscal and taxation system. In view of the extreme urgency of the reform, the 19th CPC National Congress did not merely put the fiscal relationship between the central and local governments on the top of the priority order. It further required that such a relationship must be built upon “clearly defined powers and responsibilities, appropriate financial resource allocation, and greater balance between regions.” In light of the above considerations, on January 27, 2018, the State Council issued the Reform Plan on the Shared Financial Powers and Expenditure Responsibilities between the Central and Local Governments in the Field of Basic Public Services. It was the first reform measure of the fiscal and taxation system in the new era after the 19th CPC National Congress. The reform’s starting point was to formulate national security standards for basic public services, and standardize shared expenditure responsibilities between the central and local governments, with the purpose of building a central and local fiscal relationship with clearly defined powers and responsibilities, appropriate financial resource allocation, and greater balance between regions. It is expected that the central and local fiscal relationship will be the highlight of the next reform of the fiscal and taxation system.

296

10 The Reform of China’s Fiscal and Taxation System

The Budget Management System: Implementation of the New Budget Law is Urgently Needed Relatively speaking, since the Third Plenum of the 18 h CPC Central Committee, the budget management system reform has been carried out in earnest and with more vigor. The most important landmark achievement was the promulgation of the new Budget Law, officially launched in January 2015. However, examined from the perspective of the principles of modern budget, the new budget law does not resolve some of the toughest issues that have plagued the country for many years. These issues arise mainly from the existing structure of vested interests. First of all, the new law states clearly that “the budget covers the general public budget, government fund budget, state-owned capital operating budget, and social insurance fund budget.” But when it comes to the specific items of budgetary revenues and expenditures, only the first category—the general public budget—has detailed descriptions. The other three categories are rather vague in this regard. According to the law, “the scope of revenues and expenditures for the government fund budget, state capital operating budget, and social insurance fund budget shall be implemented according to laws, administrative regulations, and the State Council’s relevant measures.” Secondly, although the new budget law clarifies the standards on openness and transparency, only the general public budget can meet the standards. The other three budgets either do not meet the requirements, or the standards they observe are not uniform. It is precisely the difference in budget management standards that has caused appreciable differences in the supervision and constraint of the four broad budget categories, to the point that the concept of a fiscal deficit that covers all government revenues and expenditures has yet to be formed. Thirdly, although the new budget law has been promulgated for nearly three years, the implementation details going with it have yet to be implemented. The lack of operable implementation rules not only makes it difficult to truly form the notion of a modern budget system. It also undercuts the efforts to realize some of the basic goals of the reform, such as the goal that all government revenues and expenditures are controlled by the fiscal and taxation departments for the completeness and unification of government budget. Needless to say, they are not only the obstacles to overcome in future reform of the budget management system, but also the basic qualities that a modern budget system, compatible with modern state governance, must possess. It is out of such considerations that the 19th CPC National Congress established a more comprehensive and meticulous goal for the reform of the budget management system on the basis of further refining well-conceived standards and transparency: “We will put in place a comprehensive, procedure-based, transparent budget system that uses well-conceived standards and imposes effective constraints; and we will implement performance-based management nationwide.”

10.3 The Direction of Reform: Expediting the Establishment of a Modern …

297

By following the road map sketched by the 19th CPC National Congress, the reform of the budget management system will certainly be accelerated to a substantial level.

The Taxation System: Direct Tax Reform and Improving Local Taxation System The taxation system reform in the new era is focused on “six taxes and one regulation”. The six taxes are value-added tax, consumption tax, resource tax, environmental protection tax, personal income tax, and real estate tax. And the regulation concerns the tax collection and management system. Among them, the reform of replacing operating tax with value-added tax has been in full swing, the resource tax reform has been carried out smoothly, the scope of consumption tax has been gradually expanded, and the reform of the tax collection and management system has been rolled out. On the surface, the reforms have been progressing on a fast pace with great fanfare. But upon further scrutiny, one can find that apart from the special significance of the tax collection and management system, all taxes that have made progress are related to indirect taxes. Personal income tax and real estate tax, which can be classified into the direct tax category, have remained basically untouched. If indirect taxes and direct taxes are the two wings of the taxation reform in the new era, then the reform is not flying evenly. The imbalance becomes all the more prominent considering that the indirect tax reforms, such as that of value-added tax, are leaned toward reducing the tax burden, while the reforms of direct taxes, as represented by personal income and real estate taxes, are intended to increase tax revenues. One direct consequence of the uneven development of the two wings is that while revenues from indirect taxes have decreased, revenues from direct tax revenue have not increased accordingly, contributing to fiscal deficit. The resulting shortfall in tax revenues can only be compensated by increasing the budget deficit and issuing additional national debt. No matter how you look at it, a tax reform financed with debt is not only unsustainable. It is also inherent with risks. The only option to realize the goal of the tax reform in the new era is to optimize the tax structure. While promoting indirect tax reforms, we should also implement direct tax reforms. This way, decreases in indirect taxes will be compensated with gradual increases in direct taxes, and decreases in corporate taxes will be covered by corresponding increases in personal taxes. The direct tax reforms intended to optimize the tax structure have so far touched mainly personal income tax and real estate tax. From the perspective of the taxsharing fiscal management system, which was first established in 1994 and also included in the new budget law, both taxes can enter into the local tax system as the main sources of tax revenues for the local governments. In particular, real estate tax has always existed and operated as a local tax or the main local tax around the world. In this sense, the lack of progress in personal income tax and real estate tax reforms

298

10 The Reform of China’s Fiscal and Taxation System

during the tax reform process in the new era can also be taken as the lack of progress in local tax reforms, or in the construction of the local taxation system. The reform of direct taxes as represented by personal income tax and real estate tax concerns not only the realization of the goal of optimizing the tax structure, but also the construction of the local taxation system and the reform process of the central and local fiscal relationship. In this sense, direct tax reform is local taxation reform, and improvement of the local taxation system is improvement of the local fiscal revenue and expenditure, which also reshapes the new pattern in the central and local fiscal relationship with tax sharing at its core. It can be expected that, in accordance with the new deployments in the wake of the 19th CPC National Congress, measures will soon be taken to roll out direct tax reforms on personal income and real estate taxes and to promote the taxation reform process focused on improving the local taxation system. It is a tough battle for the next round of the fiscal and taxation system reform.

10.4 Main Conclusions and Implications The discussions about China’s fiscal and taxation system reform over the past four decades can be summarized as follows. First, the basic trajectory of the reform so far can be described roughly as a threestep process: from paving the way for the overall reform through decentralization and concession to seeking its own reform and embarking on the path of institutional innovation; from making piecemeal adjustments to reforming the entire fiscal and taxation system and its operating mechanism; and from building a basic framework of public finance to establishing a modern public finance system. Second, the main thread going through the entire process of the fiscal and taxation system reform is that the reform has always been an important and integral component of the overall reform and, as such, has always been beholden to and served the needs of the overall reform. Just like the historical process going from the economic system reform to comprehensively deepening reform, the fiscal and taxation system and its operating mechanism reform has evolved accordingly: matching economic marketization with fiscal publicization; matching state governance modernization with public finance modernization; matching the socialist market economic system with the public finance system; and matching modern state governance and capacity with modern public finance. Such is the basic experience drawn from the process of adaptive reforms. Third, the fundamental reason why the fiscal and taxation system reform so far has been generally successful is that we have deeply recognized the inherent rules that are rooted in China’s national conditions, and strictly followed these rules in formulating and promoting the reform plans. As the de facto theoretical bases for the practice of China’s fiscal and taxation system reform, these rules can be conceptualized as follows: economic marketization inevitably brings about fiscal publicization,

References

299

and state governance modernization requires and determines public finance modernization. Market economy entails public finance. To promote the modernization of state governance, it is imperative to establish a modern public finance system as the foundation and important pillar. Fourth, as socialism with Chinese characteristics enters the new era, it is urgent to comprehensively advance the fiscal and taxation system reform, the highlight of which is the establishment of a modern public finance system. By concentrating on the difficult issues and pain points associated with the fiscal and taxation system reform in the new era, we will fight tough battles in our drive to accelerate the establishment of a modern public finance regime that will play a fundamental and supporting role in promoting the modernization of state governance and governance capacity, eventually accomplishing the historical task of comprehensively deepening reform. Fifth, from the perspective of the historical starting point of the new era and under the guidance of Xi Jinping’s thoughts on socialism with Chinese characteristics in the new era, when we review the new positioning of the fiscal and taxation system and the systemic deployment by the Third Plenum of the 18th CPC Central Committee in deepening reform, we can characterize the modern public finance system as follows. Public finance is the foundation and essential pillar of state governance, and the fiscal and taxation system is the basic element of the state governance system. In a further extension, public finance covers the entire process and activities of state governance. Using this lodestar to evaluate the current status of public finance and its functions in China, we have to admit that the fiscal and taxation system in the new era has a long way to go.

References China Financial Yearbook Editorial Committee. (2007). China Financial Yearbook. China Finance Magazine. Department of Comprehensive Planning, Ministry of Finance. (1992). China Financial Statistics: 1950–1991. The Science Press. Gao Peiyong and Wen Laicheng. (2001). China’s Financial Operating Mechanism in the Process of Marketization. China Renmin University Press. Guobanfa. (1993). Document No. 87 “Notice of the General Office of the State Council on Transmitting the Implementation Opinions of the State Administration of Taxation on the Establishment of Local Taxation Institutions and Local Taxation Bureaus.” Guofa. (1993a). Document No. 90 “Notice of the State Council Approving the Implementation Plan for the Industrial and Commercial Taxation System Reform of the State Administration of Taxation.” Guofa. (1993b). Document No. 85 “Decision of the State Council on the Implementation of the Taxation System of Financial Management.” Guofa. (2016a). Document No. 26 “Transition Plan for Adjusting the Distribution of VAT Revenue between Central and Local Governments after the Pilot VAT Reform.” Guofa. (2016b). Document No.49, “Guiding Opinions on Promoting the Reform of Dividing the Central and Local Financial Authorities and Expenditure Responsibilities.”

300

10 The Reform of China’s Fiscal and Taxation System

Li Lanqing. (1998). Deepening the Fiscal and Taxation Reform to Ensure the Realization of the Fiscal and Tax Targets for Next Year. People’s Daily, December 16, 1998. Liu Zhongli, Gui Shilei, Xiang Huaicheng, and Tang Tiehan. (1998). China’s Fiscal and Taxation Reform and Development. China Finance and Economics Press. Lou Jiwei. (2014). Deepening the Reform of the Fiscal and Taxation System and Establishing a Modern Public Finance System. Seeking Truth, 20. The Central Leading Group for Comprehensively Deepening the Reform. (2015). Deepening the Reform Plan for the Collection and Management System of National and Local Taxes. People’s Daily, December 24, 2015. Xi Jinping. (2017). Secure a Decisive Victory in Building a Moderately Prosperous Society in All Respects and Strive for the Great Success of Socialism with Chinese Characteristics for a New Era—Report to the 19th National Congress of the Communist Party of China. People’s Publishing House. Xiang Huaicheng. (1994). Reform of China’s Public Finance System. China Financial and Economic Publishing Press. Xie Xuren. (2007). Thirty Years of China’s Public Finance Reform. China Financial and Economic Publishing Press. Zhu Rongji. (2000). Zhu Rongji’s Responses to Journalists (pp. 5–6). People’s Publishing House.

Chapter 11

Innovation and Development of China’s Financial Theory

Over the past 40 years of reform and opening up, China’s financial reform and development have revolved around the main line of the construction and deconstruction of mobilized monetary and financial systems featured by expansion of bank credit under the state’s implicit credit guarantee. This chapter intends to sort out the innovation of financial theory in this aspect.

11.1 The Formation of Mobilizational Monetary and Financial System and China’s Economic Takeoff For a long period of time since the beginning of reform and opening up, the Chinese economy has been characterized by a markedly poverty trap with low income level and low per capita GDP; there are a large amount of rural surplus labors waiting to be transferred. Until the early 1990s, China’s per capita GDP was only about US $ 400, which was still behind the world level. As of the end of the 1990s, 900 million of the 1.2 billion people still live in rural areas. An economic development situation like China will inevitably lead to the rising economy’s “Gerschenkron dilemma” in economic resource mobilization and organization caused by tremendous economic growth potential and serious shortage of capital accumulation. This is related to the latecomer disadvantage proposed by Gerschenkron.1 Although on the surface, the later an economy takes off, the more it can be compensated by introduction of foreign technology and more sufficient acquisition of knowledge spillover effects, its low income level and severe shortage of capital accumulation will restrict its potential in economic growth. Obviously, in order to eliminate the hindrance to economic growth caused by the disadvantage of latecomer, it is necessary to develop a monetary and financial system with higher mobilization ability in savings. Only in this way can the economy accelerate investment and growth, break the poverty 1

Alexander (2009).

© China Social Sciences Press 2023 Z. Zhang, Handbook of Chinese Economics, https://doi.org/10.1007/978-981-99-0420-4_11

301

302

11 Innovation and Development of China’s Financial Theory

trap of low-income levels, and achieve economic take-off. Therefore, the formation of a mobilized monetary and financial system has become the starting point for all financial development and financial reform in China.

The Mobilization Mechanism for Savings of Planned Economy During the planned economy period, China had developed a mobilization mechanism for savings that restricted the intermediary role of currency. Such a mobilization mechanism for savings is mainly composed of the investment and financing system of the planned economy, and can be analyzed by using the capital flow identity as shown in (11.1): I ≡ S + Ms

(11.1)

In the above equation, I stands for fixed asset investment of enterprises, S stands for national savings, and Ms stands for increased supply in currency. On one hand, in the planned economy, enterprises, in principle, do not have decision-making power in investment, and their investment activities are mainly geared into the planned economy by social planning departments in a unified manner. On the other hand, savings are also highly concentrated. The combination of a highly centralized price system and a wage system systematically lowered the prices of factors of production (below market equilibrium prices) and the corresponding disposable income of residents. This mainly involves two aspects: (1) The application of a highly centralized price management system is used to artificially lower the prices of agricultural products, raw materials and energy-related resources, and reduce the level of labor compensation in such industries. (2) The use of a unified wage management system based on the level of industrial labor compensation where product prices have been lowered, has also lowered the level of industrial labor compensation for obtaining cheap inputs and excess profits. It can be said that in the planned economy, residents’ level of disposable income is basically only enough to meet the level of their current consumption expenditure, making the residents’ savings almost negligible. In addition, foreign economic links are weak at that time, and savings in the foreign sector (i.e., the balance of payments deficit) can also be regarded as zero. Then, Chinese national savings became government savings, that is, fiscal budget surplus. It can be seen from this that in the planned economy, the government has become the only major saving and investment entity. Obviously, such a planned economic investment and financing system has systematically lowered almost all factors of production returns through a highly centralized price and wage system, raised the savings rate to the theoretical limit, and no longer requires such way as bank credit expansion to further mobilize savings. Therefore, in line with the investment and financing system of the planned economy, China developed a separate fiscal and credit fund management system and corresponding macro-control rules with comprehensive balance between fiscal and credit systems, strictly restricting the banking system’s

11.1 The Formation of Mobilizational Monetary and Financial System …

303

capacity in participating in fixed asset investment and mobilizing savings through credit expansion. The so-called separate management system of fiscal and credit funds refers to the financial departments’ use of fiscal appropriations to meet the needs of enterprises’ fixed asset investment funds and fixed liquidity. Bank credit is only limited to meeting the temporary and seasonal excess liquidity requirements of the enterprise. Taking into account the difficulty in determining the quota of working capital, in order to prevent the financial sector from passing on the task of supplying working capital to banks, it is equally important to adopt a macro-control regulation with a comprehensive balance between fiscal and credit systems. Ge Zhida believes that fiscal balance plays a more important role in the overall balance between fiscal and credit systems.2 This is because during the planned economy period, in addition to absorbing and lending idle social funds, the main function of banks is to realize the credit use of fiscal budget funds. Obviously, under such a financial system, in order to meet the needs of economic development, it is inevitable that a balance between bank credit and expenditure will exist, which should be compensated by budget allocation and economic issuance of currency. Lin Jiken believes that during the planned economy period, working capital has not been fully verified and sufficiently allocated, especially when the scale of capital construction is too large, resulting in the misappropriation of working capital. On one hand, this will cause fiscal expenditure to exceed the budget plan; on the other hand, it may also hinder the timely formation of production capacity of invested projects, which would lead to a decline in the economic benefits of the enterprise and a false fiscal revenue collection.3 “Infrastructure squeezes fiscal revenues, fiscal system squeezes banks, and banks issue currency.” This is one of the reasons for the fiscal issuance of currency and the formation of a false fiscal balance and a real deficit. In addition, in order to curb the fiscal issuance of currency, in the period of China’s planned economy, currency issuance should follow the 1: 8 empirical value, that is, for every additional RMB 8 cash transaction amount, an additional RMB 1 issuance is required for turnover purpose.4 It can be seen and as shown in Eq. (11.1), on one hand, under the influence of the fiscal and credit fund management system, the banking system has lost the channel to transform real economy sector savings (S) into investment (I) through credit expansion in order to directly participate in fixed asset investment. On the other hand, the way that expansion of bank credit works through the increase of money supply (AMs), to indirectly provide loanable funds for fixed asset investment, is also greatly restricted by the macro-control rules, because of the comprehensive balance between fiscal and credit systems in the planned economy. It is obvious that under the investment and financing system of the planned economy, the intermediary role of currency is severely restricted, and to some extent, there has been a tendency for currency to degenerate into consumption coupons. As the most important medium for market economy, the smooth circulation of currency can effectively reduce transaction costs, as well as promote professional division of 2

Ge (1963). Lin (1981), p. 1. 4 Lin (1963). 3

304

11 Innovation and Development of China’s Financial Theory

labor and market development. On the contrary, this kind of savings mobilization mechanism, which excludes bank credit expansion, has restricted the intermediary role of currency. Although it can maximize capital accumulation, it is difficult to bring sound economic growth performance. Thus, in addition to not achieving prominent economic growth rate, this will also exacerbate economic fluctuations.

Bank Credit Expansion, Savings Mobilization, and Economic Take-Off Under state’s Implicit Guarantees It is to make up for the above-mentioned shortcomings of the investment and financing system in planned economy that China began to develop a monetary and financial system with high level of savings mobilization capabilities after the reform and opening up. Investment and economic growth is accelerated mainly through bank credit expansion under the state’s implicit guarantee. The formation of China’s mobilized monetary and financial system has mainly undergone two rounds of financial reform: (1) In the 1980s, through the establishment of the bank credit system and the central bank system, especially through the reform of the credit fund management system with actual loans and deposits, the banking system consisting of Central Bank of China and professional state-owned secondary banks was established. This round of financial reform has successfully broken the shackles of the system where fiscal and credit funds were managed separately, making professional state-owned banks the main investors and loaners of full amount working capital and fixed assets, thus making it possible to mobilize savings through bank credit expansion. (2) After entering the mid-1990s, China has begun the reform in commercialization of Central Bank and professional state-owned banks. This round of financial reform not only freed the central bank completely from the nature of wholesale banking and turned it into a real macro-control department of monetary policy, but also successfully realized the transformation of state-owned banks into commercialized entities, which encouraged the expansion of bank credit. The establishment of the banking system consisting of Central Bank of China and professional state-owned secondary banks marks the eventual formation of a mobilized monetary and financial system that meets the requirements of marketization. Since then, bank credit expansion has become China’s main approach of savings mobilization after reform and opening up. We can reveal the mechanism of credit expansion to mobilize savings more comprehensively through the use of balance sheets from representative commercial banks. As shown in Table 11.1, there are two direct constraints on the scale of bank credit expansion: (1) Adequate capital ratio; (2) Adequate reserve ratio. According to analysis based on theories such as Imperfect Information, Principalagency Theory and Incentive and Constraint Theory of financial contracts, because non-monetary financial assets (liabilities) are not completely inter-replaceable, the internal capital cost of an enterprise is lower than the external capital cost, and only

11.1 The Formation of Mobilizational Monetary and Financial System … Table 11.1 Brief balance sheet of representative commercial banks

Assets

Liabilities

Reserves Securities and loans

Current deposit Other deposits or loans Capital

305

when the bank has an adequate capital rate (the internal capital ratio determined by the bank’s operating profit and capital gains and losses), can it, on one hand, reduce the agency cost reflected by the depositor’s expected cost of auditing bank loan projects, and be encouraged to issue various deposit debts for financing loan projects; On the other hand, only by having an adequate capital rate can it become possible for the bank to provide sound collateral for various deposit debts and incentivize the effective demand of depositors, thereby supporting the availability of loanable funds for credit expansion from both the supply and demand sides of deposit debts. Similarly, due to information asymmetry and transaction costs, assets and liabilities are not completely equal. This requires enterprises to maintain sufficient liquid assets in order to reduce early liquidation losses caused by shocks of liquidity risks.5 As for the banking system, who serves the role of reducing the impact of liquidity risks within the entire society, it is naturally necessary for it to maintain a sufficient reserve ratio. Only when banks have sufficient reserves (substantially the bank’s current assets) and maintain a reasonable reserve ratio, can they effectively carry out credit expansion and provide credit support for investment and production.6 The above two constraints for the scale of credit expansion for banks in China are met through special monetary and financial system arrangements. Among them, the arrangements for financial intermediaries, especially the state’s implicit guarantees against state-owned banks from bankruptcy, play a role in supplementing bank capital. In the process of providing implicit guarantees by the nation, regulations on interest rates of deposits and loans, especially corresponding policies on deposit-loan spreads, play a vital role. As shown in Fig. 11.1, since 1999, China has changed the normal of low deposit-loan spreads with annual spreads leaping to over 3%, which was once very close to those in the euro zone where deposit-loan spreads have been high; these numbers were much higher than those in Japan, South Korea and the United States during the same period of time. Considering the prosperity in China’s monetization process, such a scale of credit expansion even maintained China’s deposit-loan spreads at the similar level of those countries in the euro zone who experienced economic stagnation and slow credit expansion; this can be undeniably attributed to China’s regulations on interest rate control and other related policies on interest rates. After all, if there exists the marketization of deposit and loan interest rates, the active expansion of credit will trigger two-way competition in the deposit and loan markets, which will usually lead to narrowed deposit-loan spreads. Thus, it can be seen that the combination of a stable policy on deposit-loan spread and active credit expansion ensures the profitability of bank intermediaries, which has played 5 6

Bemake and Gerter (1989). Friedman et al. (1993).

306

11 Innovation and Development of China’s Financial Theory

Fig. 11.1 International comparison of interest rate difference between bank deposit and loan. Source CEIC

a role in supplementing bank capital. In this sense, the state’s implicit guarantee for financial intermediaries, especially state-owned banks from bankruptcy, has also evolved into a state’s implicit guarantee for bank deposit-loan spreads. In the meantime, a monetary policy with dual goals of inflation control and economic growth has played a role in ensuring sufficient reserves in the banking system. Since the reform and opening up, the instability of China’s monetary policy has also been verified by a large number of research results. Xie Ping and Luo Xiong used the GMM estimate of the monetary policy response function when testing the Taylor rule in China’s monetary policy and found that the adjustment coefficient of inflation rate to interest rate is less than 1, which indicates an unstable monetary policy rule. Under a system like this, the occurrence and development of inflation or deflation follows a self-realizing mechanism.7 Fan Mingtai used the 1992–2003 data to estimate China’s monetary policy response function and found that the degree of aversion to inflation pressure is less than the degree of tolerance towards output gap, and the monetary policy response function shows dynamic instability.8 Zhao Jinwen and Huang Yan, when examining China’s optimal non-linear monetary policy feedback rules, found that from 1993 to 2005, the central bank had an asymmetric policy preference, which has actually caused a significant tendency for China towards inflation.9 It can be seen that China’s monetary policy has dual goals of balancing inflation control and economic growth, and to a large extent, it has the characteristics of endogenously supplying money according to the needs of credit expansion and mobilization of savings.

7

Xie and Luo (2002). Fan (2004). 9 Zhao and Huang (2006). 8

11.1 The Formation of Mobilizational Monetary and Financial System …

307

Fig. 11.2 International comparison of monetization index (I)

Fig. 11.3 International comparison of monetization index (II). Source CEIC

What is truly amazing is that the expansion of bank credit under the state’s implicit guarantee in China has not brought about possible financial repression, but instead, has quickly promoted the monetization process and effectively mobilized savings, accelerated investment and economic growth, making a due contribution to achieving the nation’s economic take-off. In 2003, China’s per capita GDP reached US $ 1000, indicating entrance into the rank of middle-income countries. It also marked that the country’s task in economic take-off was being fulfilled in an accelerating manner. As shown in Figs. 11.2 and 11.3, China’s currency index measured by M2 as a percentage of GDP reached 1.23 in 1998, and the highest point in 2016 was 2.08. These numbers were not only much higher than those of other BRIC countries, but also higher than

308

11 Innovation and Development of China’s Financial Theory

Fig. 11.4 China’s domestic and gross national savings rate. Source CEIC

major developed economies. As shown in Fig. 11.4, taking the domestic saving rate as an example, China surpassed 40% in 1992 and approached or exceeded 50% in 2007–2013, and there was only a slight decline since 2014. The trend of China’s national saving rate is similar to the one of domestic saving rate. This seemingly abnormal effect that mobilized monetary and financial system had to bring about economic take-off is closely related to the endowment conditions of China’s demographic dividend at the beginning of reform and opening up and the corresponding economic growth mode with export-oriented industrialization. According to mainstream economics, the economic growth mode of export-oriented industrialization is in nature the accumulation of domestic factors and capital driven by the introduction of external technologies, with “learning-by-doing” constituting its core growth mechanism.10 Zhang Lei further analyzed the specific mechanism of the mobilizing monetary and financial system. Zhang Lei believes that China’s current mobilizing monetary and financial system is a government-led financial system, which is in nature a nation-provided mechanism with implicit guarantee, credit interest rate control and credit interest rate subsidies acting in concert with the replication of low-interest credit pooling equilibrium.11 State’s implicit guarantees, credit interest rate control and credit interest rate subsidies complement each other. Among them, credit interest rate control means that borrowers (entrepreneurs) with different degrees of credit risk pay the same interest rate (the essence of credit pooling equilibrium); state’s implicit guarantee maintains the existence of credit market, and credit interest rate subsidies encourage low-risk borrowers (entrepreneurs)’ entry into the credit market, which is helpful in improving the overall quality of borrowers (entrepreneurs) and reducing the 10

Research group on Economic Growth and Macroeconomic Stability, Institute of Economics, Chinese Academy of Social Sciences (2006). 11 Zhang (2010).

11.1 The Formation of Mobilizational Monetary and Financial System …

309

maintenance costs of credit market. Obviously, the advantage of such a governmentled financial system is that it can provide adequate credit support to all qualified borrowers, maximize the mobilization of resources, and promote export-oriented industrialization, or economic growth in a “learning-by-doing” manner. At the same time, the export-oriented industrialization, or the economic growth in a “learningby-doing” manner, provides the most suitable growth mode to the government-led financial system and promotes corresponding financial risk control. A large number of research results verify that the expansion of bank credit under the implicit guarantee of the nation has promoted China’s economic take-off. Through an empirical analysis of China’s financial development and economic growth over the past 17 years since reform and opening up, Wang Guangqian argued the role of financial expansion in promoting the economy and the negative impact of low financial efficiency on the economy.12 Zhang Jie and Zhang Xingsheng affirmed the extreme importance of subsidizing growth within the system (mainly state-owned enterprises) through financial repression to promote macroeconomic stability and growth.13 Zhang Jie also analyzed the possible mechanism of subsidizing growth within the system through financial repression, namely the special capital structure of state-owned banks. The most important component of state-owned bank capital is state credibility, which is reflected in the state’s provision of state-owned banks from bankruptcy and implicit deposit guarantees.14 The Economic Growth and Macro Stability Research Group of the Institute of Economics of Chinese Academy of Social Sciences has further summarized the financial system since China’s reform and opening up as the “troika” consisting of bank’s credit expansion under the state’s implicit guarantee, monetary policy that takes into account both economic growth and inflation control, and the fixed exchange rate system of RMB based on capital control. This research group has demonstrated the feasibility of accelerating investment and economic growth by tailoring of currency and finance at the “learning-by-doing” stage of economic development.15 At the same time, there are also a large number of research results showing a high degree of concern that the expansion of bank credit under the state’s implicit guarantee may cause credit expansion and economic fluctuations. Huang Da and Zhou Shengye defined the concept of credit inflation earlier and pointed out that credit inflation will eventually lead to inflation. The total amount of loan that triggers currency to be placed into circulation must be subject to the increase in the necessary amount of currency in circulation during current period.16 Exceeding this limit will result in excessive money supply, that is, credit expansion. The causes of excessive credit supply and inflation can be specifically summarized as the following. Due to inadequate system reforms, enterprises and various investment entities have allocated too much funds to fixed asset investment, and the rapid growth of banks’ fixed asset 12

Wang (1996). Zhang (1998), (2002). 14 Zhang (2003). 15 Research group on Economic Growth and Macroeconomic Stability, Institute of Economics, Chinese Academy of Social Sciences (2007). 16 Huang and Zhou (1981). 13

310

11 Innovation and Development of China’s Financial Theory

investment loans has contributed to the expansion of fixed asset investment, which has forced usage of credit expansion as an approach to ease the problem of insufficient corporate liquidity. The problem of inflation in credit and currency caused by excessive investment in fixed assets was raised by Jiang Yue earlier. Wang Yijiang demonstrates this theoretical possibility more strictly through a series of assumptions such as government’s pursuit of maximized output, government’s participation in allocation of enterprise resources, and the existence of information asymmetry between government and enterprises as regard to resource allocation.17 Qian Yanmin demonstrated that the output of representative state-owned enterprises is higher than the socially optimal level from the perspectives of lag of enterprise property rights reform and the corresponding insider control, based on which the mechanism of excessive credit supply and money supply is derived.18 By introducing the concept of soft budget constraints, Zhong Wei and Wan Yuanyuan built the micro-foundation of financial crisis based on credit distortion inflation, and proposed to prevent this type of financial crisis through such measures as reducing policy-induced burden, weakening government’s implicit guarantees and introducing competitive finance systems.19 Yi Gang and Lin Ming pointed out that state-owned enterprises’ prior maximized investment and correspondingly maximized expenses afterwards and is the main driving force for the expansion of China’s economy. However, this type of growth is extremely costly, the direct consequence of which is the formation of huge amount of non-performing bank assets.20 However, as Rioja and Valev pointed out, the relationship between finance and economic growth has different manifestations at different stages: In developed countries, economic growth is mainly promoted by affecting productivity, while in developing countries, capital growth is mainly used to promote economic growth.21 A large number of research results have focused on the specific conditions and mechanisms required by the expansion of bank credit under the state’s implicit guarantee to promote economic take-off. Lin Yifu, Sun Xifang, and Jiang Xia pointed out that an enterprise (or investment project) usually has three types of risks: technological innovation risk, product innovation risk, and entrepreneur (business) risk.22 An enterprise in an emerging industry will mainly face technological and product innovation risks, while an enterprise in a relatively mature industry may face more entrepreneurial (business) risks. Considering that financial markets are generally more efficient in diversifying and managing technological and product innovation risks, as a rising economy, when it comes to economic catchup, it is more appropriate for China to select a bank-dominant financial structure. Gong Qiang, Zhang Yilin and Lin Yifu continue to explore the above-mentioned relationships between growth stages, industrial risks and financial structure using

17

Jiang (1986), Wang (1994). Qian (1996). 19 Zhong and Wan (2001). 20 Yi and Lin (2003). 21 Rioja. and Valev (2004). 22 Lin et al. (2009). 18

11.1 The Formation of Mobilizational Monetary and Financial System …

311

a financing model for enterprises.23 The article found that the effective operation of financial markets needs to be preceded by a good market environment. And the soundness of a market environment depends on the perfection of relevant laws, credit systems, property rights protection, and information disclosure. Compared with financial markets, banks can more effectively protect their rights and interests and restrain corporate moral hazard by requiring enterprises to provide loan collateral and retain default liquidation rights. The article shows that when market environment inhibits the effectiveness of financial markets, banks are more conducive to promoting the development of industries for mature industries with lower risks. However, for innovative industries with higher risks, the financing efficiency of banks has dropped significantly. At this time, it is necessary to improve market environment in order to bring into play the role of financial markets in supporting industries. Che Dawei used a Schumpeter innovation model to analyze the causes and effects of financial regulation.24 On one hand, because of scarcity in funds at the intial stage of development, if developing countries choose to take leapfrog development and make capital-intensive investment at the same time, this will inevitably generate a special set of capital allocation system within the economy, and correspondingly evolve a financial management system characterized by capital rationing and low interest rates. On the other hand, the inefficiency of enterprises caused by low interest rates and credit rationing and the excessive protection of enterprises by the government will further cause capital concentration, thereby easily forming an investment-driven growth model characterized by excessive capital investment. Once reaching a certain extent of development, this model can easily push the economy into a growth trap. Yu Jingwen proposed the hypothesis of optimal financial conditions.25 In the initial stage of economic development, a country has more urgent needs in terms of industrialization and infrastructure construction. Government’s participation in allocation of financial resources can help thecountry’s economic take-off. The lack of a sound market system and the imperfection of the legal system will magnify market failures, while government’s participation in the process of resource allocation can correct these market failures. At this time, the optimal financial conditions are at a low level, and the adoption of financial repression policies is appropriate. With the development of economy, the cost of government’s intervention in the financial market has increased. On one hand, economic development has increased the difficulty of accurately grasping information in the economic system; on the other hand, the demand for external financing increased by sectors negatively affected by financial repression. If the financing conditions cannot be improved, the development of these sectors will be impaired. At the same time, the advancement of the marketization process and the improvement of the legal system have enabled market mechanism to better play the role of resource allocation. At this time, the level of optimal financial conditions will be raised, and continued financial suppression policies will be detrimental to economic development. This paper validates the hypothesis of optimal 23

Gong et al. (2014). Che (2011). 25 Yu (2013). 24

312

11 Innovation and Development of China’s Financial Theory

financial conditions through data of 63 countries from 1981 to 2005, and analyzes China’s financial reform on this basis. Specifically, this paper uses the financial suppression index weighted by 7 sub-indicators derived from Abiad et al., And uses the OECD countries in the sample as the reference group to estimate the optimal financial conditions, where these countries’ financial suppression indicators are used as the explanatory variables; then explanatory variables such as economic development level, population age structure, legal origin and so on are added.26 In the econometric model, this article refers to the growth model of Demirguc-Kunt et al. and takes the level of economic development as the explanatory variable, which is expressed in logarithm of GDP per capita calculated at constant prices in 2000. The key explanatory variable is the absolute value of the difference between the current degree of financial liberalization and the optimal financial condition.27 The article thus reaches the conclusion that there is a negative correlation between the two variables and points out that China has arrived at the matured stage for reducing financial repression. Zhang Chengsi and Liu Guanchun construct a neo-classical growth model that examines the relationship between financial structure and economic growth, by using the ratio of total stock market transactions to total financial institution loans as a proxy indicator of financial structure and validate the logic of Lin et al. (2009) based on the 1996–2012 panel data of 29 provinces, autonomous regions and municipalities in China.28 The regression results show that the impact of financial structure on economic growth is significantly positive, that is, the rise in the relative importance of financial markets in the financial system has been conducive to rapid economic development. Obviously, despite the cost of distorting the industrial structure, the expansion of bank credit under the state’s implicit guarantee still contributed to the economic take-off. The above analyses show that the choice of bank credit expansion under the implicit guarantee of the state as a mobilizing monetary and financial system is actually a concrete application of Smith-Young’s theorem.29 According to the theorem, growth is supported by the specialized division of labor among various types of increasing activities. As the economy grows, a larger market enables enterprises to pay the fixed costs needed to produce a larger amount of intermediate inputs, which in turn will further increase the productivity of labor and capital, thereby maintaining economic growth. Therefore, as long as the monetary and financial systems can effectively mobilize savings, accelerate enterprises’ investment in fixed assets, make full use of the demographic dividend, and deepen the specialization of labor, they can accelerate economic growth and achieve economic take-off.

26

Abiad et al. (2009). DemirgucKunt et al. (2011). 28 Zhang and Liu (2015). 29 Young (1928). 27

11.2 The Conflict Between Mobilizing Monetary and Financial System …

313

11.2 The Conflict Between Mobilizing Monetary and Financial System and the Change in the Way of Economic Growth in China According to the previous analysis, the expansion of bank credit under the implicit guarantee of the state is undoubtedly an important part of China’s economic growth miracle. However, there is no free lunch in the world. With the completion of the economic take-off, the mobilizing monetary and financial system has increasingly become an obstacle to the transformation of China’s economic growth pattern, which is exacerbated by the advent of an ageing population. With the advancement of industrialization and urbanization, after nearly 30 years of rapid growth, China has also begun to enter the third stage of population transformation, i.e. the ageing era. The impact of the gradual disappearance of the demographic dividend on China’s growth deceleration has become more obvious since 2011, thus posing an era challenge to reconstruct growth momentum. Cai and Wang pointed out that as the trend of China’s population dependency ratio changed from falling to increasing around 2013, the traditional demographic dividend tended to be disappearing.30 The Frontier Research Group of Economic Growth in China believes that since the reform and opening up, China’s demographic dividend due to the increase in labor supply is disappearing.31 At present, China’s labor supply has entered an “inflection point” area with absolute reduction. After 2015, the continuous decline in the working age population and the corresponding reduction in labor supply will become the norm. The prediction of the disappearance of demographic dividend in academia is also confirmed by relevant statistics. By the end of 2012, the absolute number of workingage population in China had declined for the first time. The growing weakness of China’s mode of “learning-by-doing” development based on domestic factors and capital accumulation indicates that it has become imperative that this growth mode needs to be changed. Lee et al. (2012) verified that even when measured by the high standards of Asian economies with characteristics of investment-oriented economic growth, China’s actual investment rate still appears to be high, with severe problems in intertemporal mismatches and excessive investment.32 China’s predictable investment standard for more than 30 years should account for 33–43% of GDP, but China’s actual investment fluctuates within the range of 3–49% of GDP. However, it was only after 2000 that China’s problem in intertemporal mismatch became prominent, and it became even more serious after the implementation of a series of economic stimulus programs in 2009 in response to the international financial crisis. Starting from thetheory of investment in macroeconomics and drawing on the production-based asset pricing model in financial economics, Liu Renhe, Chen Yingnan, Ji Xiaomeng, and Su Xuejin construct a return on capital model that includes the adjusted cost 30

Cai and Wang (2005). Research group on Economic Growth and Macroeconomic Stability, Institute of Economics, Chinese Academy of Social Sciences (2006). 32 Lee et al. (2012). 31

314

11 Innovation and Development of China’s Financial Theory

of physical capital, and then calculate the return on domestic capital through taking into account China’s macro aggregate data.33 Globally speaking, once capital adjustment costs are added, China’s return on capital may not be significantly higher than other economies. It is worth noting that, excluding the production tax and corporate income tax, the return on capital taking into account the adjustment costs has decreased from 9.82% in 2008 to 3.02% in 2014. Although the reform and development of China’s financial marketization has been accelerated since 2005, it has yet to make sufficient contributions to promote the transformation of the growth mode. (1)The acceleration of market-oriented reform of interest rates. China has long implemented credit interest rate controls. The types, levels, and floating ranges of interest rates on deposits and loans of financial institutions are strictly controlled, and the corresponding interest rate adjustment cycle is also relatively long, which can reach 2–3 years.34 Since the opening of the interest rate for interbank lending market in 1996, China has experienced a long process of credit interest rate marketization. The lagging situation in the reform of the marketization of credit interest rates did not change until October 2004 after the lifting of restrictions on the rise of loan interest rates other than urban and rural credit cooperatives. On June 8, 2012, while lowering the benchmark deposit and loan interest rates, the central bank adjusted the upper limit of the floating range for deposit interest rate to 1.1 times the benchmark interest rate. It is an important step towards realizing interest rate marketization reform after the opening of the upper limit of loan interest rates and the lower limit of deposit interest rates in October 2004. In October 2015, the central bank lifted the control of the deposit interest rate ceiling of commercial banks and other financial institutions. Although the central bank will continue to publish the benchmark deposit and loan interest rates, theoretically, commercial banks can determine the deposit and loan interest rates on their own, which marks that the marketization of credit interest rates has taken its form.35 In the meanwhile, as for other financial products such as those in interbank lending, repurchase market, bond market, exchange market, and online financing like P2P, their prices are reached through mutual understanding of buyers and sellers in their own transactions, whose implicit interest rates are all market-based interest rates. Market interest rates in various periods, including shortterm, medium-term, and long-term market interest rates, form a complete structure 33

Liu et al. (2018). Please see CEIC “Compilation of Statistical Data of the 55th Day of the People’s Republic of China (1949–2004)” and “China Statistical Yearbook (2007)” for changes in lending rates of financial institutions nationwide. 35 The course of Interest rate liberalization in China: In 1996, the ceiling of inter-bank lending rate was abolished; In 1997, the repurchase rate was liberalized; In 1998, reform the discount rate formation mechanism and increase the ceiling of loan interest rate; In 1999, different institutions were gradually allowed to negotiate interest rates; In 2000, foreign currency deposit and loan interest rates were further liberalized. In 2004, the floating range of lending rates of financial institutions was expanded. In June 2012, the upper limit of the floating range of deposit interest rate was adjusted to 1.1 times of the benchmark interest rate. On November 21, 2014, the upper limit of the floating range of deposit and loan interest rates was adjusted to 1.2 times of the benchmark interest rate. On October 24, 2015, the upper limit of deposit interest rate fluctuation will no longer be set. 34

11.2 The Conflict Between Mobilizing Monetary and Financial System …

315

of interest rate periods, and are playing an important role in the pricing and allocation of financial assets. (2) The launch of the split share structure reform. On April 29, 2005, China Securities Regulatory Commission launched the reform of split share structure. By the end of 2007, the reform of split share structure was basically completed. With the completion of the share split reform, the problems of split interests and prices of state-owned shares, legal person shares, and tradable shares no longer exist. All types of shareholders enjoy the same right to circulate shares and the right to return on stock prices. All types of stocks are priced according to market mechanisms, which has become the basis of common interests for all types of shareholders. Therefore, the split share structure reform has laid a market-oriented foundation for the further development of China’s capital market to optimize the function of capital allocation, so that China’s capital market no longer has an essential difference from the international market in terms of market-based institutions. (3) The relaxation of the RMB foreign exchange management system. The reform of China’s foreign exchange management system mainly follows the direction of forming a more flexible RMB exchange rate decision-making mechanism and stabilizing the exchange rate. On January 1, 1994, the official exchange rate of Renminbi and the foreign exchange swap price officially merged, and China began to implement a single, managed floating exchange rate system based on market supply and demand. On July 21, 2005, China introduced reforms to improve the RMB exchange rate mechanism. The RMB exchange rate is no longer pegged to a single US dollar, but is based on market supply and demand. The RMB exchange rate is managed and adjusted by referring to a basket of currencies to calculate changes in the RMB multilateral exchange rate index, thus maintaining the basic stability of the RMB exchange rate at a reasonable and balanced level. On August 11, 2015, after China announced the decision of reform “to improve the central parity quotation of the RMB against the US dollar”, the volatility of the RMB exchange rate suddenly increased. In order to alleviate the pressure of RMB depreciation, the Chinese government has publicly emphasized many times its determination to maintain the stability of the RMB exchange rate, and has continuously improved the quotation mechanism for the central parity of RMB against the US dollar. At the end of May 2017, T “reverse cycle factor” was added to the original “closing price + a basket of currency exchange rate changes” quotation model to hedge against procyclical fluctuations in market sentiment. China’s current financial reforms and development are not adequate to promote the transformation of growth mode, which is first reflected in its stock market, as the barometer of economic development. As shown in Fig. 11.5, compared with China’s ever-growing monetization process, the capitalization rate measured by the total market value of Shanghai and Shenzhen stocks as a percentage of GDP has experienced twists and turns since it reached a high of 1.2 in 2007, and has only arrived at 0.69 until 2017. At the same time, China’s existing financial reforms and development are not robust enough to promote the transformation of growth mode, which is more concentrated in the distortion of capital allocation, especially the inability to effectively carry out innovative financing. Li Ke and Xu Longbing used the introduction of short-term financing bills as a natural experiment to study the

316

11 Innovation and Development of China’s Financial Theory

Fig. 11.5 China’s capitalization rate. Source CEIC

impact of changes in corporate financing constraints caused by financial innovation on the company’s operating performance, thereby providing micro-evidence for the relationship between financial development and economic growth.36 This article found that the improvement of corporate financial constraints had a significant positive impact on operating performance. On average, companies with higher credit ratings have grown faster in terms of operating performance compared with companies with lower credit ratings, with asset return increased by about 4%, and sales yield increased by about 13%. The article further provides empirical evidence to explain the economic mechanism of the company’s financing constraints to improve the impact on operating performance, and found that after the introduction of short-term financing bonds, companies with higher credit ratings took advantage of the potential financing advantages of this new financial instrument and Improved their debt capacity, especially short-term debt capacity. Due to the improvement in debt capacity, companies with higher credit ratings have improved their competitiveness and, in turn, adopted a more aggressive business strategy, leading to substantial improvement in investment rate and sales growth rate. The study helps to verify that imperfect financial market has led to corporate financing constraints, restricted corporate development, and thus hindered economic growth. Qu Wenzhou, Xie Yalu, and Ye Yumei confirmed that China’s mobilizing monetary and financial system has neither solved 36

On May 23, 2005, the People’s Bank of China issued the Measures for The Administration of Short-term Financing Bonds, allowing enterprises to issue short-term financing bonds in the interbank bond market. Short-term financing bonds refer to the securities that enterprises issue and trade in the inter-bank bond market and agree to repay the principal and interest within a certain period of time in accordance with the conditions and procedures provided for in the Measures. However, not all companies can issue short-term financing bonds, and only companies with high credit ratings can use these financial instruments to finance their businesses. Therefore, the innovation of shortterm financing instruments creates financing advantages for enterprises with high credit rating and relatively transparent information. Li and Xu (2011).

11.2 The Conflict Between Mobilizing Monetary and Financial System …

317

the financing constraints of listed companies nor the agency problem.37 This paper draws on the methods of Ascioglu et al. and explores the relationship between information asymmetry, financing constraints, and investment-cash flow by using PIN (probability of informed based trading) as a proxy variable for information asymmetry.38 The study found that companies with very high and low financing constraints both showed higher investment-cash flow sensitivity. This means that China’s listed companies may have experienced both underinvestment problems caused by financing constraints and overinvestmentproblems caused by agency costs. When the company’s level of information asymmetry is low, lower financing cost enables the company to obtain sufficient funds. The excessive investment behavior of the company’s management has led to higher investment-cash flow sensitivity; when the degree of information asymmetry is high, the financing cost is high, and the sensitivity of investment-cash flow is mainly caused by financing constraints. A considerable amount of research has confirmed that China’s current monetary and financial system shows weak support to innovative financing. Ju Xiaosheng, Lu Di, and Yu Yihua used the data of industrial enterprises in China from 1998 to 2008, and found that high adjustment costs and unstable financing sources restricted the innovation activities of enterprises, forcing enterprises to smooth by adjusting the operating costs.39 According to the SA index method proposed by Hadloek and Pierce, this paper measures the relative financing constraints of enterprises, and finds that the more severe the financing constraints of enterprises, the more prominent the smoothing effect of working capital on innovation.40 Deng Kebin and Zeng Haijian further discussed the special causes of financing constraints of Chinese listed companies.41 Their article proposes that there is a big difference between “financial constrain” and “financial dilemma” (also called “financial distress”). According to the definition of Fazzari et al. (1988), financing constrain refers to the situation where the external financing cost of an enterprise is too high due to incomplete market, which prevents the investment of the enterprise to reach its optimal level.42 Financial distress generally refers to the situation in which the enterprise’s needs for all funds cannot be met. Obviously, the increased risk of financing constraints is closely related to incomplete market, thus making it indivisible. This type of risk with non-dispersible characteristic requires that enterprises, especially small and medium-sized entrepreneurial enterprises, can only effectively relax the corresponding financing constraints if they actively innovate and cultivate stronger technological innovation capabilities and production efficiency. Conversely, if the relaxation of financing constraints does 37

Qu et al. (2011). AsliAscioglu et al. (2008). 39 Ju et al. (2013). 40 Similar to the KZ method, SA index divides the financing constraint types of enterprises according to the financial reports of enterprises, but it can be constructed only by using two variables that have little change over time and strong exogeneity: − 0.737:1 = Size + 0.043 sig-0.04 Age. Deng and Zeng (2014) further discussed the special causes of financing constraints of Listed companies in China. Hadlock and Pierce (2010). 41 Deng and Zeng (2014). 42 Fazzari et al. (1988). 38

318

11 Innovation and Development of China’s Financial Theory

not encourage companies to be more willing to take risks and engage in innovative activities, but simply pursue projects that require sufficient capital investment, it may lead to misallocation of funds, thereby endangering the growth of economic growth. However, although this article uses an index designed strictly based on the definition of financing constraints to better calculate the financing constraints of listed companies in Shanghai and Shenzhen, no evidence was found as to the effect that the relaxation of financing constraints has in encouraging companies to take risks and pursue innovation. The financing constraints of Chinese enterprises are exogenous to the market, largely due to government intervention in the market, rather than market friction and liquidity constraints caused by market competition. This has made financing constraints a systemic risk exogenous to the market system in China. Although investors assuming this risk can obtain corresponding stock excess returns, the nature of exogenous systemic risk determines that it cannot affect the technological innovation behavior of enterprises in the market system. It is because China’s financing constraints have fundamental characteristics that are external to the market, solving the problem of financing constraints should not only focus on eliminating market friction (including friction in financial market), but more importantly, breaking the barriers of financing channels among enterprises, so that risks of financing constraints arising in the market can be resolved in the market. China’s current monetary and financial system cannot meet the requirements of the transformation of growth mode, and in general, this is closely related to the lag of financial reform. First, the excessively long interest rate marketization reform has distorted the allocation of funds and harmed economic growth. Similar to all economies that have adopted progressive market-oriented reforms of interest rates, China has also established a reform strategy of steadily advancing “first foreign currency, then local currency; first loan, then deposit; first long-term large amount, then short-term small amount”. However, since the liberalization of the interbank lending market interest rate in 1996, China’s interest rate liberalization reform has gone through 20 years, and the reform process is still relatively slow compared to other major countries. For example, it took the United States 16 years from the liberalization of interest rates on large deposit certificates of more than US $ 100,000 within 90 days in 1970 to the cancellation of the Q Regulations in 1986; it also took Japan 16 years from allowing the listing and circulation of government bonds in 1977 and liberalizing interest rate of interbank lending market in 1978, to lifting restrictions on all deposit interest rates in 1994; It also took 16 years for South Korea from liberalizing commercial paper discount rates in 1981 to fully realizing marketization of interest rates in 1997 after two stages of market-oriented reforms. In fact, with the exception of France and India, who have completed market-based interest rate reforms using 20 years, most countries carrying out progressive reforms have achieved the goal of fully opening interest rates within only about 10 years. China has paid a lot of price due to the overly long path taken for market-oriented reform of interest rates. Interest rate distortion is one of the important root causes. Chen Kunting, Zhou Yan, and Huang Jing used the DSGE cycle model in their study

11.2 The Conflict Between Mobilizing Monetary and Financial System …

319

with a focus on the negative effects of interest rate distortion.43 As the Mises-Hayek Industrial Volatility Model points out, credit expansion itself has management problems involving inter-temporal mismatch risks (Brian Snowden, Howard Wen, Peter Wennatch, 1998).44 Credit expansion is essentially a measure taken by financial sector to render excessive monetary support for investment projects that yield lower returns through driving down interest rates. Due to the lack of consumer willingness to save, such credit expansion will eventually lead to hyperinflation and eventually be forced to end. At that time, as the risk premium for inter-rate interest rate mismatches soars, the economy and investment will begin to adjust for contraction. The state’s implicit guarantee for bank credit expansion has further exacerbated the risk of mismatches over time. As of the “interest rate distortion” mentioned in this article, in addition to the traditional definition of “intertemporal mismatch”, that is the real level of interest rate (i.e., the actual natural interest rate level) expressed as the actual value of the policy interest rate implemented in the real economy (excluding inflation) in deviation from the real interest rate level of the medium- and long-term economic equilibrium, also included the actual interest rate difference between deposit and loan spreads deviating from the long-term equilibrium. The study found that: (1) there is an obvious maturity mismatch, and the negative impact of real savings interest rates only leads to economic growth in a very short period of time and with a very limited range, and then forms a large depression that far exceeds the growth rate. (2) The average long-term actual saving interest rate is close to zero, which not only causes inequality in income distribution, but also affects long-term growth. Too low a real saving interest rate leads to a weak willingness to save in the private sector, thereby reducing the amount of loanable funds in the credit market, which in turn reduces investment and ultimately affects the long-term economic growth. (3) The impact of financial market friction (deposit and loan spreads) may change the medium- and long-term economic development trends. The experiment shows that an increase of 1% in spreads will be converted into an extrusion of investment and consumption, of which the most is extrusion, reaching 81% of all extrusion; and only 1% of the remaining 19% is undertaken by the entrepreneurial department, while 18% forms a crowd-out of the general household consumption. More research has explored the specific mechanisms by which interest rate liberalization affects the economy and finance. Under the framework of a natural experiment, Jian Ze, Qian Chunhui and Yu Dianfan examined the impact of changes in the banking system on China’s industrial restructuring after joining the World Trade Organization.45 The article finds that the marketization of the banking sector has promoted corporate-level restructuring and improved total factor productivity. The reason is that after joining the World Trade Organization, the reform of property rights of the banking sector, inter-bank competition, and the government’s deregulation of the banking sector have changed the behavior of banks and the allocation of credit capital to a certain extent. On one hand, from the perspective of maximizing their own profits, banks that gradually 43

Chen et al. (2015). Brian et al. (1998). 45 Jian et al. (2013). 44

320

11 Innovation and Development of China’s Financial Theory

gain independent economic interests and operating autonomy tend to provide credit capital to more profitable companies (Berglof and Roland 1997), thereby reducing the banks’ incentives in rescuing enterprises with lower efficiency.46 On the other hand, as banks begin to become independent economic entities, individual banks may face liquidity constraints, which, to a large extent, may limit their effort in rescuing enterprises with lower efficiency (Dewartripont and Maskin 1995)47 Moreover, the possible bargaining between banks in the process of mutual borrowing also makes it unprofitable for the reformed banks to join together to finance inefficient enterprises (Povel 1995).48 As a result, important changes have taken place in bank behavior and the allocation of credit capital. With such changes, credit capital has been allocated to enterprises with stronger profitability, thus hardening budget constraints at the enterprise level. Obviously, the changes in the banking system have different effects on enterprises with different profitability. While promoting the reconstruction of enterprises with stronger profitability and the growth of total factor productivity, these changes have exacerbated the differentiation of production efficiency among different enterprises in the industry, which in turn has stimulated industrial-level reorganization and cross-enterprise resource reconfiguration. In this creative destruction process, the output creation rate is much higher than the output destruction rate, and the efficiency of resource allocation across enterprises shows a clear trend of improvement. As a result, the marketization of the banking sector has driven the growth of China’s industrial sector and the improvement of total factor productivity. Jin Zhongxia, Hong Hao and Li Hongjin focus on the study of the benefits of marketization of interest rates, especially deposit interest rates through construction, calibration and simulation of Stockman’s Cash First Dynamic Stochastic General Equilibrium Model (DSGE).49 The results of the study show that the rise in nominal deposit interest rates will effectively suppress the growth of investment and capital stock by increasing the actual interest rate of deposits and the marginal cost of corporate capital, and increase the proportion of consumption in GDP, which is conducive to improving the economic structure and promoting sustainable economic development; In the face of external shocks (regardless of whether it is a technical shock or a monetary policy shock), the rise in interest rates can also reduce macroeconomic fluctuations through economic restructuring, which is conducive to the long-term stable growth of the macro-economy;After the marketization of interest rates, the real economy’s response to monetary policy shocks will be greatly strengthened, which also means that the transmission channels for monetary policy interest rates will be more smooth. On the contrary, after the market-based interest rate reform, the concern that the increase in nominal deposit interest rates will impact economic development and cause negative effects on investment and macroeconomic growth has not been supported by the model. It can be seen that although many countries have experienced varying degrees of financial crisis and economic turmoil at the same 46

Berglof and Roland (1997). Dewartripont and Maskin (1995). 48 Povel (1995). 49 Jin et al. (2013), Stockman (1981). 47

11.2 The Conflict Between Mobilizing Monetary and Financial System …

321

time or shortly after the market-based interest rate reform, they cannot be attributed to the market-based interest rate reform itself; inappropriate macroeconomic policies and failed financial supervision should be more responsible. Obviously, the serious lag in interest rate marketization reform will pay a corresponding price. Ji Yang, Xu Jianwei, and Zhang Bin draw on the research of He and Porter and Xu, using a dual-track interest rate model of bank oligarchic competition. After comparative static analysis, parameter calibration and numerical simulation, a micro-mechanism is depicted where “planned track” deposit interest rate affects the “market track” loan interest rate.50 The study believes that liberalizing the deposit interest rate ceiling is a key step to promote the marketization of interest rates, whose mechanism of action can be summarized into two points (1) Relaxing the upper limit of the deposit interest rate will increase the deposit interest rate, which will increase the income of the residential sector and help banks attract more loanable funds, thereby alleviating the pressure of loan supply and reducing interest rate of loans. (2) If the entry threshold of the banking industry is appropriately lowered while maintaining the upper limit, it will not reduce financing costs. This is because the control over deposit interest rate restricts banks’ means of competition. Banks cannot raise interest rates to attract deposits, and lack corresponding loanable funds to lower loan interest rates. In addition, under the conditions of free market access, the relaxation of the deposit interest rate ceiling will cause some banks to go bankrupt. However, due to China’s strict approval system for the establishment of banks, the number of banks is far lower than the long-term equilibrium number of banks, and in reality there is no bankruptcy risk. Therefore, the cost of marketization of interest rates may actually be exaggerated. Liu Liya, Yu Jing, Yang Jinqiang, and Zhu Xiaoneng built a monopolistic competition model to optimize the new credit decision in line with the characteristics of the Chinese banking industry, based on the loan supply model framework proposed by De Young. They explores the functioning mechanism by which competition affects the credit structure of commercial banks in the process of interest rate liberalization, and through the analysis of microdata of China’s banking industry from 2007 to 2014, the following conclusions are reached: (1) Competition is conducive to adjusting the bank’s credit structure, but it will prompt the bank to pursue the risky behavior of credit expansion; (2) Small and medium-sized banks with low liquidity levels and low capital adequacy ratios have more active credit structure adjustments and are more likely to seek credit expansion; (3) Increasing competition has prompted banks to further increase the allocation of credit resources for long-term loans and increase the risk of maturity mismatch.51 Therefore, the article recommends that regulators should make full use of competition and differentiated supervision methods to guide business transformation of commercial banks, and improve the banking industry’s risk management measures under the framework of macro-prudential management.

50 51

Ji et al. (2015), He et al. (2014), Porter and Xu (2013). Liu et al. (2017), DeYoung et al. (2005).

322

11 Innovation and Development of China’s Financial Theory

Fig. 11.6 Scale and structure of social financing. Source CEIC

Secondly, the serious lag in the development of the financial market not only slowed the reform of market-based interest rate, but also greatly reduced its effectiveness. The most important institutional reason for the lagging financial market development is that it is still treated as a bank credit facility. As shown in Fig. 11.6, although the proportion of new RMB loans in the whole society has declined from 92% in 2002 to the lowest point of 51% in 2013, the proportion of new foreign currency loans, new entrusted loans, new trust loans and corporate bond financing rose steadily, but the proportion of new RMB loans returned to 71% in 2017. The calculation by Zhang Yong, Li Zhengjun, and Gong Liutang show that China’s average state-owned bank credit financing accounted for more than 75% of total social financing in 2004– 2013, indicating that state-owned bank credit financing with deposit interest rate control has become the main body of financing, and free-priced market financing is in a secondary position.52 (1) In order to adapt to the interest rate control of banks and the interference of the long supervision of corporate bonds, the development of corporate bond market lags behind. In March 1987, the State Council promulgated the “Interim Regulations on the Management of Corporate Bonds”, which stipulates that the issuance of corporate bonds must be approved by the People’s Bank of China, and the People’s Bank of China, together with the State Planning Commission and the Ministry of Finance, formulate the total quota of annual corporate bond issuance. (2) As a benchmark for the issuance of interest rates in the bond market, the issuance method and depth of the treasury bond market also have obvious shortcomings, which further restricts the development of the corporate bond market. In July 1981, China reissued government bonds that had been interrupted for 23 years. At that time, treasury bonds were 52

Zhang et al. (2014).

11.2 The Conflict Between Mobilizing Monetary and Financial System …

323

characterized by a long period (10 years) and non-transferability. They paid lower interest to companies that bought the bonds and paid higher interest to residents. This near-administrative apportionment of treasury bonds is only gradually transitioning to a more market-oriented issuance as the Treasury bond transfer market is opened.53 (3) The regulatory system of the Chinese stock market has always been marked by the tone of rigid regulation. This is reflected in the stock listing, issuance, equity allocation and the confirmation of delisting qualifications. Taking stock issuance as an example, from 1990 to 2000, for the issuance of stocks, the regulatory agency adopted an approval system for quota index management, that is, quotas are allocated and distributed to provincial governments or industrial authorities, who would recommend companies within the quota limits, and then The China Securities Regulatory Commission approves the issuance of shares by enterprises. The approval system for new share issuance was formally implemented in March 2001, and a responsibility mechanism was established with mandatory information disclosure as the core, which stressed prior accountability, legal disclosure and subsequent investigation. Compared with the quota approval system, the main progress of the approval system is to increase the degree of procedurization and standardization of the issuance review work, but the essence of quota approval has not been fundamentally changed. At the same time, the pricing system for stock issuance has gradually changed from executive-led to market-led. It is this over-regulation that seriously restricts the development of financial markets. A large number of studies have confirmed that due to the heavier color of alternative market regulation, in the three years from 1996 to 1998, the China Securities Regulatory Commission stipulated that the necessary condition for listed companies to conduct follow-up financing (allotment) is that the return on net assets must reach 10% or more for three consecutive years. Chen Xiaoyue, Xiao Xing and Guo Xiaoyan used the modified Jones model test to confirm that there existed profit manipulation behaviors by listed companies during this period to meet allocation requirements of regulatory departments.54 The article further pointed out that there is a great relationship between the profit manipulation behavior of listed companies and the rigid and simple allotment qualification standard. From 1994 to 1995, because the overall economic situation was relatively optimistic, it seemed too lax to use the standard of 10% of three-year average net asset after-tax profit rate. A stricter standard of 10% must be reached. This was originally intended to protect the interests of investors, but in actual implementation, because this is a clear quantitative standard, coupled with the reverse change of the overall economic situation, this provision does not really achieve the purpose of protecting investors. Instead, it encourages listed companies to reach new standards through profit manipulation. Therefore, the article proposes to expand the scope of performance evaluation of

53

In 1988, The State Council of the PRC decided to gradually open the transfer market of Treasury bonds by stages. On April 21, the first batch of trials to implement over-the-counter trading of Treasury bills began simultaneously in seven cities, including Shenyang. At the beginning of 1990, the pilot trading of Treasury bills was gradually expanded to 92 cities nationwide. 54 Chen et al. (2000).

324

11 Innovation and Development of China’s Financial Theory

listed companies and change the original single profit indicator to a multiple indicator including profit amount and profit structure, which can improve the quality of information disclosure. Huang Zhizhong and Chen Long used the sample companies listed on the Shanghai Stock Exchange before the end of 1994 and used a variety of statistical methods to analyze their profit reports for six consecutive years. Their research found that: (1) The profit of listed companies and the profit margin of total assets do not follow the random walk process and the random walk process with growth factors. (2) From the statistical analysis of the two sample combinations with strong negative self-correlation of profit increment, adding the profit increment variable to the model greatly improves the model fit. These statistical test results confirmed the existence of earnings manipulation issues for listed companies during this period, and at the same time showed that the new regulations of the CSRC on allotment eligibility did not improve the quality of information disclosure.55 In the “Notice on Issues Related to the Allotment Work of Listed Companies” promulgated by the CSRC on March 26, 1999, there are new regulations on the allotment eligibility of listed companies: the original requirement of 10% annual net asset after-tax profit rate has been changed to the requirement that the three-year average net asset after-tax profit rate should be more than 10% with each year’s rate being no less than 6%. Wang Yaping, Wu Liansheng and Bai Yunxia used the report earnings information of all report samples, inferred that the report earnings follow a mixed normal distribution, and used parameter estimation to infer the frequency and magnitude of earnings management at the threshold. The conclusion of the study shows that all listed companies in China had surplus management in order to avoid reporting losses from 1995 to 2003. In 2001–2003, an average of 64.4% of the loss-making companies carried out earnings management at the threshold of 0 and achieved the purpose of avoiding reporting losses. The average earnings management margin was increased by ROA data 0.065.56 Chen Xinyuan, Ye Peng, and Chen Donghua presented new adverse evidence on China’s “substitution (market) regulation” from the perspective of rigid and simple allotment eligibility qualification incentives for “opportunistic asset restructuring”.57 Ping Xinqiao and Li Ziran proved through theoretical models that, under the premise that the quality of listed companies follows normal distribution, if the CSRC determines the refinancing eligibility of listed companies based on the average value of the ROE estimated by experience, it is very dangerous. Instead, it will increase the frequency of false information disclosure.58 In addition to revealing the distortion of rigid control on the quality of information disclosure of listed companies, some research results questioned the rationality of the rigid control rules themselves. Wang Liyan and Liu Junxia inspected the difference in the double reporting of net profits of AH companies from 1994 to 2000, and found that there were significant differences between the mainland and Hong Kong accounting standards before 1998, but the implementation of the new accounting standards in mainland 55

Huang and Chen (2000). Wang et al. (2005). 57 Chen et al. (2003). 58 Ping and Li (2003). 56

11.2 The Conflict Between Mobilizing Monetary and Financial System …

325

China in 1998 has not been able to eliminate or significantly reduce double reporting discrepancies.59 The analysis of the test results shows that the accounting system in 1998 was not completely the accounting rules required by the operators of listed companies, which was an important reason for the difference. The 1998 accounting rules were not the result of the Nash equilibrium chosen by the stakeholders, and were naturally easily deviated by the operators. In the process of formulating this rule, the drafting report, compiled by accounting standard drafters based on information gathered by themselves and the comparative research report provided by the Deloitte Consulting Expert Group, was not disclosed to the public, which has seriously affected the participation of stakeholders in the process of formulating accounting standards. Jiang Guohua and Wang Hansheng used the model to verify that the losses and the continuous losses are not directly dependent on the company’s long-term profitability, but directly related to the index of profit and loss stability.60 Therefore, a special treatment policy (commonly known as ST policy) for listed companies that have suffered losses for two consecutive years may not be able to serve the function of promoting the development of listed companies and regulating the stock market. Based on the sample data of Chinese listed companies from 1996 to 2006, Li Yuanpeng found that the so-called mystery of the divergence between the economic cycle and the operating performance of listed companies is simply rooted in the profit manipulation at the time of IPO.61 Obviously, due to the heavier tone of alternative market regulation and insufficient requirements for the scope and authenticity of mandatory information disclosure, the role of China’s listed companies in regulating information disclosure system, developing capital markets and enhancing capital allocation is greatly confined.62 In sharp contrast to the limited improvement in information disclosure system of listed companies, the shareholding reform, once recognized as one of the biggest institutional flaws in China’s capital market, has achieved great success due to full compliance with the marketization principle. In fact, the original intention of the split-share design is to the development towards the internal capital market. The so-called internal capital market refers to the mutual holding of shares between companies and internal transfers. The open secondary market is relatively underdeveloped. Originally, if such capital market development direction is adhered to, China’s financial system is likely to evolve into a Japanese and German model with a all-round banking system, characterized by a sponsored banking system, mutual ownership of companies, open capital markets, and especially the lagging development of the stock market. However, because of the rapid development of the stock market, especially due to the fact that the state-owned listed companies continue to abandon the right of allotment, the development direction of the capital market has become unsustainable, thus shifting to a more market-oriented orientation. Based on the analysis framework of investor protection, Xin Yu and Xu Liping used marketization index and government effectiveness index as substitute 59

Wang and Liu (2003). Jiang and Wang (2005). 61 Li (2009). 62 He and Xia (2005), Liu and Xiong (2005). 60

326

11 Innovation and Development of China’s Financial Theory

variables of governance environment respectively, to discuss the role of governance environment in the process of determining the price and efficiency of stock reform. The results found that a better governance environment would result in a “corporate governance premium” for listed companies, which would significantly reduce the cost of shareholding reform.63 Yang Dan, Wei Zhenxin, and Ye Jianming introduced a general method of stock price correction for non-tradable shares, that is, the value of each non-tradable share is assumed to be a proportion of the tradable shares, and this proportion is estimated as an unknown parameter. When using this correction method to study whether the full-circulation reform fairly compensates shareholders of tradable shares, it is found that only companies with a small ratio of non-tradable shares have fair compensation.64 Liao Li and Zhang Xueyong used quarterly data before and after the shareholding reform of Chinese listed family companies and the empirical evidence shows that full circulation can effectively correct the interest orientation of the ultimate controller of a listed company and restrain its behavior of hollowing out.65 Although due to factors such as the imperfect governance structure of listed companies, there is still a loss of efficiency in the split share structure reform, but overall, the split share structure reform has achieved success under the premise of maintaining market stability.66 The stagnation of financial market development has caused a great negative impact on the reform of interest rate liberalization. Some studies have shown that the lagging reforms in the real economy and financial markets have hindered marketization reforms of interest rates. Zhang Yong, Li Zhengjun, and Gong Liutang used a new Keynesian DSGE model that introduced a dual-track interest rate system with a financing premium to verify that the dual-track interest rate system is endogenously determined by the simultaneous existence of highly distorted product markets and highly distorted financing in China.67 Under the condition that the efficiency of the financial market and commodity market has not been fundamentally improved, and the soft budget constraint of the non-financial sector has not been eliminated, the hardening of the soft budget constraint of the state-owned commercial banks and the promotion of the reform of interest rate marketization will bring the situation where not only high market distortions will drive up financing premiums and financing costs, but also state-owned enterprises and local financing platforms with soft budget constraints will further squeeze financing opportunities in the private sector that is sensitive to interest rates, which will exacerbate the inefficiency of capital allocation. Therefore, industrial monopolies should be broken, so that state-owned enterprises can truly become self-restraining and self-stimulating market economy entities, and the market’s function of allocating resources will be continuously enhanced; then, the proportion of direct financing can be increased, government intervention in the private financing sector can be decreased, institutional friction in the financial market can be reduced, and the operating efficiency of 63

Xin and Xu (2007). Yang et al. (2008). 65 Liao and Zhang (2008). 66 Zhao et al. (2006), Shen et al. (2006). 67 Zhang et al. (2014). 64

11.2 The Conflict Between Mobilizing Monetary and Financial System …

327

the financial market can be improved. Only under such conditions can full marketization of interest rates be realized and the welfare losses be minimized. Chen Yanbin, Chen Xiaoliang, Chen Weize constructed a dynamic general equilibrium model with heterogeneous production efficiency shocks and corporate financing constraints through the introduction of “distortion tax”, and used this to study the impact of interest rate control on the imbalance of aggregate demand structure and the macroeconomic effects of market-oriented reforms of interest rates.68 The specific design of the distorted tax is: because the household faces a “distorted tax” and does not expect to receive the “distorted tax” through transfer payment in the next period, it will reduce consumption in the next period; in order to smooth consumption, households will reduce consumption in this period and increase savings and investment, thereby equalizing the marginal utility of the two periods. The government needs to invest the “distortion tax” in the state sector through the credit market. Combining the above two roles, the “distortion tax” will increase the saving and investment of the whole society, the marginal output of capital will be reduced, and the interest rate will be low, so not only has the interest rate control been realized, but also the typical characteristics of China’s “coexistence of low interest rates and high savings” is portrayed. The study found that interest rate control can expand investment and squeeze consumption, while financing constraints strengthen the effect of interest rate control, so interest rate control exacerbates the degree of imbalance in aggregate demand structure. The market-oriented interest rate reform will increase the consumption of GDP in the residential sector by 4.7 percentage points, while the share of investment in GDP will decrease by 1.6 percentage points, so the aggregate demand structure will be improved. However, the loan interest rate will increase from 3.66 to 4.59%, an increase of 25.4%. The scale of investment in the whole society will shrink due to the increase in capital costs, and the capital stock will decline by 10.3%, which will eventually lead to a total output decline of 7.2%. If the interest rate is liberalized and the financing constraints of private enterprises are reduced through supporting financial reforms, not only can the aggregate demand structure be improved, but also the impact of interest rate control on total output can be effectively avoided. Some research results have revealed the negative impact of financial market distortions on the effects of interest rate marketization reforms. Qiang Jing, Hou Xin and Fan Longzhen regard the benchmark interest rate of oneyear deposits as the policy benchmark interest rate that affects the maturity structure of the bond market interest rate;The deviation between the short-term market interest rate and the benchmark interest rate can be used to measure the liquidity of funds, and be used as the second factor variable that affects the market interest rate; Since investing in long-term bonds carries risks, the risk premium is regarded as the third factor variable. Based on these three variables, the affine interest rate term structure model is constructed.69 Empirical evidence shows that the model explains well the performance of national debt interest rates from 2002 to 2017. The model reveals that the policy benchmark interest rate is still an important variable that determines 68 69

Chen et al. (2014). Qiang et al. (2018).

328

11 Innovation and Development of China’s Financial Theory

the interest rate of each period of the market, and the capital liquidity factor mainly affects the change of short-term interest rates, and the risk premium factor mainly determines the change of long-term market interest rates. The study also found that the policy benchmark interest rate is highly correlated with the expected inflation rate, but the market interest rate and the expected inflation rate are weakly linked. The reason is that the liquidity factor and the expected inflation rate are negatively correlated in the two periods before and after the sample period.70 Therefore, simply relaxing interest rate control is just the beginning of market-oriented reforms. Establishing market-based interest rates closely linked to economic fundamentals is the focus of the following reform. Finally, as the most lagging area of financial reform, the RMB exchange rate system has always been in the dilemma of increasing exchange rate flexibility and fearing exchange rate fluctuations, which has further impaired the improvement of the efficiency of capital allocation. Some studies confirm that China’s economic and financial stability needs to increase the flexibility of the RMB exchange rate. Yuan Shenguo, Chen Ping, and Liu Lanfeng established a small open economy DSGE model to verify whether there is a difference between floating exchange rates and fixed exchange rates in affecting economic stability in the presence of financial accelerators.71 This article studies the changes in the RMB exchange rate after removing the trend from January 1994 to June 2008, and finds that fixed exchange rate system is basically implemented from January 1997 to July 2005. This period can be analyzed as a fixed exchange rate system; while from August 2005 to June 2008, the RMB exchange rate system was more inclined to floating exchange rate systems, so this period of time was approximated as a floating exchange rate system for analysis. Using the above data, it is found that, compared with floating exchange rates, a fixed exchange rate will magnify the financial accelerator effect and aggravate economic fluctuations. Chen Chuanglian, Yao Shujie, Zheng Tingguo and Ou Jinghua theoretically analyzed the time-varying and interactive relationship among international capital flows, interest rates and exchange rates, and empirically analyzed the timevarying dynamic relationship among the three in China from January 1997 to April 2016 using a time-varying parameter vector autoregressive model.72 The article finds that the interest rate channel is the most unsmooth during the mutual transmission of interest rate, foreign exchange rate and capital flow. The impact of interest rates on international capital flows is blocked. In addition to the limited role of China’s interest rate pricing mechanism and capital account control, another reason is that the daily fluctuations in exchange rates are limited, which weakens the transmission effect of interest rates on exchange rate fluctuations and prevents the interest rate 70

In order to reflect the change of market environment, this article divides the sample into the first half and the second half. The first is from January 2002 to December 2010, and the second is from January 2011 to December 2017. In the second stage, the pace of interest rate liberalization was accelerated. At first, deposit and loan interest rates were allowed to float around the benchmark interest rate, and then they were no longer limited. In the last two years, the Central bank explored price-oriented monetary policy regulation means, such as the interest rate corridor system. 71 Yuan et al. (2011). 72 Chen et al. (2017).

11.2 The Conflict Between Mobilizing Monetary and Financial System …

329

parity curve from playing a more effective role. However, distortions in China’s real economy and financial markets have made it difficult to increase the flexibility of the RMB exchange rate. Mei Dongzhou and Gong Liutang promoted Bernanke’s and other models to the open economy of small countries and examined China and emerging market economies in a special currency mismatch, that is, they generally hold large amounts of US dollar assets, and corporate financing mainly depends on domestic banks and the economy. The choice of exchange rate system is always under the pressure of appreciation.73 There are few studies on this special currency mismatch. Among them, the “high savings dilemma” model proposed by McKinnon is the most representative, but the model lacks a micro foundation. Shi Jianhuai once questioned McKinnon’s “high savings dilemma syndrome” theory.74 This article analyzes the problems in the proof of the two key propositions behind the theory (the exchange rate change is invalid for the adjustment of the current account and the risk premium of local currency assets is negative to attract the holding of US dollar assets). If the RMB appreciates, China will most likely fall into a deflationary spiral and a zero interest rate liquidity trap. Therefore, a moderate appreciation of the renminbi is feasible.75 However, Shi Jianhuai’s own empirical research still verified the judgment of McKinnon’s renminbi appreciation tightening effect.76 The research of Mei Dongzhou and Gong Liutang made up for the lack of micro-foundation, and found that the choice of exchange rate system was directly related to the proportion of US dollar assets held and the effect of financial accelerators. Its numerical simulation confirmed that whether it was a positive export shock or a negative world interest rate. The shocks may lead to a decline in China’s output and even trigger a liquidity trap. The specific mechanism is that a positive export shock or a negative world interest rate shock will force the RMB to face upward pressure and damage the domestic company’s net worth, thereby increasing external financing costs through the financial accelerator effect, causing economic recession. There are also some research results that take into account the big power factor in an open economy. Xu Jianwei and Yang Panpan decomposed the renminbi’s real exchange rate into the part where tradable products deviate from the one-value law and the part with “relative” price changes. It was found that tradable products deviating from the one-price law contributed 60%-80% to the real exchange rate fluctuations, while “relative” price changes, that is, the impact of relative price fluctuations between tradable and non-tradable products accounted for only 20–40%.77 Since the relative development stage of the economy is an important factor in explaining this decomposition conclusion, for a long time to come, the deviation of the price of tradable products from the law of one price will remain the main factor for fluctuations in the real exchange rate of the RMB. Although the article does not discuss further the determinants of tradable products deviating from the law of one price, the implicit 73

Mei and Gong (2011), Bernanke et al. (1999). McKinon (2005). 75 Shi (2005). 76 Shi (2007). 77 Xu and Yang (2011). 74

330

11 Innovation and Development of China’s Financial Theory

assumption remains obvious that a large country is not a world price recipient. In addition, as far as China is concerned, the viscosity of the nominal RMB exchange rate is also an influential factor that cannot be ignored. When the nominal exchange rate of RMB is sticky, domestic and foreign inflation rates will not make sufficient adjustments to changes in nominal exchange rates, which will result in long-term domestic and foreign prices of traded products deviating from the level determined by the law of one price. Tang Xiang believes that China’s deteriorating interregional competition, that is, the ranking of competition has led to a continuous decline in the intermediate input and wage costs of unit output in various sectors, and then through the three price multiplier effects, China’s prices and wage levels have been seriously depressed. This has constituted for the main reason for the undervalued RMB real exchange rate.78 This paper expands the standard input–output model and simulates the price level effect of two competitive sectors (road freight transportation and coal mining) in China. The results show that the competition can fully explain the extent to which Western scholars believe that the RMB is undervalued around 2005 (30–40%). Obviously, keeping the RMB’s nominal exchange rate basically stable is only an important part of the mobilizing monetary and financial system to achieve economic take-off. At the same time, the lack of flexibility in the RMB exchange rate system also triggered distortions in capital controls. In order to adapt to the requirement of maintaining the independence of monetary policy and achieving basic stability of the RMB exchange rate, China was been forced to adopt strict capital controls which has brought corresponding distortions. Although as early as January 1, 1994, the conditional convertibility of the renminbi under the current account has been realized, the free exchange under the capital account has been relatively slow. According to the definition given by the 2012 report from the research group of the Central Bank of China, the opening of capital account is a process of gradually relaxing capital controls, allowing residents and non-residents to hold cross-border assets and engage in cross-border asset transactions, and realizing the free exchange of currencies.79 Among the IMF’s 40 indicators in 7 categories divided for a country’s capital control, China currently has 4 non-exchangeable items, 22 partially-exchangeable items and 14 basically-exchangeable items. In the next 5– 10 years, the quantity-oriented management mode of capital flows should gradually be replaced with a price-oriented mode. Liu Liya, Cheng Tianxiao, Guan Yizhong, and Yang Jinqiang mentioned that most of the literatures on capital control research have the following defects, which may lead to the overestimation of the effect of capital control and the possibility of distortion and underestimation.80 (1) Existing theories only consider the impact of capital control on the rate of return on assets, but in fact, capital control is quite distorting. While reducing the rate of return on assets, it also has a very strong impact on output shocks. (2) Most empirical studies use data on net international capital flows, which not only smoothes out the volatility of the 78

Tang (2012). On February 23, 2012, the research group of the People’s Bank of China released a report titled “Conditions for Accelerating the Opening of China’s Capital Account are basically Ripe”. 80 Liu et al. (2013). 79

11.2 The Conflict Between Mobilizing Monetary and Financial System …

331

T total international capital flows, leading to deviations in the research conclusions, and it also fails to distinguish behavioral differences between domestic and foreign investors. Under the framework of the small country model of Cowan et al., this paper assumes that the fluctuation of domestic output shocks is a function of capital control. It is found and verified that when capital controls increase the fluctuations of domestic output shocks, capital control will not effectively reduce the total international capital flows.81 The reason is that capital control is prone to corruption, which is not conducive to the development of the domestic financial market, and increases the financing costs of domestic enterprises. As a result, government policies are not subject to market discipline. These externalities will lead to increased fluctuations in domestic output shocks. In addition, financial market development also tends to reduce the efficiency of capital controls. Although some research results have verified that on the basis of capital control, monetary policy can simultaneously achieve domestic economic and RMB exchange rate stability. However, the effectiveness of such monetary policy is being increasingly challenged (Yao et al. 2014; Zhang 2015).82 Li Cheng, Wang Bin, and Ma Wentao established a dynamic macroeconomic model that included multiple inefficient asset markets under an open economy. The theoretical deduction yielded the central bank’s monetary policy response function, i.e. the optimal interest rate rule.83 The results show that interest rate regulation not only needs to respond to output and inflation trends, but also needs to be adjusted accordingly to changes in asset prices and exchange rates. The existing interest rate control is mainly aimed at economic growth and inflation stablization, and the focus on asset prices, especially stock prices and exchange rates, is not significant, making China’s interest rate adjustments insufficient to respond to macroeconomic changes under the conditions of rapid capital market development. There is a certain selfactualization mechanism for inflation or deflation, and the width of monetary policy regulation needs to be expanded. With the expansion of the capital market investment scale, its impact on the development of the national economy is increasing. The effect of asset price volatility has not only been limited to the asset market itself, but has also begun to affect the aggregate demand level and needs to be reflected in monetary policy. In addition, as the marketization of interest rates and exchange rates has increased, the chain between exchange rates and interest rates has gradually tightened, which has exacerbated the difficulty of balancing monetary policy. After the exchange rate reform in 2005–2008 (especially from 2006 to 2007), the huge trade surplus and the large inflow of short-term international capital led to a surge in foreign exchange reserves. Under the unified foreign exchange settlement and sale system, the People’s Bank of China purchased a large amount of base currency, causing excess liquidity and increasing inflationary pressures. In this regard, domestic interest rates are in a dilemma. On one hand, interest rates need to be lowered in order to shrink the arbitrage space of short-term international speculative capital, thus alleviating the pressure of RMB appreciation. On the other hand, it is 81

Cowan et al. (2008). Yao et al. (2014), Zhang (2015). 83 Li et al. (2010). 82

332

11 Innovation and Development of China’s Financial Theory

necessary to raise interest rates to increase capital costs, constrain capital needs, and prevent the domestic economy from overheating. During this period, the renminbi’s slight appreciation was accompanied by multiple-time raising of interest rates by the People’s Bank, aiming to maintain stable macroeconomic operation and tighten liquidity, leaving no time to consider changes in exchange rates. Obviously, the long-term reform of interest rate marketization, the lagging development of the financial market, the insufficient elasticity of the RMB exchange rate and the gradual failure of capital controls have jointly caused distortions in the allocation of funds, especially the inability to effectively carry out innovative financing, which has hindered the transformation of China’s economic growth model.

11.3 Problems Faced with China’s Financial Marketization Reform According to the above analysis, the difficult deconstruction of bank credit expansion under China’s state implicit guarantee is not enough to meet the needs of the transformation of growth mode. The reason for this is that the difficulty of this financial market-oriented reform is not only to solve the problem of soft budget governance of state-owned enterprises and local governments accompanied by a mobilized monetary and financial system, but also to prevent debt-deflation that may be caused by the suppression of excessive credit expansion risk. The task group of the Business Management Department of the People’s Bank of China established a financial accelerator mechanism embedded in the budget soft constraint according to the theory of financial accelerators based on the budget soft constraint problem in some Chinese companies and the realistic background of price distortion and resource mismatch. Through the optimization of debt contracts between enterprises and financial institutions, the financing premium equation of budget-constrained enterprises is obtained, and the endogenous mechanism of price distortion and resource mismatch caused by budget-soft constraints is described.84 Specifically, financial accelerators can play a role in raising financing premiums, thereby reducing corporate leverage and reducing the supply of loanable funds. Therefore, the financial accelerator can promote the flow of capital to companies with better financial status and higher profitability by adjusting the level of financing premium, and optimize the allocation of funds; during the economic downturn, it can accelerate the withdrawal of companies with low production efficiency and high financial risks, and promote market clearing. On the contrary, soft budget constraints will largely offset the role of financial accelerators. Soft budget constraints have weakened the correlation between corporate financing premiums and leverage ratios, and companies have become less sensitive to interest rates and liabilities. The greater the degree of government guarantees, the lower the corporate financing premium, the more loans available, and the higher the leverage. 84

Research Group of The Department of Business Management of the People’s Bank of China (2017).

11.3 Problems Faced with China’s Financial Marketization Reform

333

Wang Bosen, Lu Yuanzhen, and Ye Yongxin defined government implicit guarantees as the probability of government repayment after bond defaults, and analyzed the implicit guarantee problems in the Chinese bond market based on the Dufie and Singleton’s model.85 Specifically, they used the CIR affine model interest rate model and adopted Kalman filtering and the maximum likelihood estimation method to infer the investor’s views on the default probability of different types of bonds from bond prices: the spline method is used to fit spot interest rate curves of different kinds of bonds;By introducing the probability of government implicit guarantees in the classic model, the role of government implicit guarantees in bond pricing is measured. The pricing of AA-rated central corporate bonds and local state-owned corporate bonds implies, respectively, 39.9% and 6.7%, the corresponding probability of the government’s implicit guarantees. Similar implicit guarantees were 33.9% and 1.2% in the pricing of AA + rated central corporate bonds and state-owned corporate bonds, respectively. This figure is much lower than the 100% actual probability in government’s action in debt coverage, reflecting investors’ more rational and conservative judgments about the implicit guarantees that the government may offer. At the same time, investors also have different evaluations of implicit guarantees for different types of bonds: investors’expectations of the central government’s debt coverage are higher than that of local governments, and investors pay more attention to the hidden governmental support behind the bond issuer when investing in lower-rated bonds. Ma Wentao and Ma Prairie used a dynamic stochastic general equilibrium model with multi-governmental-layer to explore the role of government guarantees and their “steady growth” goals in local government debt.86 The study found that the performance of government guarantees depends not only on its response to output growth, but also on local competition. When only considering the response of government guarantees to the growth rate of output, government guarantees may, on one hand, drive output growth, and, on the other hand, suppress output due to the negative impact on the efficiency of the enterprise, which may cause the intervention trap of “more guarantees leads to more needs for guarantees”. However, if local government competition is further introduced, this effect is not evenly distributed. There also exists a negative “spill-over effect” to the external region due to local government guarantees to increase capital returns under local competition, which further aggravates output growth and the ups and downs of debt expansion. The central government’s vertical guarantees to local governments and the distribution of guarantees among local governments are carried out under a system of fiscal decentralization and financial decentralization. Fierce local competition under the fiscal decentralization system will force local governments to not only pursue “steady growth” but also actively raise funds for “steady growth”. In the case of extremely unequal powers and financial powers between the central and local governments, by intervening in the financial system, local governments provide financing facilities for themselves or for enterprises with political connections, which is the original

85 86

Wang et al. (2016), Duffie and Singleton (1997), (1999). Ma and Ma (2018).

334

11 Innovation and Development of China’s Financial Theory

intention of the governments. Government guarantee is an important way for the government to intervene in the financial system. The inflation and financial risks caused by financial decentralization are shared by the entire economy, while the benefits are only enjoyed by a single region (such as increased corporate financing and faster GDP growth). In theory, the combination of financial decentralization and fiscal decentralization will soften micro budget constraints and exacerbate the negative effects of financial decentralization. The article verifies that government guarantees’ degree of interpretation of local government debt will remain at around 30% in the long run, the absence of which may lead to the centralized release of local government debt risks. Based on this, the relative relationship between steady growth, de-leveraging and risk prevention should be balanced in macro adjustments, and the powers and financial powers of the central and local governments should be further rationalized to make them institutionalized and transparent, and to weaken the local Individual guarantee. Wang Yongqin, Chen Yinghui, and Du Julan chose a unique perspective, that is, the perspective of the financial market of trading urban investment bonds, and decomposed the yield spread of urban investment bonds into one part with liquidity risk spread and the other part with default risk spread; by using of (in terms of local governments) exogenous shocks, they further identified the default risk of local government debt in China through the method of double difference.87 In terms of the overall risks of the Chinese economy, this article takes advantage of China’s monetary policy shocks, the 2008–2009 international financial crisis, and real exchange rate shocks; at the local level, it controls such information as fiscal revenues and expenditures, land prices, and industrial structure and so on. The regression results verified that the macroscopic exogenous shocks were steadily priced, but local information was not priced and reflected in the yield spread. In other words, the default risk of local government debt is not reflected in the yield spread of urban investment bonds, and China’s overall default risk is effectively priced instead; the overall default risk spread soared sharply after 2012. This also provides a preliminary indication that China’s local debt has serious problems in soft budget constraints, and the financial market has not treated different local debts differently. Niu Linlin, Hong Zhiwu, and Chen Guojin used the spread between the 5-year urban investment bond and the national bond as the market-based representative factor of local government debt risk, and adopted the arbitrage-free Nelson-Siegel interest rate term structure expansion model to ensure the consistency of the pricing of government bonds of each term. Based on this, they jointly modeled the weekly data of the 2009–2014 national bond yield curve and the urban investment bond spread, and studied the joint dynamics and risk transmission mechanism of the two.88 The analysis results show that the local government debt risk represented by the urban investment bond spread has a significant effect on the pricing of government bond yields. On one hand, Treasury bonds serve as an alternative to poorly credited urban investment bonds due to their safety nature, which is manifested by the expansion of urban investment bond spreads and 87 88

Wang et al. (2016). Niu et al. (2016).

11.3 Problems Faced with China’s Financial Marketization Reform

335

the reduction of the expected yield of short- and medium-term government bonds (the “safe haven effect”); On the other hand, the market’s judgment on the risk of urban investment bonds is also reflected in the risk premium of treasury bonds. The increased risk of urban investment bonds leads to the increase of local government debt burdens. Under the existing system, the hidden financial burden of the central government will form (thee “compensation effect”). Although the combined effect of the two shows that the “safe haven effect” is taking an advantageous position than the “compensation effect” in the sample, if the local debt risk cannot be effectively controlled, it may cause the outbreak of systemic risk in the bond market and the premium and yield may be significantly increased. In addition to discussing institutional factors such as soft budget constraints that trigger high leverage, there are many studies discussing the importance of grasping the pace of de-leveraging to prevent the risk of debt-deflation. Based on the nonlinear model predictive control method, Peng Fangping, Ouyang Zhigang, Zhan Kai, and Liu Liang theoretically analyzed the mechanism of debt trap. When the economy is at a low debt level, debt has a significant positive effect on investment (output). With the continuous rise of the debt level, when the threshold is exceeded by about 0.8, the risk premium caused by the debt rises, bringing sharp decline in investment (output) and the sharp decline in investment (output) in turn contributed to the unsustainable growth of debt, which in turn caused the economy to fall into a debt trap.89 This article further confirms the above theoretical analysis based on the data of listed companies in China from 2002 to 2013, and shows that from the enterprise level, China has fallen into a debt trap. Based on the panel data of 91 countries from 1983 to 2012, Ma Yong, Tian Tuo, Ruan Zhuoyang, and Zhu Junjun used the systematic GMM estimation method and the binary panel discrete selection model to empirically analyze the relationship between financial leverage, economic growth and financial stability.90 (1) Empirical results show that: (1) De-leveraging has a significant negative effect on economic growth. At the same time, with the de-leveraging process, the probability of financial crisis will increase significantly; (2) Financial leverage fluctuations are significantly negatively correlated with economic growth and financial stability, indicating that increased financial leverage fluctuations will not only harm economic growth, but also negatively affect the stability of the financial system. The above conclusions have relatively precise policy implications for a country’s economic growth and financial stability. First of all, we should consider proactively strengthening the macro management of financial leverage from a precautionary point of view, so as to avoid the tendency of excessive leverage in the entire financial system. Secondly, in the process of “passive de-leveraging” after the crisis, we should adopt a step-by-step strategy as much as possible, fully consider the smooth operation that should be in place during the process of policy implementation, and avoid, to the greatest extent, the economic recession and financial instability caused by the rapid decline of financial leverage. Ji Min, Yan Baoyu and Li Hongjin proposed that although the level of leverage is negatively correlated with the level of economic development after 89 90

Peng et al. (2017). Ma et al. (2016).

336

11 Innovation and Development of China’s Financial Theory

exceeding the threshold, the threshold itself is not stable and the sustainability of debt, that is, whether debt and currency expansion can be effectively maintained, is equally important for economic growth and financial stability.91 Since investment or consumption caused by debt can promote GDP growth, as long as the growth rate of debt (per capita) is faster than the growth rate of leverage, then nominal GDP (per capita) can still achieve positive growth. Therefore, countries with different debt sustainability have different economic performance at the same level of leverage. Generally, under the situation of low economic debt and low level of leverage, monetary and credit expansion can indeed bring about rapid economic growth, but this effect will be exhausted in the long run, and the efficiency of leverage is the key determinant. Therefore, on one hand, the process of de-leveraging and economic structural transformation should be reasonably planned to avoid the liquidity risk and “debt-deflation” risk that may be caused by excessively compressing credit and investment. On the other hand, the government should reduce direct resource allocation and create necessary environment where it is up to the market to choose who will increase leverage and who will de-leverage in order to optimize the leverage structure and increase leverage efficiency. Based on dynamic panel data from 119 countries from 1980 to 2012, Chen Yulu, Ma Yong, and Xu Lu studied the impact of population aging on financial leverage from an empirical perspective, and found that after crossing the “turning point” of aging, the process “de-leveraging” will be accompanied by a significant increase in the probability of a financial crisis.92 According to the empirical conclusions of the article, it is very likely that China will enter the inflection point region between 2019 and 2028. Afterwards, the aging of the population, the de-leveraging of the financial sector and the decline in asset prices may have a “resonance” effect, which will have a violent impact on the stability of the financial system. Tan Haiming, Yao Yudong, Guo Shuqiang, and Ning Chen took the representative capital goods of real estate as a link, and combined Kuznets’s “long cycle” theory and city hierarchy system theory to construct China’s “long cycle” computable general equilibrium (CGE) model.93 Taking Japan’s post-war population data and macroeconomic data as the basis for estimating the parameters, the two major demographic factors of population aging and migration are simulated to analyze the medium- and long-term effects of China’s economic growth, urbanization and real estate prices in 2015–2050. The article also introduces financial leverage and rational expectation factors and explores the interaction between leverage and economic growth, population migration, and birth rate. The study found that due to the impact of the aging population, China’s economic growth may experience a gradual downward trend from 2021 to 2025, triggering a decline in housing prices and “reverse urbanization.” Under the condition that economic acceleration may lead to high leverage, the one-sided emphasis placed on leverage may possibly lead to long-term economic recession. Zhang Bin, He Xiaobei, and Deng Huan used the rising leverage ratios of the US and European countries before the subprime mortgage 91

Ji et al. (2017). Chen et al. (2014). 93 Tan et al. (2016). 92

11.4 Conclusions

337

crisis as a reference to compare China’s rising leverage ratios during 2009–2016, and discussed the composition, causes, and impact of leveraging on the real economy.94 It is still difficult to explain China’s rapid increase in leverage in recent years based on reasons such as the high currency growth rate, soft budget constraints of local governments and state-owned enterprises, and high savings rates. Under the specific background of the economic structure transition from manufacturing to service, the marginal effectiveness of real GDP growth and inflation growth due to debt expansion has decreased, leading to increased leverage. The key to dealing with Chinese high level of leverage lies in two aspects. One is to avoid a vicious cycle of debt-deflation. Moderate inflation is most conducive to reducing debt. Deflation will further increase real debt and increase leverage. The second is to reduce the pressure on the government to maintain stability and employment, and avoid the government from passively increasing leverage by deregulating the service industry, balancing central and local relations, and promoting the reform of related investment and financing mechanisms and other reform measures that release the vitality of economic growth.

11.4 Conclusions According to the previous analysis, the expansion of bank credit under the implicit guarantee of the Chinese state formed after the reform and opening up has effectively mobilized savings, accelerated investment and economic growth, and made due contributions to the realization of economic take-off. The completion of the economic take-off task and the advent of the ageing population are urging China to change its growth pattern based on domestic factors and capital accumulation and form a new growth engine driven by innovations that can create markets. However, the long-term reform of interest rate marketization, the lagging development of the financial market, the inflexibility of the RMB exchange rate and the gradual failure of capital controls have made the mobilization of the monetary and financial system difficult to de-construct, resulting in distorted fund allocation, especially the inability to effectively carry out innovative financing, which has hindered the transformation of China’s economic growth pattern. More importantly, to further deepen the reform of financial marketization, it is necessary to solve the problems of soft budget constraint governance of state-owned enterprises and local governments hidden behind the mobilizing monetary and financial systems while preventing the risk of debt-deflation caused by de-leveraging. Xu Zhong summarized the focus of China’s future financial marketization reform as the modernization of China’s financial system and national governance system in the new era.95 This historical mission requires the following. (1) Financial governance should be more closely integrated with other governance of the national governance system to better play the role of financial governance in the modernization of the national governance system and 94 95

Zhang et al. (2018). Xu (2018).

338

11 Innovation and Development of China’s Financial Theory

governance capabilities. This includes the relationship between fiscal policy and finance, the relationship between leverage and the improvement of corporate governance, the relationship between financial risk prevention and the improvement of governance mechanisms, and the relationship between population aging, sustainable pensions and capital markets. (2)The construction of a modern financial system should be guided by the construction of a modern financial market system, with a focus on cracking market segmentation and distortions in pricing mechanisms. (3) It is necessary to build China’s modern financial system according to the general law of financial market development, to make it clear that the central bank and financial supervision are inseparable, and to establish an incentive-compatible supervision system.

References Abiad, A., T. Tressel, and E. Detragiache. (2009). A New Database of Financial Reforms. IMF Staff Papers, 57(2), 281–302. Alexander Gershenkron. (2009). A Historical Perspective on Economic Backwardness. Chinese translation. The Commercial Press. AsliAscioglu, Shantaram P. Hegde, and John B. McDermott. (2008). Information Asymmetry and Investment-Cash Flow Sensitivity. Journal of Banking & Finance, 32(6), 1036–1048. Ben S. Bemake and Mark Gerter. (1989). Agency Costs, Net Worth, and Business Fluctuations. American Economic Review, 79(1), 14–31. Benjamin M. Friedman, Kenneth N. Kuttner, Ben S. Bemake and Mark Getter. (1993). Economic Activity and the Short - Term Credit Markets: An Analysis of Prices and Quantities. Brookings Papers on Economic Activity, 1993(2), 193–283. Berglof, E. and G. Roland. (1997). Soft Budget Constraint and Credit Crunches in Financial Transition. European Economic Review, 41(3), 807–818. Bernanke, B., M. Gertler and S. Gilchrist. (1999). The Financial Accelerator in a Quantitative Business Cycle Framework. In J. Taylor and M. Woodford (eds.). Handbook of Macroeconomics, 2, 1341–1393. North - Holland, Amsterdam. Brian Snowden, Howard Vane, and Peter Wenatzick. (1998). A Guide to Modern Macroeconomics: An Introduction to Comparative Studies of Different Schools of Thought. The Commercial Press. Cai Fang, and Wang Dewen. (2005). China’s Demographic Transition: Implications for Growth. In Gamaut and Song (eds.). The China Boom and Its Discontents. Canberra: Asia Pacific Press. Che Dawei. (2011). Endogenous Mechanism of Financial Regulatory System and its Influence, Economic Research Journal, 2. Chen Chuanglian, Yao Shujie, Zheng Tingguo, and Ou Jinghua. (2017). A Study on the Relationship between Interest Rate Liberalization, Exchange Rate Restructuring and International Capital Flows. Economic Research Journal, 4. Chen Kunting, Zhou Yan, and Huang Jing. (2015). An Analysis of the Cycle and Growth Effect of Interest Rate Shocks. Economic Research Journal, 6. Chen Xiaoyue, Xiao Xing, and Guo Xiaoyan. (2000). Rights and Profit Manipulation of Listed Companies. Economic Research Journal, 1. Chen Xinyuan, Ye Pengfei, and Chen Donghua. (2003). Opportunistic Asset Restructuring and Rigid Control. Economic research Journal, 5. Chen Yanbin, Chen Xiaoliang, and Chen Weize. (2014q). Interest rate Regulation and Aggregate Demand Structural Imbalance. Economic Research Journal, 2.

References

339

Chen Yulu, Ma Yong, and Xu Lu. (2014b). Aging, Financial Leverage and Systemic Risk. Studies of International Finance, 9. Cowan, K., J. De Gregorio, A. Micco and C. Neilson. (2008). Financial Diversification, Sudden Stops, and Sudden Starts. Current Account and External Financing Working Paper. Deng Kebin, and Zeng Haijian. (2014). Financing Constraints of Chinese Enterprises: Characteristics and Causes Testing, Economic research Journal, 2. DemirgucKunt, A., E. Feyen and R. Levine. (2011). Optimal Financial Structures and Development: The Evolving Importance of Banks and Markets. World Bank Mimeo. Dewartripont M. and Maskin E. (1995). Credit and Efficiency in Centralized and Decentralized Economics. Review of Economics, 62(4), 541–555. DeYoung, R., A. Gron and G. Toma. (2005). Risk Overhang and Loan Portfolio Decisions: Small Business Loan Supply Before and During the Financial Crisis. Journal of Finance, 70(6), 2451– 2488. Duffie, D. and K. J. Singleton. (1997). Model of the Term Structure of Interest rate Swap Yields. Journal of Finance, 52, 1287–1321. Duffie, D. and K. J. Singleton. (1999). Modeling Term Structure o£ Defaultable Bonds. Review of Financial Studies, 12, 687–720. Fan Mingtai. (2004). Financial Structure and Its Influence on Monetary Transmission Mechanism. Economic research Journal, 7. Fazzari, S., R. G. Hubbard and B. C. Petersen. (1988). Financing Constraints and Corporate Investment. Brookings Papers on Economic Activity, 141–195. Ge Zhida. (1963). The Comprehensive Balance of Finance Credit and Materials. Economic Research Journal, 10. Gong Qiang, Zhang Yilin, and Lin Yifu. (2014). Industrial Structure, Risk Characteristics and Optimal Financial Structure, Economic research Journal, 4. Hadlock, C. and J. Pierce. (2010). New Evidence on Measuring Financial Constraints: Moving Beyond the KZ Index. Review of Financial Studies, 23(5), 1909–1940. He, D., He. Wang and X. Yu. (2014). Interest Rate Determination in China: Past, Present and Future. HKIMR (Hong Kong Institute of Monetary Research) Working Papers, 042014. He Jia, and Xia Hui. (2005). The Choice of Financing Instruments for Enterprises with Controlling Interests: The Theory of Convertible Bond Financing. Economic research Journal, 4. Huang Da, and Zhou Shengye. (1981). What Is Credit Expansion and How Does It Cause It? Economic Research Journal, 11. Huang Zhizhong, and Chen Long. (2000). Empirical Analysis of the Law of Profit Growth of Listed Companies in China. Economic Research Journal, 12. Ji Min, Yan Baoyu, and Li Hongjin. (2017). Leverage ratio Structure, Level and Financial Stability: Theoretical Analysis Framework and China experience. Journal of Financial Research, 2. Ji Yang, Xu Jianwei, and Zhang Bin. (2015). Influence, Risk and Timing of Interest Rate Liberalization: A Discussion Based on the Double-track Interest rate Model. Economic Research Journal, 1. Jian Ze, Gan Chunhui, and Yu Guangjing. (2013). Marketization, Credit Allocation and Industrial Restructuring of the Banking Sector. Economic Research Journal, 5. Jiang Guohua, and Wang Hansheng. (2005). Should a Listed Company Lose Money for Two Consecutive Years Be “ST”? Economic Research Journal, 3. Jiang Yue. (1986). The Mechanism of Current Liquidity Shortage and Its Countermeasures. Economic Research Journal, 5. Jin Zhongxia, Hong Hao, and L, Hongjin. (2013). The Impact of Interest Rate Liberalization on the Effectiveness of Monetary Policy and Economic Structural Adjustment. Economic Research Journal, 4. Ju Xiaosheng, Lu Di, and Yu Yihua. (2013). Financing Constraints, Working Capital Management and Sustainability of Enterprise Innovation. Economic Research Journal, 1. Lee I. H., Syed, M. H. and Xueyan L. (2012). Is China Over-investing and Does it Matter? International Monetary Fund Working Papers.

340

11 Innovation and Development of China’s Financial Theory

Li Cheng, Wang Bin, and Ma Wentao. (2010). Asset Prices, Exchange Rate Fluctuations and Optimal Interest Rate Rules, Economic Research Journal, 3. Li Ke, and Xu Longbing. (2011). Financing Constraints, Debt Capacity and Corporate Performance. Economic Research Journal, 5. Li Yuanpeng. (2009). The Business Cycle and the Business Performance of Listed Companies Deviate Mystery. Economic Research Journal, 3. Liao Li, and Zhang Xueyong. (2008). The Effectiveness of Full Circulation in Correcting the Interest Orientation of Ultimate Controllers. Economic Research Journal, 8. Lin Jiken. (1981). Insisting on the Economic Issue of Money. Economic Research Journal, 8. Lin Jiken. (1963). On the Amount of Monetary Needs and How to Determine them. Jiang Han Journal, 11. Lin Yifu, Sun Xinfang, and Jiang Zhao. (2009). The theory of Optimal Financial Structure in Economic Development. Economic Research Journal, 8. Liu Liya, Cheng Tianxiao, Guan Yizhong, and Yang Jinqiang. (2013). Can Capital Controls Affect International Capital Flows? Economic Research Journal, 5. Liu Liya, Yu Jing, Yang Jinqiang, and Zhu Xiaoneng. (2017). Is Competition a Double-edged Sword for Bank Credit Structure Adjustment?—Micro Evidence of China’s Interest rate Liberalization Process. Economic Research Journal, 5. Liu Renhe, Chen Yingnan, Ji Xiaomeng, and Su Xuejin. (2018). Return on Capital in China: An Estimate Based on Q Theory. Economic Research Journal, 6. Liu Yuhui, and Xiong Peng. (2005). Share Splitting, Government Regulation and IPO Underpricing in China. Economic Research Journal, 5. Ma Wentao, and Ma Caoyuan. (2018). Intervention of Government Guarantee, Constraint of steady growth and Trap of Local Government Debt Inflation. Economic Research Journal, 5. Ma Yong, Tian Tuo, Ruan Zhuoyang, and Zhu Junjun. (2016). Financial Leverage, Economic Growth and Financial Stability. Journal of Financial Research, 6. McKinon, R. (2005). Exchange Rates under the East Asian Dollar Standard: Living with Conflicted Virtue. MIT Press (Cambridge). Mei Dongzhou, and Gong Liutang. (2011). The Choice of Exchange Rate Regime in Emerging Market economies. Economic Research Journal, 11. Niu Linlin, Hong Zhiwu, and Chen Guojin. (2016). Local Government Debt and Its Risk Transmission: An Analysis based on the Spread between Government Bond Yield and Urban Investment, Economic Research Journal, 11. Peng Fangping, Ouyang Zhigang, Zhan Kai, and Liu Liang. (2017). Has China Fallen into the Debt Trap?—Theoretical Models and Empirical Evidence, Journal of Financial Research, 2. Ping Xinqiao, and Li Ziran. (2003). Determination of Refinancing Qualification and False information Disclosure of Listed Companies. Economic Research Journal, 2. Porter, N. and T. Xu. (2013). Money Market Rates and Retail Interest Regulation in China: The Disconnect between Interbank and Retail Credit Conditions. Bank of Canada Working Paper. Povel, P. (1995). Multiple Banking as a Commitment not to Rescue. Research in Finance, 21, 175–199. Qian Yanmin. (1996). On the External Behavior of enterprises and the Efficiency of monetary policy. Economic Research Journal, 2. Qiang Jing, Hou Xin, and Fan Longzhen. (2018). The Formation Mechanism of Term Structure of Benchmark Interest Rate, Expected Inflation rate and Market Interest Rate. Economic Research Journal, 4. Qu Wenzhou, Xie Yalu, and Ye Yumei. (2011). Information Asymmetry, Financing Constraints and Investment—Cash Flow Sensitivity: Empirical Research Based on Market Microstructure Theory. Economic Research Journal, 6. Research Group of the Department of Business Management of the People’s Bank of China. (2017). Soft Budget Constraint, Financing Premium and Leverage Ratio: A Study on Micro-Mechanism and Economic Effect of Supply-side Structural Reform. Economic Research Journal, 10.

References

341

Research group on Economic Growth and Macroeconomic Stability, Institute of Economics, Chinese Academy of Social Sciences. (2006). Learning by Doing, Low-cost Competition Mechanism and Transformation of Growth Path. Economic Research Journal, 4. Research group on Economic Growth and Macroeconomic Stability, Institute of Economics, Chinese Academy of Social Sciences. (2007). Financial Development and Economic Growth: The Shift from Mobilizing Expansion to Market Allocation. Economic Research Journal, 4. Rioja, F. and N. Valev. (2004). Finance and the Source of Growth at Various Stage of Economic Development. Economic Inquiry, 42. Shen Yifeng, Xu Lin, and Huang Juanjuan. (2006). Analysis of the “Clustering” Phenomenon in the Consideration Level of Chinese Share Allocation, Economic Research Journal, 11. Shi Jianhuai. (2005). Is high saving really a Dilemma?—A Consultation with Professor McKinnon. China Economic Quarterly, 1. Shi Jianhuai. (2007). Is RMB Appreciation Contractionary? Economic Research Journal, 1. Stockman, A. (1981). Anticipated Inflation and the Capital Stock in a Cash in Advance Economy. Journal of Monetary Economics, 8(2), 387–393. Tan Haiming, Yao Yudong, Guo Shuqiang, and Ning Chen. (2016). Aging, Population Migration, Financial Leverage and the Long Economic Cycle. Economic Research Journal, 2. Tang Xiang. (2012). the Myth of RMB Undervaluation: An Input-Output Analysis. Economic Research Journal, 10. Wang Bosen, Lu Yuanzhen, and Ye Yongxin. (2016). Implicit Government Guarantee Risk Pricing: A Discussion based on China’s Bond Market. Economic Research Journal, 10. Wang Guangqian. (1996). Theoretical Thinking on Improving Financial Efficiency. Social Science in China, 4. Wang Liyan, and Liu Junxia. (2003). The Implementation Deviation of Accounting Information Disclosure Rules of Listed Companies: Evidence from the Difference of Dual financial Report of A-H-share Companies. Economic Research Journal, 11. Wang Yaping, Wu Liansheng, and Bai Yunxia. (2005). Frequency and Range of Earnings Management of Listed Companies in China. Economic Research Journal, 12. Wang Yijiang. (1994). Behavior Mechanism of Investment Expansion and Inflation in Economic Reform. Economic Research Journal, 6. Wang Yongqin, Chen Yinghui, and Du Julan. (2016). Soft Budget Constraint and Default Risk of Local Governments in China: Evidence from Financial Markets. Economic Research Journal, 11. Xie Ping, and Luo Xiong. (2002). Taylor Rule and Its Test in China’s Monetary Policy. Economic Research Journal, 3. Xin Yu, and Xu Liping. (2007). A Study on the Relationship between Environmental Governance and Stock Reform Consideration from the Perspective of Investor Protection. Economic Research Journal, 9. Xu Jianwei, and Yang Panpan. (2011). Understanding China’s Real Exchange rate: Deviation or Relative Price Fluctuation? Economic Research Journal, 7. Xu Zhong. (2018). Modernization of China’s Financial System and National Governance System in the New Era. Economic Research Journal, 7. Yang Dan, Wei Bianxin, and Ye Jianming. (2008). The Impact of Equity Division on Empirical Research on China’s Capital Market and Model Modification. Economic Research Journal, 3. Yao Yudong, Li Lianfa, and Xin Xiaodai. (2014). Monetary Policy Rules, Capital Flows and Exchange Rate Stability. Economic Research Journal, 1. Yi Gang, and Lin Ming. (2003). Understanding China’s Economic Growth. Social Science in China, 2. Young, A. (1928). Increasing Returns and Economic Progress. Economic Journal, 38(152), 527– 542. Yu Jingwen. (2013). Optimal Financial Conditions and Economic Development. Economic Research Journal, 12.

342

11 Innovation and Development of China’s Financial Theory

Yuan Shenguo, Chen Ping, and Liu Lanfeng. (2011). Exchange Rate System, Financial Accelerator and Economic Volatility. Economic Research Journal, 1. Zhang Bin, He Xiaobei, and Deng Huan. (2018). Leverage in A Different Way: The Phenomenon, Causes and Effects of Leverage Rise in International Comparison. Journal of Financial Research, 2. Zhang Chengsi, and Liu Guanchu. (2015). An Analysis of the Marginal Effect Evolution of Financial Structure in the Process of Economic Growth. Economic Research Journal, 12. Zhang Jie. (1998). Financial Support in Gradual Reform. Economic Research Journal, 10. Zhang Jie. (2003). The Capital Mystery of China’s State-owned Banks. Economic Research Journal, 1. Zhang Lei. (2010). Why Rising Economies Choose Government-led Financial Systems. The Journal of World Economy, 9. Zhang Xingsheng. (2002). Economic Transformation and Financial Support. Social Sciences Academic Press. Zhang Yong. (2015). Hot Money Inflow, Foreign Exchange Sterilisation and Exchange Rate Intervention: DSGE Analysis based on Capital Control and Central Bank Balance Sheet. Economic Research Journal, 7. Zhang Yong, Li, Zhengjun, and Gong, Liutang. (2014). Dual Interest Rate System, Financial Reform and Optimal Monetary Policy. Economic Research Journal, 10. Zhao Jinwen, and Huang, Yan. (2006). Empirical Research on the relationship between Monetary Policy and Inflation in China. Social Science in China, 5. Zhao Junqiang, Liao Shiguang, and Li Zhan. (2006). A Study on Profit Distribution in the Reform of Non-tradable Shares of Listed Companies in China. Economic Research Journal, 11. Zhong, Wei and Wan, Yuanyuan. (2001). The Soft Budget Constraint and the Micro-construction of Financial Crisis Theory. Economic Research Journal, 8.

Chapter 12

Innovation and Development of Income Distribution Theory

Over the past 40 years of reform and opening up, China’s income distribution theory and practice have gone through a process of continuous evolution. At the beginning of the reform, we first affirmed the principle of material interests and proposed to implement the principle of distribution according to work in response to the egalitarian “big pot”. With the progress of the marketization of the economy, in addition to distribution according to work, other income distribution methods have gradually entered economic life, especially when the factors of production are increasingly participating in income distribution, and residents’ income sources are becoming more diversified and showing rapid growth. The Third Plenary Session of the Fourteenth Central Committee of the Communist Party of China proposed a basic income distribution system of “distribution according to work as the main body and coexistence of multiple distribution methods”, realizing a major breakthrough in income distribution theory. In the process of continuous evolution of income distribution theory, issues such as the relationship between equity and efficiency, income gap and common prosperity have also been hot topics of theoretical discussion and practice. Since the 18th National Congress of the Communist Party of China, the theory of income distribution has been further developed, with greater emphasis on fairness and justice, common prosperity and the “sense of gaining” of the people. “Sharing” has been regarded as an important part of the new development concept.

12.1 The Affirmation of the Principle of “Material Interests” and the Returning to the Principle of “Interest Distribution According to Work of Labor Time” in the Early Stage of Reform and Opening Up Changes in distribution relations and distribution principles are an important adjustment to the pattern of social benefits and a comprehensive reflection of the evolution of the economic system. To understand the evolution of China’s income distribution © China Social Sciences Press 2023 Z. Zhang, Handbook of Chinese Economics, https://doi.org/10.1007/978-981-99-0420-4_12

343

344

12 Innovation and Development of Income Distribution Theory

theory since the reform and opening up, it is necessary to review the historical starting point of the evolution of income distribution theory and practice. The theoretical starting point of the evolution of China’s income distribution theory is the classic authors’ conception of the distribution of personal consumer goods in the future society. Marx portrayed the distribution of personal consumer goods within the “united body of free people” in his work Capital and stated that “the share of each producer in the means of living is determined by his labor time”. Labor time is “a measure of the individual share of production in a common product”.1 Marx’s complete exposition on the theory of income distribution in the future society is presented in the Critique of the Gotha Program: every producer, after making various deductions, retrieves from the society, exactly what he gave to the society. What he gives to society is the amount of his personal labor. He gave the amount of labor to society in one form and received it back in another form.2 Marx recognizes the difference between personal income and consumption of future social workers. Lenin later summarized Marx’s principle of distribution according to work as “receiving the same amount of product according to the same amount of labor”.3 According to the actual situation of the socialist economic construction in the Soviet Union, the practical form of the principle of distribution according to work was explored, such as through the monetary wage system (Including timing and piece-rate wages) to implement distribution according to work, and to ensure “more work, more gain; less work, less gain” through bonuses and profit commissions. During the period of planned economy, the principle of distribution according to work was recognized in both theories and policies, that is, “more work, more gain; less work, less gain and no work, no food.” In practice, the rural collective economy adopts the “system of work points”, and government agencies, public institutions, national ownership enterprises, and urban collective enterprises adopt the “wage system”. However, in practice, both the wage system and the work points system have evolved into the egalitarian situation of “eating rice from the same big pot”. The fundamental reason is that under the planned economic conditions, there is no effective means to accurately measure the quality and quantity of labor actually paid by laborers. The amount of labor can only be measured in terms of labor time and according to preassessed wage grades, and the result is necessarily inefficient and unfair. According to Yang Xiaokai’s calculation, the Gini coefficient of Hubei Province in 1981 was 0.1332.4 According to World Bank estimates, the Gini coefficient of Chinese urban residents’ income in 1980 was 0.16.5 This shows that the income of urban and rural residents in China was at a high average. In response to the laziness and inefficiency caused by egalitarianism during the planned economy period, from the beginning of reform and opening up, we clearly emphasized the principle of material benefits and has effectively implemented the 1

Anthology of Marx and Engels (2009). Anthology of Marx and Engels (2009), p. 434. 3 Selected Works of Lenin (1972). 4 Yang (1982). 5 World Bank (1983). 2

12.1 The Affirmation of the Principle of “Material Interests” …

345

principle of distribution according to work. In December 1978, Deng Xiaoping’s famous speech “Emancipate the Mind, Seek Truth from Facts, Unite and Look Forward” clearly put forward the principle of implementing socialist material interests. He said: If we don’t talk about more work and more gain, don’t pay attention to material interests, this may only work for a small number of people with advanced mind, but for the broad masses, it may only work for a while, but not for a long time. The revolutionary spirit is very precious. Without the revolutionary spirit, there would be no revolutionary action. However, revolution emerges on the basis of material interests. If we only talk about sacrificial spirit and not material interests, it is idealism. Deng Xiaoping also put forward the “prosperity for some” argument, and also explained the internal connection between “prosperity for some” and “prosperity for all”. He said: We should allow some areas, some enterprises, and some workers and peasants to earn more and start a better life because of their hard work and greater achievements. With some people’s lives getting better first, the great demonstration power will affect their neighbors, and drive people from other areas and other units to learn from them. In this way, the entire national economy will continue to develop in a wave-like manner, and the people of all ethnic groups in the country will be able to get rich faster. Regarding the principle of socialist material interests, Lenin made a clear statement at the four-year anniversary of the victory of the October Revolution. He said: We are inspired by the wave of enthusiasm. We first inspire the general political enthusiasm of the people, and then inspire their military enthusiasm, we had planned to rely on this enthusiasm to directly achieve the same great economic tasks as general political tasks and military tasks…Real life shows that we were wrong…Instead of relying directly on enthusiasm, we must rely on the enthusiasm generated by the great revolution, rely on personal interests, rely on combining with personal interests, and rely on economic accounting. At the end of 1978, the Third Plenary Session of the Eleventh Central Committee of the Communist Party of China was held. It was pointed out in the meeting that to mobilize the socialist enthusiasm of hundreds of millions of peasants in our country, we must fully pay attention to their material interests in the economy. The Decision of the Central Committee of the Communist Party of China on Several Issues Concerning the Acceleration of Agricultural Development pointed out that it is socialist principles of distribution to distribute according to work and adhere to the principle of more work and more gain, and we should never allow it to be opposed as a principle of capitalism. In 1984, the “Decision of the Central Committee of the Communist Party of China on the Reform of the Economic System” proposed that it is the only way to common prosperity that the state-owned enterprises internally differentiate income levels to fully reflect the rewards for hard-working and punishment for laziness, to reflect merits for superiority and punishments for inferiority, to fully reflect more work and more gain, less work and less gain, and fully reflect the difference between mental and physical labor, complex and simple labor, skilled and unskilled labor, heavy and non-heavy labor as well as to encourage some people to become rich first. In the early days of reform and opening up, the discussion on distribution according to work in China’s ideological and theoretical circles was extremely heated, and many important economists participated in it. From spring 1977 to winter 1978,

346

12 Innovation and Development of Income Distribution Theory

four large-scale seminars on distribution according to work were held,6 which constitutes for an important part of the thought liberation movement at the time. It can be said that the discussion on distribution according to work is the starting point of bringing order out of chaos in the economics community. Yu Guangyuan believes that distribution according to work is an objective economic law: if distribution according to work is not carried out for a long time, the socialist system cannot exist. Distribution according to work is determined by the nature of socialism.7 As for the inevitability of distribution according to work, most scholars argue it from public ownership. Xu He believes that within the scope of national ownership, distribution according to work “has already possessed sufficient conditions for its functioning”.8 Some scholars also analyzed the similarities and differences between actual distribution according to work and Marx’s envisaged distribution principle of personal consumer goods in future society. The main point envisaged by Marx is that the distribution of personal consumer goods is based on labor. Therefore, the distribution of personal income with devotion of labor as the main standard must be supported by socialism. However, Marx envisaged strict implementation conditions for the distribution of personal consumer goods. There are two important ones: one is the realization of public ownership of the factors of production in the entire society, and the other is that there is no commodity currency relationship, and the labor provided is direct social labor. These two conditions are not available in real life, so the distribution according to work in reality has many characteristics that are different from Marx’s assumption. For example, in reality, distribution according to work needs to be done with the help of money. After devoting their labor, workers first receive monetary wages instead of “labor vouchers”, and then use monetary wages to purchase the consumer goods they need. As another example, it is not possible to implement uniform distribution according to work in the whole society, because there still exist companies with independent accounting, which are still economic entities with independent interests. It is in this sense that Jiang Yiwei put forward the theory of “two-level distribution according to work”, that is, society first distributes to enterprises according to work, and then enterprises distributes to individuals according to work.9 The discussion of “labor” in the distribution according to work in the early period of reform and opening up is theoretically enlightening. Whether we can effectively implement the distribution according to work depends on whether we can scientifically and accurately measure the “labour” of laborers. The labor actually paid by the laborer depends on the laborer’s skill, labor intensity and labor dynamics, and is the actual consumption of laborer’s physical and mental power, which is largely difficult to directly observe. More importantly, in reality, since the labor of laborers is not direct social labor, it is also crucial whether it is spent on the purposes that society 6

See The Compilation of the Minutes of the Four Meetings of the Seminar on the Theory of Distribution according to Work, China Financial and Economic Press, 1979. 7 Yu (1979). 8 Xu (1979). 9 Jiang (1980).

12.2 The Establishment of Socialist Basic Income Distribution System

347

needs. The labor used for personal income distribution can only be labor that is useful to society, and invalid labor that does not create any social wealth or use value cannot be used as a distribution standard. In the early days of reform and opening up, Hong Yuanpeng had an in-depth discussion on the measurement of labor, and put forward the view that “the amount of labor in the distribution according to labor must be the socially necessary labor time”.10 Socially necessary labor time is determined by important factors such as average technical level, average labor proficiency, average labor intensity, and the degree to which products meet social needs. Therefore, socially necessary labor time is used instead of natural labor time to measure the actual labor devotion. This is in line with the objective requirements of the movement of the law of value under the market economy. From today’s perspective, this view is forward-looking. China’s reform started with the contract responsibility system of rural households. This contracting system has completely changed the original “work points system” in income distribution, and implemented the income distribution pattern in which “after submitting enough income to the country and the collective group, people get to keep the rest as their own”. There is a heated discussion in the theoretical circles as to whether the contracting system has implemented the principle of distribution according to work, and the mainstream viewpoint has fully affirmed it. Li Jiapeng believes that from the basis of distribution, under the people’s commune system, remuneration is mainly calculated based on the potential form of labor (labor’s capacity) and the flowing form of labor (the amount of labor devoted), both of which have the tendency to easily slide to egalitarianism; Under the household contract system, remuneration is calculated based on the materialized form of labor (the final product of labor). This method of remuneration directly links labor remuneration with labor achievements, and can accurately and effectively measure the actual contribution of labor, so it is a true implementation of the principle of distribution according to labor.11

12.2 The Establishment of Socialist Basic Income Distribution System Diversified Sources and Forms of Residents’ Income Over the past 40 years of reform and opening up, China’s ownership structure and economic operation mechanism have been constantly changing, and the income distribution principles and pattern will inevitably change accordingly. From the perspective of ownership structure, the single public ownership structure in the planned economy period was broken, the individual economy, private economy, and 10 11

Hong (1979). Li (1983).

348

12 Innovation and Development of Income Distribution Theory

foreign investment economy grew rapidly, and the ownership structure and property structure were increasingly diversified; from the perspective of the economic operation mechanism, market plays an increasingly important role in the allocation of resources. Production factors such as labor, capital, and land need to pass through the market to enter the economic circulation process. The combination of laborers and factors of production is no longer taking a simple and direct from, the usage of such factors as capital is required to serve as intermediaries. Changes in the ownership structure and economic operation mechanism have led to changes in income distribution principles and patterns. That is, factors other than labor are gradually added to the system of income distribution, and income outside the system of distribution according to work is increasing. As early as the period of reform and opening up, the household contract responsibility system was implemented. The principles and pattern of income distribution have quietly changed. The factor of “tangible things” has begun to affect people’s household income and economic conditions. Xu He clearly pointed out this when discussing the inadequate implementation of distribution according to work in collective economy: “as for each collective economic unit, the conditions in which production materials and production funds are occupied are different. So even if they devote the same amount of labor, the production level and the income level of each unit are also different. Under the condition of devoting the same amount of labor, those units with good production conditions will get more total income, so the personal income of the members will also be more; Conversely, for those units with poor production conditions, their total income and members’ personal income will be less.”12 It can be seen that after the implementation of the contract system, It is not only the labor of family members that determines the household income of farmers, but also non-labor factors such as the fertility of the land, the quality of agricultural tools, the quality of seeds, agricultural infrastructure, and climate. The advantages of those farmers’ households with good natural conditions, more funds invested, better management skills and greater natural conditions will immediately become apparent, which in turn encouraged other farmers’ households to increase factor inputs and improve operation and management skills in order to achieve a better harvest and obtain more income. Therefore, in theory, the mode of distribution according to factors of production has begun to sprout in the period when household contract responsibility system prevailed. Another important change in income distribution during the period of household contract responsibility system is that personal income or household income distribution has exceeded the scope of personal consumer goods distribution, which is a major difference from the classical writer’s assumption that the distribution of income is limited to the distribution of personal consumer goods. Under the household contract responsibility system, the income earned by farmers includes not only the part for maintenance of simple reproduction for themselves and their families, but also the part for additional investment in order to expand reproduction.13 That 12 13

Xu (1979). Yu (1983).

12.2 The Establishment of Socialist Basic Income Distribution System

349

is to say, personal income already contains a part of income that can be converted into investment and property, which means a qualitative change of the mechanism in capital accumulation and capital formation in China. This is a major change, indicating that non-public property will begin to generate and will gradually increase and that the social property structure is beginning to diversify. It can be said that the implementation of the household contract responsibility system also marks the emergence of a new income distribution theory. The emergence of a non-public economy and non-public property is a turning point in the changes in China’s income distribution principles and residents’ income structure. The development of China’s nonpublic ownership economy started from the individual economy. The Third Plenary Session of the Eleventh Central Committee of the Communist Party of China affirmed the existence of self-retained land for members, family sideline business, and rural markets, and regarded them as a channel to increase farmers’ income. In the individual economy, laborers directly combined themselves with their own factors of production to proceed production, and the products and income obtained belong to the laborers themselves. The income of the self-employed is obviously a kind of labor income, because he or she has paid hard work, but this income is not obtained according to the principle of distribution according to work. In essence, it is a kind of operating income, which is obtained from the market and is determined by many factors such as the labor effort, production conditions, technology and management level of individual workers, and is subject to the law of value. The development of China’s private economy occured slightly later than the individual economy, but it grew rapidly. The biggest feature of the private economy is the employment of workers, whose mode of distribution is very different from that of the public economy. The income of hired workers is the income of labor, but it is determined by the value of labor, and it is also affected by the supply and demand of the labor market. The employer’s income contains many components: as the business runner, he or she is responsible for the business decision-making and daily operation of the enterprise, and has devoted mental and physical labor to obtain labor income; as the capital owner, he or she has invested capital, which was put into in the process of participation in social equalization of profits, thereby obtaining capital income; As an employer, he or she hires workers and thus obtains the surplus value created by the workers; he or she also assumes business and property risks, thereby obtaining risk-compensating income Therefore, an employer’s income is a mixture of labor income, capital income, surplus value, and risk compensation income. The income distribution principle of foreign-funded economy is the same as that of private economy. At the beginning of reform and opening up, with the increase of residents’ income and consumption surplus, residents’ property began to increase and diversify, and thus, property income also increased and diversified. Residents’ property and property income mainly include: first, savings deposits and interest. In 1978, the savings deposit balance of urban and rural residents was 21.06 billion yuan, and in 1995 increased to 2966.23 billion yuan, an increase of nearly 140 times. In 1995, the interest rate for half-year time deposits was 6.65% and for five-year periods was 13.86%. Savings deposits brought considerable interest income. The second is bonds and

350

12 Innovation and Development of Income Distribution Theory

interest. In 1995, the balance of corporate bonds was 67.987 billion yuan, the balance of national bonds was 228.64 billion yuan; the balance of financial institution bonds was 87.629 billion yuan;the balance of national investment bonds was 13.939 billion yuan;and the balance of national investment company bonds was 15.181 billion yuan, constituting the fixed income assets of residents and enterprises. The third is stocks and their dividends and capitalized income. In the early 1980s, joint-stock enterprises began to emerge, with some enterprises beginning to issue stocks to their employees or society to raise funds. By the end of 1989, China’s stocks had issued a total value of 4.2 billion yuan. The fourth is real estate and its rent and capitalized income. With the advancement of the housing system reform, housing has gradually acquired the attributes of commodities and property, and real estate has increasingly become an important asset held by residents, bringing substantial capitalized income and rent to real estate holders. In the middle and late 1980s, more and more scholars began to pay attention to the changes in income distribution principles and residents’ income structure. In 1988, Gu Shutang and Cai Jiming published “The Contradiction between the Theory of Distribution According to Work and Reality”, which analyzes the changes in the principle of income distribution in reality, and believes that due to the existence of various types of ownership, commodity production and commodity exchange came into being, issues such as the proportion of accumulation and consumption in national income, the immediate and long-term interests of workers, the choice between personal needs and public needs and so on cannot be completely regulated by the state. Both enterprises and individuals have varying degrees of autonomy in income distribution and accumulation, so the mode of distribution according to work as envisaged by classic writers cannot yet be fully implemented. The distribution method in the primary stage of socialism can be summarized as “distribution according to contribution”, that is, distribution according to the actual contributions made by various factors of production in the creation of social wealth.14 Of course, some scholars have questioned the mode of distribution according to factors. A representative view believes that distribution according to factors is a reprint of Say’s “Trinity Formula”, which is contrary to the principles of socialism.15

The Establishment of the Basic Distribution System of Socialism In the early days of reform and opening up, China’s income distribution principles and residents’ income structure have begun to diversify, which has laid a realistic foundation for the formation of a basic distribution system. In 1987, the 13th National Congress of the Communist Party of China formally proposed “implementing multiple distribution methods with distribution according to work as the 14 15

Gu and Cai (1988). Guo (1992).

12.2 The Establishment of Socialist Basic Income Distribution System

351

main body”, pointing out that: the distribution method at the initial stage of socialism cannot be single. The principle we must adhere to is that distribution according to work is the main body and other distribution methods are complementary. In addition to the main method of distribution according to work and the income of individual labor, when companies issue bonds to raise funds, there will be interest earned on debt; with the emergence of the joint-stock economy, there will be share dividends; The income of business operators partially includes risk compensation; private enterprises employ a certain amount of labor, which will bring some non-labor income to business owners. As long as the above income is legal, it should be allowed. Although the 13th National Congress of the Party did not explicitly propose “distribution according to factors of production”, it affirmed a series of non-labor income, which actually serves as affirmation of the practice of distribution according to factors of production. The Third Plenary Session of the Fourteenth Central Committee of the Communist Party of China passed the Decision of the Central Committee of the Communist Party of China on Several Issues Concerning the Establishment of a Socialist Market Economic System. For the first time, “Allow individual production factors such as capital to participate in the distribution of income” was proposed, and the original statement of “taking the method of distribution according to work as the main body and other distribution methods as supplements” was changed to “taking the method of distribution according to work as the main body with multiple distribution methods coexisting”. The change of wording from “supplements to coexistence” indicates the elevation of the status of multiple distribution methods (mainly distribution according to factors). The 15th National Congress of the Communist Party of China proposed the basic economic system of socialism, and clearly proposed “distribution according to factors of production”: a system that adheres to distribution according to work as the main body and multiple distribution methods as coexisting methods, combining distribution according to work and distribution according to factors of production … allowing and encouraging capital, technology and other factors of production to participate in the distribution of income. The 16th National Congress of the Communist Party of China further promoted distribution according to factors as the “principle”, and proposed “establishing the principle that labor, capital, technology, and management and other factors of production participate in distribution according to contribution, and improve the situation of taking distribution according to labor as the main body, with multiple distribution methods coexisting”. The system also pointed out that “all legal labor income and legal non-labor income should be protected.” The report of the 17th National Congress of the Communist Party of China reiterated: we should adhere to and improve the distribution system where distribution according to work is regarded as the main body with multiple distribution methods coexisting, improve the system in which labor, capital, technology, management and other production factors participate in the distribution according to their contributions, and propose to create conditions for more people to own property income. It can be seen that from the 13th CPC National Congress to the 17th CPC National Congress, a basic socialist distribution system has been formed. How to treat the basic distribution system of socialism theoretically? It conforms to the general principles of Marxist writers regarding distribution. Regarding the

352

12 Innovation and Development of Income Distribution Theory

general principles of income distribution, Marx has two classic statements: One is the discussion in the Critique of the Gotha Programme: “Any distribution of consumption materials is nothing but the result of the distribution of production conditions; and the distribution of production conditions represents the nature of the mode of production itself.”16 Here, “distribution of production condition itself” can be understood as the ownership structure of factors of production. Then there is the discussion in : The distribution relationship and distribution method are only manifested as the back of production factors… The structure of distribution is entirely determined by the structure of production. Distribution itself is a product of production, not only in terms of objects, but also in terms of forms. As far as the object is concerned, what can be distributed is only the results of production. As far as the form is concerned, the certain way of participating in production determines the special form of distribution and the form of participating in distribution From these two statements of Marx, it can be clearly seen that it is its ownership structure that determines a society’s distribution system. In the early days of reform and opening up, we began to break the “one-iron-plate” public ownership structure during the planned economy period. The ownership structure and social property structure are increasingly diversified. This is not shifted by human will. The 15th National Congress of the Communist Party of China established the basic socialist economic system, that is, “public ownership is the mainstay, and multiple ownership economies develop together.” The joint-stock system, private enterprises, and mixedownership economies have grown rapidly and are playing an increasingly important role in economic and social life. The basic distribution system that is compatible with the basic socialist economic system must be “the method of distribution according to work as the main body with multiple distribution methods coexisting”: “public ownership as the main body” determines the main-body status of distribution according to work; “multi-ownership economy development together” determined that multiple distribution methods coexist, and the main method in “multiple distribution methods” is distribution according to factors of production. The breakthrough point of the basic distribution system of socialism is the introduction of distribution according to factors of production. The basic theoretical issues involved in the distribution of factors of production are the relationship between value creation and value distribution, and the nature of property income. The proposal of distribution according to factors of production made many people think of the “trinity formula”. The “Trinity Formula” was proposed by French economist Say. He believes that labor, capital, and land, as the three factors of production, are not only the factors that create the use value of commodities, but also the elements that create the value of commodities. Therefore, all three should receive corresponding income: labor for wages, capital for interest, and land for rent. Marx dedicated a special chapter in the third volume of “Capital” to make a profound criticism of the “Trinity Formula”, but sometimes he was mistaken as denying the income from factors of production. The crucial point of the “Trinity Formula” is that it confuses the relationship between value creation and value distribution, and tries to use value creation as the basis for 16

Anthology of Marx and Engels (2009), p. 436.

12.2 The Establishment of Socialist Basic Income Distribution System

353

value distribution. However, if value creation is used as the basis for value distribution, then production factors such as capital and land cannot participate in value distribution, which is obviously not realistic. Or, production factors is recognized to create value, thereby providing a basis for production factors to participate in value distribution. And this is against the labor theory of value. From the perspective of Marx, the vulgarity of the “Trinity Formula” is to regard capital, land, and labor as the sources of value. But Marx did not deny that land ownership, capital and so on becoming the sources of income. He said: “labor itself, as a natural means of capital, has become a source of profit, land itself has become a source of land rent.”17 In Marx’s view, value distribution and value creation are different, and the ownership of factors of production is the basic foundation for participating in value distribution to obtain income. In Marx’s theory, ownership is never just regarded as a kind of pure “lawful” possession relationship between people and things, it is essentially a relationship of economic interests between people; it is a kind of right to claim interest, that is, the owner of the production factor has the right to obtain the material benefits brought by the production factor through the possession of the factor. When discussing the nature of land ownership, Marx wrote: “If we examine the various situations in a country that practices capitalist production, where capital can be invested on land without paying rent, then we will find that all of these circumstances mean the abolition of land ownership, even if it is not a legal abolition, it is de facto an abolition. However, this abolition only occurs under very limited circumstances, which by their very nature are only accidental.”18 Marx used land ownership as an example to discuss the relationship between value distribution and value creation. The essence of ownership is more fully revealed in this relationship: according to the theory we talk about, the private ownership of natural objects such as land, water, mines, etc., for these production conditions, and for the ownership of one or other production conditions provided by nature, it is not the source of value, because value is only equal to materialized labor time; This ownership is not the source of excess residual value … However, this ownership is a source of income. Ownership is the basic foundation for participating in income distribution, but ownership is not the complete basis for participating in income distribution by owners of factors of production. The reason why the owners of the factors of production can participate in the distribution of income with their ownership and why this fact is widely accepted by the society, is that in addition to the ownership, the factors of production that the owners possess also play an important role in the creation of social wealth. Even if the element of “thing” does not create a value “atom”, it participates in the creation of social wealth. Marx’s labor value theory distinguishes between value creation and wealth creation, but value creation cannot replace wealth creation. Social wealth is the unity of use value and value. Marx abstracted the process of value creation from the process of wealth creation. The purpose was to reveal the source of residual value from the analysis of value relationships and value creation. Therefore, we must not replace the process of wealth creation by the process of value 17 18

Anthology of Marx and Engels (2009), p. 934. Anthology of Marx and Engels (2009), p. 849.

354

12 Innovation and Development of Income Distribution Theory

creation abstracted from wealth creation when applying labor value theory.19 Marx and Engels analyzed the statement that “labor is the source of all wealth and all cultures” in the “Criticism of the Gotha Program” proposed by the German Workers Party Program and pointed out: “Labor is not the source of all wealth. Nature, like labor, is the source of use value (and material wealth is composed of use value!). Labor itself is nothing but a manifestation of natural forces, that is, human labor.” The above sentence … is correct under the premise that labor has its corresponding objects and materials.20 It can be seen from the above analysis that although non-labor production factors are not elements of value creation, they are elements of wealth creation. Marx specifically analyzed the role of non-labor production factors in the process of wealth creation. He pointed out when analyzing the role of natural resources such as land and mineral resources in wealth creation:“All kinds of commodities are a combination of two elements, natural matters and labor…Man can only function as nature itself in production, that is, it can only change the form of matter. Not only that, he also often relies on the help of natural forces in this form-changing labor itself. Therefore, labor is not the only source of the use value or material wealth it produces.”21 He gave an example that “if rich minerals are found, the same amount of labor will appear as more diamonds”.22 Capital is an important factor of production. Special attention should be paid to the role of capital in wealth creation and value formation. According to Marx’s analysis, the most important role of capital is to incorporate various factors of production, including labor and land, into the production process.23 “Once capital merges the two original elements that form wealth, i.e., labor and land, it acquires an expansion capability.”24 Not only that, the application of science and technology in production and Craftsmanship also needs to be completed through the incorporation of capital. Without the intervention of capital, science and technology cannot be transformed into real productivity, and even the most advanced science and technology can only stay in the concept morphologically. Capital not only participates in the creation of wealth, but also has an influence on the creation of value. In the value composition of wealth c + v + m, v + m refers to new value, which is created by labor is the transfer value of “things” or “capital”; this transfer value is not passive for value creation, and can play its role in an active way. Specifically, as capital quality improves, machinery and equipment with higher technology may affect the amount of value by creating more products.25 As Marx pointed out: “The value of a week’s products produced by an Englishman who works with a powerful automated machine and the value of a week’s products produced by a Chinese man who only uses a hand spinning wheel 19

Hong (2001). Anthology of Marx and Engels (2009), p. 428. 21 Anthology of Marx and Engels (2009), p. 56. 22 Anthology of Marx and Engels (2009), p. 53. 23 Hong (2001). 24 Anthology of Marx and Engels (2009), p. 697. 25 Hong (2001). 20

12.2 The Establishment of Socialist Basic Income Distribution System

355

are still surprisingly different.26 In addition, “labor is not homogeneous, labor is also introduced into the process of value creation by capital. Capital hires higher quality living labor to create higher value.”27 The 16th National Congress of the Communist Party of China proposed “establishing the principle for labor, capital, technology, and management and other factors of production’s participation in distribution according to contributions”, which involves the “contribution”of the factors of production. There is a heated discussion in the academic community on how to understand the “contribution of factors of production”. According to the above analysis, “contribution of production factors” obviously does not mean that the production factors themselves create value, but that it participates in the creation of wealth and affects the creation of value. This does not contradict Marx’s labor theory of value. So, how does the production factor such as capital participate in value distribution in real economic life? This is done through the “invisible hand” of the market, that is, the owner of the factors of production first divides the newly created value by means of the law of value, the law of competition, and the law of supply and demand. Marx’s theory of profit equalization explained in his work “Capital” has explained this process scientifically. That is: the inherent requirement of “equal capital generates equal profits” drives production factors to flow continuously between productions in different products, different sectors, and different regions, thereby changing the supply and demand relationship and prices of different products, sectors, and different regions and changing their profitability accordingly. This process will continue until the remuneration of equal production factors tends to be equal. Therefore, profits obtained by the enterprise already include the results of capital and other production factors’ participating in the distribution of new value in society; and the compensation given to the owners of production factors at the micro level of the enterprise is actually a confirmation of the process of market distribution of values. The basic distribution theory of socialism is the inheritance and innovation of the income distribution theory of Marxist political economy, which lays the foundation for the basic incentive structure of the socialist market economy. First, it insists on the method of distribution according to work as the main body, which adheres to the basic nature of socialism and embodies the socialist view of equity. Marx believes that the only measure of future social income distribution is labor. In reality, labor cannot serve as the “only” measure of distribution. However, labor should be the main measure of distribution. Sticking to this point is an adherence to the essence of classic writers’ view of distribution of future personal income. Second, it recognizes the existence of multiple distribution methods, in particular, it recognizes and encourages the participation of various factors of production in distribution, such as labor, capital, land, technology, and management and so on. The introduction of method of distribution according to factors of production is undoubtedly a major breakthrough in the Sinicization and modernization of the income distribution theory of Marxist political economics. The traditional theory of personal income 26 27

Anthology of Marx and Engels (2009), p. 699. Hong (2001).

356

12 Innovation and Development of Income Distribution Theory

distribution only recognizes the distribution of income according to work, and does not recognize other forms of labor income, let alone non-labor income such as income from production factors. This is obviously not in line with the internal law of the development level of productive forces in the primary stage of socialism and the socialist market economy. The recognition of the method of distribution according to factors of production and the recognition of non-labor income has opened up a variety of income channels and a broad space for wealth for the people. Third, an incentive mechanism has been established that is highly integrated with the socialist market economy. Interest is the original driving force of economic operation. A good distribution system should be able to fully release the reasonable interests of members of society, and then converge into an inexhaustible driving force for economic and social development. The interest structure established by the socialist basic distribution system is highly compatible with the inherent incentive structure of the socialist market economy. On one hand, “distribution according to work as the main body” can stimulate the enthusiasm of hundreds of millions of workers and the enthusiasm of accumulating human capital, and encourage people to work hard to become rich; On the other hand, allowing and encouraging distribution according to factors of production can mobilize the enthusiasm of the people to accumulate wealth and allocate resources, promote the formation of social capital and increase the mobility of factors of production, and lay a micro-incentive foundation for the decisive role of the market in resource allocation. In summary, the basic distribution system of socialism can “let out the vitality of all labor, knowledge, technology, management, and capital, and let all sources of social wealth fully flow.”

12.3 Further Development of Income Distribution Theory in the New Era Since the 18th National Congress of the Communist Party of China, the Party Central Committee with Comrade Xi Jinping at its core has led China into a new era of comprehensive deepening of reform and economic development. When General Secretary Xi Jinping presided over the study of the Central Political Bureau in November 2016, he clearly referred to the coexistence of multiple distribution methods as the main distribution system according to work as the socialist basic distribution system. The report of the Nineteenth National Congress of the Communist Party of China pointed out that we must uphold and improve the country’s basic socialist economic system and distribution system, and place the socialist basic distribution system in the same important position as the basic socialist economic system. In the new era, income distribution theory and income distribution reform are developing into the depth, and the basic distribution system is further improved.

12.3 Further Development of Income Distribution Theory in the New Era

357

People-Centered Development Thinking is the Main Line of Reform and Practice of Income Distribution in the New Era People-centered development is the main line of reform and development in the new era, and the main line of advancement of the theory and practice of income distribution in the new era. In 2015, the Fifth Plenary Session of the Eighteenth Central Committee of the Communist Party of China clearly put forward the development concept of “people-centeredness” for the first time, and made “sharing” one of the five development concepts. During the collective study of the 18th CPC Central Committee Political Bureau on November 23, 2015, Xi Jinping pointed out: we should adhere to the people-centered development thinking. Development for the people is the fundamental position of Marxist political economy. The Nineteenth National Congress of the Party further emphasized the people-centered development thinking. Implementing the people-centered development thinking, the development of income distribution theory in the new era has two distinct backgrounds. The first is to pay more attention to social fairness and justice, and to emphasize distributing the “cake” in a fairer way, while constantly making the “cake” bigger. The second is to emphasize more towards common prosperity. Through a series of policy measures to adjust the income distribution pattern, by improving the redistribution adjustment mechanism with taxation, social security, and transfer payment as the main means, the problem of income gap will be alleviated, and the development results will be fairer and fairer to all people.

Consolidate the Dominant Position of Distribution According to Work, and Strive to Increase the Proportion of Labor Compensation and Labor Income At the beginning of the reform and opening up, the income gained through distribution according to work and other labor income was the mainstay of residents’ income, and the dominant status of distribution according to labor was obvious. With the introduction of various distribution methods such as distribution according to factors of production, the proportion of labor income such as distribution of income according to work has decreased, and the proportion of non-labor income such as production factor income has increased. The entire configuration of national income distribution has also changed. The proportion of labor remuneration in the initial distribution stage has declined, and the proportion of residents’income within the national income distribution has declined. According to estimates, in 1992, labor compensation accounted for 49.40% of GDP, which dropped to 42.14% in 2004 and slightly increased to 44.93% in 2011. As the decline of the proportion of labor compensation

358

12 Innovation and Development of Income Distribution Theory

in GDP, the proportion of household income in GDP has shown a downward trend. In 1992, residents’income accounted for about 65% of GDP, and in 2012 it dropped to 41.6%. The decline in the “two proportions” is not conducive to adhering to the dominant position of distribution according to work. The report of the Eighteenth National Congress of the Communist Party of China put forward the ideas of “two synchronization” and “two improvements”, that is, “growth in resident income and economic development should be synchronized, and growth in labor compensation and labor productivity should be synchronized”, while “the proportion of residents’ income in national income distribution should be improved and the proportion of labor compensation at the initial distribution stage should be improved”.28 In 2013, the State Council approved the “Several Opinions on Deepening the Reform of the Income Distribution System”, and proposed specific measures to increase the proportion of labor compensation, including the implementation of employment priority strategies and more active employment policies, creating an equal employment environment and improving the ability of workers to earn income in order to achieve higher quality employment; measures also include deepening the reform of the wage system, improving the wage determination and growth mechanism of enterprises, government departments, and institutions and so on. The Third Plenary Session of the Eighteenth Central Committee of the Communist Party of China emphasized the importance of improving labor compensation, that is, focusing on protecting labor income, striving to achieve the synchronization of labor compensation growth and labor productivity improvement, and increasing the proportion of labor compensation ate the initial stage of distribution.29 The report of the Nineteenth National Congress of the Communist Party of China reiterated the increase of the “two proportions”.30 From 2012 to 2016, the measures of the “two synchronization” and “two Improvements” showed their effectiveness. According to a rough calculation, in 2012, labor remuneration accounted for 44.9% of the GDP, increasing to 47.9% in 2015, an increase of 3 percentage points, and an average annual increase of 0.75 percentage points. In 2012, residents’income as a percentage of GDP was 41.6%, and it increased to 45.6% in 2016, a total increase of 4 percentage points, and an average annual increase of 1 percentage point. Both the labor remuneration and the proportion of residents’ income have achieved a primarily steady increase. At the same time, from 2012 to 2016, the country’s GDP and per capita income of urban and rural residents maintained a rapid growth rate, and maintained a synchronous growth trend, and labor productivity and labor compensation also achieved simultaneous improvement.

28

Selected Documents since the 18th National Congress of the Communist Party of China (I) (p. 28.). Beijing: People’s Publishing House, 2014. 29 Decision of the Central Committee of the Communist Party of China on Several Major Issues Concerning Comprehensively Deepening Reform. Beijing: People’s Publishing House, 2013. 30 Xi (2017).

12.3 Further Development of Income Distribution Theory in the New Era

359

Improve Distribution According to Factors of Production and Increase Residents’ Property-Based Income Through Multiple Channels Ever since the 15th National Congress of the Party proposed “distribution according to factors of production”, distribution according to factors of production and income from factors of production have played an increasingly important role. However, China’s market economy is still in the process of development, and there are still many imperfections in the method of distribution according to the factors of production. The Eighteenth National Congress of the Communist Party of China proposed “improving the initial distribution mechanism in which labor, capital, technology, management and other factors participate in the distribution according to their contributions.” The Third Plenary Session of the Eighteenth Central Committee of the Communist Party of China proposed “improving the mechanism of capital, knowledge, technology, management and other factors determined by the factor market”, and the 19th National Congress of the Communist Party of China proposed “improving the institutional mechanism for distribution according to factors of production”. The key to perfect distribution according to factors of production is to establish a perfect market for factors of production. In this market, factors of production can flow fully and freely, and prices of factors of production can accurately reflect their contribution to the creation of social wealth and their own level of scarcity. Only through this way of distribution according to factors of production and the dominant way of distribution according to work, can a reasonable order and pattern of income distribution be established. With the introduction of distribution according to factors of production, people’s property income has increased. Property income has a cyclical cumulative effect, which often rapidly widens the income gap of members of society. In order to increase the income level of residents and alleviate the effect of widening the income gap of property income, more people must have more property and thus obtain more property income. Since the Eighteenth National Congress of the Communist Party of China, the Party Central Committee with Xi Jinping at its core has repeatedly proposed “multiple channels to increase residents ‘property income” and “widening channels for residents’ labor income and property income.” Laborers are encouraged to obtain labor income, and at the same time be able to obtain more factor income. Therefore, although various types of factors of production have participated in the distribution of income, the proportion of labor compensation in total income decreases, but this does not mean that the total income of workers will decline. The income of workers will increase as they possess more production factors and property income.

360

12 Innovation and Development of Income Distribution Theory

Focus on Cultivating and Growing Middle-Income Groups In October 2010, the “Proposal of the Central Committee of the Communist Party of China to Formulate the Twelfth Five-Year Plan for National Economic and Social Development” put forward the concept of “middle-income group”. The Third Plenary Session of the Eighteenth Central Committee of the Communist Party of China clearly stated that: we should increase the income of low-income earners, increase the proportion of middle-income earners, strive to narrow the income distribution gap between urban and rural areas, regions, and industries, and gradually form an olive-shaped income distribution pattern. The Fifth Plenary Session of the Eighteenth Central Committee of the Communist Party of China regarded “expanding middleincome groups” as an important part of building a well-off society in an all-round way, and “expanding the proportion of middle-income people” was included in the “13th Five-Year Plan”. The report of the Nineteenth National Congress of the Communist Party of China proposed a longer-term goal for expanding middle-income groups: from 2020 to 2035, on the basis of building a well-off society in an all-round way, the proportion of middle-income groups will be significantly increased, and socialist modernization will be basically achieved. The middle-income group has obvious economic characteristics. They have a relatively generous income and are free to spend on consumer durables, high-quality education and medical care, housing, vacations and other leisure activities. Our country has entered the ranks of upper-middle-income countries, and the growth of middle-income groups is of great significance for the sustained and healthy development of the country’s economy and society. According to international experience, “a prosperous middle class is a necessary condition to promote consumer demand, maintain economic growth and escape the middle income trap.”31 Some middleincome countries have not succeeded in crossing the middle-income trap. An important reason may be that a middle-income group has not been nurtured. Because “without such a group, it is difficult to create the huge consumer market, investment in education, institutionalized savings and social mobilization needed to support growth.”32 For example, South Korea’s per capita income in 1986 was comparable to that of Brazil in 1979. South Korea successfully crossed the middle-income trap but Brazil did not. This is partly because South Korea has cultivated a large middle class, accounting for 55% of the total population at that time, which was twice that of Brazil. Since the 18th National Congress of the Communist Party of China, our country’s middle-income groups have shown growth with faster pace. General Secretary Xi Jinping said at the 2015 China-US Entrepreneurs Investment Symposium in Seattle that China’s middle-income population is close to 300 million and will double in the next decade.33 Some scholars estimated that the country’s middle-income group accounted for 38.1% of the total population in 2012, and it would increase to 47.6% 31

Lin and Michael (2011), p. 40. Lin and Michael (2011), p. 42. 33 Retrieved from http://china.cnr.cn/ygxw/20150923/120150923_519,944,639.shtml. 32

12.3 Further Development of Income Distribution Theory in the New Era

361

in 2014. However, compared with high-income countries, our country’s middleincome group was relatively small. There are 230 million people within the middle class in the U.S., accounting for 3/4 of the country’s population, and the proportion of middle class has exceeded 90% of the total population in South Korea, Japan, and EU countries.34 Therefore, China’s middle-income group still has a lot of room for growth. The new era needs to accelerate the growth of middle-income groups and form an olive-shaped income distribution pattern as soon as possible.

Alleviate Poverty in a Targeted Manner and Build a Well-Off Society in an All-Round Way Since the reform and opening up, our country’s rapid economic growth has lifted many people out of poverty. According to the “China Poverty Alleviation and Development Report 2016” jointly released by the Chinese Academy of Social Sciences and the Poverty Alleviation Office of the State Council, from 1981 to 2012, China’s population of poverty has decreased by 790 million, accounting for 71.82% of the global population of poverty reduction. The report of the Eighteenth National Congress of the Communist Party of China further proposed the goal of fully building a well-off society by 2020. The key to building a well-off society in an all-round way is to lift the poor out of poverty as soon as possible. General Secretary Xi Jinping has always been concerned about the eradication of poverty. On November 3, 2013, he first proposed the concept of “precise poverty alleviation” when he investigated the issue of poverty alleviation and development in Shibadong Village, Hunan Xixi Tujia and Miao Autonomous Prefecture. In November 2015, the Central Poverty Alleviation and Development Working Conference was held in Beijing. General Secretary Xi Jinping pointed out: by 2020, the goal of “two worry-free, three guarantees” should be achieved…At the same time, the increase in the per capita disposable income of farmers in poverty-stricken areas is higher than the national average, and the indicators of the main areas of basic public services are close to the national average. At this point, China’s poverty alleviation and development work has entered a new stage of tackling poverty. In 2012, Chin’a population in poverty was 98.99 million. By 2014, the number was 70.17 million. By 2020, we should ensure that the rural poverty-stricken people will get rid of poverty under the current standards, that all poverty-stricken counties will remove their “hats of poverty”, and solve the overall poverty in the region. Since the 18th National Congress of the Communist Party of China, the achievements of poverty reduction in our country have been very obvious. From 2012 to 2017, the total number of people in poverty decreased by 68.53 million, an average annual decrease of 13.706 million. The incidence of poverty was reduced from 10.2% to 3.1%. In 34

Lin and Michael (2011), p. 42.

362

12 Innovation and Development of Income Distribution Theory

2017, 28 poverty-stricken counties such as Jinggangshan and Lankao County have taken the lead out of poverty, achieving the first reduction in the number of povertystricken counties in history.

12.4 Conclusions After 40 years of reform and opening up, the main social contradictions in our country have been transformed into contradictions between the people’s increasing need for a better life and unbalanced and inadequate development. Economic development has begun to shift from high-speed growth to a high-quality development stage. What we pursue is higher quality, more efficient, fairer and more sustainable development. According to the strategic arrangement of the 19th National Congress of the Party, on the basis of fully building a well-off society in 2020, socialist modernization will be basically achieved in 2035. By that time, people’s lives will be more affluent, the proportion of middle-income groups will increase significantly. The development gap between urban and rural areas and the living standards of residents will narrowed significantly, the equalization of basic public services will basically be achieved, and all people will take a solid step towards common prosperity. By 2050, a prosperous, powerful, democratic, civilized, harmonious and beautiful modern power of socialism will be built. At that time, the common prosperity of all the people will basically be realized, and the people will enjoy a happier and better life. The 40-year practice of reform and opening-up has proved that the basic distribution system, the system with distribution according to work as the main body accompanying the coexistence of multiple distribution modes, is effective. It promotes the rapid growth of residents’ income and the rapid accumulation of social wealth. The new era must persist the above. At the same time, due to major social contradictions and changes in the stage of economic development, as well as important changes in the status and role of some basic factors that affect income distribution, in the new era, the socialist basic distribution system needs to be further improved to respond to social concerns.

Narrow the Income Gap and Pursue Common Prosperity “Common prosperity” is the essential characteristic and fundamental goal of socialism and the greatest superiority of the socialist system. Marx has once clearly pointed out that in the new social system, the development of social productive forces will be so rapid … production will be aimed at the prosperity of all people. Deng Xiaoping regarded “common prosperity” as one of the essences of socialism by pointing out that “The essence of socialism is to liberate productive forces,

12.4 Conclusions

363

develop productive forces, eliminate exploitation, eliminate polarization, and ultimately achieve common prosperity.”35 General Secretary Xi Jinping’s series of important speeches repeatedly emphasized the reduction of the income gap, the promotion of common prosperity, and the achievement of more and more fair development which benefits all people. After 40 years of reform and opening up, the income and living standards of our residents have generally improved, but the gap between the rich and the poor has widened significantly, and has evolved into an important source of various social and economic conflicts. Narrowing the income gap and pursuing common prosperity will be a main line for advancing the theory and practice of income distribution in the new era.

Further Deal with the Relationship Between Fairness and Efficiency Fairness is a right. Marx believes that rights must not go beyond the economic structure of society and the development of social culture constrained by economic structure. This above assertion of Marx provides important theoretical enlightenment for positively identifying the relationship between fairness and efficiency and its line of historical evolution. In the early days of reform and opening up, in order to overcome egalitarianism and stimulate people’s enthusiasm for production, it was necessary, from theory to practice, to emphasize the role of “efficiency”. The priority of efficiency was gradually established and widely accepted by society. In 1993, the Third Plenary Session of the Fourteenth Central Committee of the Communist Party of China first proposed the principle of “giving priority to efficiency with due consideration to fairness”, which was reiterated by the 15th National Party Congress. After the 16th National Congress of the Communist Party of China, as the income gap widened, references to fairness and common prosperity appeared more and more in the decisions and policy documents of the party and government. Since the Fourth Plenary Session of the Sixteenth Central Committee of the Communist Party of China in 2004, there has been no mention of the principle of “giving priority to efficiency with due consideration to fairness”. The 17th National Congress of the Communist Party of China has changed the original statement of “focusing on efficiency in initial distribution and fairness in redistribution” to “regarding the relationship between efficiency and fairness in both initial distribution and redistribution and pay more attention to fairness during redistribution”, which considers the relationship between fairness and efficiency in the entire process of production and distribution. Since the 18th National Congress of the Communist Party of China, there has been a series of new understandings of the relationship between fairness and efficiency. The outstanding theoretical and practical characteristics has made the significance of “fairness” more and more important. In the new era, we must take “fairness of rights, fairness of 35

Selected Works of Deng Xiaoping (1993), p. 373.

364

12 Innovation and Development of Income Distribution Theory

opportunities and fairness of rules” as the basic criteria, and regard “fair starting point, fair process, and fair results” as the key focus point to work on, embedding fairness in the socialist market economic system in order to lay solid foundation for a better life for the people.

References Anthology of Marx and Engels. (2009). Vol. 3. (p. 428). People’s Publishing House. Gu Shutang, and Cai Jiming. (1988). Contradiction between Theory and Reality of Distribution according to Work. Social Sciences in China, 3. Guo Zhongfan. (1992). The Theory of Value: The Basis and Starting Point of Political Economy: On the Theoretical Sources of the Theory of Factor Distribution. Journal of Hubei Normal University (Philosophy and Social Sciences Edition), 5. Hong Yinxing. (2001). Advanced Social Productivity and Scientific Labor Value Theory. Academic Monthly, 10. Hong Yuanpeng. (1979). Discussion on Labor Measurement in Distribution according to Work. Journal of Fudan University, 3. Jiang Yiwei. (1980, March 21,). Some Relatives to Distribution according to Work. Workers’ Daily. Li Jiapeng. (1983). The Progressive Change of the Relationship of Production. Economic Research Journal, 11. Lin Zhonggeng, and Michael Spencer. (2011). Medium and Long-term Development and Transformation of China’s Economy: Thoughts and Suggestions from an International Perspective. Beijing: CITIC Press Group. Selected Works of Deng Xiaoping. (1993). Vol. 3. People’s Publishing House. Selected Works of Lenin. (1972). Vol. 3. (p. 252). People’s Publishing House. World Bank. (1983). China: Socialist Economic Development, Vol. 1. Washington. Xi Jinping. (2017). Building a Well-off Society in an All-round Way and Winning the Great Victory of Socialism with Chinese Characteristics in the New Era. Beijing: People’s Publishing House. Xu He. (1979). Distribution of Bonus according to Work in the Basic Economic Law of Socialism. Academic Forum, 1. Yang Xiaokai. (1982). Gini Coefficient, an Important Index of Social and Economic Development. Journal of Wuhan University, 6. Yu Guangyuan. (1979). Several Issues on Deeply Studying the Theory of Distribution According to Work. Economic Research Journal, 1. Yu Zuyao. (1983). The Practice of Agricultural Contract to Household is the Prelude to the Reform of China’s Economic System. Economic Research Journal, 3.

Chapter 13

From “Development is the Absolute Principle”, to the Scientific Outlook on Development, to the New Development Concept

Over the past 40 years of reform and opening up, China has undergone a “double transformation”: On one hand, China has moved from a planned economy to a socialist market economy; On the other hand, it has moved from an agricultural society to an industrial society, and then to a socialist modern power. This “Double transformation” has achieved great success. Over the past 40 years, our understanding of the laws in social and economic development with Chinese characteristics has been continuously deepened. It has gone through a clear theoretical evolution trajectory from “development is the absolute principle”, the scientific development concept to the new development concept, which has expanded the vision of developing countries to modernization, and provided Chinese wisdom and Chinese solutions for human beings to solve problems as regard to development.

13.1 Development is the Absolute Principle The Third Plenary Session of the Eleventh Central Committee of the Communist Party of China opened the historical curtain of reform and opening up, and also opened a new historical journey of the economic take-off and development of the Chinese economy. This historic turning point is an inevitable result of the main contradiction movement in the primary stage of socialism in our country and an inevitable requirement of the essence of socialism. Taking the opportunity of reform and opening up, the whole society gradually formed a consensus that “development is the absolute principle”.

© China Social Sciences Press 2023 Z. Zhang, Handbook of Chinese Economics, https://doi.org/10.1007/978-981-99-0420-4_13

365

366

13 From “Development is the Absolute Principle”, to the Scientific Outlook …

Development is the Absolute Principle China has experienced a qecial peniod from 1958 to 1978. Faced with the national economy and people’s lives in a state of distress, the party’s leadership and theoretical circles in economics began to reiterate the standards of productivity, and clearly pointed out that it is necessary to vigorously develop social productivity, change the status quo of poverty and backwardness, and transform the focus of party and the country to the work of economic construction. In August 1977, the report of the 11th National Congress of the Party emphasized that “productivity is the most revolutionary factor”; On September 13–20, 1978, Deng Xiaoping made a speech (also known as the “North Tour Talks”) during his inspection of the three provinces in Northeast China and Tangshan and Tianjin, and made it clear that the focus of the party’s work should be quickly and resolutely shifted to economic construction. The issue of reform and opening up has also been explained systematically; In December 1978, the Third Plenary Session of the Eleventh Central Committee of the Communist Party of China formally proposed “to shift the focus of work of the whole party and the attention of the people of the whole country to the construction of socialist modernization.”1 Thus opened the historical prologue of China’s reform and opening up. It can be said that “focus on development and concentrate on construction” has become the biggest consensus of the entire party and society at the beginning of reform and opening up. As of October 1987, the 13th National Congress of the Communist Party of China clarified the the Party’s basic line atthe primary stage of socialism with “one central task and two basic points” and further raised the position of the issue of development from the work focus of the party and the state to the “center” of the party and the state; also, the economic development strategy and the goals of economic system reform in the primary stage of socialism in China was systematically analyzed and put forward, and a series of basic questions such as development stage, development road, development goals, development steps, development strategy, etc. were initially answered. Thus, the formation process of the socialist economic development thought with Chinese characteristics has started. In this process, Deng Xiaoping, as the chief designer of reform and opening up, played a key historical role. His series of incisive analyses and judgments built the theoretical and ideological basis for the economic development of socialism with Chinese characteristics, and concentrated the energy of the whole party and the whole society on the issue of development. First of all, by reviewing and summarizing the experience and lessons learnt from socialist modernization construction, Deng Xiaoping firmly grasped the fundamental question of “what is socialism and how to build socialism”, and profoundly revealed the essence of socialist path in “liberating productive forces and developing productive forces”. In April 1985, when meeting with foreign guests, Deng Xiaoping pointed out: “The basic principle of Marxism is to develop productive forces. The two decades of experience from 1958 to 1978 tell us: poverty is not socialism, socialism needs to eliminate poverty. le’s 1

Selected Works of Important Documents since the Third Plenum of the CPC Central Committee (2011).

13.2 The Source of China’s Economic Growth Miracle

367

living standards, it cannot be said that they meet the requirements of socialism.”2 In 1992, Deng Xiaoping said in his “South Tour Talk” that “the essence of socialism is to liberate productive forces, develop productive forces, eliminate exploitation, eliminate polarization, and ultimately achieve common prosperity.”3 Second, in order to further promote the emancipation of the mind, lift the old ideological constraints, and encourage cadres and people at all levels to actively try to use various new things, new methods, and new measures that can effectively promote economic development, the “three favorable” standard (whether it promotes the growth of the productive forces in a socialist society, increases the overall strength of the socialist state and raises the people’s living standards) was put forward to provide judgment criteria and action guidelines for various tasks. The “three favorables” was put forward by Deng Xiaoping when he talked in the South in 1992. He pointed out that “the reason why reform and opening up can’t take a step forward and people dare not break into it can be summarized into the fear that too many things with capitalism will lead us to the path of capitalism. The vital point of this issue is choosing a “family name” of “capitalism” or “socialism”. The question is whether the surname is ‘Zi’ or the surname’. Our judgment criteria should mainly focus on whether it is conducive to the development of the productive forces of a socialist society, whether it is conducive to enhancing the overall national strength of a socialist country, and whether it is conducive to raising the people’s living standards”.4 “The key to solving all problems in China depends on its own development.”5 “Development is the absolute principle.”6 Dang Xiaoping’s important assertions quickly focused the attention of the whole party and the people of China on the theme of “development” will would lead the overall situation.

13.2 The Source of China’s Economic Growth Miracle Over the past 40 years of reform and opening up, except for a few years, China’s economy has generally maintained a trend of sustained high-speed development. At the beginning of the reform and opening up, China’s per capita GDP was only 7.85% of the world’s average, which made it one of the poorest countries in the world at that time. It increased to 79.70% by 2016, which is 10 times higher than that in the initial period of reform and opening up and higher than the average level of the middle- and high-income countries. Calculated at comparable prices, China’s GDP has grown by an average of about 9.5% annually during the 40 years of reform and opening up.

2

Selected Works of Deng Xiaoping (1993, p. 116). Selected Works of Deng Xiaoping (1993, p. 373). 4 Selected Works of Deng Xiaoping (1993, p. 372). 5 Selected Works of Deng Xiaoping (1993, p. 265). 6 Selected Works of Deng Xiaoping (1993, p. 377). 3

368

13 From “Development is the Absolute Principle”, to the Scientific Outlook …

China has jumped from a poor and backward underdeveloped country to a middle-toupper-income country. Its comprehensive national strength and international status have improved significantly with people’s living standard improved significantly, creating a miracle of economic growth that has attracted worldwide attention.

General Drivers of the “Chinese Miracle” The exploration of the “Chinese miracle” can be carried out along the modern economic growth theoretical framework, that is, to explore the source of China’s economic growth from the general factors that affect economic growth, such as capital, labor, and technological level. (1) High accumulation and high savings From the perspective of growth accounting, China’s economic growth mainly comes from the accumulation of capital factors. From 1978 to 1991, China’s average rate of fixed asset investment was 28.6%, which rose to 37.5% in 1993 and 43.6% in 2004. China’s investment rate is not only higher than that of the United States and the Economic Cooperation and Development Organization countries, but also higher than the level of high-speed growth in Southeast Asian countries such as Japan, South Korea, Malaysia, Singapore, and Thailand. Based on China’s provincial panel data from 1978 to 2010, Wu (2013) used a combination of SFA and DEA calculations and found that the average contribution rate of capital investment to China’s economic growth is as high as 92%, which constituted the main source of sustained and stable growth in China. The investment-driven characteristics of China’s economic growth are very obvious. The pulling effect of investment also has a long-term upward trend with volatility. The continuous upward trend in the twenty-first century is very obvious, and the contribution value should increase by nearly 1 percentage point every year. At the same time, thanks to fast physical and technological progress, high accumulation has not caused a rapid decline in China’s return on capital and the consequent decline in economic growth.7 Unlike some export-oriented economies that are highly dependent on foreign investment and privatization transition countries that are open to foreign capital, China’s high accumulation of economic growth is mainly due to its own high savings rate. There are three main sources of China’s high savings rate. First, in the process of dual structure conversion, a large amount of rural surplus labor continues to flow into the urban sector, which requires capital to match. At the same time, the inflow of labor alleviated the decreasing trend of the marginal output of capital input, coupled with the infinite elasticity of labor prices under the dual economic structure, thus ensuring the stability of the marginal return on capital and the enthusiasm of market players 7

Wu (2013).

13.2 The Source of China’s Economic Growth Miracle

369

to invest. Therefore, the high savings rate and high investment rate form a causal relationship with the long-term labor transfer process. Second, from the perspective of government behavior, the Chinese government often provides various support to production-oriented enterprises through various preferential or distorting policies and unlimited guarantees of the national banking system, and bears a large amount of macro-costs in order to mobilize savings and centralize allocation of resources to achieve industrialization. In the meantime, affected by fiscal decentralization and promotion incentives, local governments have a strong “growth hunger” and investment impulse. The third is the role of Chinese culture. Chinese culture promotes frugality and economy. (2) Dual structure conversion and demographic dividend The dual economic structure is a typical feature of the Chinese economy, and the conversion of the dual economic structure is one of the important drivers of China’s economic growth. On this point, domestic academic circles have reached broad consensus. Chen Zongsheng and Li Defu proposed a dual economic growth model of endogenous agricultural technological progress by absorbing the ideas of endogenous growth theory, in order to carry out the analysis on “East Asian Miracle” and China’s economic development from the perspective of dual economic structure transformation. They believe that the “East Asian Miracle” is the result of the continuous shift of the traditional agricultural labor force to the modern non-agricultural sector: on one hand, the modern sector uses capital to feed the traditional sector, promote agricultural technological progress, and promote labor transfer. On the other hand, the development of the modern sector has absorbed surplus labor and accelerated the structural transformation. Although the increase in total factor productivity in the non-agricultural sector is not significant, the transformation of the labor force structure still promotes sustained and rapid economic growth.8 Furthermore, Li and Chen (2006) pointed out through empirical calculations that from 1978 to 2004, 26.32% of China’s economic efficiency improvement was due to the contribution of the dual structure transformation, and this contribution was as high as 48.46% from 1978 to 1990, decreased to 13.39% from 1990 to 2004. After conversion, from 1978 to 2004, the dual structure conversion contributed 17.83% to China’s economic growth.9 Regarding the economic growth caused by the surplus labor force in the process of dual structure conversion, some economists have done further research from the perspective of demographic dividend. Cai Fang and his collaborators are representative in this regard. An empirical study of them showed that the demographic dividend contributed 26.8% of China’s per capita GDP growth rate from 1982 to 2000. For every one percentage point decrease in the population dependency ratio, the per capita GDP growth rate could increase by 0.115% points.10

8

Chen and Li (2005). Li and Chen (2006). 10 Cai and Wang (2005). 9

370

13 From “Development is the Absolute Principle”, to the Scientific Outlook …

(3) Technology absorption and independent innovation The catch-up development of China’s economy also shows a process of approaching the world’s technological frontier, that is, the process of technological catch-up. Although from the results of growth accounting, capital investment contributed most of the share of China’s economic growth, on one hand, the simultaneous occurrence of urban–rural transfer of rural surplus labor and high accumulation slowed the growth rate of per capita capital and suppressed the trend of diminishing marginal capital output; on the other hand, with technological progress, a considerable portion of capital accumulation appears as a process of dynamic transfer, which is essentially the result of technological progress. Especially with the deceleration of the surplus labor transfer process and the gradual disappearance of the demographic dividend, the catch-up development of China’s economy has increasingly relied on technological advancement. According to the different formation mechanisms of technological progress, the impact of technological progress can be examined in terms of technological absorption and independent innovation. Technology absorption is mainly achieved through foreign trade, foreign direct investment (FDI) and other channels, by accepting international technology spillovers, introducing and imitating foreign technologies. Independent innovation is mainly achieved through domestic enterprises’ own R&D investment. Whether it is technology absorption or independent innovation, it has an important role in promoting China’s technological progress (or total factor productivity improvement) and economic growth. Further, compared with technological absorption, independent innovation has a more significant role in promoting China’s economic growth and technological progress. Jiang Renai and Feng Genfu’s research pointed out that domestic R&D investment is the main driving force of China’s technological progress, and its contribution to total factor productivity is greater than that of trade and intangible technology spillovers.11 Based on the panel data of different provinces, Chen and Sheng (2008) pointed out that each region’s own technological investment is the most important factor to promote local technological progress. Without the improvement of the local technological development level, it will be difficult to give full play to the role of foreign R&D capital transmitted by the FDI channel in promoting local technological progress.12 The results of practical and theoretical research show that China’s future technological progress and economic development need to rely more on the improvement of independent innovation capabilities. (4) Steadily promote market-oriented reforms Market-oriented reform liberated social productive forces, which is the foundation of the birth mechanism of the “Chinese miracle” and the endless driving force of the “Chinese miracle”. The marketization of the economy has promoted market competition, expanded market size, improved factor markets and resource allocation, formed 11 12

Jiang and Feng (2006). Chen and Sheng (2008).

13.2 The Source of China’s Economic Growth Miracle

371

a strong incentive system, promoted technological progress and strengthened the nonpublic economy, all of which have promoted China’s economic development. The vast majority of literature supports the role of marketization in promoting economic development. Based on provincial panel data from 2001 to 2005, the research by Wang and Fan (2007) shows that our country’s market reform has a significant positive impact on economic growth, with a contribution rate of 14.22%13 ; Fan et al. (2011) examined the contribution of marketization reform to total factor productivity and economic growth, and found that from 1997 to 2007, the marketization process contributed an average of 1.45% annually to economic growth, and contributed up to 39.2% to total factor productivity.14 It should be pointed out that the emphasis on the positive role of marketization is not to deny the role of the government. While playing a decisive role in allocating resources in the market, we must actively play the leading role of the government and organically combine effective markets with effective governments. This is the basic experience of China’s economic development in the past 40 years, which shares a lot of common points with the successful experience in East Asia summarized in the World Bank report “East Asian Miracles: Economic Growth and Public Policy”. It should also be noted that the positive role of the Chinese government is not limited to the central level. As a large country, China inevitably encounters the problem of decentralized local management. Therefore, the market mechanism also needs to be organically integrated with the intervention of local governments. In the future, it is necessary to further study how market-oriented reform should be coordinated with the reform of the integration of local government authority to promote the orderly and healthy development of the economy.

Unique Factors of the “Chinese Miracle” It is rarely seen in the history of world economic growth that an economy as large as China has achieved high-speed growth for up to 40 years. There must be unique factors behind it. (1) Culture of China Since the 1980s, the importance of culture to economic development has begun to be concerned by more and more scholars, and it has begun to try to incorporate the analysis framework of mainstream economic growth theory. Philip Aghion and P. Howitt argued in Economics of Growth that culture is the third level of growth and

13 14

Wang and Fan (2007). Fan et al. (2011).

372

13 From “Development is the Absolute Principle”, to the Scientific Outlook …

may be a more fundamental level.15 This revival of Weber’s theory has largely benefited from the economic miracles of East Asia and China—after Christian ethics was used to explain why the rapid development of modern capitalist economies appeared in Western Europe, Confucian culture was used to explain why modernized countries and regions are concentrated in East Asia. In addition, with the shrinking concentration of the “East Asian Miracle” into the Confucian cultural circle,16 the cultural determinism of economic growth has become a hot topic in international academic discussions. Some scholars use cultural factors to analyze China’s economic development. Some scholars believe that the main reason for China’s success lies in the Chinese people’s hard work, intelligence, and endurance. “As long as they can see tomorrow, they can endure huge hardships today.” No nation can fight so optimistically in such a harsh environment17 ; The secret of China’s success first and foremost lies in the hard work and wisdom of the people, the value of frugality in Chinese culture, and the great importance attached to technology, culture, and education.18 Zhu Tian published the “Mystery of China’s Growth” in 2016, which systematically elaborated on the important role of Chinese culture in China’s economic growth. He pointed out through item-by-item analysis that various possible explanations about the Chinese miracle, such as a low base, demographic dividends, and reform and opening up, could not provide satisfactory answers, and answers only be found from the perspective of cultural factors. As for the reason why Chinese culture did not function before, but only functioned in the last thirty years, Zhu Tian pointed out that culture is a necessary condition rather than a sufficient condition for the “Chinese miracle”, and it must be combined with institutional factors such as reform and opening up so to constitutes a sufficient condition for a miracle to occur. As far as market system factors are concerned, China has no significant advantages over other countries, and culture is where China has its true advantage. The history of world economic development also shows that cultural advantage rather than institutional advantage is the key to for a country’s economic performance to stand out. So, what are the advantages of Chinese culture? In short, there are two points: “One is the value of thriftness and frugality, and the other is the emphasis on education and learning. The former affects the accumulation of physical capital, the latter affects the accumulation of human capital and pace of technological progress.”19 15

Philip Agyin and Peter Hoyt regard the process of economic growth and the design of growth policies as composed of several levels. In addition to culture as the third level, the first level is the direct incentive for innovation and capital, and the second level is institutional and structural reform. See Philip and Peter (2011). 16 After the Publication of the World Bank’s East Asian Miracle: Economic Growth and Public Policy, Southeast Asian countries dominated by Buddhism and Islam, such as Thailand, Indonesia and Malaysia, gradually lost their luster as a growth miracle. The fastest economic growth in East Asia is achieved by Vietnam, a Confucian culture on earth. Meanwhile, the Asian “tigers” on the circle of Confucian culture have succeeded in becoming high-income economies, and China, the center of Confucian civilization, continues to be a growth story. 17 Zhang (2009). 18 Yao (2015). 19 Zhu (2016).

13.2 The Source of China’s Economic Growth Miracle

373

(2) Big country advantage National scale is one of the important endowments for a country’s economic development. Hollis Burnley Chenery et al. pointed out that in terms of industrial take-off, big countries have a clear advantage-the per capita income of a big country to reach the stage of quasi-industrialization is only about 250 US dollars; and compared with 400 US dollars for a large standard country, around $600 is needed for small countries that export primary products. China has the largest population in the world and the third largest territorial area in the world. This endowment can only be matched by a very few countries such as the United States, Russia, Brazil and India. Correspondingly, the various advantages resulting from it are also showing extreme specificity. In China, as early as the early 1990s, some scholars paid attention to the economic development of large countries and conducted a comprehensive analysis of the comprehensive advantages of large countries. Specifically, the comprehensive advantages of being a major power are mainly reflected in the following facts: it is conducive to ensuring national security, while at the same time maintaining a relatively low level of defense expenditure; it is easier to form international prestige and influence; the domestic market is vast, and various regions within the country can effectively collaborate, communicate with each other, learn from each other’s strengths, and reduce dependence on foreign countries; to a certain extent and within a certain range, funds and technical forces can be invested in the construction of large-scale modernization projects that are urgently needed; Once each link and each part possesses the nature of development, they will produce a mechanism of mutual effect and mutual promotion, thus forming a development inertia.20 Li Daokui and Hai Wen pointed out that China’s economic development needs to make good use of the advantages of being a large country, and the advantages of being a large country will also ensure the sustained and rapid growth of China’s economy.21 Ouyang Shao has conducted a more systematic study on the relationship between the comprehensive advantages of being a major power and our country’s economic development,22 and pointed out that, compared with “comparative advantage” and “advantage of a late comer”, “big power advantage” can better explain China’s economic growth. The basis for the formation of the “comprehensive advantages of a major power” is the feature of the “diversified structure” of major developing countries in terms of region, economy, technology, etc. This feature allows major developing countries like China to establish a relatively complete and coordinated industrial structure and at the same time, give full play to the advantages of traditional industries and labor-intensive industries, and cultivate high-tech industries with competitive advantages by integrating domestic superior resources. With the comprehensive advantages of major powers, our country can pursue a “diversified development strategy that leverages comparative advantages and fosters competitive advantages.” This is very different from the

20

Wu (1992). Li (2005), Haiwen (2007). 22 Ouyang (2011). 21

374

13 From “Development is the Absolute Principle”, to the Scientific Outlook …

industrialization path taken representatively by the “four small dragons” in East Asia that rely on comparative advantage strategies.23 Lin Yifu, Cai Fang, and Li Zhou also noted that China’s strength as a big country is an important guarantee for sustained and rapid economic growth, with particular emphasis on the diversified characteristics of China’s various regions in terms of technology and the comparative advantage in technological progress brought about by the large population.24 In recent years, India, which has a lower capital accumulation rate and human capital than China, but has obvious characteristics of technological diversification, has gradually shown a trend of catch-up development, which has also, at a certain degree, provided supporting evidence of the comprehensive advantage theory for large countries. (3) Growth competition among local governments Competition among local governments has played an important role in promoting China’s economic growth. Fan Gang and Zhang Shuguang studied the problem of local government competition earlier and called it “brotherly competition”.25 G. Montinola and Qian Ying attempted to explain the miracle of China’s economic growth from the perspective of the government system, and proposed the hypothesis of “federalism with Chinese characteristics”: the administrative decentralization and fiscal decentralization system at the beginning of the reform gave Chinese local governments strong economic incentives, prompting local governments to actively use relatively autonomous economic decision-making power to maintain and protect the market as well as to promote local economic growth in order to gain more financial income.26 Zhou Li’an believes that economic incentives are not the “most basic and long-term source” of local government competition incentives.27 He pointed out that since the mid-1990s, a large amount of administrative power has changed from “block management (hierarchical management of municipal and county governments)” to “stripe management (provincial-level vertical management)”. After the tax-sharing system, local fiscal and tax revenues have dropped significantly, and fiscal contractual contracts are often adjusted by the central government afterwards, resulting in a situation of “whiplashing quick bull”. However, even so, the enthusiasm of local governments to promote economic growth has not been significantly reduced. It can be seen that in addition to economic incentives, there are more basic incentive forces. This is the promotion incentive evolving around GDP. Although promotion incentives may not be able to realize the function of maintaining the market in the “federalism with Chinese features” hypothesis, they can form a partial replacement for the formal property rights protection and judicial system, allowing local governments to play a “helping hand” instead of the role of a “looting hand”. Still some scholars have proposed the theory of county competition. County competition has 23

Ouyang (2009). Lin et al. (1999). 25 Fan and Zhang (1990, pp. 32–44). 26 Montinola et al. (1995). 27 Zhou (2007). 24

13.3 The Scientific Outlook on Development

375

promoted the development of the local economy. The reason why county competition can be expanded is largely due to the fact that China’s land is publicly owned, and the specific distribution power is concentrated at the county level, which allows county governments to effectively use land resources to compete. In short, China’s regional competition model is extremely specific and constitutes a unique factor in the “Chinese miracle”. Of course, the existing institutional arrangements have had some negative effects on regional competition, such as the inducing of “investment hunger”, taking GDP as the only criteria for “heroes” and the phenomenon that promotion incentives have led local governments to ignore the improvement of the ecological environment and people’s livelihood. Therefore, how to improve regional competition, give play to its positive effects, and at the same time restrain its negative effects, will be a focus of theoretical research and policy design for future economic development.

13.3 The Scientific Outlook on Development As China’s economy continues to grow at a high speed and continues to reach new heights, a series of contradictions and problems are gradually accumulating. After entering the twenty-first century, these contradictions and problems have become increasingly prominent, which has become an increasingly obvious constraint to the sustained, stable and healthy development of our economy. With the changes in the conditions and contradictions facing economic development, the concept of economic development is constantly updated and developed. In the first decade of the twenty-first century, the Party Central Committee with Hu Jintao as the general secretary put forward the “scientific concept of development” and realized the theoretical leap of economic development.

Continuously Changing Conditions and Environment for Development Over the past 40 years of reform and opening up, our country’s GDP has grown at an average annual rate of about 9.5% based on comparable prices. In 2009, it surpassed Japan and became the world’s second largest economy. Since World War II, many countries and regions have experienced short-term rapid growth, but only 25 economies have maintained an average annual growth rate of 7% or for 25 years or longer.28 The rapid economic growth has brought profound changes to the country’s economic and social life, and we have paid a high price for this. The most obvious is the price paid in resource environment. According to preliminary estimates, from 28

25 economies including Botswana, Brazil, China, Hong Kong SAR, Indonesia, Japan, South Korea, Malaysia, Malta, Oman, Taiwan region, Thailand, etc.

376

13 From “Development is the Absolute Principle”, to the Scientific Outlook …

2003 to 2012, the cost of environmental degradation and resource depletion in China has been close to 10% of GDP, of which air pollution accounted for 6.5%, water pollution accounted for 2.1%, and soil degradation accounted for 1.1%. The medical costs and the decline in quality of life caused by the resulting diseases are getting more serious. The World Bank and the Development Research Center of the State Council pointed out in a report: “China’s current growth model has put a lot of pressure on environmental factors such as land, air and water, as well as increasing pressure on the supply of natural resources. The challenge ahead is to transform these pressures into a source of economic growth by adopting a green growth model.”29 In 2003, our country’s GDP per capita exceeded the 1000-dollar mark, striding an important step forward, and the economy and society entered a critical stage of development. From the perspective of international experience, after entering this stage, a country’s economic and social development will undergo major changes in many aspects, including the rapid transformation and upgrading of residents’ consumption, from the survival-oriented consumption that meets basic needs of life to development-oriented consumption in pursuit of quality of life and enhanced capabilities; the technological content of manufacturing products has begun to increase significantly, and industrial and agricultural production has moved from an extensive development stage of high pollution, high energy consumption and high emissions to an stage with intensive and sustainable development; the process of urbanization has begun to accelerate significantly, and gradually integrates with industrialization, agricultural modernization, peasant citizenization and service industry expansion and upgrading. However, judging from the actual situation in our country, the extensive economic growth mode has not been fundamentally changed, the intensive development mode is far from being formed, the pressure on population, resources and environment is increasing, and people’s livelihood issues are becoming prominent. (1) The proposal of the Scientific Outlook on Development Under the historical background of major changes in the national economy and social development, our party has made major adjustments to the economic development concept and established a scientific outlook on development in compliance with the objective laws of economic development. In 2003, the Third Plenary Session of the Sixteenth Central Committee of the Communist Party of China adopted the “Decision of the Central Committee of the Communist Party of China on Several Issues Concerning the Improvement of the Socialist Market Economic System” and pointed out that “we should be committed to a comprehensive, coordinated and sustained path of development that puts people’s interests first, and promote allround development of the economy, society and the people.”30 At this meeting, Hu Jintao clearly proposed “establishing and implementing a scientific outlook on development”, stating: “We must correctly handle the relationship between the quantity and quality of growth, speed and efficiency. Growth is not simply synonymous with 29

World Bank and Development Research Center of The State Council (2013, p. 9). Selected Important Documents since the 16th National Congress of the Communist Party of China (2005, p. 465).

30

13.3 The Scientific Outlook on Development

377

development. If we simply expand the number and merely pursue the speed, without paying attention to quality and efficiency, without focusing on the coordinated development of economy, politics and culture, and without emphasizing on the harmony between man and nature, there will be growth imbalances, thus ultimately restricting the situation of development.”31 To steer economic development into a scientific development track, first of all, we must effectively transform the economic development mode and adjust the economic structure. As early as 1995, the proposal of the Ninth Five-Year Plan for the Fifth Plenary Session of the 14th Central Committee of the Communist Party of China clearly stated that “we need to actively promote the transformation of economic growth mode and make economic efficiency the center of economic work.” In 2005, the Fifth Plenary Session of the Sixteenth Central Committee of the Communist Party of China re-emphasized the importance of transforming the economic growth mode and pointed out: “The state of land, fresh water, energy, mineral resources and the environment in China has constituted serious restrictions towards economic development.”32 On June 25, 2007, Hu Jintao delivered a speech at the provincial party and ministerial cadre training class of the Central Party School, replacing the previous expression of “transforming economic growth mode” with “transforming economic development mode”, pointing out: “From ‘changing the economic growth mode’ to ‘changing the economic development mode’, although it is only a twoword change, it has a very profound connotation. In addition to covering all the contents of changing the economic growth mode, “changing the economic development mode” also has put forward new and higher requirements with regard to the implication, goals, strategies, approaches of economic development.”33 Specifically, economic growth mainly focuses on quantitative expansion, while economic development pays more attention to qualitative improvement and structural optimization; economic growth highlights the means, while economic development highlights the purpose, that is, the goal of people-orientation and ultimate realization of comprehensive development for mankind; economic growth mainly focuses on the field of production, while economic development covers all aspects of national economic activities such as production, distribution, exchange, and consumption, which in turn requires a more comprehensive and systematic formulation of development strategies; the realization of economic growth mainly depends on investment and scale expansion, while economic development must rely on efficiency-driven and sustainable development. In order to meet the “new and higher requirements”, the central government has successively deployed many strategic measures such as building an innovation-oriented country and taking the path of new industrialization with distinctive Chinese features.

31

Selected Important Documents since the 16th National Congress of the Communist Party of China (2005, p. 484). 32 Selected Important Documents since the 16th National Congress of the Communist Party of China (2005, p. 1064). 33 Excerpt of Important Discourse on Scientific Outlook on Development (2009).

378

13 From “Development is the Absolute Principle”, to the Scientific Outlook …

Since the introduction of the Scientific Outlook of development concept, the economics community has conducted extensive and in-depth discussions. And the discussion of the institutional mechanisms for achieving scientific development is of great theoretical and practical significance. Zhang Zhuoyuan pointed out that deepening fiscal reforms and improving fiscal and taxation policies are extremely important for transforming the economic growth mode and improving the quality and efficiency of economic activities. To this end, it is necessary to improve the budgetary supervision of government revenue, establish and improve a tax system that is conducive to resource conservation, environmental protection, and the transformation of economic growth mode; we need to focus on deepening price reforms so that production factors and prices of resource products can reflect the degree of resource scarcity; at the same time, we need to promote reforms in other areas to form a joint force to promote the transformation of economic growth, such as changing government functions to transform the government from a protagonist of economic activities to a public service-oriented government, reforming the performance evaluation of cadres and promoting appointment systems, and deepening enterprise reform, especially the reform of state-owned enterprises, so to form a micro foundation for transforming economic growth.34 Liu Wei pointed out that the transformation of economic growth mode firstly lies in technological innovation, and the fundamental of technological innovation lies in institutional innovation. Among them, the key is to increase efficiency as the primary driving force for growth. The important contradiction that needs to be addressed is the widening income distribution gap.35 In response to the country’s high-input growth mode, Lin Yifu and Su Jian pointed out that this is mainly caused by the country’s long-term policyoriented factor price system of low interest rates, low land prices, low energy prices, and low raw material prices. Therefore, to transform the economic growth mode, it is necessary to reform the factor price system and other aspects, so that the factor price system faced by enterprises conforms to the country’s factor endowment structure, and the optimization of enterprises can be as close as the optimization of the entire economy.36 In response to the problems of high consumption, high emissions, and high pollution in China’s economic development, Cai Fang et al. pointed out that passively waiting for the arrival of the Kuznets turning point can no longer cope with the increasing environmental pressure. We must take the initiative to rely on the determination of the central government and the motivation of local governments and enterprises to change the growth mode, and increase incentives to achieve sustainable economic growth.37 Based on comprehensive index evaluation of the changes in China’s economic development mode from 2000 to 2009, Li Lingling and Zhang Yaohui proposed to start with weak links to accelerate the transformation of economic development methods through such ways as optimizing the structure

34

Zhang (2005). Liu (2006). 36 Lin and Su (2007). 37 Cai et al. (2008). 35

13.4 The New Development Concept

379

of income distribution, increasing the degree of marketization and the input–output rate of scientific research, and changing the methods of production.

13.4 The New Development Concept Since the Eighteenth National Congress, based on the new characteristics of China’s economic development, the Party Central Committee with Xi Jinping at its core has made new important judgments on the stage of China’s economic development and proposed a new development concept of “innovation, coordination, green, openness, and sharing”, achieving a new leap forward in the theory of socialist economic development with Chinese characteristics.

New Normal of Economic Development and Structural Reform on the Supply Side In May 2014, Xi Jinping pointed out during his inspection work in Henan: “we should strengthen our confidence, proceed from the current staged characteristics of our country’s economic development, adapt to the new normal, and maintain a strategically normal mentality.”38 This is the first time the new normal of economic development has been formally proposed. Since then, Xi Jinping has explained the new normal on many important occasions, thus forming an economic development idea and policy framework that adapts to and leads the new normal. There are four distinct characteristics as of the new normal towards which China’s economic development has moved: First, the growth rate is shifting from high speed to medium- high speed. Second, the development mode is shifting from scale and speed-focused to quality and efficiency-focused. Third, the adjustment of economic structure has shifted from incremental expansion to simultaneous pursuit of stock adjustment and optimization of increment. Fourth, the driving force for development has shifted from relying mainly on resources and low-cost labor and other factors to innovation-driven.39 The economic theory community has made many achievements in the discussion of the new stage of economic development. In 2012, Yuan Fuhua proposed the concept of “structural deceleration” through analysis of the economic development process of modern and contemporary developed countries, and gave a theoretical explanation40 by pointing out that when the economic structure gradually matures, employment will concentrate towards the service sector, and the expansion of the service sector with a high proportion of employment and low rates of labor productivity growth, will lower the growth rate of labor productivity in the 38

Xi Jinping’s Speech during Investigation in Henan Province. People’s Daily, May 11,2014. Xi (2016a). 40 Yuan (2012). 39

380

13 From “Development is the Absolute Principle”, to the Scientific Outlook …

whole society. China is facing the adjustment of industrial structure towards service orientation and the transformation of population structure, and these changes will be concentrated in a relatively short historical period. Scholars such as Jincuo and Guo Kesha have pointed out through historical and international comparisons that shifting and decelerating economic growth is an objective law that does not rely on human will. It is also a stage that China’s economy will enter after experiencing long-term high-speed growth.41 After entering the new normal, the connotation of economic development will undergo major trend changes. First, the imitation-driven consumption phase with wave-draining features has basically ended, and consumption has begun to show different levels with personalized and diversified consumption gradually becoming mainstream. Accordingly, the importance of ensuring product quality and safety, innovative supply, and stimulating demand has increased significantly. Second, investment in traditional industries and real estate is relatively saturated, while opportunities in infrastructure connectivity and investment opportunities in new technologies, new products, new industry trends, and new business models have emerged in large numbers, placing new demands on innovative investment and financing methods. Third, the change in international market demand and our country’s low-cost comparative advantage calls for us to cultivate new comparative advantages and actively influence the reconstruction of international trade and investment rules. Fourth, under the condition of overcapacity, the industrial structure must be optimized and upgraded. At the same time, under the background of accelerating development of Internet technologies and endless innovations, miniaturization, intelligence, and specialization in production will become the new characteristics of industrial organizations. Fifth, with the aging population and the international blockade of key technologies, the driving force for the scale of factors has weakened, and economic growth will rely more on the quality of human capital and technological progress. Sixth, competition is gradually shifting to quality-based and differentiated competition. Consumers pay more attention to quality and individualization. In the past, enterprises have relied on preferential policies in such aspects as taxation and land to form a competitive advantage, and foreign national treatment has become unsustainable. Unification of national market and improvement of resource allocation efficiency have become endogenous requirements for economic development. Seventh, the environmental carrying capacity has reached or approached the upper limit, making it difficult to carry extensive development with high-consumption. People’s demand for ecological products such as fresh air, clear drinking water, and clean environment is becoming more and more urgent, and the ecological environment is becoming more and more precious. Eighth, with the downward adjustment of economic growth, various hidden risks are gradually becoming apparent. Risk in areas such as local government debt, 41

Jin (2015), Guo (2016).

13.4 The New Development Concept

381

shadow banking, real estate are being revealed, and there are structural risks in employment. Ninth, from the perspective of demand, the marginal effects of comprehensive stimulus policies have decreased significantly; from the perspective of supply, both the problem of overcapacity must be fully resolved and the future industrial development direction should be explored through the use of market mechanisms.42 The key to adapting to the above-mentioned series of trend changes is to take the strategic adjustment of the economic structure as the main direction of action, accelerate the transformation of economic development mode, and fundamentally solve a series of problems in imbalances. In the past, the short-term adjustment from the demand side was no longer suitable for dealing with the new situation, new trends, and new problems under the new normal. At best, it can only delay the occurrence of problems and contradictions, but ultimately it is difficult to avoid a more intense and concentrated outbreak. However, for a long time, short-term and emergency macro management has formed a path dependence. On one hand, in order to cope with economic risks and growth stalls, excessive expansionary economic policies are often adopted, but this will reduce the quality of development, and at the same time bring a series of constraints such as financial risks, debt traps and overcapacity for subsequent macro policy formulation, which has forcefully led to the difficulty in the direction-turning of expansive economic policies. On the other hand, in some areas, investment hunger and thirst are difficult to curb, but the phenomenon of GDP heroism still persists, and people’s awareness of development is still difficult to achieve a quantitative to qualitative change in the short term, especially under the background of regional competition, where the lack of interest coordination mechanism further stimulates blind comparison in growth rates. To this end, it is necessary to break past thinking in economic development and policy, and work from the supply side to steer our country’s economic development onto a new track. Xi Jinping pointed out that “promoting supply-side structural reform has become an inevitable choice for our country’s economic development to enter the new normal, and it is a strategic idea that our country’s macroeconomic management must establish under the new normal of economic development.”43 To advance the supply-side structural reform, it is necessary to “focus more on meeting the needs of the people, more on market and consumer psychology analysis, more on guiding social expectations, more on strengthening the protection of property rights and intellectual property rights, and more on the use of entrepreneurial talents. More attention should be paid to strengthening education and improving the quality of human capital, to the construction of ecological civilization, and to scientific and technological progress and comprehensive innovation.”44

42

Selected Important Documents since the 16th National Congress of the Communist Party of China (2005, pp. 241–245). 43 Xi (2017). 44 Selected Important Documents since the 18th National Congress of the Communist Party of China (2016, pp. 246).

382

13 From “Development is the Absolute Principle”, to the Scientific Outlook …

“Five Major” Development Concepts On the basis of a profound summary of domestic and foreign development experience and lessons and a profound analysis of the development trend at home and abroad and in response to the outstanding contradictions and problems facing our country’s economic development after entering the new normal, at the Fifth Plenary Session of the Eighteenth Central Committee of the Communist Party of China held in October 2015, the Party Central Committee with Xi Jinping at the core, proposed a new development concepts of “innovation, coordination, greentech, openning-up and mutual-share”. The new development concept reflects the deepening of our party’s understanding of China’s economic and social development laws, the latest achievement of the theory of socialist economic development with Chinese characteristics, which constitutes the theoretical crystallization of the party’s leadership of the socialist economic development with Chinese characteristics in the past 40 years of reform and opening up, the inheritance and innovation of the Marxist development concept, and the basic theoretical and practical guide for our country’s future economic development. The new development concept reflects the dialectical relationship between the part and the whole. On one hand, the new development concept puts forward specific points of focus on the development problems that need to be resolved. To be specific, “innovation” focuses on the development momentum, “coordination” focuses on the imbalanced development, “greentech” focuses on harmonious coexistence between man and nature, “openning-up” focuses on internal and external linkages of development, and “mutual-share” focuses on social equity justice; On the other hand, the new development concepts constitute an inseparable whole with each specific concept interconnected, interlinked and mutually promoted. It must be adhered to and implemented as a whole.45 First, innovation is the first driving force to lead development, and is the fundamental way to respond to changes in the development environment, enhance development potential, seize development initiative, and better lead the new normal. In addition to technological innovation, innovation also involves such aspects as theory, system, and culture. Adhering to innovation and development means putting innovation at the core of the overall development of the country, allowing innovation to run through all the work of the party and the country, and making innovation prevail in the whole society. At present, weak innovation capability has become a short board that restricts our country’s economic development. In 2012, among the top 100 global innovative companies with patents as the main indicator, none of the Chinese companies made the list; among the top 100 world brands with well-known trademarks as the main indicators, there are only 4 from China; statistics on 25 representative innovative companies shows that their intangible assets account for an average of only 0.65% of the company’s total assets; among them, intellectual property assets account for only 16.98% of intangible assets, showing significant gap with the average level 45

Xi (2016b).

13.4 The New Development Concept

383

of developed countries.46 The weak innovation capability has led to a slow industrial upgrade in our country, making it difficult to climb from the low-end link of the global value chain to the upstream link and impossible to achieve the overall leap in China’s economy through large-scale creation of international brands with independent intellectual property rights.47 Innovative development is of real urgency. On one hand, with the end of the process of upgrading and replacing old capital equipment, the faster speed of physical and technological progress in the past will return to normal levels; On the other hand, the gradual disappearance of the demographic dividend has gradually strengthened the constraints on the diminishing margin of capital output, and the conditions that once promoted the sustainability of the “Chinese miracle” under high accumulation are gradually disappearing. This means that my country’s long-term economic growth model that relies on high-intensity capital investment and low contribution of total factor productivity urgently needs to be steered to the efficiency-driven track led by innovation. Therefore, innovative development has become an inevitable choice to promote the transformation and upgrading of China’s economy and the transformation of development methods in the new era. Second, coordination is an inherent requirement for sustained and healthy development; it is both a means of development and a goal of development; it also serves as a standard and scale for measuring development. To achieve coordinated development, we must adhere to the unity of the “two-point theory” and “key theory”, the unity of development balance and imbalance, the unity of development weaknesses and potential, and focus on promoting the coordinated development of urban and rural areas, promoting the coordinated development of economic society and promoting the simultaneous development of new-type industrialization, informationization, urbanization, and agricultural modernization, thus enhancing the country’s hard and soft power while continuously promoting the integrity of development. It should be noted that the large differences in development at the urban, rural, and regional levels and the irrational industrial structure are a significant feature of China’s long-term economic and social development. This is due to objective reasons such as the large scale of the country, the uneven geographical distribution of natural endowments, and the late start of industrialization and urbanization. On the other hand, there are also reasons for institutional policies such as the urban–rural dual division and distortion of regional competition mechanisms. To promote coordinated development in the new era, the focus is to properly handle the relationship between the market and the government. On one hand, if the market mechanism is allowed to function, it will inevitably lead to excessive development differences, which requires the government to reasonably play its own role through measures such as fiscal transfer payments and equalization of public services, and to correct the excessive urban–rural and regional gaps formed by the market mechanism; on the other hand, we need to strictly control the government’s improper interventions and the resulting problems such as repeated construction, excessive investment, and overcapacity, and reform such problems as the “fuzzy property rights” of the land and 46 47

Li and Zhang (2015). Liu (2005).

384

13 From “Development is the Absolute Principle”, to the Scientific Outlook …

environment, the “soft budget constraint” of the financial system, and the systemic illnesses such as “no distinction between government and state-owned enterprise”, allowing the market to play a decisive role in the allocation of resources. Third, greentech is a necessary condition for sustainable development; it is the direction of the scientific and technological revolution and industrial transformation in the current era and the most promising area for development. It prominently highlights people’s longing for a better life. It is necessary to firmly establish the modern development belief that green water and green mountains are mountains of silver and gold, protecting the environment is protecting productive forces, and improving the environment is developing productive forces, thus forming ways of green production and lifestyles, properly handling the relationship between improving lives through economic development and protecting the environment through saving resources in order to build a beautiful China with blue sky, green land and clear water. For a long time, our country’s economic growth has been burdened with heavy environmental costs. The extensive growth characteristics of high pollution, high energy consumption, and high emissions have not been fundamentally transformed, and its ability to sustain development has been destroyed. According to estimates, from the beginning of reform and opening up to 2008, China’s potential economic growth rate averaged 9.5%, of which, about 1.3% points were the cost of the environment. After entering the twenty-first century, an average of 2% points of economic growth was driven at the expense of the environment48 ; from 1998 to 2010, China’s environmental pollution cost accounted for 8–10% of real GDP, and the numbers in economically developed regions were significantly higher than those in less developed regions. The long-term elasticity of residents’ health expenditures to economic growth was 1.66. High-speed economic growth is greatly discounted due to the decline of the level of social health.49 The historical experience of developed countries shows that the “old path of development before governance” will not work and will cause unbearable economic, social and cultural costs, some of which are even irreversible. Therefore, whether it is for the long-term fundamental interests of the people or for the sake of the utilitarian economic performance, green development is the only way for the country’s future development. Fourth, opening-up is the only way for a country to prosper and develop. It is an important magic weapon for our country to achieve brilliant achievements to drive innovation, force reform, and promote development through opening-up. Adhering to open development, we must continue to promote the integrated strategy of bringing in and going out, implement a more proactive open strategy, strive to build a new system of open economy, and develop a higher level of open economy. It should be noted that, on one hand, the current overall development momentum of the world economy is still insufficient, and the conflicts and frictions between various countries or regions have increased significantly. To this end, it is necessary to explore new external kinetic energy, develop new modes of win–win cooperation, and build a broad community of interests. The Belt and Road Initiative and the establishment of an Asian infrastructure 48 49

Yuan (2010). Yang et al. (2006).

13.4 The New Development Concept

385

investment bank are both positive actions taken by our country to adapt itself to the new external situation and changes. On the other hand, with the rapid expansion of the economy, China has become an important “endogenous variable” in the international economy, whether from the perspective of safeguarding national interests or from the perspective of establishing a fair and reasonable international economic order, we are required to play an increasingly important role and deeply integrated into the international economic system. The internationalization of the renminbi, the establishment of the crude oil market with renminbi settlement, and the expansion of the free trade zone are all important actions taken by our country to actively build a new system of open economy and develop a higher level of open economy. At the same time, we must also see that the international economic situation is becoming more and more complicated and the uncertainty of policy effects has been significantly increased. Therefore, perseverance in openness and development cannot be simply understood as blindly seeking quick and great growth, but should be carried out flexibly and steadily on the basis of gradually summing up lessons learned based on changes in the situation. Fifth, mutual-sharing is the essential requirement of socialism with Chinese characteristics and a concentrated expression of the superiority of the socialist system. The essence of insisting on mutual-sharing development is to adhere to the peoplecentered development thinking. The key is to make more effective institutional arrangements and do a good job from the top-level design to the “last mile” landing. At the practical level, it is necessary to expand middle-income groups, increase support for the people in need, and resolutely win the battle against poverty. For a long time, the income gap of our country’s residents has been at a high level, which has prevented the achievements of economic development from fully benefiting all people. This has also inhibited the fulling effect of domestic demand in stimulating economic growth. The Gini coefficient published by the National Bureau of Statistics and the measurement data provided by studies such as Hu Jiayong and Wu Peng50 show that the income gap between urban and rural areas and among residents has risen significantly after the reform and opening up; we should eliminate the impact of the rapid decline in the relative economic development level of the Northeast region; the development gap between the country’s coastal and inland regions has also increased significantly. In recent years, various types of inequality have decreased, but the extent of the reduction has been very limited. A large number of theoretical and empirical studies have shown that excessive gaps will restrict economic development from the perspective of demand. Therefore, mutual-sharing development is not only an internal requirement for governing for the interest of the people, but also a fundamental way to promote the integration of distribution and development and achieve common economic and social progress.

50

Hu and Wu (2012).

386

13 From “Development is the Absolute Principle”, to the Scientific Outlook …

Start a New Journey of Socialist Modernization After 40 years of reform and opening up and economic development, socialism with Chinese characteristics has entered a new era. With the comprehensive construction of a well-off society and the realization of the goal for the first century, our country is about to embark on a new journey to build a socialist modern country. The realization of socialist modernization is a long-term strategic exploration and deployment of our party and country. As early as the third National People’s Congress in 1964, Zhou Enlai put forward the grand goal of achieving “four modernizations” by the end of the twentieth century in the government work report. In 1978, the Third Plenary Session of the Eleventh Central Committee of the Communist Party of China made it clear: “Transfer the focus of work of the whole party and the attention of the people of the whole country to the construction of socialist modernization.” In October 1984, Deng Xiaoping used “two steps” to summarize China’s medium- and long-term development strategy when meeting with Chinese and foreign representatives participating in the China-Foreign Economic Cooperation Seminar. He stated” “Our economy will be developed to quadruple by the end of this century, and the per capita GDP will reach 800 US dollars, people’s lives will reach a well-off level…On this basis, we will develop for another 30–50 years and strive to be close to the level of developed countries in the world.”51 On the eve of the 13th National Congress of the Communist Party of China in August 1987, Deng Xiaoping clearly stated the “three-step” strategy when meeting with the leaders of the Italian Communist Party: “Our country’s economic development is divided into three steps, and this century takes two steps to reach a moderately well-off society. In the next century, it will take another 30–50 years to go one step further and reach the level of moderately developed countries.”52 The 13th National Congress of the Communist Party embodied the “three-step” strategy. Step 1: from 1981 to 1990, the GDP would be doubled from 1980 to solve the problem of food and clothing for the people; Step 2: From 1991 to the end of the twentieth century, the gross national product would be doubled and people’s livelihood would reach a well-off level; Step 3: By the middle of the twenty-first century, the per capita GDP would reach the level of a moderately developed country, the people would be relatively affluent, and modernization would be basically realized. In 1997, the 15th National Congress of the Communist Party of China proposed the “three-step” strategy of the new century: the goal of the first 10 years is to achieve the doubling of GDP from that of 2000, so that the people’s well-off life is more affluent, and a relatively complete socialist market economy system will be formed; after another 10 years of hard work, by the 100th anniversary of the founding of the Party, the national economy will be further developed and all systems will be further improved; by the mid-century of the founding of the People’s Republic of China in the mid-century, modernization will be basically realized and a prosperous, democratic, and civilized socialist country will be built. In 2006, the Sixth Plenary Session of the Sixteenth Central Committee of the Communist Party 51 52

Selected Works of Deng Xiaoping (1993, p. 77). Selected Works of Deng Xiaoping (1993, p. 251).

References

387

of China added the word “harmony” to the modernization goal. In 2017, the 19th National Congress of the Communist Party of China added the word “beautiful” to the goal of modernization, proposing to build a prosperous, powerful, democratic, civilized, harmonious and beautiful socialist modern power. The year 2020 is a critical time node. China will fully build a well-off society, form a system with complete systems, scientific norms, and effective operation, make all aspects of the system more mature and stereotyped, and then start a new journey to build a socialist modernization country. According to the strategic deployment of the 19th National Congress of the Party, from 2020 to the middle of this century, two stages of development will be involved: the first stage spans from the 2020 to 2035. The goal is to basically realize socialist moderniization on the basis of building a moderately prosperous society in all respects; the second stage starts from 2035 to the middle of this century, the goal is to build a prosperous, powerful, democratic, civilized, harmonious and beautiful socialist modern power on the basis of basically realizing modernization. It can be expected that the practice and theory of socialist economic development with Chinese characteristics will also enter a new era in an all-round way.

References Cai Fang, and Wang Dewen. (2005). China’s Demographic Transition: Implications for Growth. In Garnaut and Song (eds.). The China Boom and Its Discontents. Canberra: Asia Pacific Press. Cai Fang, Du Yang, and Wang Meiyan. (2008). The Transformation of Economic Development Mode and the Internal Impetus of Energy Conservation and Emission Reduction. Economic Research Journal, 6. Chen, Jiyong, and Sheng, Yangfeng. (2008). Knowledge Spillover from Foreign Direct Investment and Regional Economic Growth in China. Economic Research Journal, 12. Chen Zongsheng and Li Defu. (2005). High Savings, High Investment and China’s Economic Growth in the Process of Labor Transfer. Economic Research Journal, 2. Excerpt of Important Discourse on Scientific Outlook on Development. (pp. 24–25). Beijing; Central Party Literature Press and Party Building Books Publishing House 2009. Fan Gang, and Zhang Shuguang. (1990). Theory Outline of Public Ownership Macroeconomy. Shanghai: Shanghai SDX Joint Publishing Company. Fan Gang, Wang Xiaolu, and Ma Guangrong. (2011). Contribution of Marketization Process to Economic Growth in China. Economic Research Journal, 9. Guo Kesha. (2016). Theoretical Basis for China’s Economic Development to Enter the New Normal—An Analysis of the Political Economy of Socialism with Chinese Characteristics. Economic Research Journal, 9. Haiwen. (2007, June 1). China’s Economy Has the Advantage of Great power, Can Grow Strongly for another 20 Years. Beijing Morning Post. Hu Jiayong, and Wu Peng. (2012). Promoting the Phased Transformation from “Getting Rich First” to “Sharing the Wealth”. Economic Perspectives, 12. Jiang Renai, and Feng Genfu. (2006). Are There Rapid Efficiency Improvements in China’s Economy since the Reform? China Economy Quarterly, 1. Jin Bei. (2015). Research on the New Normal of China’s Economic Development. China Industrial Economics, 1.

388

13 From “Development is the Absolute Principle”, to the Scientific Outlook …

Li Daokui. (2005). Great Power Advantage Facilitates Chinese Creativity. 21st Century Business Review, 7. Li Defu, and Chen Zongsheng. (2006). Are There Rapid Efficiency Improvements in China’s Economy since the Reform? China Economy Quarterly, 1. Li Yang, and Zhang Xiaojing. (2015). The New Normal: The Logic and Prospect of Economic Development, Economic Research Journal, 5. Lin Yifu, and Su Jian. (2007). On the Transformation of China’s Economic Growth Mode. Management World, 11. Lin Yifu, Cai Fang, and Li Zhou. (1999). China’s Miracle: Development Strategy and Economic Reform (1999 ed., p.18). Shanghai: Truth & Wisdom Press, Shanghai People’s Publishing House. Liu Wei. (2006). Historical Changes of Economic Development and Reform and Fundamental Transformation of Growth Mode. Economic Research Journal, 1. Liu Zhibiao. (2005). The Upgrading Path and Brand Strategy of China’s Manufacturing Industry under the Background of Globalization. Research on Financial and Economic Issues, 5. Montinola, G., Qian Yingyi, and B. Weingast. (1995). Federalism, Chinese Style: The Political Basis for Economic Success in China. World Politics, 48, 50–81. Ouyang Yao. (2009). Systematic Advantage of Great Powers: A New Perspective on China’s Economic Competitiveness. Economic Theory and Economic Management, 11. Ouyang Yao. (2011). The Comprehensive Advantages of big Countries. Shanghai: Truth & Wisdom Press, Shanghai SDX Joint Publishing Company, Shanghai People’s Publishing House. Philip Agyin, and Peter Hoyt. (2011). The Economics of Growth. (pp. 344–345.). Beijing: China Renmin University Press. Selected Works of Deng Xiaoping. (1993). Vol. 3. People’s Publishing House. Selected Important Documents since the 16th National Congress of the Communist Party of China (Part 1). Beijing: Central Party Literature Press, 2005. Selected Important Documents since the 18th National Congress of the Communist Party of China (Part 2). Beijing: Central Party Literature Press, 2016. Selected Works of Important Documents since the Third Plenum of the CPC Central Committee (Part 1; pp. 3–4). Beijing: Central Party Literature Press, 2011. Wang Wenju, and Fan Hejun. (2007). Empirical Analysis of the Contribution of Market-oriented Reform to Economic Growth in China. China Industrial Economics, 9. World Bank and Development Research Center of the State Council. (2013). China in 2030: Building a Modern, Harmonious, and Creative Society. Beijing: China Financial & Economic Publishing House. Wu Peng. (2013). The Dynamic Transformation of China’s Economic Growth since the Reform. China Industrial Economics, 2. Wu Zhongmin. (1992). Comprehensive Advantage and Syndrome of big Country. Science and Technology Review, 8. Xi Jinping. (2016a). Speech at the Seminar on the Study and Implementation of the Spirits of the Fifth Plenary Session of the 18th CPC Central Committee for Provincial and Ministerial Leading Cadres. Beijing: People’s Publishing House. Xi Jinping. (2016b). Speech during Investigation in Chongqing. People’s Daily, Jan 7, 2016b. Xi Jinping. (2017). Speech at the 38th Group Study Session of the Political Bureau of the 18th CPC Central Committee. People’s Daily, Jan 23, 2017. Yang Jisheng, Xu Juan, and Wu Xiangjun. (2006). Historical Changes of Economic Development and Reform and Fundamental Transformation of Growth Mode. Economic Research Journal, 1. Yao Shujie. (2015). China’s Economic Development and Theoretical Innovation under the “New Normal”. Economic Research Journal, 12. Yuan Fuhua. (2010). China’s Potential Economic Growth under the Constraint of Low-carbon Economy. Economic Research Journal, 8. Yuan Fuhua. (2012). “Structural Acceleration” and “Structural deceleration” of Long-term Growth Process: An Explanation. Economic Research Journal, 3.

References

389

Zhang Wuchang. (2009). China’s Economic System. Beijing: CITIC Press Group. Zhang Zhuoyuan. (2005). Deepening Reform and Promoting Transformation of Extensive Economic Growth Mode. Economic Research Journal, 11. Zhou Li’an. (2007). A Study on the Promotion Tournament Mode of Local Officials in China. Economic Research Journal, 7. Zhu Tian. (2016). The Mystery of China’s Growth. Beijing: CITIC Press Group.

Chapter 14

The “Three Rural” Issues in China’s Market-Oriented Economic Reform

China is a large developing country with a large population with rural residents accounting for a considerable proportion of the total population. This is the most basic national situation in our country. Therefore, the issues of agriculture, rural areas, and rural people (referred to as the “three rural” issues) have always been the most important issue restricting the development of our country’s national economy, and have a bearing on the overall development of the cause of the party and the state. Whether in the period of the revolutionary war, the period of construction after the founding of the People’s Republic of China, or the period of reform and opening up, our party has always attached great importance to, seriously treated, and worked hard to solve the “three rural” issues. In different historical periods, the party and state leaders have always paid great attention to the solution of the “three rural” issues. Mao Zedong once pointed out that our country has more than 500 million rural population, and the situation of rural people is very important for the development of our economy and the consolidation of the political power. General Secretary Xi Jinping clearly stated many times in easy-to-understand way that “A well-off society is dependent on the well-being of the rural people; it must be noticed that agriculture is still the short leg of the “four modernizations”, and the rural area is still the shortcoming of building a moderately prosperous society in all respects way.” China’s overall strength is dependent on the strength of agriculture.” For China to be beautiful, the rural areas must be beautiful; for China to be rich, rural people must be rich.“A solid agricultural foundation, a harmonious and stable rural environment, and peaceful and content living and working condition of the rural people are the guarantee of the overall situation of the country and the proactive execution of various kind of work.” “Without agricultural modernization, without strength and prosperity of the rural area, without peaceful and content living and working condition of the rural people, national modernization is incomplete, incomplete, and unreliable.” “Agriculture cannot be ignored at any time, rural people cannot be forgotten, and rural areas cannot be treated with indifference.”1 1

Wang (2018).

© China Social Sciences Press 2023 Z. Zhang, Handbook of Chinese Economics, https://doi.org/10.1007/978-981-99-0420-4_14

391

392

14 The “Three Rural” Issues in China’s Market-Oriented Economic Reform

Since the end of the 1970s, China’s reform of the economic system with a market economy orientation has first made breakthroughs in the reform of the rural economic system initiated by the majority of rural people, with the abolition of the “One Big Two Public” commune system as the main content. This is no accident. It shows that the “three rural issues” had become the focus of various contradictions in the society at that time, and it was also a strong demand for the majority of farmers to get rid of poverty and hunger for a long time. The first breakthrough of the “three rural issues” is not only one of the most important features and highlights of China’s economic system reform, but also an important reason why China’s economic system reform can achieve great success in a short time. In the 40-year course of the continuous deepening of market-oriented economic system reform in China, the “three rural issues” has always been at the top of the list. A clear evidence is that for many years, the Party Central Committee has arranged and deployed the reform and development of the “three rural issues” in the form of the No. 1 priority document, which has led to the gradual deepening of the “three rural issues”. The tide of the reform of the “three rural issues” has also aroused great concern in the theoretical circle of economics in China. Scholars and experts have sought to analyze and explain the reform of China’s market economy based on the positions, views, and methods of Marxist dialectical materialism and historical materialism. As of the “three rural issues” in China, dozens of monographs and nearly one thousand articles have been published. The scope of the field studied, the depth of the problems explored and the diversity of the opinions under analysis are all unprecedented, and many authentic knowledge and real insights are included. In particular, a large number of young economists have participated in the discussion on the country’s “three rural issues” and have contributed a series of new analytical frameworks and perspectives that deserve attention. The reform of the “three rural issues” itself is a huge and complicated system of engineering, covering all aspects of the problem, including various issues such as productivity and production relations, economic foundation and superstructure, rural areas and cities, as well as various disciplines including agricultural economics, development economics and institutional economic, etc. For the reference of further studies of experts and scholars, this chapter only summarizes the main topics in the discussion carried out in China’s economic theory circles as regard to the “three rural” issues in our country’s market-oriented economic reform.

14.1 “Three Rural” Issues at the Early Stage of China’s Market-Oriented Economic Reform Guided by the ideological line of “emancipating the mind, seeking truth from facts, uniting and looking forward” put forward by the Third Plenary Session of the Eleventh Central Committee of the Communist Party of China held in late 1978;

14.1 “Three Rural” Issues at the Early Stage ...

393

in the late 1970s and early 1980s, the hundreds of millions of Chinese rural people represented by the village of Xiaogang in Fengyang County, An Hui Province of China, have broken the cage of the rigid centralized management system of the People’s Commune System and implemented the household contract responsibility system based on the collective ownership of the land, with “contracted production to households” as the main form of operation (hereinafter referred to as “family contract system”). This is an epoch-making fundamental change in China’s rural economic system. This kind of reform in rural economic system carried out by independent innovation and spontaneous development of the rural people, quickly spread throughout the country’s rural areas and became the main body of rural economic operation. Then, since the 1980s, township and village enterprises first sprung up in rural areas in the provinces on the southeast coast of the country, and gradually advanced to rural cascades in the central and western regions. Township and village enterprises are another great creation of rural people in China following the household contract system. They are a pioneering initiative of rural people to break through the dual barriers between urban and rural areas, find a way out of surplus labor, and seek prosperity in the countryside. Since then, in the 1990s, generations of Chinese farmers dealing with the yellow soil field have spontaneously moved from rural areas to large and medium-sized cities, from backward inland areas to economically developed coastal areas, from low-income agricultural plantation industry to high-income secondary and tertiary industries. Small streams of labor has been exported and developed into a “migrant worker wave” with tens of millions of mobile troops which has created tremendous concussion in the whole society. This is another striking move by rural people in China since the creation of the household contract system and township and village enterprises since the late 1970s and early 1980s, and with their strong development trend, it has violently impacted the urban–rural dual social and economic structural barriers. If the so-called “first impact” refers to rural people’s utilization of family contracting system to impact the “One Big Two Public” People’s Commune System, and the so-called “second impact” refers to rural people’s utilization of the development of township and village enterprises characterized by “separating the land without leaving the village” to impact the dual economic structure with industrial and agricultural division. Then, this time, the peasants used a spontaneous large-scale cross-regional impact on the old dual social structure with urban–rural division and closed-region, which can be regarded as the third impact. Through three major practical innovations, rural people in China have broken through the shackles of the old system that constrains the development of rural people, the old structure of the urban–rural dual economy, and all the old rules and regulations, old ideas and concepts that constrained the rural people to become rich, so that they can run more quickly on the way to liberating themselves. In the face of the three major practical innovations independently created and spontaneously carried out by the mass of rural people, the economics community in China has conducted extensive discussions in an effort to give an explanation from economic theory.

394

14 The “Three Rural” Issues in China’s Market-Oriented Economic Reform

Family Contracting System has Shaped the Business Entity of Rural Market Economy At the beginning of the implementation of the reform of household contract system, people still held inconsistent understanding of it. Some people think that the family contracting system has neither adhered to public ownership nor distribution according to work. The collective economy at the production team level has actually become an “empty shell” and “existence in name”. The team-based public ownership has been passively disintegrated. Therefore, it is essentially a retreat to “single action”, a special form of small peasant economy that retains the appearance of the collective economy. This view was once popular when the household contract system was first implemented. Later, although it has been reduced, it has not disappeared. There are still many people who hold this view privately, including some rural people and rural cadres. Some rural people call the distribution of contracted land “the second land reform”, which is understood as the “coming back home of land”; some rural cadres even used the statement that “30-years’ hard work in vain and back to the period before liberation overnight”, which is a very vivid portrayal of this kind of view.2 Others believe that it cannot be denied that family contracting system is good, but its “suspicious composition” and “incorrect direction” may not necessarily guarantee its longevity. Maybe one day it will have to be changed back, and there will be a “second cooperation”.3 Social doubts about the nature of the household contract system are also reflected in the circle of economic theory. In the early 1980s, a series of dissertation articles on rural household contracting systems were published. Most of the main points focused on whether the family contracting system changed the nature of the collective economy. And most of the articles regarded the family contracting system as the “changes in the form of labor organization”, or “changes in the form of management”, or even “changes in the form of the production responsibility system”, etc., within the framework of collective economy and cooperative economy, which serve as the basis for the assertion that the household contract system “has not changed the nature of the collective economy”.4 It should be pointed out that at that time, a few articles analyzed the implementation of the household contract system by stating that “it has delegated the actual right of management and distribution of production, as well as the rights of possession, usage and control of production materials to rural people”, and the issue of the “realization of public ownership” was also put forward. However, the author of the article believes that these indicate that the household contract system “is no longer a complete collective economic nature”, and that “the adherence to a collective economic form based on production teams” is the “outlet and direction of China’s agricultural industry.”5 Some theorists have 2

Liu (1980), Deng (1980), Yuan (1996). Lin (1983a). 4 Guo (1982). 5 Ma (1981). 3

14.1 “Three Rural” Issues at the Early Stage ...

395

raised various doubts about whether the family contract system will affect agricultural modernization. For example, some theorists think that the family contract system has strengthened rural people’s attachment to the land and the contracted land is regarded as private. In addition, the fragmentation of the land is a hindrance to the mechanization of agriculture, and it has also hindered the land concentration to be developed towards moderate scale operations. The household contracting system has also divided and consumed the years of accumulation of the collective economy, weakened the collective economy, and raising funds for agricultural modernization becomes extremely difficult. After the cancellation of the old system of the people’s commune, the degree of organization of rural people was greatly reduced. It is difficult for such extremely scattered rural households to adapt to the development and changes of the market economy, and it is even more difficult to raise themselves to the level of modernization according to the needs of the market. Therefore, some theorists believe that the household contracting system is mainly the product of the failure of cooperation on the basis of traditional agriculture. It is not only a correction of the previous errors of cooperation, but also a rescue to maintain the direction and results of cooperation. The special social and historical background of the family contracting system determines that it will not exist forever, and because it is more suitable for China’s agriculture at the traditional stage, it is not suitable for modern agriculture. Therefore, with agriculture becoming more and more modernized, its historical mission will also be completed.6 At the beginning of 1982, the Minutes of the National Rural Work Conference forwarded by the Central Committee of the Communist Party of China pointed out that the cadres and the masses had doubts about the nature and future of the household contract system. All forms of family contracting, including “household-based production system” and the “household-based contract system”, are socialist forms of cooperative economy.7 Then in the report of the 12th National Congress of the Party held in September 1982, it further affirmed the creative practice of the masses of rural people in reform of rural areas, stating: “in recent years, various forms of production responsibility system have been established in rural villages. Productive forces has been further liberated, which must be persevere in the long term, and we can only gradually make improvement on the basis of summarizing the practical experience of the masses, and we must not rashly change the wishes of the masses, nor can we go back to the old path.”8 At the beginning of 1983, the Central Committee of the Communist Party of China retransmitted “Some Issues of Current Rural Economic Policy” as a draft trial, and made policy provisions on new situations and new issues that have emerged in rural areas after the general implementation of the household contract system.9 All of these played an extremely important role in eliminating the 6

Lin (1983b), Zhao (1983), Yuan (1996). Minutes of the National Rural Work Conference. People’s Daily, April 6, 1982. 8 Hu Yaobang. Creating a New Situation of Socialist Modernization in an All-round way. Compilation of Documents of the Twelfth National Congress of the Communist Party of China. People’s Publishing House. 9 Some Problems in the Current Rural Economic Policy. People’s Daily, January 2, 1983. 7

396

14 The “Three Rural” Issues in China’s Market-Oriented Economic Reform

suspicion of the family contracting system among cadres and the masses at the time, and promoting the healthy development and consolidation of the family contracting system. After two or three years of practice, the household contracting system has been increasingly developed and consolidated, and its advantages have been fully exerted. Agricultural production has developed vigorously, rural people’s income has greatly increased, and the appearance of the rural areas has also been greatly improved. Facing this reality, people’s doubts about the family contracting system have basically disappeared. However, how to deeply dissect the status, role and future of family contracting system in the reform of the entire rural economic system from a theoretical height and how to examine the practical and theoretical significance of rural family contracting system from the macro perspective of China’s marketoriented reform were important issues that were urgently needed to be solved in China’s economic theory. At that time, the mainstream views of the Chinese economic theory community on the nature, development trend, and theoretical implications of the household contract system were relatively clear. They believed that: (1) Our country’s agricultural cooperative movement in the 1950s and 1960s has led hundreds of millions of rural people to the socialist road, but it has not really found the specific form of China’s agricultural economic development path. The implementation of the household contract system has enabled the country’s agricultural economic development to find specific forms of production, exchange, and distribution that are suitable for the level of local productivity at that time, for the traditional psychological habits of the Chinese nation, and for China’s overall national conditions. In particular, the household contracting system grasps the objective requirements of the two aspects caused by the dual characteristics of joint labor, namely, on one hand, there is decentralized independent labor, and on the other hand, there is the control and coordination of the state and the collective over the production process. The path of separate fields and individual economy cannot be achieved in China, and the kind of exclusion of scattered and independent labor, as long as taken the centralized and unified form, is not suitable for our country’s national conditions either. The family contracting system truly reflects rural people’s ownership status in the collective economy, and combines the direct producers with the most basic means of production in agricultural production—land, so it can not only guarantee the producers’ immediate interests, but also straighten out their economic relations with the state, the collective, and each other. (2) The family contracting system is mainly characterized by two levels of management, and it is theoretically based on the combination of the proper separation of the ownership and the right to use of the main means of production, the advantages of the socialist collective economy and the individual rural people’s enthusiasm for production. The key to this form of ownership is to confirm the existence of the rural household as the basic management level of socialist agriculture. The core is to mobilize the production enthusiasm of hundreds

14.1 “Three Rural” Issues at the Early Stage ...

(3)

(4)

(5)

(6)

397

of millions of rural people and to promote the rapid development of agricultural productivity. Because rural people have obtained autonomy and control in production, they have obtained autonomy and independence in economic, social, and political aspects. The straightforward distribution method of “keeping all the rest after submitting what’s owed to the country and the collective” has enabled rural people to keep the rest of the production after submitting to the country and the collective, which has provided direct benefits to the rural people, thereby overcoming the egalitarian ills of the “big pot” in the past, which has greatly stimulated rural people’s enthusiasm for production, and solved the motive problem of driving the development of socialist agriculture in China. The household contracting system has broken the mandatory administrative control of the planned economy on China’s agriculture, and gradually restored the connection between agriculture and the market that was blocked by the planned economic system, thus accelerating the agricultural production towards commercialization, professionalism and industrialization and leading to increased division of labor within the agricultural sector. At the same time, with the rapid increase in agricultural labor productivity, rural people are freed from the over-reliance on land, which has promoted the process of their leaving the rural areas, and such a process is a necessary condition for any country to realize agricultural modernization. Only by completing such a process can modern agriculture be established on the basis of specialization, corporatization, and moderate scale of operation.10 Today’s family management is family management under the condition of land publicizing. In many ways, it is restricted by the collective economy. It is a management level in the cooperative economy and an integral part of the entire socialist economy. It is neither an individual economy after land reform, nor a small peasant economy in the old society, but a new type of family management.11 Some people further believe that the implementation of the household contract system is not only a “change in the form of labor organization” or “a change in the form of the production responsibility system”, but also a profound change in the socialist production relationship, which is a major breakthrough in traditional socialist economic theory.

First, in terms of ownership of means of production, the original people’s commune system was established in accordance with the basic model of traditional socialist economic theory, and land and other major means of production were jointly occupied and used together; Under the household contract system, the relationship between the rural households and main means of production such as land is based on the basic model of the socialist commodity economy, and this relationship is theoretically based on the elaboration that the system of ownership can be further 10

Tang (1983), Research Institute of Economics, Henan Academy of Social Sciences (1982), Lin (1983a), Xu (1981). 11 Wang (2008).

398

14 The “Three Rural” Issues in China’s Market-Oriented Economic Reform

divided into four parts with four different forms such as the rights of proprietorship, the rights of control, the rights of possession and the rights of use; this is a new form of ownership system with separation of the above four forms of rights in which the main means of production such as land are still owned by the collective formed by the rural households, which is dominated and controlled by this collective but is actually possessed and used by the rural households. This is a creation of Chinese rural people in long-term cooperative economic practice. Its essence is to establish a new way of combining producers and means of production. Under the people’s commune system, in a broad sense, that is, within the scope of society, members within the people’s commune system realize the indirect combination of means of production and producers on the premise of public ownership of the land and the integration of the four forms of rights. However, under the household contract system, rural households realize direct integration of the means of production and the producer in the production process on the premise of public ownership of the land and the separation of the four forms of rights within the scope of the family. The process of transformation from indirect integration to direct integration is a process in which rural households have also transformed from the basic economic unit under the people’s commune system, i.e., a labor member within the production team, into an independent, first-level socialist commodity economy with economic substance. Of course, in some places where the collective economic strength is relatively strong, when the family contract system is implemented, the collective also retains the right to use and control of the production equipment such as large-scale machinery and equipment and large-scale water conservancy facilities, and implements unified management, and has formed a “combined and double-layer management” model. However, land, the basic agricultural production material, is still contracted to rural households. Therefore, the level of farmer household management remains a major level of management. Second, due to the separation of the ownership and rights of use of the means of production, the relationship between the collective and the rural households has changed a lot. Under the people’s commune system, the production team, as the basic unit of rural production, is responsible for the specific process of organizing agricultural production and management under the administrative intervention of the government at all levels and organizations of the people’s commune at all levels. The relationship between the production team and the rural households is the relationship between the production organizers, managers and laborers in the form of administrative affiliation. Under the household contract system, the relationship between the collective and the rural households has become an equal contractual relationship with the nature of commodities between the owners and dominators of the means of production and the occupiers, users and operators of the means of production. By contracting, the two parties not only confirmed their independent status and independent interests, but also re-integrated the division of the four forms of rights of ownership according to the principle of economic interests. On one hand, relying on the ownership of the land, the collective collects reserves such as provident fund and public welfare fund from business achievements of the rural households, and imposes restrictions on the use of land and other main production materials, such as the prohibit of sale, mortgage, pawn, or construction of houses, etc.. Relying

14.1 “Three Rural” Issues at the Early Stage ...

399

on the right to dominate and control the land, the collective can also make necessary adjustments to the division of the land and redistribute the right to use of the land under appropriate circumstances. On the other hand, relying on their exclusive ownership and use of land during the contract period and referring to national and collective strategic plans, the rural households carry out independent production and management according to market demand. At this time, the peasant family has transformed from the laborers originally attached to the collective economy into relatively independent commodity producers with greater management autonomy. Third, due to the separation of the four forms of rights of ownership, changes in the status of rural households and the formation of management autonomy, correspondingly, the distribution of labor products has also undergone fundamental changes. This change is first manifested in form. The members of the people’s commune system have their labor products divided into two distinct parts. The basic part is the collectively distributed labor remuneration calculated by “work points” (including the physical form of “rations” and its converted form in cash); the other part is a small amount of self-retained land income and sideline economic income directly attributed to the rural households themselves. However, as for the rural households under the household contract system, their labor products are obtained in accordance with the basic form of “keeping all the rest after submitting what’s owed to the country and the collective”, which is reflected as keeping all the labor income left after handing over the portion owed to the state and the collective. This changes the form of distribution from the original “public distribution” to “family-based submission”. In addition, this change is reflected in the specific content of the distribution. Because of the independent status that rural households hold in production unit and operation level, a new form of distribution according to work with “household-based accounting and co-production-based remuneration” is introduced. With condensed form of materialized labor as the basis for remuneration, this new form of distribution focuses on economic effects and effective labor, which is more in line with the characteristics of agricultural production, can more accurately reflect the actual contributions of laborers and more fully reflect the principle of distribution according to work. Besides that, under the household contract system, the part that is “left to oneself” is greater than the amount purely calculated based on distribution according to labor. It includes the compensation for the necessary value of the products produced by the rural people to work for themselves, and the value compensation in the form of capital and labor invested for their simple reproduction. It also includes compensation for rural people’s additional investment to expand reproduction. Therefore, although labor is the main source of the “own” part, the tools, technologies, equipment and funds owned by each household are also important factors affecting rural people’s income. This includes the factors in which commodity production is distributed according to amount of funds. During the term of the contract, the amount “submitted to the country and the collective” is quantified, while the amount “left to oneself” is variable, which encourages land contractors to make additional investments and increase labor productivity, thereby obtaining additional and higher income. It is precisely because of household contracting system’s separation of ownership and rights of control from rights to use and rights to possess within the relationship of

400

14 The “Three Rural” Issues in China’s Market-Oriented Economic Reform

the means of production, that the rural households have become a relatively independent management level, which solves the problem of “rights”; through contracting, rural households have become commodity producers and managers with management autonomy, which solves the problem of “responsibility”; in addition, through the implementation of the distribution form in which labor is directly linked to labor achievements, it has truly realized more work, more gain, less work, less gain, more input, more gain, and less input, less gain, which solves the problem of “interest”. It is this direct and close combination of rights, responsibilities, and interests in the family economy that has fully stimulated rural people’s enthusiasm for improving production and income. It is no exaggeration to say that the implementation of the household contract system has liberated China’s agricultural productivity once again. Besides that, with the implementation of the household contract system, rural commodity production has developed rapidly. A new family economy based on commodity production is gradually emerging. This new family economy is based on the retention and development of traditional family economic foundations as its starting point; through the development of commodity production, the use of advanced tools and technologies, the gradual implementation of the division of labor and division of sectors, and gradual expansion of the scale of production, “small and complete” production can be transformed to “small and compatible” and further to “small and specialized” production, thus gradually forming a commercialized, specialized and then further to the corporatized family economy; then, the factors of socialization of production could continue to penetrate into the traditional agricultural system, thus organically integrating the process of people’s subjective promotion and construction with the process of natural and objective historical development, which could greatly speed up the historical process of China’s agricultural modernization. Therefore, it can be said that the birth and growth of this new family economy will not only bring vigorous vitality to the development of China’s rural economy, but also have a tremendous role in promoting agricultural modernization with Chinese characteristics.12 As some people have summed up, as a result of the family contract system in rural China, a series of chain effects will appear: complete stimulation of creative ability and enthusiasm of rural people → unprecedented and rapid increase of agricultural productivity → increase in agricultural production and income → surplus of labor force and funds → a variety of operations, division of labor, division of sectors and further development of rural industry → the emergence and development of professional households, new consortia and various technical service organizations → the transformation of a self-sufficient and semi-self-sufficient traditional production method to a commoditized and socialized modern production method → the promotion of the transformation of the rural circulation system and financial system → the flow of rural surplus labor force to the city and the development of rural urbanization → the emergence of socialization, modernization and the prototype of a socialist agriculture with Chinese characteristics.13

12 13

Yu (1983), Li (1983), Tang (1983). Lin (1983a).

14.1 “Three Rural” Issues at the Early Stage ...

401

The reform of the rural economic system that broke through the traditional socialist economic theory and the rigid socialist model was the first to succeed, which not only caused a chain reaction of the entire rural economy, but also inevitably produced a huge impact on the entire economic system of China, including industry, commerce, finance, taxation, etc.. Agricultural economic reforms have broken through the administrative system of the integration of government and society, the division of administration and enterprises is implemented, and production and operation is proceeded according to the characteristics of socialized production; Break through the plan system regulated by a single mandatory plan is broken through and a contract system is implemented, while interests, rights and responsibilities of the country, collectives and rural people are integratively taken into account; the simplification of the management form of the socialist economy has been broken through, the diversification of management forms has been implemented, which has invigorated the economy; the distribution system of “iron rice bowls” and “big pot rice” has been broken through, with labor and labor achievements directly linked and the distribution of labor achievements combined with the obligations assumed, the rights exercised, and the benefits enjoyed; in addition, the self-sufficient and semi-self-sufficient natural economic system has been broken through, the specialization and integration of production is promoted, leading to the disintegration of the self-sufficient and semi-self-sufficient natural economy and the development of the commodity economy. These have provided lessons and directions for China’s reform of the entire economic system. Therefore, in a certain sense, it can be said that the reform of the agricultural economic system has become the precursor of the comprehensive reform of the Chinese economic system.14 Regarding the development trend of family contracting system, some people think that family management has become the most common form of agricultural management, which is determined by the industrial characteristics of agriculture. The basic characteristic of agricultural production is the dispersion of space, and it must respond to small changes in the natural environment in a timely manner, which makes cost of agricultural production supervision relatively high. The economic interests among rural household members are highly consistent and do not require precise labor measurement and supervision. Taking family as the basic business unit of agriculture, laborers are granted with great initiative, enthusiasm and flexibility. They can not only be jointly responsible for the whole process of agricultural labor, but also for the final agricultural products. In addition, they can respond more sensitively to various unpredictable changes, which just fits into the very feature of agriculture as a biological reproduction process. Compared with other management methods, family management has better adaptability in agriculture. Family management is not only suitable for traditional agriculture with manual labor as the mainstay, but also modern agriculture with advanced scientific technology and production methods. Family contracting has great potential and has a broad prospect for development. 14

Yu (1983).

402

14 The “Three Rural” Issues in China’s Market-Oriented Economic Reform

In the process of our country’s agricultural modernization, there is no such issue as changing the status of the family business as the productivity level increases. Family management is and will be the most basic form of agricultural management in the country.15

The Development of the Second Township and Village Enterprises has Changed the Single Industrial Structure and Ownership Pattern in the Rural Areas In the process of realizing agricultural modernization, a large amount of surplus agricultural labor will inevitably leave the land to engage in other industries. In our country, due to the shackles of a closed dual economic structure and dual social structure, coupled with the need to transfer hundreds of millions of surplus agricultural labor, it is necessary to open up a new path in order to transfer such a huge rural population in such an obvious dual structure with such strict divistion between modern industrial cities and traditional agriculture and rural areas thus forming two fundamentally different areas. This transfer process of surplus labor force is consistent with the process of rural industrialization and urbanization. And the township enterprise and small towns thus came into being have become the main channel for the transfer of surplus agricultural labor. (1) The choice of the development path of township and village enterprises Since the 1980s, township and village enterprises have sprung up in rural areas of the southeastern coastal provinces of China. The economic theorists have paid great attention to such a new thing that has emerged in the vast rural areas. It has a very important strategic position and role in realizing industrialization, urbanization and modernization of rural areas, revitalizing the entire rural economy, realizing the prosperity and prosperity of the vast rural areas of our country, transforming the dual-economic structure, and exploring an economic development path with Chinese characteristics for rural areas. The reason why township and village enterprises can play such an important role is mainly because: (1) It has broken the dominating ownership pattern of the rural public ownership that has continued for decades, and has begun to form a diversified ownership pattern, further liberating productivity. Since the implementation of the household contract system still adheres to the collective ownership of land as the main means of production, there has been no coexistence of multiple ownership systems. Township and village enterprises that are run by towns and villages are still collectively owned. It addition to these enterprises, a large number of individual-run, family-run, and joint-venture enterprises have emerged, which are called “multi-wheel driven” in some places. In fact, it is a pattern of development with multiple ownerships. On one hand, the collective economic strength has been consolidated and strengthened. On the other hand, the enthusiasm of families 15

Han (2012).

14.1 “Three Rural” Issues at the Early Stage ...

403

and individuals has been exerted, which has brought rural economic development to a new level. (2) It has broken the single unbalanced rural industrial structure that has been “grain-based” for decades. The traditional industrial division of labor between urban and rural areas was shattered, and coordinated development of the first, second and tertiary industries was realized, forming a new industrial structure with comprehensive revitalization of various industries. In particular, township and village enterprises have supported agriculture and other industries by means of “complementing agriculture with industry” and “building agriculture with industry”, which has become an important material basis for supporting the comprehensive development of agriculture and the rural economy. (3)It has broken the single income structure causing long-term difficulty for rural people to be lifted from poverty, since they had been tied to the land for major sources of food for decades. It has expanded rural employment opportunities and capacity, and has transferred a large number of surplus agricultural labor force. It has diversified the sources of income distribution for rural people, and the per capita net income of rural people has increased significantly. A large number of township and village enterprises have developed in rural areas. Rural people have got rid of poverty and embarked on a well-off road, greatly narrowing the gap between urban and rural areas. (4)It has broken the closed natural economic pattern of rural self-sufficiency and semi-sufficiency that has lasted for thousands of years, brought the vitality of the commodity economy into the countryside, promoted the transformation of the rural economy and society from traditional to modern, and also promoted the transformation from extensive to intensive, thus greatly stimulating the improvement of agricultural labor productivity and creating possibility of realizing agricultural modernization. (5) It has greatly impacted the dual structure of urban–rural division that has lasted for decades, a new economic and social structure in which industrial and agricultural integration and urban–rural integration have emerged. Rural market towns driven by the development of township and village industries have increasingly become a link in the economic network connecting large and medium-sized cities and the vast rural areas, gradually forming a rationalized social division and cooperation system between urban and rural areas, thus forming a complex, multi-level economic network. Large modern industries in urban areas complement and develop together with rural township industry, large and medium-sized cities, and small rural towns, which constitutes an industrialization and urbanization path with Chinese characteristics.16 Of course, along with the development of township and village enterprises, a series of problems have emerged, and there have also been some criticisms of township and village enterprises. For example, as regard to the relation to agriculture, some people accused the development of township and village enterprises to occupy the cultivated land, so that the young and educated young and middle-aged laborers have left agriculture, and agriculture has become a “sideline”. People who are still staying at the rural areas are mostly the elderly, the weak, women or children. And issues such as the “three wastes” emissions which has spread industrial pollution to the countryside has also affected the development of agriculture. As of the relation 16

Wei (1984), Guo (1993), Zhang (1995), Chen (1992).

404

14 The “Three Rural” Issues in China’s Market-Oriented Economic Reform

to urban state-owned industries, some people accused the development of township and village enterprises by “squeezing the big with the small” and “advanced with the backward”, and “competing with the state-owned industry for raw materials, capital, and market”. Others believe that the path of “township and village enterprises and small towns” has caused “rural diseases”, which are concentratedly reflected in the rural localization of rural industries, agricultural sidelines, the deterioration of the rural ecological environment, the disorder of the development of small towns, and the “amphibiousness” of the rural population. And all of these are due to the fact that the path of “township and village enterprises and small towns” makes it impossible to completely break through the dual economic system under the conditions that the state has not completely abandoned the various policies and systems on which the dual social and economic structure of urban and rural divisions depends. Therefore, “township and village enterprises and small towns can only be used as a starting model for rural industrialization and urbanization, and it must never be described as the best target model. It was pointed out that our country’s township and village enterprises were born in many unreasonable political and economic environments. Therefore, it inevitably brought many congenital obstacles from its mother body. With the development of the commodity economy, especially with the establishment, development and gradual improvement of the socialist market economic system, these innate obstacles have brought a series of difficulties and problems to the future development of township and village enterprises, including decentralization of resource allocation, homogenization of products and industrial structures, singularity and turbidity of business entities, communitization of operation, administration-based and experience-based micro-management, economic inefficiency, etc.17 (2) Regional model for the development of township and village enterprises Due to the differences in the level of rural productivity development, the original collective economic status, the degree of development of the commodity economy, the status of urban–rural relations, and the differences in humanities, nature, geography, and traditions in various regions of China, some regional development model with unique characteristics have emerged in the development of township and village enterprises. Examples include “Southern Jiangsu Mode”, “Wenzhou Mode”, “Gengche Mode”, “Fuyang Mode”, “Jinjiang Mode”, “Pearl River Delta Mode” and “Hengdian Mode”, etc. The economic theory community has theoretically evaluated many different modes of rural township and village enterprises and commodity economic development. It was suggested that the diversification of rural economic development models is a subject worthy of attention and research. Because any region can only choose its own development path and method according to its own objective conditions; Only by selecting the best combination of productivity factors and combining labor, labor objects, labor tools, etc. into the best structure, can labor productivity be improved. Only by creating numerous economic models and allowing them to develop and 17

Gu et al. (1989), He (1990), Research Group of Township Enterprises (1990), Luo and Cui (1994).

14.1 “Three Rural” Issues at the Early Stage ...

405

improve in practice will it be conducive to exploring the best economic structure suitable for our country’s national conditions.18 Some people think that despite the variety of models, they all show common points in reflecting a rural economic development path that adapts to China’s national conditions and the changes from dual economic structure into a unitary economic structure. Some people have summarized such a path as: on the basis of land contracted by the household, it encourages the flow and recombination of various factors of production, and aims to realize the transfer of agricultural population to non-agricultural industries, thereby gradually completing the historical process of rural economic modernization mainly through the establishment of township and village collective economic enterprises, and the operation of rural household-based and joint household-based enterprises as well as private enterprises operated by various forms of joint ventures (collectively called township and village enterprises). The advantage of this path lies in the fact that it relies on the initiative and enthusiasm of the broad masses of rural people and their talents under suppression for a long time and makes full use of the potential available in the local economic resources, so that various production factors have miraculously achieved a combination, thereby forming a considerable level of productivity.19 It was pointed out that this is brand new path totally different from the one taken in the history of the developed capitalist countries in the West, or the one still being adopted by many developing countries, or even the traditional path followed by some socialist countries including the path taken in the past 30 years by China. The traditional way is to first develop a large industry in the city, and then this large industry will transform the backward agriculture according to the country’s own reality in both technical aspect and the aspect in economic relations, during which process the surplus labor in agriculture will be transferred to the non-agricultural sector of the city. This is a long and painful path. By developing township and village industries and other non-agricultural industries in rural areas, the remaining agricultural labor force in rural areas can be gradually transferred to the non-agricultural sector on-site or nearby, and the difficulties encountered by traditional paths can be avoided. Our country’s practice has proved that this is a path that can promote the development of rural commodity economy faster without the need for a large amount of investment from the state, and help to narrow the gap between urban and rural areas, coordinate the development of industry and agriculture, and achieve rural modernization.20 Others believe that the ultimate theoretical purpose of model research is not to gain an understanding of each specific model, but to study each specific model to finally grasp the general law of socialist rural economic development. Although a large number of models have been put forward successively in various places, they are indeed “overwhelming”, but as long as these models are proposed based on an in-depth study of the actual economic relationship and operating mechanism, and a corresponding theoretical summary has been made which was not based on conjecture or fiction, 18

Shen (1986). Wenzhou Rural Investigation Group, Institute of Economics, Chinese Academy of Social Sciences (1986). 20 Dong (1986). 19

406

14 The “Three Rural” Issues in China’s Market-Oriented Economic Reform

then it is not a “fashionable commodity”, but a truthful reflection of the complexity of objective economic phenomena, which is a necessary stage for us to gradually realize the regularity of the development of socialist rural economy.21 Others believe that our country’s rural economy and the entire social economy will move towards the future of socialist modernization in a rich and colorful posture. Whether it is nationwide or region-wide, the specific forms and practices will be diversified in the development of township and village enterprises and in the rural commodity economy to realize the modernization of the rural economy, and different models can interact with each other on the same path by competing and complementing each other without advocating the whole country to learn and promote one single model, as we have done extremely foolishly.22 (3) The historical position and evaluation of the development of township and village enterprises After entering the 1990s, the system environment, market conditions and other external factors of the development of township and village enterprises have undergone profound changes, highlighting that the Chinese economy, which had been formed in the early 1990s, has shifted from a comprehensive shortage to a relative surplus, and the seller’s market has gradually transformed into a buyer’s market. The situation of insufficient effective demand in the domestic market has been strengthened, the international market has also changed with the growth of the global economy, factors such as the Asian economic crisis have become difficult to maneuver, and the market’s constraints on the development of township and village enterprises have been further strengthened. At the same time, the deepening of the reform of state-owned enterprises has gradually made the original institutional advantages of township and village enterprises degraded and disappeared; the reform of the financial system and the acceleration of the commercialization of banks have seriously deteriorated the financing environment of township and village enterprises. All these have created unprecedented challenges for the development of township and village enterprises. In the face of new challenges and under the pressure of market competition, Chinese township and village enterprises have entered a new stage of shifting from quantity expansion to quality improvement, and from pursuit of speed and efficiency to quality and efficiency. A series of new features have emerged in terms of property rights and investment, growth methods, market development, organizational structure and corporate layout. The development of township and village enterprises also showed a diversified pattern: through the reform of the property rights system, the main body of investment in the original rural collective enterprises has changed from a single peasant in the initial period to multiple forms of subjects such as a township government, the village collective, an individual peasant, a manager, an legal person, and foreign investment, etc. 21

Lin (1987). Wenzhou Rural Investigation Group, Institute of Economics, Chinese Academy of Social Sciences (1986).

22

14.1 “Three Rural” Issues at the Early Stage ...

407

Township and village enterprises are a special kind of entity formed under special historical periods and special macro-environmental conditions. In the past two or three decades, the vigorous development of township and village enterprises has not only contributed to the growth of the national economy, but also changed the employment structure of China’s labor force and the scale structure of industrial enterprises, and improved the industrial structure of rural China, thus contributing to the adjustment of the rural economic structure. Then, township and village enterprises have provided valuable experience for the reform of China’s economic system, especially for urban collective and state-owned enterprises, through the reform of property rights systems such as contracting systems and shareholding cooperative systems. More importantly, the emergence of township and village enterprises has played a role as a special channel for resource allocation between the planned system and the market system in China’s traditional dual urban–rural economic structure. However, with the gradual completion of the transition from China’s planned economic system to a market economy system, the special role of township and village enterprises as a resource allocation channel is disappearing, and its defects in its nature of community and closedness are increasingly prominent. As a special department, township and village enterprises are losing their significance of independent existence, the special status of township and village enterprises is approaching its end, and the characteristics of the industry will eventually replace its geographical characteristics.23

“Migrant Worker Tide” Hits the Urban–Rural Binary Barriers Our country’s economics community also holds two very different views towards the turbulent “migrant worker tide”. One view is that the “migrant worker tide”, as a masterpiece of Chinese farmers in the new situation, is not only an inevitable reflection of the optimal combination of labor resources under the market economy, but also a feedback and manifestation of the implicit contradiction in China’s long-term implementation of the urban–rural separation policy. It is also an important indicator of the enhancement of Chinese farmers’ market economy awareness and promotion of social progress. First, for importing regions, migrant workers provide them with a large amount of inexpensive labor, which fills and solves the structural shortage of labor in large and medium-sized cities and economically developed regions, and provided a great level of necessary labor accumulation for the development of the second and tertiary industries, which has promoted the construction and transformation of large and medium-sized cities, facilitated the lives of urban residents, and solved the problem of agricultural contraction brought about by the industrial development of the import area, and enhanced the stamina of economic construction and sustainable and stable development of the import area. Second, for exporting regions, it is a good way to change the surplus labor resource advantage into a commodity 23

Zhang (2008).

408

14 The “Three Rural” Issues in China’s Market-Oriented Economic Reform

advantage and a market economy advantage. It not only creates employment opportunities for rural people, but also alleviates the contradiction between more people and less land in rural areas. The income of rural people has been increased, and the pace of getting rid of poverty and getting rich has been accelerated. The so-called “one person out of village, whole family out of poverty” is a very good manifestation of this. The migrant workers bring their income from work to home, which not only increases rural consumption, but also develops production and promotes economic construction and civilization construction in the rural areas. Third, migrant workers were directly influenced by modern industrial civilization and urban civilization, which has broadened their horizons, improved their skills and quality. Some of them have become the backbone of the local secondary and tertiary industries after returning home, and many have become farmer entrepreneurs. Fourth, the large output and great level of movement of surplus agricultural labor have made a practical exploration for the labor commodity theory under the conditions of the socialist market economy, and promoted the cultivation, establishment and development of the most important labor market in the construction and improvement of the socialist market system in China. It has also created prerequisites for the rational allocation of resources in our country, the move of agriculture to scale management, the further improvement of rural productivity, and the modernization of agriculture. Therefore, the “migrant worker tide” should never be restricted. Instead, a unified urban and rural labor market should be established on the basis of the reality, so to promote the rational and orderly flow of labor and to facilitate population migration, and to promote and ensure the smooth progress of urban and rural structural reforms. The new order has opened wider development channels for rural areas, increased agricultural incomes and improved rural employment, thereby promoting the process of industrialization, urbanization and economic modernization of rural areas in China.24 Another view is that the disorderly and blind flow of rural people is not conducive to the development of the rural economy, nor is it beneficial to the development and stability of the city. First, the large outflow of young people from the rural areas with a certain cultural foundation and relatively high intelligence has changed the structure of the rural labor force. Most of the people who stayed in agriculture for many years are old and weak women or children. The quality of the labor force has declined significantly, which has seriously affected the wider agriculture in its local use of new technology, which is not conducive to the realization of agricultural modernization. Second, because the outflowing farmers did not give up the contracted arable land, the phenomenon of desolated arable land occurred in large numbers, which was not conducive to the full utilization of limited resources in arable land. Third, the “migrant worker tide” has also brought a series of problems and pressures to the city’s public security, industry, transportation, material supply, and order of life. The urban people’s sense of security has generally decreased. Fourth, many national policies, such as planned births, health and epidemic prevention, industrial and commercial taxation, and compulsory education, cannot be implemented among migrant farmers, and so on. 24

Xu (1994, 1997), He (1998), Yuan (1995).

14.1 “Three Rural” Issues at the Early Stage ...

409

Among the economic theorists and practical workers in China, there are basically two main groups of advocates for the transfer of surplus agricultural labor. The claim of local transfer is the earliest one that is held by more people. This kind of proposition believes that due to the huge amount of surplus agricultural labor in China and the pressure of employment in cities, in order to avoid the blind flow of rural surplus labor and prevent the instability factors caused by it, local agricultural surplus labor should mainly adopt the way of “local digesting”, “local transfer” and “local absorption”. Those who hold this kind of opinion believe that, according to China’s national conditions, in the unique institutional environment of our country, cities have little capacity to absorb rural labor, while rural non-agricultural industries with rural industry as the main body have a decisive role in absorbing agricultural surplus labor. Therefore, the basis for the transfer of agricultural surplus labor in China should mainly be placed on the development of rural industries. That is to say, the vast majority of the surplus agricultural labor force can only implement such ways as “leaving the soil without leaving the village” and “entering the factory without entering the city”, that is, to realize the transfer through large-scale township and village enterprises, various individuals, and private industry and commerce in the local village. This kind of transfer is basically a part-time transfer with the nature of both “industry and agriculture” or both “business and agriculture”. Small towns in the rural areas, as the main distribution center for rural surplus labor transfer and the bases of township and village enterprises for scale operation, can also absorb part of the rural labor force. Therefore, key development should be supported in this respect. Some people even believe that among the current three paths to transfer agricultural surplus labor, such as rural people’s advancing into cities, absorption of agricultural surplus labor by township and village enterprises and rural people’s flowing into small cities and towns, due to the deepening of urban reforms, the difficulty of employment is increasing, rural people are faced with obstacles from entering cities, and township and village enterprises are in the stage of upgrading and absorbing with weakening capacity in absorbing surplus labor. The only way is to transfer surplus labor to small towns. Only the development of small towns will bring huge development space for the surplus agricultural labor.25 Those who hold the idea of cross-region transfer believe that due to the vast territory of our country and the great differences in local conditions, local transfer, as a general principle, cannot be implemented. Especially, the economically backward central and western regions have no possibility of realizing such transfer. They believe that in order to truly and thoroughly transfer China’s huge agricultural surplus labor force from agriculture, it is necessary to directly link the mass transfer of rural people with urbanization in accordance with the path that developed countries have traveled. Only in this way can we complete the historical task of transferring surplus labor in agriculture to other industries and at the same time realize industrialization, urbanization, and modernization of the whole country. Those who hold this kind of opinion believe that “leaving the soil without leaving the village” and “entering the factory without entering the city”, have obviously become the constraints of the development of productive forces; and the path of developing 25

Chen (1995), Sun and Pan (1998), Yuan (1996), Chen and Wu (1994).

410

14 The “Three Rural” Issues in China’s Market-Oriented Economic Reform

small cities and towns is also undesirable. The development of small cities and towns has caused even more severe shortage in already scarce cultivated land resources. And agricultural development is facing more severe challenges. In addition, the inherent problems such as low marginal output and poor aggregation effect of small towns have not brought about rapid urbanization of the population, but rather a rapid deterioration of the rural ecological environment. Restricting rural people from entering the city seems to avoid the “urban disease”, but it has caused a more serious “rural disease” to a certain extent. The springing up of township and village enterprises within various towns, villages and even households have resulted in waste of cultivated land, polluted environment and low efficiency. Moreover, without breaking the “big dual” structure, this approach has also formed a “small dual” (agricultural and rural industry) structure within the rural areas. In this way, not only that the development of rural industrialization and urbanization cannot promote the development of agriculture, on the contrary, it will put agriculture in a more disadvantaged position. Others believe that the surplus agricultural labor force in any country in the world today is shifting to non-agricultural industries. Due to the coercive effect of the economic and social laws inherent in the changes of modern society, the basic path is to advance along the transformation of urbanization to transform “rural people” into “urban people”. The development of the urbanization direction includes three laws that no one can change and resist: the transfer of surplus agricultural labor from agriculture to non-agricultural industries; surplus agricultural labor flows from poor and backward areas to economically developed areas. People’s opposite behavior away from these laws can only temporarily block these laws from fully expressing themselves or displaying their effects in a deformed manner, but these laws will eventually force people to act according to them after encountering many setbacks due to violation of objective laws.26 Some people think that both of above opinions have limitations and fail to grasp the essence of the problem from a comprehensive perspective. What our country is facing is the largest systematic project in the history of the transfer of agricultural surplus labor in the world, which cannot be fully eliminated by “local transfer” or “cross-region transfer” alone. The limitation of the local transfer proposition is that it overestimates the capacity of rural non-agricultural industries to accommodate the surplus agricultural labor force, and does not see the trend that the capacity of rural non-agricultural industries is shrinking. The proposition of cross-region transfer, on the other hand, overestimates the capacity of different economic regions and cities to accommodate the surplus rural labor force, ignoring that agriculture can also expand a large amount of surplus labor force through extensive development and in-depth exploitation. Therefore, they advocate that the transfer of agricultural surplus labor force should be carried out in an all-round way, with multiple levels of accommodation, through broadening all employment opportunities, eliminating all obstacles, and finding employment in all places wherever it can be transferred. Only in this way can the transfer of agricultural surplus labor force in China be finally resolved, and the modernization of the country’s agriculture finally achieved. Others 26

Guo (1989), Li (1996), Yuan (1996).

14.2 “Three Rural” Issues at the Stage of Deepening China’s …

411

argue that the transfer of surplus labor in agriculture takes two steps: The first step is to eliminate hidden unemployment in agriculture and accelerate the transfer of surplus rural labor to non-agricultural industries; The second step is to change the abnormal state of urban and rural population distribution and gradually increase the proportion of urban population. Although these two processes cannot be separated completely, they must never be combined into only one step. At this stage, our basic point should be on expanding the local transfer of rural surplus labor.27

14.2 “Three Rural” Issues at the Stage of Deepening China’s Market-Oriented Economic Reform Different Thoughts on Deepening the Reform of Rural Economic System After the Third Plenary Session of the Eleventh Central Committee of the Communist Party of China, after nearly 20 years of reform, our country’s rural economic system has undergone profound change: first, the people’s commune system has been abolished and a two-tiered operation system of family contracting system with integration of unification and division was implemented. Second, the pattern of the unification of public ownership has been broken and multiple economic components and multiple forms of operation were developed. Thirdly, on the premise of maintaining steady growth in the production of grain and cotton and other major crops, the rural industrial structure has been adjusted, diversified operations and township and village enterprises have been developed, economic exchanges between urban and rural areas have been expanded, and the division of labor and division of sector in rural areas has grown considerably. Fourth, the system of unified purchase and marketing of agricultural products under the traditional planning system has changed, the agricultural product market has developed significantly, the per capita disposable income of farmers has increased significantly, and the appearance of the countryside has undergone historic changes. At the same time, solid foundation was laid for the reform and development of the entire national economy. However, on the whole, rural areas in China were still in the process of changing from the old system to the new system, and the task of reform was far from being completed. The old system has not been completely eliminated, and it still works in some aspects; the new system has just been established, and many aspects are not yet perfect. A series of contradictions and problems have emerged in the operation of the rural economy, such as the contradiction between small production and large markets, the contradiction between increasing production and increasing income, and the contradiction between the periodical occurence of “difficulty in buying” and the “difficulty in selling” of major agricultural products. All these are problems in the conversion process from 27

Deng (1991), China Labor Market and Wage Reform Policy Research Group (1995).

412

14 The “Three Rural” Issues in China’s Market-Oriented Economic Reform

the old to new systems, which is a reflection of the conflict between the old and new systems. Therefore, to solve the contradictions and problems in the rural economic development at that time, the fundamental way out was still to deepen the reform. In this regard, economic theory community in China basically has reached a consensus. However, as to the specific approach to further deepen the reform and innovation of the rural economic system, many different ideas and thoughts have emerged. The theory of price reform first. Some people think that with the development of commercialization of agricultural production in our country, the regulating effect of value law on agricultural production will inevitably increase. Under such circumstances, the question of agricultural economic benefits, that is, how to obtain more benefits with less production cost and production occupancy, will inevitably become the main driving force for the production and management of rural households. In a certain sense, the level of economic benefit has increasingly become one of the most important factors that promote or restrict the development of our country’s agricultural production. Therefore, in order to take China’s agriculture to a new level, we must follow the guidance of the law of value and regard the price reform of agricultural products as the core, to solve the problem of disparity in the gap in comparative interests that exists in reality, and to gradually reduce the gap of comparative interest within the plantation industry and between agriculture and other industries, thus enabling the socially necessary labor invested in agriculture to receive roughly the same remuneration as the equivalent labor invested in other industries, and enabling agricultural investors and operators to obtain roughly equivalent social average profit rate from investors and operators in other industries. Only in this way can we mobilize the enthusiasm of farmers to engage in farming, make agriculture attractive to producers and investors, and truly establish a mechanism of self-development and a virtuous cycle of agriculture to ensure the sustained and stable growth of agriculture. Those who hold this view believe that price is the basic means of regulating comparative interests, and gradually form a price system that conforms to the value law and is the core of rural economic system reform. However, an economy that relies solely on complete price liberalization and is completely regulated by market supply and demand may not necessarily form a reasonable comparative interest relationship. Fully automatic price adjustments are not necessarily adjustments with moderate effects. A series of measures including pricing and other comprehensive policy measures such as fiscal, tax, financial, material and other economic means, form a comparative interest adjustment system that takes price as the core and complements other economic means. This is the fundamental strategy for solving agricultural problems.28 The theory of scale management of land. Some people advocate pushing forward further reform of the land system, implementing the optimal allocation of land resources, and expanding the appropriate scale of agricultural operations. Those who hold this view believe that the current land system in the rural areas of our country can only adapt to the development of traditional agriculture, but not to the 28

Zhang (1989), Zhou Fuxiang, and Zhong Cheng. Adjusting Comparative Interest, Stabilizing Agricultural Development. Reform,6.

14.2 “Three Rural” Issues at the Stage of Deepening China’s …

413

development of modern agriculture. Traditional agriculture is labor-intensive agriculture, which requires a small scale of land management, while modern agriculture is capital-intensive agriculture. Only on a larger land area can the intensity of capital investment be increased. At present, the task facing our country’s rural areas is how to accelerate the development of agricultural production on the basis of modern agriculture. The only way to accomplish this task is to implement institutional changes, and the transformation of the land system is the key. Some people also believe that to solve the problem of low comparative interest in agriculture, it is only through the transformation of the land system that the scale of agricultural operations can be expanded. Only in this way can the farmers obtain the same income as the laborers engaged in other industries. Only by using farming as a means to earn income, can we have the enthusiasm for investment, thus improving economic benefits, developing agricultural machinery and water conservancy, and increasing output; Only in this way can the pressure on food prices be fundamentally reduced, because the cost is inversely proportional to the scale, and only a moderate scale can reduce the production cost and alleviate the pressure on the price increase of agricultural production materials. In short, to make farmers economically motivated to grow grain and engaged in farming, they must have enough land for enterprise-oriented operation; the aim is not to pursue sufficient food and clothing, but to pursue commodities. For farmers to grow grain in a more economical and scientific way, sufficient land must be provided for farmers to operate on a moderate scale. In order not to waste the potential of our country’s very precious land, we must also let the best operators manage the land. To this end, it is necessary to break the current egalitarian land system that allocates a small amount of land equally to every individual in the rural areas, regardless of whether it will be planted, whether it will be operated, or whether it will be managed with time, efforts and willingness. Otherwise, our country’s agricultural support to the entire society cannot be improved, or even decreased. What is to be liberalized now is not land prices, but land. If the land problem is not solved, farmers will have insufficient land to grow, and the role of the law of value will also be restricted.29 As for how to transform China’s existing land system and realize operation with moderate scale, there are some different opinions as follows: (1) Stateownership of land should be implemented through operation of the National Land Management Corporation, who rent or permanently lease land to farmers according to the requirements of moderate scale operation. The disposal right of land can enter the land circulation market subject to state regulation.30 (2) Land should be privately owned with property rights of land entering the market, so that land resources are allocated by the market to achieve a moderate scale of operation.31 (3) Implementing the ternary ownership of land at the state, collective (community), and individual level. To be specific, in addition to granting of the ownership of ration fields (also referred to as “welfare fields”) to farmers, other state-owned and collectively-owned

29

Wang (1989), Zha (1988), Feng (1988), Zhang and Guo (1989). Cai (1986), Yang (1989). 31 Luo (1988), Wang (1988). 30

414

14 The “Three Rural” Issues in China’s Market-Oriented Economic Reform

lands are operated on a moderate scale.32 (4) On the basis of stabilizing and perfecting the current family contracting system, extend the contracting period; or change the contracting period to the permanent tenancy system; or implement the two-field system, with the ration field contracted to individuals, and the responsibility field (also referred to as the lease field or commodity fields, etc.) contracted to farming experts through a bidding process.33 The theory of increasing investment in science and technology. Some people think that vigorously increasing investment in science and technology and improving land output and labor productivity is the path to take in order to promote the accelerated development of agriculture in China. People with this view believe that expanding the production area cannot fundamentally solve the problem for long-term stable development of agriculture, and the role of family contracting system has already been weakened. The foundation laid by rural material technology formed in the 30 years since the founding of the People’s Republic of China has also been exhausted. And now the use of advanced science and technology is the only and ultimate solution to China’s agricultural problems. Increasing investment in science and technology has become the main driving force for China’s agricultural development. Moreover, the reliance on increased investment in science and technology also meets the requirements of the law of value. This is because only by vigorously strengthening investment in agricultural science and technology can agricultural labor productivity be continuously improved, so that a large amount of surplus labor can be transferred outwards, and the labor consumption of agricultural products can be reduced, thereby greatly reducing costs, and gradually bringing the prices of agricultural and sideline products close to their intrinsic values so that farmers’ income can be increased and famers can basically get equal remuneration with the same amount of work devoted as compared to industrial workers. In this way, with the increase in investment in agricultural science and technology, China’s agricultural situation will undergo a fundamental change. People can obtain the same or even higher income from agricultural production compared to that they may get when engaged in production in other industries.34 Linked to this view, some people believe that the transformation of the agricultural growth mode, that is, the transformation from extensive to intensive growth mode, is not only the only way to solve the deep-seated contradictions of China’s traditional agriculture, but also an inevitable choice to promote the sustainable, rapid and stable development of agriculture under the new situation. The intensive growth of agriculture is a qualitative leap, the core of which is the intensive technology and knowledge utilized in realizing comprehensive technological progress and achieving agricultural growth brought about by the increased productivity of all factors of production.35

32

Li (1986), Luo (1987), Yujiang (1993). Bai (1988), Zhou (1987), Li (1996). 34 Du et al. (1990), Xu Jingyong. Thoughts on strengthening the aftereffect of agricultural development. Chinese Rural Economy, 9. 35 Liu (1996). 33

14.2 “Three Rural” Issues at the Stage of Deepening China’s …

415

The theory of rural organization innovation Theory. Some people think that the further development of rural economy depends on the innovation of rural organizations. Since 1979, it is because of the breaking of the people’s commune system and the recognition of the role of rural households as the smallest and most basic economic organization that the renewal of the rural economic organization is realized, which has promoted the development of China’s rural economy. At present, household-based management cannot be denied and replaced by scale management. Rural household-based management is the basis and main form of economic organization innovation at present and for a long period into the future. Of course, as a microeconomic cell, farmers have obtained no clear land rights, no clear property definition, no reasonable distribution system, no mature competition rules and order, no independent legal person status correspondingly, etc., thus they remain their status of small peasants who are semi-public and semi-private, rather than independent producers of commodities. Layers of organizations in villages, townships, and counties that are above this level are mostly organizations with administrative nature, rather than economic organizations with enterprise nature. Such an organizational system makes it difficult for the rural economy to develop in a sustainable, stable, and healthy manner. For a long time, as a basic model of rural economic organization construction and cooperative economy, “the combination of integration and division, and double-layered management” is neither a true portrayal of the in the rural areas, nor an essential attribute of cooperative economy. The cooperative movement promoted by this model is actually a return to the tradition of the “integration of government and society”, which is a kind of counter-movement during the innovation of rural organizations. Farmers’ resentment and “terror” is a denial of this model in practice. The new system of rural commodity economy requires new economic organizations and new organizational methods, as well as rethinking of the path of rural economic organizations. In contemplating details of the innovation of rural economic organizations, some different insights were put forward. (1)A large number of rural enterprise organizations should be developed, with a large number of new-type agricultural enterprises cultivated, and farmers should be more guided to the enterprise-oriented track.36 (2)Agricultural cooperatives should be redeveloped, of which agricultural transportation and marketing cooperatives should be put in the most prominent position. It is like a large company, with each member unit of the cooperative actually being an enterprise or workshop under the company, and the cooperatives will tend to be specialized, such as the establishment of pig farming cooperatives and vegetable cooperatives, etc.37 (3)The shareholding cooperative system is a new type of cooperative economy for rural people, which is characterized by a clear direction, voluntary integration, clear property rights, equal rights and responsibilities, direct interests, shared risks, autonomous operation, and flexible mechanisms. It not only absorbs the advantages of the shareholding system, but also retains the advantages of the cooperative system, and avoids the deficiencies 36

Rural Organizational Innovation and Economic Development Symposium Minutes (1988), Liu and Chen (1988). 37 Tan (1995), Wang (1988).

416

14 The “Three Rural” Issues in China’s Market-Oriented Economic Reform

of the two. It reasonably reflects the interests of investors, operators and laborers. It is a major innovation in the production organization of farmers in the country.38 (4)The farm system can be divided into two categories: family farms (including joint household farms) and collective farms. Farms can also be divided into village-run farms, factories (township and village enterprises) -run farms, and station (agricultural service stations, agricultural technology promotion stations) -run farms. The scale operation of the farm has achieved significant comprehensive economies of scale and social benefits, which has injected vitality into agricultural development.39 The stepping out of the dualistic structure theory. Some people think that to solve the problem of further development of agriculture, it is impossible to rely solely on internal adjustment and reform of agriculture. The fundamental way out for agriculture lies outside agriculture, and we need to depend on the advancement of industrialization and urbanization to get out of the dual economic structure. Those who hold this view believe that it is the natural economy’s way of thinking to seek development of agriculture and the countryside without considering the national economy as a whole and the society as a whole. The development process of agriculture and rural areas is also the process of non-agricultural industrialization and urbanization. Without the rapid development of non-agricultural industries and urbanization, the problem of rural surplus labor cannot be fundamentally solved, the ratio of rural land to labor cannot be increased, the scale of agricultural operations cannot be expanded, advanced science and technology cannot be widely used, and the improvement of agricultural labor productivity and land productivity will encounter fundamental limitations. In addition, the agricultural commodity production and the accumulation capacity within agriculture cannot be rapidly developed or improved, and rural self-sufficiency and closedness cannot be weakened or eliminated. Also, the organic links between agriculture and other sectors of the national economy, and between rural areas and cities cannot be comprehensively developed, and it will become impossible for farmers and rural areas to become rich and prosperous. Therefore, in order to fundamentally solve the various problems faced by our country’s agriculture and realize the modernization of agriculture as soon as possible, it is simply not enough to only focus on issues within agriculture and rural areas, which can be considered efforts made towards the wrong direction without grasping the essence and laws of agricultural and rural development. Only talking about agriculture within the boundary of agriculture is bound to encounter many insurmountable difficulties, such as the contradiction between continuing to raise the price of agricultural and sideline products and taking care of the interests of various parties, the contradiction between the need to increase investment in agriculture and the limited financial resources of the country, and increasing the productivity of agricultural labor and the surplus land of agricultural labor. Contradictions, etc. This is mainly due to the fact that we have not broken the dual economic structure that splits the interests between industry and agriculture, and between urban and rural areas. Therefore, to bring agriculture to a new level, the only option is to get out of the dual economic 38 39

Li (1991), Zhou and Tang (1993), Kong (1995). Zhang (1995), Hu (1996).

14.2 “Three Rural” Issues at the Stage of Deepening China’s …

417

structure. The fundamental solution to the sluggish development of agriculture and lack of stamina depends on the success of the dual economic transformation and the improvement of macroeconomic environment of the national economy, which will be a complicated and arduous long-term process. It cannot be expected that agricultural development will be accomplished overnight through undertaking reforms targeting at only one issue or only a couple of issues. Therefore, in thinking about the issue of agricultural development, what is important is not the specific design of the reform plan or reform measures, but the grasp of the long-term process of the development and transformation of our country’s dual economic structure (urban and rural duality and rural duality).40 The theory of coordinated development of industry and agriculture. Some people think that the fundamental way out for agriculture is to implement a new strategy for the coordinated development of industry and agriculture. Those who hold this view believe that the essence to China’s agricultural problems is the extent to which the actual level of agricultural production in China can bear the speed of industrial development, the scale of national construction, and the people’s level of consumption. Fundamentally, it is a question of how large the carrying capacity of agriculture is. The issue of agricultural development is reflected by the contradiction between relatively concentrated industry and absolutely decentralized agriculture, the contradiction between the rapidly developing industry and the slowly developing agriculture, and the contradiction between the industry with modernized production and the agriculture with manual labor. In other words, it is the contradiction between the industrial and other sectors of the national economy and the backward development in the production of agricultural products in the process of accelerating industrialization and urbanization. Therefore, tinkering will not work in realizing sustainable and stable development of agriculture. We have to fundamentally adjust the relationship between interests of industry and agriculture, change the tilting strategy towards heavy industry, implement a new strategy for the coordinated development of industry and agriculture, put industrial agriculture on an equal footing, correct the long-term distortion of national income distribution, and correct the imbalance between the development of industry and agriculture, so that industry and agriculture can develop in a coordinated, mutually-promoting and commonly-growing manner.41 The theory comprehensive supporting governance. Some people think that the problem of our country’s agriculture is by no means simply about the adjustment of production relations or the rational allocation of resources, nor is it just a matter of increasing investment or reforming the operation system. It is impossible to cure the chronic diseases of Chinese agriculture with a single prescription. The sustained, stable and coordinated development of agriculture can only be ensured by taking supporting reforms and comprehensive governance measures, undertaking reforms concerning the microeconomic mechanism and macroeconomic environment, and at the same time by using industrial policies to direct the rational adjustment of 40

Tang (1988); Li Hengzhang. On Dual Dual Structure and Agricultural Development. Chinese Rural Economy, 2; Chen (1998). 41 Liang (1989), Niu (1988).

418

14 The “Three Rural” Issues in China’s Market-Oriented Economic Reform

the industrial structure under the guidance of the national economic development strategy, and accomplishing the rational allocation and optimized integration of resources, on the basis of recognizing the realistic national conditions. It was emphasized that in order to get rid of the predicament of rural reform and put the rural economic development on the right track, it is necessary to correct the relationship between reform and development from the combination of theory and practice, and fundamentally solve the problem of “two skins” between reform and development. It is necessary to abandon the reform propelling theory that only relies on logical inference and abstract deduction to design reform programs, the system reform determinism that is independent of the inherent requirements of economic development, and the introduction of market mechanism that deviates from reality through simple copying and completely excludes state intervention. In addition, we also need to abandon the pure economic development theory that break away from implementing reforms.42

The Practice of Deepening the Reform of Rural Economic System (1) Reintroduction of food problems and reform of food circulation system In 1984, after six consecutive years of rapid growth, our country’s grain production has increased from 300 million tons per year to more than 400 million tons in 1978. The per capita grain output is 396 kg, which is close to the target of 400 kg. The bumper harvest of grain has not only eased the tension between grain supply and demand that has plagued our country for a long time, but also brought about conflicting problems such as the “difficulty in selling grain”, “difficulty in storing grain” and overburdened national finances. At that time, the prevailing view was that the supply of grain was already in a “relative surplus” state. Therefore, a series of policy measures was put forward such as lowering grain prices, lowering grain output, reducing national financial input to agriculture and subsidies for production materials of agricultural purposes and accelerating structural adjustment in rural industries while advancing the reform of the grain purchase and sales system, so that farmers are allowed to gradually arrange grain production according to the law of market supply and demand and the principle of comparative interest, which is in fact a transfer of market risks to farmers. The result of this series of policies was that during the ten years from 1985 to 1994, national grain production had experienced long-term fluctuations (only the total output in 1990 exceeded that of 1984), and there were four times of declines. By 1994, the per capita grain output was 368 kg, a decrease of 7.3% compared with that of 1984. During this period, the growth of farmers’ income slowed down significantly, and the rural market appeared weak,

42

Wu (1989), Min (1989).

14.2 “Three Rural” Issues at the Stage of Deepening China’s …

419

which had a great impact on farmers’ enthusiasm for production and the development of the entire national economy. In order to adjust to the shortage of domestic food production, large quantities of food had to be purchased from the international market. Looking into the future, the situation for food is far from being optimistic. By the end of the twentieth century, based on a per capita annual consumption of 400 kg of 1.3 billion people, the food demand need to be 520 million tons, and a gap of 20 million to 30 million tons will appear. And the per capita annual 400 kg of food is just the level enough to meet the needs of basic food and clothing; according to this level, by 2010, the total demand of a population of 1.4 billion is 560 million tons; in 2030, the total demand of a population of 1.6 billion is 640 million tons. It will be very difficult to achieve this level of output with the existing area of arable land.43 It was at this time that Brown, the director of the US Worldwatch Institute, published articles in newspapers such as World Outlook and the International Herald Tribune in 1994, raising the question of “Who will feed China?” The article believes that by 2030, China’s food shortage will reach 207 million to 369 million tons. China will not be able to feed itself, and the world will not have enough food to export to China. China’s future food crisis will inevitably become a world crisis. So Brown warned the world: “The shortage of food is accompanied by economic instability, and its threat to security is much greater than that of military invasion.”, which added a new meaning to the “Chinese threat theory”. Brown’s alarmist “hungry world theory” is like a boulder thrown into the water, which not only aroused the natural response of Chinese scholars and relevant people, but also aroused the attention of world-renowned scholars and relevant people on China’s food issues.44 Domestic scholars’ analysis of the crux of China’s food problem in the new period generally focuses on both demand and supply sides. Seen from the perspective of demand, the net population growth was about 16 million per year, and the annual demand for grain increased by more than 6 million tons; with rural industrialization, urbanization, and the transfer of rural surplus labor to large and medium-sized cities, the pressure on commodity food supply has increased. Seen from the perspective of supply, the coverage of cultivated land has fallen sharply, and per capita cultivated land was approaching the warning line and dangerous point; water shortage was increasing day by day, and the problem of environmental degradation has not been effectively stopped; the enthusiasm for developing food production of local governments from major grain and food producing areas has decreased, which has become a general trend. The more prominent economic behavior of reducing grain production in regions with more developed non-agricultural industries has changed the traditional pattern of grain transportation from south to north in China to the pattern of “from north to south” and there were fewer and fewer provinces transporting grain out. The situation of “major grain-producing provinces (counties) becoming financially poor provinces (counties)” has made the enthusiasm to produce grains

43 44

Niu (1987), Lu (1987), Liu (1987), Tang (1997). Xu (1997), Li (1996).

420

14 The “Three Rural” Issues in China’s Market-Oriented Economic Reform

increasingly disappear.45 When discussing the way to solve the above problems, it is generally analyzed from the corresponding policy measures, but different people focus on different aspects of the policies. For example, some people think that the main cause which limits food production from going up is that “cheap grains lead to hurt farmers”. The problem of food is ultimately a problem of price. The fundamental solution to the food problem lies in the commercialization of food and the implementation of equivalent exchange46 ; Others raise the opposite question: who will be shouldering the burden if food price is raised again? If state subsidies should be called on, but do governments at all levels have money? If the burden is switched to wage earners, can they bear it? What would it look like if food prices rose again and other commodities rose in turn? Obviously, re-increasing food price is not a fundamentally feasible method.47 Some people believe that only relying on scientific progress can we promote stable and high-yield grain production. First, we must focus on the cultivation of fine breeds of grains, which would be a breakthrough to achieve high-yield grain production; second, we should focus on cultivation methods, which stresses on rational layout of farming, popularizing applicable technologies, scientific applying of fertilizers, and controlling gain diseases and pests; we must also strengthen the importance of scientific and technological talents through improving their benefits, working facilities and enhancing their comprehensive quality.48 Others believe that increasing input is an important condition for increasing grain production; first of all it is about the input of labor, and at the same time we should increase the input of capital, materials, technology and other factors.49 In addition, there are advocates is such aspects as protecting cultivated land, developing wasteland, implementing specialization of grain production, operating on a moderate scale, strengthening the construction of commodity grain bases, developing grain production service systems and supporting policies, as well as stopping grain waste, etc. However, it was also suggested that the solution to China’s food problem is not about food itself, but about how to think about the strategy and countermeasures of our country’s agricultural development in the long-term and as a whole, and from the perspective of the international market. The main reason for insufficient agricultural investment is the low return rate of agriculture, and the fundamental reason for low agricultural income is the contradiction between the traditional economic structure and the process of economic modernization. Therefore, it is no longer possible to develop food production by continuously raising food prices (not to mention that China’s main food market prices are close to international market prices), and it is difficult to solve the problem by increasing government investment in agriculture or increasing subsidies for farmers’ farming activities. The implementation of longterm strategy can only rely on the breakthrough progress of agricultural science and technology and the transfer of a large number of agricultural labor to non-agricultural 45

Institute of Agricultural Economics, Chinese Academy of Agricultural Sciences (1995). Wen (1989), Guo (1988). 47 Feng (1987). 48 Zhuang (1987). 49 Ouyang (1987), Editorial Department of Chinese Rural Economy (1990). 46

14.2 “Three Rural” Issues at the Stage of Deepening China’s …

421

industries, while the short-term strategy is to make full use of the international market and import relatively cheap food to make up for the possible insufficient food supply caused by the fact that China could not increase agricultural input in the near future. This saves a lot of valuable resources for the development of non-agricultural industries and the realization of industrial transfer of agricultural population. We don’t have to emphasize one-sided self-sufficiency in food supply, but to exchange a large amount of input for a bit of expensive output. This is unwise and by doing this we are actually caught in the trap set by others. Of course, Chinese people can “feed themselves”, but they do not necessarily have to feed themselves with food grown on their own, but can feed themselves with food bought with their own money; It is not necessary to grow food on this small piece of land to feed themselves, but they can go to all parts of the world to grow food to feed themselves.50 Of course, some people opposing this view believe that, although abandoning the position which relies on domestic solutions to China’s food problems and turning to the international market to fill the gap between China’s food supply and demand in the future is conducive to utilizing comparative advantages of domestic resources and reducing the pressure on cultivated land and the environment caused by increased demand, and can help promote the upgrading progress of industrial structure, as a country with a large population, it not realistic to rely on the international market to solve food problems since it not only has huge political risks, but also may incur huge economic risks.51 The system for grain purchase and sale is one of the important factors restricting the development of grain production. Therefore, it is also the focus of theoretical attention as regard to the approaches to reform the grain purchase and sale system. Since the implementation of the planned economy in our country in 1953, a unified purchase and marketing system has been implemented for grain, although under the circumstances of insufficient grain supply at that time, it has played an important role in ensuring the supply of basic rations for urban residents and accumulating funds for industrialization by means of price scissors, this system obliterates the commodity attributes of grain, cuts off the link between agricultural production and the market, and violates the economic rules of equivalent exchange, resulting in numerous abuses, great damages to farmers’ enthusiasm for production, and farmers’ long term suffering in poverty. Since 1979, some transitional measures have also been taken, such as a substantial increase in grain purchase prices, conversion of unified purchases into contract orders, resumption of negotiated purchases, and gradual cancellation of subsidies for grain sales and quantitative supply to urban residents, and so on. Later, policy measures were taken to purchase surplus grain at a protective price, sell grain enterprises at a fair price, forbid grain purchase funds from being used for other purposes, and converse management mechanisms of grain enterprises. However, it should be said that the grain purchase and sales system has not been straightened so far, and the relationship between grain producers, consumers, operators, and regulators, as well as the distortion and misalignment of the market in which these parties are connected, have yet to be resolved. There is still a long way 50 51

Fan (1995). Institute of Agricultural Economics, Chinese Academy of Agricultural Sciences (1995).

422

14 The “Three Rural” Issues in China’s Market-Oriented Economic Reform

to go on the road of marketization of grain production and marketing and retrieving the commodity attributes for grain.52 As for how to reform the grain purchase and sales system, there are generally two sides of views, i.e. the radical and incremental views. The basic idea of the radical view is to restore the nature of complete commercialization of grain, complete marketization of grain purchase and sale, and accelerate the establishment of an open and more complete grain market system with multiple channels, multiple components, multiple forms and less links, and with public ownership as the main body.53 Those who hold the idea of incremental reform believe that under the background of rapid economic growth and the difficulty of transferring a large number of surplus labor in agriculture, the results of bringing grain to the market and grain marketization are likely to be unfavorable for stabilizing grain planting area and increasing grain supply. Due to the low comparative benefits in food production, under the conditions of accelerated marketization, resource allocation will inevitably move in a direction that is not conducive to increasing food supply. Therefore, the reform should be inclined to an incremental market-oriented institutional adjustment. In the process of marketization, attention should be paid to the protection of grain production and the interests of grain farmers, and a system and policy environment conducive to improving the efficiency of grain production should be constructed. The specific ideas include three aspects: ➀ to construct a mechanism to balance the total amount of grain in China; ➁ to construct a balanced mechanism for the supply and demand of grain; ➂ to establish a stable mechanism for the grain market, and to establish a macro regulation system mainly with indirect regulation on the basis of further cultivating the grain market.54 (2) Reform of the land property rights system with “separation of three rights” as the main content “On the premise of adhering to the collective ownership of rural land, we should promote the separation of land contracting rights and land management rights, and form a pattern with separation of ownership, contracting rights, and management rights, and circulation of land management rights.” This reform of the separation of the three rights is another major institutional innovation in rural areas following the household contract responsibility system, which has enriched the connotation of the two-tier rural operation system from theory to practice. “Separation of three rights” means that on the basis of adhering to the collective ownership of rural land, the reality of the continuous separation of rural people and rural land is respected, and the rights that have use value and exchange value and are tradable in the market are separate from the land contracting rights, which forms land management rights. Thus, the land contracting management rights are separated into two independent rights forms: farmer households’ contracting rights 52

Tang (1993), Duan (1998). Jin and Luo (1996), Bai (1998). 54 Institute of Agricultural Economics, Chinese Academy of Agricultural Sciences (1995), State Council Information Office (1996). 53

14.2 “Three Rural” Issues at the Stage of Deepening China’s …

423

and land management rights, which has promoted the transformation of the original dual ownership structure with rural land collective ownership and land contracting management rights into the “triple property structure” with collective ownership, farmer households’ contracting rights and land management rights, in order to more effectively realize the modern rural land property rights system with functions of political governance over collective land, social security and economic utility. The innovation of “separation of three rights” lies in the separation of farmers’ contracting rights and land management rights. The essence of “separation of three rights” is to reconstruct the rural land property rights structure under collective ownership. The separation and subdivision of property rights over the past 60 years since the founding of the People’s Republic of China have been an important way and channel for the change of the rural land property rights system. The separation of land contracting management rights into farmer household contracting rights and land management rights means further division and subdivision of land contracting management rights. The subdivision, transaction and allocation of rural land property rights are the basic clues for China to promote the practice and innovation of “separation of three rights”. The separation of the three rights is to reconstruct the system of the rural land collective ownership, use rights, and transfer rights, in order to provide farmers with a complete land system structure with clear ownership and stable expectations. The key to playing the positive role of the “separation of three rights” is to reasonably define the scope of rural land collective ownership, farmers’ contracting rights, and land management rights. Therefore, the “separation of three rights” is to continue the logic of the change of the rural land property rights system of “separation of land ownership and contracting management rights”, choose a more effective and satisfactory rural land property rights system, and clearly define various rights including the rights to own, use, make profit from and dispose of rural land, so to ensure smooth market transactions and achieve optimal allocation; the essence of the “three powers separation” is to reconstruct the rural land property structure under collective ownership to realize its function of property rights. As can be seen from the policy meaning of “separation of three rights”, the land property relationship between farmers’ collectives and contracting farmers’ households, and between contracting farmers’ households and new-type agricultural business entities, as well as the relationship between farmers and land have been clearly constructed from an institutional perspective. Therefore, the “separation of three rights” has constructed a concrete form for the realization of rural land collective ownership. It is a realistic and feasible institutional arrangement to clarify the relationship between rural land collective ownership, farmers’ social security and land property rights, as well as the marketization reform of rural land property rights. It is also a practical and feasible institutional arrangement that effectively resolves the contradictions and conflicts between the social security function and the economic utility function carried by the land contracting management rights. First, through the design of a property rights system that stabilizes the contracting rights of farmers, the rural land is evenly distributed among the members of the collective economic organization, and the private use of the land by the members of the collective economic

424

14 The “Three Rural” Issues in China’s Market-Oriented Economic Reform

organization is realized to promote “the stable and unchanged land contracting relationships in the long run”, to ensure fair starting point at the stage of initial allocation of rural land use rights, and to respect and meet the needs of farmers’ social security. Secondly, for the guaranteed rural land use rights acquired by farmers in the initial distribution, farmers can freely circulate them in the rural land property market in accordance with laws and regulations through the design of the property rights system that frees up land management rights, so to promote the optimal allocation and make full use of rural land, “guide the orderly circulation of land management rights” and “develop various forms of agricultural operations with moderate-scale”. Obviously, the separation of rural households’ contracting rights and land management rights under the system of “separation of three rights” is the sequential realization of rural land use rights in the phases of initial allocation and free transfer. Seen from the objectives and requirements of the reform of “separation of three rights”, the two important issues of “who grows the land” and “how to grow the land” must be resolved to release the land management rights. Therefore, the basic principles of releasing land management rights are twofold. First, in the premise of doing no harm to collective ownership and farmer’s contracting rights, contracted farmers can voluntarily transfer the actual management rights of rural land to others for use, so as to expand the scope of “cultivators” of rural land and realize “cultivators have their own fields” in the modern sense, thus fully taking advantage of the use value of rural land. There are two forms of “cultivators have their own fields” in the modern sense: One is the simplified, fragmented and small-scale management under the contracted farmers’ family management; The second is diversified operation modes based on family operations (referred to as family operations, collective operations, cooperative operations, and enterprise operations) and modest-scale operations. This is an innovation in the methods of utilizing rural land, the method of agricultural production, and the methods of management. Second, land management rights are granted with the capacities of mortgage and security guarantee, allowing holders of land management rights to mortgage and finance land management rights to financial institutions in order to pursue and make use of the exchange value of rural land, to meet the capital needs of agricultural scale operations, and to ease the financing difficulties of agricultural management entities.55 (3) Industrialized management is the reform and innovation of the agricultural economic system Agricultural industrialization management is a new type of mechanism that supports, protects and promotes agricultural development in the deepening of rural reforms. It is another institutional innovation of the rural economic system after the family contract system and township and village enterprises. The concept of “agricultural industrialization” only began to appear in the academic world in our country after entering the 1990s. But as far as its content is concerned, it actually began in the 1970s. At that time, in order to open up the Chinese market, Chia Tai Feed Company in Thailand provided technical services and 55

Xiao and Liang (2016).

14.2 “Three Rural” Issues at the Stage of Deepening China’s …

425

production materials such as breeding chickens and feed to Chinese farmers, which led farmers’ households to develop the chicken industry. Then the company bought adult live chickens from farmers, and sold them to the market after slaughtering, processing, segmenting, packaging and so on, so that the company can gain a foothold and develop. This is an earlier practice of “company + farmer household” in China, which was called the” Chia Tai mode” by some people. Drawing on foreign experience, some state-owned farms, suburbs of large cities, and concentrated production areas of cash crops with high level of productivity development have also taken the lead in breaking through the single structure of agricultural production, starting to extend before and after production, and forming a group of agro-industrial complex enterprises. In the mid-1980s, when some regions in southeast coastal provinces such as Shandong, Jiangsu, and Zhejiang were building export-oriented agricultural product bases, in response to the international market demand, agriculture was again integrated with industry, commerce, and trade then a number of trade, industry and agriculture integrated management organizations have emerged. Someone wrote an article in 1988, summarizing the model of “company + farmer household”, and a group of young scholars formally proposed the idea of “company + farmer household” as a new way of rural organizational innovation and economic development.56 In the 1990s, with the development of the market economy and changes in the social demand for agricultural products, the original problems have become increasingly apparent, such as the fragmented agricultural industry, the multi-sectoral and paralleled operation system, as well as the contradiction between scattered small-scale farmers’ operation and the market economy. In order to adapt to the rapidly changing market demand, some regions chose to increase farmers’ income while enhancing the effective supply of society. Taking the development of agricultural industry integration as a practical breakthrough to resolve deep-seated contradictions in agriculture, agricultural reform was deepened as a whole, including the integrated innovation of rural industrial organization, resource allocation, industrial management, operation mechanism and management system. Thus, an upsurge of agricultural industrialization reform is gradually emerging in rural China. At the same time, discussions on the industrialization of agriculture in China’s theoretical circles are also flourishing.57 Since the concept of “agricultural industrialization” was applied in the early 1990s, some people in the academic theory circle have questioned whether this concept is scientific. Most people have adopted this wording in a defaulting manner, but have put forward a dozen or twenty different expressions of their connotations and characteristics, and no consensus has been reached so far. This not only reflects the overall fact that the agricultural industrialization management of China has just started and is still regarded as a new concept, but also reflects the immaturity of economic theory in the face of this new concept. Although the expressions of the connotation of agricultural industrialization are diverse, it can be concluded with some representative and Tan (1996), Jiang (1988); Liu Yunzhou, and Chen Jian. Company + Farmer: A Way to Deepen Rural Reform. Chinese Rural Economy, 10; (1988). Rural Organizational Innovation and Economic Development Symposium Minutes. Chinese Rural Economy, 1. 57 Xia and Niu (1996). 56

426

14 The “Three Rural” Issues in China’s Market-Oriented Economic Reform

common understanding. In summary, the so-called agricultural industrialization is the integrated management of farming, breeding, agriculture, industry and commerce or trade; it is a shift from simple production of primary products to comprehensive processing and deep utilization; it is a shift from simple farming to comprehensive management of agriculture-industry-commerce or trade-industry-agriculture in rural areas. Through integrated management, it integrates the pre-production, midproduction and post-production of agriculture into one, and incorporates agricultural production and operation into the processing and marketing of agricultural products, so that agriculture can closely integrate and cooperate with modern industry, commerce, finance, transportation and other industries to build an economic entity that shares benefits and risks from the production of primary products to final products. This kind of agricultural industrialization is closely related to the commercialization, marketization, socialization and modernization of agriculture and rural economy. Agricultural industrialization has broken the boundaries of ownership, linking state-owned, collective, and individual economies; it has broken through the boundaries of administrative regions, linking regions, provinces, and domestic and foreign enterprises all together; it has broken through the boundaries of industry affiliation and combined agriculture, industry, trade, and commerce industries, thereby promoting the optimal combination of production factors and the rational adjustment of industrial structure, and the complementary advantages and benefits between urban and rural areas. Agricultural industrialization is a multi-functional, multi-objective and multi-level agricultural industrial operation system guided by economics, ecological principles, market economic laws and system engineering; it is a complex system that achieves the highest overall agricultural economic benefits, realizes sustainability and stability of resources, and meets the various needs of social production and life and maximizes the environmental, economic and social benefits.58 China’s agricultural industrialization is developed on the basis of its own national conditions, and according to the characteristics of agricultural development in various regions, it takes on a variety of forms; based on the degree of density of the relationship between companies and the farmers, it can be divided into four types, i.e. the types of compact, semi-compact, loose, and collaborative. The specific models of relatively mature development can be roughly summarized into the following categories: the leading enterprise-driven type, the leading industry-driven type, the commodity base-driven type, the professional market-driven type, the industry company-intensive type, the group company loose type, the service organizationdriven type, the technology-promotioned type, the integrated management type of agriculture (pastor) and business, and the foreign exchange and agriculture–driven type. There are three things in common as of the operating mechanisms of these models. First, they all integrate production, supply and marketing, and connect pre-production, mid-production, and post-production links to seek for a complete economic entity. Second, they all integrate resources, talents, technology and capital, unify resource allocation, industrial development and market expansion to form a scale advantage and group advantage with market competitiveness. Third, they all 58

Liu (1997), Tan (1996), Wang (1997).

14.2 “Three Rural” Issues at the Stage of Deepening China’s …

427

integrate high output value, high efficiency, and high efficiency, and unify the valueadded benefits in production, processing, sales, and other links to form a revenue distributing mechanism for benefit sharing. In this way, the overall benefits of agriculture can be brought into play, as well as the group effect of the combination of multiple industrial sectors. Therefore, agricultural industrialization is not only the reform of the agricultural production and management model, but also the innovation of the rural economic management system.59 Agricultural industrialization and its organizational and institutional innovations are based on the basic premise of insisting on the long-term stability of the two-tiered management system of family-based contracting and responsibility, combined with integration and division. It is optimal way to accelerate our country’s agricultural modernization in the practice of market-oriented reform and the development of commodity economy.60 This is firstly due to the emergence of industrialized management of agricultural production, which has brought twilight to the realization of two fundamental changes in our country’s agriculture and rural economic development. Specifically, first, the industrialization of agriculture is conducive to solving the contradiction between small production and large market. Agricultural industrialization has improved the degree of organization of agricultural production, and has given full play to the system functions of household contracting and double-layer management. In particular, it connects the scattered small production with the centralized large market, which solves the contradiction between family management and market risk, thereby promoting the smooth development of commercialization of agricultural production on a larger scale and to a greater extent. Second, the industrialization of agriculture is conducive to solving the contradictions such as high consumption-low output, high input-low return, and high output-low efficiency in agriculture. Through implementation of the one-stop operation in agricultural pre-production, mid-production, and post-production processes, agricultural industrialization, has transformed agricultural production from yield-oriented agriculture to benefit-oriented agriculture, thus achieving high yield, high value, and high efficiency, greatly improving labor productivity, input–output rate, and conversion rate of agricultural products, as well as the rate of commodity rate. It has increased the added value of agricultural products, realized economies of scale, improved the comparative benefits of agriculture, accelerated the improvement of agriculture’s position as a weak industry, and enhanced the stamina for the development of agriculture in both its depth and breadth. Third, the industrialization of agriculture is conducive to solving the contradiction between the small-scale operation of farmers and the centralized use of modern technology and the application of large-scale machinery and equipment. Regionalized layout, specialized production, socialized services and scientific management is implemented in agricultural industrialization, with leading enterprises and service organizations handling problems and providing unified services to issues that are

59 60

Tan (1996), Liu (1997). Research Group on the Transition of Traditional to Modern Agriculture in China (1997).

428

14 The “Three Rural” Issues in China’s Market-Oriented Economic Reform

difficult for one household to handle, thus effectively connecting the decentralized operations of farmers and forming a large-scale industrial chain or industrial cluster through combining decentralized family operations with scale-up operations, and eventually resolving the contradiction between “small individuals” and” large groups” and between “low levels” and “high-tech”. Moreover, the integrated operation of production, sales and marketing not only provides objective demand for the application of agricultural science and technology, but also provides a strong impetus and practical feasibility for the large-scale application of science and technology in agriculture. In-depth development with the storage, transportation, and fine finishing of agricultural and sideline products has greatly improved the scientific and technological content of agricultural products and accelerated the transformation of agriculture from an extensive operation to an intensive operation.61 Secondly, agricultural industrialization has also driven the development of secondary and tertiary industries in rural areas, changed the traditional rural production structure, expanded the flow and combination of urban and rural production factors, and promoted the development of rural urbanization. On one hand, agricultural industrialization organizes large-scale production of agricultural and sideline products in accordance with market orientation, provides sufficient supply for processing, and promotes the development of township and township industries that mainly process agricultural and sideline products, which in turn promotes the development of commodity circulation, transportation, and other tertiary industries; On the other hand, with the development of the secondary and tertiary industries, the technology, talents, capital, materials, and information of the cities and towns flow more to the countryside, which is then combined with resources such as land, labor, and raw materials, thus accelerating urban integration. In addition, agricultural industrialization management is a new economic growth point for the urban economy to integrate with the rural economy. It takes the rural and urban production markets as a whole to in its operation, and can reap both the complementary benefits from urban and rural advantages and the benefits from the shrinking of dual economic structure in urban and rural areas, thus accelerating the pace of urban–rural economic integration.62 Finally, agricultural industrialization has also found a breakthrough point for fundamentally achieving the transfer of rural surplus labor and achieving the common prosperity of farmers. Agricultural industrialization has promoted the development of agriculture in both its breadth and depth, and has driven the development of secondary and tertiary industries in cities and towns, which has opened up a broad path for the realization of short-distance transfer of agricultural surplus labor. Moreover, due to the implementation of the integrated operation of production, sales and marketing, farmers can not only get the benefits of engaging in the breeding industry, but also share the profits from industry and commerce, which brings opportunities for greatly increasing farmers’ income. Some people came up with the following points when summarizing the impact of agricultural industrialization on farmers’ interests. 61 62

Feng (1997), Liu (1997), Guo (1996), Xiong (1996). Tan (1996), Liu (1997).

14.2 “Three Rural” Issues at the Stage of Deepening China’s …

429

First, we should guide and help small peasant households to enter the big market and share the benefits of market transactions. Second, agricultural industrialization has increased the unit input–output rate in agriculture and agricultural productivity, and improved economic benefits of agricultural production. Third, an internal system of interest compensation mechanism in an integrated system has been formed, which has improved the comparative benefits of agriculture. Fourth, agricultural industrialization has transferred the surplus agricultural labor and increased the income of farmers’ households. Fifth, agricultural development is transforming into an attractive investment field and a fairly profitable industry, creating a broad space for the transformation of agriculture from a weak industry to a strong industry, and providing realistic prospects for farmers to achieve a well-off lives.63 Therefore, it can be said that the industrialization of agriculture with specialization, socialization and integration is gradually changing the economic attributes of agriculture, so that agriculture is no longer a traditional production sector, but has achieved an equal position with other industries, obtained qualification to participate in the social industry cycle and has become an equal member of many industries in modern society.64

Rethinking on Solving the “Three Rural” Issues In February 2000, Li Changping, Secretary of the Party Committee of Qipan Township, Jianli County, Hubei Province, wrote a letter to the leadership of the State Council. One sentence in the letter which stated that “the farmers are suffering, the countryside is really poor, and the agriculture is really in danger” shows the seriousness of China’s “three rural” issues, which has caused strong repercussions from across the country and has aroused the second wave of concern on the “three rural” issues in the economics circle, who has conducted theoretical discussions on the causes, essence, key points and solutions of the “three rural” issues. In the short span of six years from the end of 1978 to 1984, due to the comprehensive promotion of the household contract responsibility system, the productive forces were liberated and the rural economy was greatly developed. During that time, the government was happy because the food problem was solved; the people in the city were happy because the agricultural product market was enriched; farmers were also happy because they were making more money. Since then, the rise of township and village enterprises in the mid-to-late 1980s has absorbed 120 million laborers who have left the countryside, promoted rural industrialization, and also promoted the development of China’s foreign trade and open economy. They have become another important source of income for agriculture. Since the beginning of the 1990s, with the lifting of some restrictive policies, a large number of farmers have entered cities, providing a steady stream of labor for industrialization, making 63 64

Editorial Department of Issues in Agricultural Economy (1997), Li (1996). Yan (1997).

430

14 The “Three Rural” Issues in China’s Market-Oriented Economic Reform

China one of the most dynamic manufacturing centers in the world. This has also further increased farmers’ income. Therefore, it can be said that without the success of rural reform and the supply of a large amount of rural labor power, our country’s reform and opening up will not achieve such a great success, and the circumstance of rural poverty and backwardness will not be significantly relieved. So, why did the problems of “farmer’s suffering, rural areas’ poverty, and agriculture’s endangering” become prominent again in the late 1990s? Economists analyze and believe that the most fundamental reason is that with the market-oriented reforms spreading across cities and rural areas, a series of contradictions were highlighted. First, although the income of farmers has increased, the basis for increasing income was not solid. In general, the basis for the sustainable development of agriculture in China was still weak. The problem of agriculture’s dependence on natural factors such as the climate and so on, has not been fundamentally resolved. In the face of natural disasters, the phenomenon of farmers’ returning to poverty can be seen everywhere. Therefore, it can be said that the long-term and deep-seated contradictions that restrict the growth of farmers’ incomes still exist, and a mechanism for continuous income increase has not been established yet. After 1998, farmers’ income from agriculture has declined for three consecutive years, and agriculture’s contribution to farmers’ income growth has been negative for three consecutive years, which can serve as an evidence of the above saying. Second, the rural market economic system has not yet been fully established, let alone perfected. The contradiction between “small production” and “big market” still exists. The agricultural pre-production, middle-production, and post-production service systems have not been perfected. The problem for agricultural products in their “difficulty to sell” and the problem for agricultural production materials in their “difficulty to buy” alternate in their presence. The increase in agricultural productivity often brings about the effect of “devaluated grain hurting the farmers”, leading to the circumstance that farmers could not necessarily gain more income when they are more productive. Third, in the face of the rise of urban industrialization, township and village enterprises were often at a disadvantage in market competition. With the emergence of overcapacity in the national economy, some township and village enterprises have shut down and closed down, weakening the ability of non-agricultural industries to absorb rural labor, leading to the reverse of the good situation where rural labor were transfered to non-agricultural industries. In addition, with the development of industrialization and urbanization, a large amount of rural land expropriated with cheap prices has caused some farmers to lose their land as a subsistence guarantee. These landless farmers had no employment and would inevitably become rapidly impoverished. Fourth, the income gap between urban and rural residents continued to expand. For a long time, the income of farmers has grown at a low speed on the basis of low levels, while the income of urban residents has increased rapidly on the basis of a high base number. The income gap between urban and rural residents has continued to widen, from 1.8:1 in 1984 to 3.2:1 in 2006: At this rate, it is estimated that when the national per capita GDP reaches the level of 3000 US dollars, the urban–rural income gap will be widened to 5:1. If this happens, it will seriously affect the progress of building a well-off society in an all-round way and building a socialist harmonious society. In addition, the situation of urban and

14.2 “Three Rural” Issues at the Stage of Deepening China’s …

431

rural labor market segmentation formed under the planned economic system has not been fundamentally changed. Peasants working in cities not only have low wages and poor treatment, but also receive a lot of discriminatory and unfair treatment, making it difficult for them to integrate into the cities. All of this shows that so far, the original dual structure system has not been fundamentally changed, the urban and rural economy has not yet entered the track of a virtuous cycle, and the problem of urban– rural structural imbalances is still very prominent. Fifth, the pressure of rebound in farmers’ burden still exists, and farmers have no mechanism to reduce their burden and increase their income. Under the current administrative management system, there are still many items related to agricultural production and farmers’ lives that need to be paid for. In some places, there still exist such phenomenon as arbitrary charges and various forms of fund-raising and fund-appropriation, embezzlement of government subsidies and compensation, and various violations of farmers’ rights and interests, which has made the lives of the less affluent farmers even worse. According to the analysis of the causes of the above-mentioned “three rural” issues, some scholars believe that the “three rural” issues are ultimately the problem of farmers’ income. Only by doing everything possible to increase the income of farmers, can the issue of “three rural” issues be fundamentally resolved. As far as “farmers’ suffering” is concerned, most of the agricultural labor is now mechanized, and the labor intensity has been greatly reduced. The bitterness that farmers feel is not come from the intensity and difficulty of production, but is from the relatively slow growth of income, which has caused difficulty for them in seeking medical services, sending children to school, or affording all kinds of apportionment. Similarly, in terms of the “danger” that agriculture is facing, the income elasticity of demand for agricultural products is low, which leads to the increased income resulting in very limited increase of demand. Since the reform and opening up, the average annual growth rate of agriculture has been 6.2%, which is not slow. Therefore, the “danger” that agriculture is facing is only because the income of farmers is growing too slowly, and the gap between urban and rural areas continues to widen. In the future, farmers will be uneasy about agriculture, and agriculture will be endangered. Based on such an analysis, these scholars believe that to further solve the “three rural” issues, the policy of “giving more, taking less and letting go” must be adopted. “Giving more” is to increase the whole society’s investment in agriculture and rural areas, accelerate the construction of agriculture and rural infrastructure, and thus directly increasing farmers’ income; “taking less” is to effectively reduce the burden on farmers, promote the reform of rural taxes and fees, and allow farmers to recuperate; and “letting go” is to further deepen rural reforms, revitalize rural management, and give full play to the enthusiasm and creativity of farmers. Therefore, some scholars believe that the policy of “giving more, taking less and letting go” is the inevitable requirement for consolidating the foundation of agriculture in the new stage and promoting the sustainable and healthy development of agriculture and rural areas. It is an inevitable choice to solve the new situation and new problems in the development of agriculture and rural economy in the new stage. It is also an inevitable decision to adhere to the

432

14 The “Three Rural” Issues in China’s Market-Oriented Economic Reform

“people-oriented” concept, protect the rights and interests of farmers, and safeguard the fundamental interests of farmers.65 However, some scholars believe that the “three rural” issues, at present, is mainly caused by the general laws of economic development and our country’s special institutional arrangements. In the early stage of industrialization, the high growth rate of industry caused the production factors to quickly gather in industry, which has exacerbated the weakening of agriculture. In addition, our country has long implemented a development model of heavy industry-light agriculture and heavy city-light rural with urban–rural dual structure, which will inevitably aggravate the “three rural” issues. The outstanding performance of China’s “three rural” issues lies in the increasing income gap between urban and rural residents, and without a major change in the institutional background, this economic gap will definitely show a “matthew effect”, thus further reducing the economic and political status of farmers. From this point of view, we cannot consider the “three rural” issues only as a simple combinations of the three aspects of rural problems; that is to say, we must jump out of the box of the “three rural” issues and find a way out to solve the “three rural” issues. Only by realizing the transformation from the dual structure to the modern economic structure and transferring a large amount of rural surplus labor from the rural areas can the problems related to the “three rural” issues be fundamentally solved. These scholars believe that only by looking at the issue of “agriculture, rural areas and rural people” from this perspective, can we have a sufficient level of understanding of the issue of “three rural” issues, which is not a problem of a department or an industry, but a global problem. Therefore, the pursuit of solutions to the “three rural” issues cannot be confined to the agricultural sector itself, such as by increasing investment in agriculture (which is of course important, but far from enough), and we should mobilize the whole society to achieve social development. Starting from such fundamental tasks as industrialization, marketization, socialization, and urbanization, we should make overall strategic arrangements, get out of the dual economic structure, form a modern economic structure, and realize modernization. Based on this, some scholars believe that solving China’s “three rural” issues is a complex and arduous system engineering, which will inevitably involve enduring the “pain” of system reform and interest pattern adjustment, as well as trial-and-error in the process of building a new system. Therefore, only “global and overall planning” can be used as the fundamental guiding ideology to solve the “three rural” issues, so to solve the urban–rural dual structure problem that has long restricted China’s economic and social development, and to establish a coordinated mechanism for the development of urban and rural economy and the society under the condition of socialist market economy. Some scholars further pointed out that looking at the development process of some industrialized countries, in the initial stage of industrialization, it was a general trend that agriculture supported industry and provided accumulation for the development of industry. However, after industrialization reached a considerable level, it was also a general trend for industry to feed agriculture and for cities to support rural areas to achieve coordinated development between industry and agriculture, as well as 65

Lin (2006), Ye (2005), Le (2006), Li (2006).

14.2 “Three Rural” Issues at the Stage of Deepening China’s …

433

between cities and rural areas. At present, our country has generally reached the stage of development in which agriculture is promoted by industry and rural areas are guided by cities. We should follow this trend, adjust the distribution of national income more consciously, and more actively support the development of agriculture, rural areas and rural people. Only in this way can our country’s “three rural” issues be fundamentally resolved.66 Some scholars proposed to find a solution to the “three rural” issues only outside the countryside, that is, to open the household registration system, develop nonagricultural industries, develop large and medium-sized cities and small towns, and attract more rural laborers to the cities, so as to eventually realize the “reduction of the population of farmers”. Some scholars objected this idea by pointing out that it is unrealistic because China’s rural population base is huge while the employment opportunities in urban areas are limited. The 900 million farmers cannot be successfully transferred out of the rural areas for a considerably long period of time. The the rural tax reform of “giving more and taking less” is also a passive response to the “three rural” issues. They believe that the only correct thing to do is to shift from “eliminating the countryside” to “constructing the countryside”, to take the parallel roads of urban construction and rural construction, to build rural areas in the process of urbanization rather than destroy them, and try to avoid “slum-like” urbanization. Only this can mark a fundamental change in China’s rural policies and a fundamental and complete solution to China’s “three rural” issues. Linked to the above ideas, some scholars believe that China’s “three rural” issues is a fundamental, global, and extensive problem. Therefore, to solve the “three rural” issues requires both overall planning and overall consideration, as well as focus on the key issues. The general idea should be to achieve rural urbanization, agricultural industrialization, and peasant citizenization, and the fundamental way out to achieve these “three transformations” still lies in promoting market-oriented reforms, reforming and innovating various basic economic systems in rural areas, and improving socialist market economic system in rural areas. Market-oriented reform is the theme of rural reform and the basis of development. Market-oriented reform should be an overall goal of implementing various policy measures. Now, people talk a lot about taking the path of “farmers entering the cities”, or “nonagriculturalization”. That is to say, rural areas need to be transformed to cities, agriculture should seek industrialization, and farmers should be linked to markets. This idea is undoubtedly not wrong. Judging from the experience of the industrialized countries in the world, they have all experienced a process in which the proportion of agriculture has fallen sharply, the population of farmers has greatly reduced, and the city has expanded significantly. But as far as our country is concerned, for a long period of time, the carrying capacity of cities and the transfer capacity of rural areas are still limited. It is probably not helpful to the development of the entire economy to only emphasize urbanization and farmers’ entry into the cities. We should also emphasize the idea of rural development within the rural areas. The idea of development is to walk with the two legs of “farmers entering the cities” and “local 66

Zhang (2002), Lu (2002), Guan (2003).

434

14 The “Three Rural” Issues in China’s Market-Oriented Economic Reform

development in rural areas” based on specific local conditions, in oder to achieve overall planned, interactive, and coordinated development of rural and urban areas, and form an integrated urban and rural market system, so that the socialist market economic system can be improved and industrialization and modernization can be eventually realized.67 Some other scholars believe that the fundamental cause of China’s “three rural” issues is a semi-self-sufficient mode of production with scattered household-byhousehold layout on the basis of low level of productivity, i.e. a semi-natural economy. The root cause of the emergence of “three rural” issues is that in the process of transition from the traditional planned economic system to the market economic system based on this semi-natural economy, the contradiction and conflict arose between the demand of the market system and the arrangement of the planned system. To fundamentally solve the “three rural” issues, we cannot rely on any other institutional arrangements. We can only rely on market-based institutional arrangements to allow farmers to obtain the complete property rights of land that they deserve, so that they become the real market players. Also, we should vigorously cultivate rural private enterprises and develop the rural factor market system, which are the key to rural economic growth and the important entry point for solving the “three rural” issues.68

More Explorations on the Path of Agricultural Modernization with Chinese Characteristics Since the 1980s, our country’s economics community has launched a new round of discussion on agricultural modernization. Compared with the discussion in the early 1960s, this round of discussion is quite different in terms of the scope of the problem, the angle of analysis, and the method used in analysis, particularly, a series of new points of view appeared in the understanding of the concept of agricultural modernization. In the discussion of agricultural modernization in the early 1960s, agricultural modernization was once briefly summarized into the four “-lizations”, namely mechanization, electrification, water conservancy-driven, and chemicalization. At that time, although there were different opinions and arguments about which one of the four “-lizations” is the key to China’s realization of agricultural modernization, there were no different opinions about the components of the four “-lizations” of agricultural modernization. However, in the 1980s, people began to think that this generalization of the concept of agricultural modernization was not enough to reflect the basic characteristics of modern agricultural production, nor to reflect the major achievements of modern agricultural science and technology and

67

Wang (2004), Research Group of “Deepening the Trend of Rural Taxes and Fees Reform” (2006), Shen (2006). 68 Zhou (2004).

14.2 “Three Rural” Issues at the Stage of Deepening China’s …

435

their extensive use in agricultural production. Thus, a series of new generalizations of the concept of agricultural modernization came into being as follows. (1) Some people think that the specific meaning of agricultural modernization refers to the historical process of transforming from ancient agriculture and modern agriculture to modern agriculture. The so-called modernization of agriculture means that modern science and technology and modern industry are used to equip agriculture and modern economic science is used to manage agriculture, so to transform individual small peasant agriculture lacking social division of labor to socialized large-scale agriculture. It can be briefly referred to as mechanization, scientization, and socialization.69 (2) Some people believe that neither the old concept of mechanization, electrification, water conservancy-driven, or chemicalization, nor the new concept of mechanization, scientization, or socialization, has gotten rid of the shackles which treated modernization simply as mechanization. The essence of agricultural modernization is actually scientization, that is to gradually establish the production and management of agriculture, forestry, animal husbandry, side-line production, micro, insects, industry and other industries on the basis of ecological science, system science, biological science, economic science and social science. The entire history of agricultural development is a history from experience to science, and science and technology is the driving force for modern agriculture.70 (3) Some people use the viewpoint of system theory to make a new summary of the concept of agricultural modernization. From the perspective of the system concept, the production process of agricultural economy is carried out in a certain agricultural economic system, and the natural reproduction process of agriculture is achieved in a certain agricultural ecosystem, and to some extent, the agricultural economic system adjusts the agricultural ecosystem to meet certain economic needs through certain technical means, measures and methods. The collection of these technical means, measures and methods constitutes a certain agricultural technology system. Agricultural production is a comprehensive system composed of these three systems. It is through the energy transformation and material circulation between these three systems that agricultural economic reproduction and natural reproduction can be realized. Under the specific constraints of various regions in China, the achievement of the optimal agricultural economic structure, optimal agricultural technical structure and optimal agricultural production structure, and the realization of maximum agricultural economic efficiency, agricultural technical efficiency and agricultural

69

Gao (1979), Zhu (1979). Shi and Yang (1981); (1984). On Agricultural Modernization. Exploration of Agricultural Development, 2; Shi (1983); (1983). Explore the “Inevitability Kingdom” of Great Agriculture. Outlook Weekly, 7.

70

436

14 The “Three Rural” Issues in China’s Market-Oriented Economic Reform

ecological efficiency with minimum consumption is the realization of agricultural optimization. The modernization of our country’s agriculture is essentially the optimization of these three systems.71 (4) Some people think that the realization of agricultural modernization is a comprehensive process involving a wide range of fields including natural resources, economic development, as well as population and social systems. Agricultural modernization is the process of continuously realizing the scientific and effective combination of the three forces of nature, technology and economy based on the application of modern scientific theories. The goal to build is a highlyefficient agro-ecological structure and a cost-effective management and control technology system, and a production system for food, fiber and energy that maintains the most suitable state with the natural environment and integrates and develops with the entire national economy.72 (5) Some people start from the concept of sustainable development and think that ecological agriculture is a new concept of modern agriculture. The so-called ecoagriculture a modernized mode for agricultural development that is established through using modern scientific and technological achievements and modern management methods and the effective experience of traditional agriculture on the basis of the principles of ecology, economics and eco-economics, in order to obtain higher economic, ecological and social benefit. Simply put, it is an intensive agricultural system that operates and manages in accordance with the laws of ecological economy. Macroscopically speaking, eco-agriculture requires the coordination of the eco-economic system structure and the relationship of ecosystem-economy-technology to promote the stable, orderly, and coordinated development of the eco-economic system, and establish a macroeconomic dynamic balance. Microscopically speaking, eco-agriculture requires that materials are circulated in a multi-level manner with comprehensive utilization in order to improve the efficiency of energy conversion and material circulation and establish a micro-ecological and economic balance. On one hand, we need to provide society with agricultural and sideline products in large quantities, varieties, and with high-quality and with less input; on the other hand, it is necessary to protect resources, continuously increase the amount of renewable resources, improve environmental quality, and provide a good living environment for humanity so to create conditions for the sustainable development of agriculture.73 (6) Some people think that modern agriculture is essentially commercial agriculture. The so-called commercialized agriculture means that the agricultural sector provides the society with more surplus products in the form of commodities than the need of agricultural workers themselves. On one hand, this kind of commercialized agriculture can only be achieved based on intensive agriculture 71 Deng (1981); (1986). The New Agricultural Revolution: From Industrialization to Biochemistry. Guangxi People’s Publishing House. 72 Hou (1979). 73 Wei (1984), Ye (1988), Liu (1996).

14.2 “Three Rural” Issues at the Stage of Deepening China’s …

437

characterized by a large amount of input from modern science and technology (including agronomic technology, biotechnology, engineering technology, etc.), and through improving labor productivity, land productivity, and input–output rate. On the other hand, only development of agricultural commodification of a certain degree will put forward objective requirements for the input of modern science and technology, and provide various necessary conditions, such as funding, for its input. Moreover, in the path of development of agricultural commercialization, only when agriculture becomes a large-scale socialized agriculture with a high level of specialization, a certain level of self-development mechanism and a market demand-based orientation, can it fully exert its functions and benefits for the investment of modern agricultural technology or for the productivity of modern agriculture. Therefore, agricultural modernization can only be gradually realized through meeting the objective requirements of agricultural commodification and through the development of agricultural commodification. Without agricultural commodification, agricultural modernization can only be a blabber.74 (7) Some people think that agricultural modernization is a relative and dynamic concept and it is the process and means of transformation from traditional agriculture to modern agriculture. Its connotation changes with the advancement of technology, economy and society, showing the nature of its representativeness of times; it also varies regionally based on the different historical backgrounds, economic development levels and resource endowments of different countries and regions, showing the nature of its representativeness of regions. In addition, due to the globalization of the economy, it also shows the nature of the world. Agricultural modernization includes not only the modernization of production conditions, production technology, and the organization and management of production, but also the optimization of resource allocation methods and the corresponding institutional arrangements, so its connotation is also integrated.75 In the discussion as of the approach to select for the path of agricultural modernization that suits China’s national conditions, a consensus is reached that agricultural modernization is a comprehensive concept that marks the development of contemporary agricultural productivity to a certain level, and there is no difference among countries, nations, and classes. However, to choose a specific path for agricultural modernization that is most suitable for the national conditions of a certain country should embody national characteristics; different nations and countries should not adopt the same model. The so-called path of agricultural modernization suitable for China’s national conditions (or with Chinese characteristics) means that the main tasks and fundamental signs of agricultural modernization, as well as the steps to achieve agricultural modernization, must be based on China’s actual situation with Chinese characteristics. However, when specifically analysing the methods to determine the main tasks, fundamental signs, and ways to achieve agricultural 74 75

Zhang and Xu (1987), Yuan (1996). Mao and Kong (2012).

438

14 The “Three Rural” Issues in China’s Market-Oriented Economic Reform

modernization according to Chinese characteristics, some divergent opinions have emerged. Most people still insist that the basic task of our country’s agricultural modernization is either to increase the output per unit area or to increase agricultural labor productivity. It was only when elaborating its reasons that some arguments were made that were different from the discussions in the early 1960s. It is worth noting that in this discussion, some people put forward a new insight. They believe that the above two opinions are both one-sided, and in practice, they are both undesirable. Instead, the improvement of both labor productivity and land productivity should be organically united. The argument is that increasing land productivity is also an aspect of increasing labor productivity. The reason why land productivity can be improved is that under the premise of unchanged labor conditions, it is because of the addition of social labor condensed on things such as improved variety of crops and chemical fertilizers and pesticides. Due to the input of these materialized labors, farmers have created more use value per unit area of land and increased the organic composition, which has relatively reduced the consumption of live labor and increased labor productivity. Some people advocate the use of improving agricultural labor efficiency as the fundamental symbol of agricultural modernization, on the grounds that the indicator that directly determines the level of agricultural production development is not the productivity of a single factor of production, but rather a comprehensive indicator fully reflecting production development achievements such as the indicator of production efficiency. This indicator not only shows the achievements in developing production through utilization of scientific and technological achievements, but also shows the achievement in operation and management realized by organizing and coordinating various productions factors according to scientific laws and economic laws in pursuit of the maximized economic benefits. This is also reflected in its calculation method. Production efficiency is the unit output of all inputs combined and it is the weighted average of the input productivity of each input. Therefore, it is the most comprehensive indication of the utilization of all inputs and the results thus achieved. Others advocate the use of a comprehensive index system as a sign of agricultural modernization, because agricultural production itself is an organic complex, where natural reproduction and economic reproduction are intertwined, and agricultural modernization is a comprehensive process of development. In line with this, the indicators reflecting agricultural modernization should also be comprehensive which include multiple aspects. They believe that it is more appropriate to use three indicators of land productivity, labor productivity and the rate of capital utilization to reflect the status of agricultural modernization. Land productivity is an important indicator that reflects the rationality of land use with measurements such as the level of unit output indicating the level of agricultural production; labor productivity mainly reflects the use of agricultural machinery system and the level of modernization achieved. The indicator of the rate of capital utilization comprehensively reflects the proportional relationship between the use value or total output value obtained in agricultural production and the entire capital occupation, which reflects the issues as the economic effects achieved through materialized labor consumption and the

14.2 “Three Rural” Issues at the Stage of Deepening China’s …

439

quality of operation and management. Using these three indicators to comprehensively reflect agricultural modernization is also comparable in the world. They not only reflect the level of agricultural modernization in a country, but also reflect the characteristics of agricultural production in various countries; they can also reveal some common problems with regularity in the process of agricultural modernization in various countries.76 Some people think that the level of modern agricultural development will ultimately be expressed by total factor productivity, competitiveness of agricultural product market and the sustainability of agricultural production systems; therefore, the simplest way is to improve the three indices of total factor productivity, agricultural product competitiveness and the index of green development in order to promote the development of modern agriculture.77 Due to the different understanding of the main tasks and fundamental signs of agricultural modernization, there are many different views on the way to achieve agricultural modernization in China. In summary, there are four main views. The first view still insists that agricultural mechanization is the central link in agricultural modernization, and that this is the objective regularity of the development of agricultural productivity, and it does not differ from country to country.78 The second view is that the modernization of biochemical technology should be put at the center of agricultural modernization, which is determined by the characteristics of agriculture itself and the main purpose of agricultural modernization, and is inseparable from the development trend of contemporary agricultural science and technology.79 The third view is that the modernization of agriculture in China should take the path of combining mechanical technology modernization and biotechnology modernization. Because the two are not contradictory or separable from each other, but are adapted to each other in a manner of mutual promoting and complementing that proceed alternately. In pursuit of the biotechnology modernization, agricultural mechanization must not be overlooked. In particular, attention should be paid to solving the mutual adaptation of agricultural technology to agricultural machinery, and vice versa. Moreover, our country has a large area and complex natural conditions. Different regions should have different focuses to avoid “one size fits all”.80 The fourth view holds that for the modernization of biotechnology and mechanical technology, we should proceed from the requirements of the development of the entire national economy and propose goals and priorities to be achieved in stages. It was suggested that our country’s agricultural modernization should have different long-term, medium-term, and near-term goals. It should be the long-term goals of agricultural modernization to achieve overall mechanization, electrification, and chemicalization centered on the comprehensive improving of labor productivity; concentrating the main forces to improve land productivity, and at the same time achieving mechanization selectively (including the selection of machine types and regions) should become the 76

Han (1979), Zheng (1980), Zhang and Gu (1980). Li (2018). 78 Tong and Bao (1978), Zhu (1979), Zhang et al. (1979). 79 Liu and Song (1980), Yan (1979), Qin (1980), Liao (1981). 80 Wu (1980). 77

440

14 The “Three Rural” Issues in China’s Market-Oriented Economic Reform

medium-term goal of agricultural modernization in our country. The near-term goal of our country’s agricultural modernization should be to achieve the above-mentioned medium- and long-term goals in a phased manner while focusing on increasing the commodity rate of food and other agricultural and livestock products.81 The impact of the implementation of the household contract system on the process of our country’s agricultural modernization is also an important topic discussed during this period. At the beginning of the discussion, some people thought that there was a big contradiction between the two, and it was difficult to achieve mechanization and modernization under the household contract system; others, on the contrary, fully affirmed that the two are not contradictory. The implementation of the household contract system is also conducive to the modernization of agriculture. Later, after discussion, the general public believed that both these two views were not comprehensive, and it should be said that the implementation of the household contract system has both the advantages and disadvantages towards the development of agricultural modernization. We should give full play to its advantages and overcome its disadvantages. Moreover, some people pointed out that there is no necessary connection between agricultural modernization and production scale. Agricultural modernization is the comprehensive application of modern science and technology in agriculture, with more capital and labor invested on the same land, so the problem is not about the scale, but about the degree of socialization and intensiveness; it’s not necessarily true that household-based agricultural production can only be compatible with animal farming and manual labor. The use of large machinery should be compatible with collective labor. Many countries with modernized agriculture still have a large number of family farms. It is based on certain conditions that mass production can be better than small production. At present, our country still does not have these conditions, and one-sided pursuit of mass production can only lead to derailing from reality.82 Some people also put forward different views on whether to take agriculture management of moderate scale as the starting point for agricultural modernization, and think that doing so is contrary to our country’s national conditions and history. We should promote the development of the peasant economy, and determining the idea of agricultural modernization centered on the development of peasant economy is very necessary for the development of our country’s agriculture. To promote the development of peasant economy, the first thing is not to increase the scale, but to improve agricultural infrastructure and other conditions, increase the promotion and popularization of agricultural production technology, and at the same time, give full play to the advantages of the Internet and big data for farmers’ economic development and seize the opportunity of the era of the upgrading of the consumption structure of the broad masses of our people, thus further promoting the development of the peasant economy. At present, there are still more than 200 million households of small peasants in China. We need to reexamine the historical role of the small peasant economy in China’s development. The small farming economy is

81 82

Han (1979). Lin (1983b), Zhao (1983, vol. 1).

14.2 “Three Rural” Issues at the Stage of Deepening China’s …

441

not outdated.83 Some people also proposed the mode of “Internet + agriculture”, thinking that “Internet + ”, as a new form of productivity, has changed the mode of combination of laborers and means of production in agricultural production, which not only helps to solve the problem of capital supervision in the mode of agricultural enterprise management, but also helps to improve the benefits of economies of scale in the agricultural family business model, and it can also make up for the shortcomings of process specialization and vertical division of labor that are difficult to achieve in the agricultural production process through product innovation and social division of labor. The emergence of “Internet + ” has given small peasant production a new impetus, and it has become possible to cross the “Carfting Canyon” of capitalist production and form the prototype of the socialist agricultural production.84 “The mode of “Internet + agriculture” is to utilize the Internet to improve the level of agricultural production, operation, management and service, cultivate a new batch of networked, intelligent and refined mode of modern ecological agriculture in “planting crops, raising livestocks and processing”, form a demonstrative driving-effect, accelerate the improvement of new models of agricultural production and management system, foster a diversified Internet management service model in agriculture, and gradually establish a quality and safety traceability system for agricultural by-products and agricultural materials in order to promote a significant increase in the level of agricultural modernization.85 Since the 1990s, with the proposition of the new “three rural issues” and the implementation of such policies as the “urban–rural coordinated development”, “industrial back-feeding of agriculture and urban support for the countryside” and “construction of a new socialist countryside”, the issue of accelerating the development of modern agriculture has been put on the agenda again. The discussion on agricultural modernization has been further deepened in China’s economic theory circles, and a more unified view of the concept of agricultural modernization has been gradually formed, which agreed that agricultural modernization is the process of changing from traditional agriculture to modern agriculture, the process of transforming traditional agriculture and continuously developing comprehensive agricultural productivity, the process of transforming agricultural production methods and promoting the sound and rapid development of agriculture and the process of building a rich and civilized new countryside in harmony with resources, ecology and environment. In this process, we must equip agriculture with the technology provided by modern industry, transform agriculture with modern biological science and technology, manage agriculture with modern market economy concepts and organizational methods, upgrade agriculture with modern industrial system, promote agriculture with modern economic forms, use modern development concept to lead agriculture, and develop agriculture by cultivating new type of peasants. Agricultural modernization is a relative and dynamic historical concept, and the degree of agricultural modernization is constantly developing and changing. This concept is 83

Sui (2017). Zhou (2017). 85 Zhao and Chen (2015). 84

442

14 The “Three Rural” Issues in China’s Market-Oriented Economic Reform

a general conclusion drawn from the experience of agricultural modernization in developed countries and the positive and negative experiences of the development of agricultural modernization in our country.86 According to the national conditions of China, our country’s agricultural modernization should have the following basic characteristics. (1) Commercialization. Commercialization is a manifestation of the economic and social benefits of agricultural modernization. The degree of agricultural commodification in our country is still very low, so this should be emphasized even more. Agricultural modernization is a process in which the rural economy develops from a traditional natural economy to a modern commodity economy. Only when it moves towards a developed commercial economy and there is a wide market demand for agricultural products can modernization become the goal pursued by agricultural development. (2) Specialization. Specialization is closely related to modern science and technology and commercialization. Its leading factors are the development of science and technology and the improvement of the demand for commodities. Therefore, specialization is an inevitable requirement of modernization and the two are inseparable. (3) Intensification. The main approach to realize intensification is to develop precise agriculture, that is, the approach with high-density technical investment and relatively large input of live labor. In terms of resource utilization, it is demonstrated through full and reasonable utilization of resources without waste, and the wide adoption of the development approach of comprehensive utilization and in-depth processing. (4) Multifunction. In addition to continuing to stabilize and develop the construction of commodity grain-growing bases to ensure food security in China, we must actively cultivate and support the construction of commodity bases for such sectors as animal husbandry, aquaculture, forestry and the sector of economic crops including cotton, oilseeds, vegetables, flowers, fruits, and medicinal materials. We must also vigorously develop various new and modern agricultural models such as urban facility agriculture, circular agriculture, green agriculture, foreign exchange earning agriculture, sightseeing and leisure-based agriculture, ecological agriculture, and tourism agriculture, making it a new driving force for building modern agriculture in China. (5) Socialization. Modern agriculture requires organically linking of the production, processing and circulation of agricultural products to form a complete, efficient, and mutually-promoting agricultural industry system. Therefore, the industrialization of agriculture should become the basic form of management for the development of modern agriculture in our country.87 (6) Going green. We must insist on grasping the new development concept of “lucid waters and lash mountains as invaluable assets” to promote the green development of agriculture and rural areas. The green agricultural development path 86 87

Zha (1992), Wu (1992), Zhao (2007), Zhou (2007). Qin (1980), Wu (1980), Liao (1981), Wang (1992).

14.2 “Three Rural” Issues at the Stage of Deepening China’s …

443

is a sustainable agricultural development path. It advocates being green and organic, conserving the ecology, protecting the environment, emphasizing the recycling of resources, and the sustainable development of agriculture. In the future, the development of agriculture can no longer follow the old path that only looks at economic benefits while ignoring eco-environmental benefits. Going greening is an urgent choice for our country to change its agricultural development mode. The development of green agriculture is to carry out agricultural production under the condition that the environment is not polluted, the ecology is not destroyed, and resources can be recycled.88 Since the twenty-first century, especially after joining the WTO, our country’s modern agricultural development has faced new internal and external environments and conditions, and agricultural modernization has entered a new stage. First, the indepth advancement of industrialization and urbanization has created conditions for prospering the secondary and tertiary industries in the countryside, accelerating the transfer of surplus labor, developing moderate-scale operations, and simultaneously realizing agricultural modernization. Second, our country has generally entered a new era of coordinated urban–rural development in which agriculture is promoted by industry and urban–rural development. The policy system of strengthening agriculture and enriching farmers has been constantly improved and the input of financial support for agriculture has steadily increased, creating a favorable development environment for agricultural modernization. Third, international trade is becoming increasingly active, and international competition in the quality and price of agricultural products is becoming increasingly fierce. This has brought unprecedented opportunities to the development of our country’s modern agriculture and also has brought about greater challenges. During this period, academia mainly studied agricultural modernization as a process of comprehensive system engineering under open conditions by comprehensively analyzing agricultural development issues from the mutual relationship between agriculture and rural areas and other economic and social aspects, rather than simply talking about agricultural modernization through discussion of agriculture itself. In this period, the agricultural modernization policy mainly emphasized the elimination of the dual urban–rural structure, adjustment of the relationship between industry and agriculture, and the uniformed and coordinated management of urban–rural development, through paying more attention to the scientific, organizational, and industrialization of production and operation. In 2007 the number 1 document from the Central Government of China comprehensively explained the connotation of agricultural modernization in the new period, namely “to equip agriculture with modern material conditions, to transform agriculture with modern science and technology, to upgrade agriculture with modern industrial systems, to promote agriculture with modern management forms, to lead agriculture using modern development concepts, and to develop agriculture through cultivating farmers of the new-type.” In 2008, the Third Plenary Session of the Seventeenth Central Committee of the Communist Party of China further proposed the approach of “two transformations” to realize agricultural modernization, that is, “the 88

Yue and Kong (2015).

444

14 The “Three Rural” Issues in China’s Market-Oriented Economic Reform

household-based operation should shift to the mode that uses advanced technology and production methods, and the unified operation should be developed towards the direction of the unity and cooperation among farmers and rural households and the formation of a diversified business service system with multi-level and multiform.” In 2010, based on a profound understanding of the current stage of China’s economic and social development and the new situation of industrial-agricultural and urban–rural relations, the Fifth Plenary Session of the 17th Central Committee of the Communist Party of China put forward the idea of “synchronization of the three-lizations”, that is, “to simultaneously promote agricultural modernization with in-depth development of industrialization and urbanization.”89

14.3 “Three Rural” Issues in the New Era of China’s Market-Oriented Economic Reform The Proposition and Solution of the New “Three Rural” Issues in the New Period In the 1980s, although the first breakthrough in rural reforms and the rapid rise of township and village enterprises has once narrowed the gap between urban and rural areas, it has not fundamentally eliminated the urban–rural dual structure and corrected the imbalance between urban and rural areas. With the subsequent shift of reform focus from rural to urban areas, and the accelerated development of industrialization and urbanization, the gap between urban and rural areas has begun to widen again. The problems of urban–rural imbalances and the decline in rural areas have become increasingly prominent. Issues related to agriculture, rural areas, and rural people are still prominent in China’s economic and social development. Some people have suggested that the new “three rural” issues have emerged in the new period, but a variety of different interpretations existed as regard to the content of the new “three rural” issues. For example, some people regarded the issues of “land distribution”,“tax burden” and “peasant exile” as the old “three rural” issues and regarded “the circulation and large-scale management of agricultural land”, “the non-agricultural use of rural land” and “peasants’ entering the cities to work” as the new “three rural” issues. Some people regard the occurences of “migrant workers”, “landless farmers” and “end of agricultural villages” derived from globalization and rapid changes in Chinese society as the new “three rural” issues. Some people regard issues related to “farmers”, “agricultural resources” and “agricultural officials” as the new “three rural” issues. Others call the problems of “agricultural inferiorization”, “hollowing of rural areas” and “poverty diversification of the rural people” as the new “three rural” issues. Others believe that with the rapid development of industrialization and urbanization, the problems of “hollowing of rural areas”, “marginalization 89

Mao and Kong (2012).

14.3 “Three Rural” Issues in the New Era …

445

of agriculture” and “aging of rural people” have become increasingly prominent and have become an urgent problem to be solved known as the new “three rural” issues. And there are more examples of the content of the new “three rural” issues.90 Analysis shows that these so-called new “three rural” issues are all problems occured under the background where China’s market-oriented economic reform enters a new phase and the reform and development of the “three rural” issues enters a new stage. The characteristics of these so-called new “three rural” issues are closely connected with industrialization and urbanization. They are the connection points of urban–rural relations, the “front lines” of changing the appearance of the countryside and improving the lives of farmers and are also the “focus” and “hot spot” of various contradictions in current society. Therefore, these so-called new “three rural” issues cannot be solved by themselves in the countryside. To find a way to solve the these problems, we must jump out of the perspective of simply starting from the countryside, and consider the problem more from a perspective of the unified and coordinated development of both the urban and rural areas.91 As of the ways to solve the new “three rural” issues, scholars have put forward the following ideas. (1) We should breakdown the dual urban–rural structure and realize the integration of urban and rural development The dual urban–rural structure is the main obstacle to the integration of urban and rural development. It is necessary to improve the institutional mechanism to form new relationship between industry and agriculture and between urban and rural areas that promotes agriculture by industry, leads rural areas by urban areas, realizes reciprocity between workers and farmers and integrates urban and rural areas, so that the majority of farmers can participate in the modernization progress on an equal basis and share the fruits of modernization. Realizing the integration of urban and rural development is the inherent law of economic and social development, and is an important content and development direction of our country’s modernization. Theoretically, the internal relationship between industry and agriculture and between the urban and rural areas determines the integrated development of urban and rural areas. Agriculture and industry are the two pillar industries for the development of human society, while rural and urban areas are the two basic areas for human economic and social activities. There is an inherent, inevitable, and organic connection between industry and agriculture, and between city and countryside, and they are interdependent, complementary, and mutually reinforcing. The development of agriculture and rural areas cannot be separated from the radiation and drive of industry and cities; similarly, the development of industry and urban areas cannot be separated from the support and promotion of agriculture and rural areas. The integrated development of urban and rural areas is to take industry and agriculture, cities and rural areas as an organic and unified whole, and give full play to the mutual connection, interdependence, mutual complementation 90 91

Xiang and Zhou (2017). Li (2010).

446

14 The “Three Rural” Issues in China’s Market-Oriented Economic Reform

and mutual promotion between them, especially to give full play to the radiating and driving effect of industry and cities on agricultural and rural development, in order to achieve coordinated development of industry and agriculture and the development of urban and rural areas. To advance the integration of urban and rural development in our country, the main obstacle to the dual urban–rural structure must be removed. The so-called urban– rural dual structure means that urban residents and rural residents are divided into two distinct social groups by the system. The allocation of public resources and basic public services are inclined to urban and urban residents. The basic public services enjoyed by farmers obviously lag behind those enjoyed by urban residents in cities and town. Farmers cannot equally participate in the modernization process and share the results of modernization. We should promote the equal exchange of urban and rural factors and realize balanced allocation of public resources. This is a basic requirement and important measure to improve the integrated system of urban and rural development and to form new relationship between industry and agriculture and between urban and rural areas that promotes agriculture by industry, leads rural areas by urban areas, realizes reciprocity between workers and farmers and integrates urban and rural areas. The main requirements and measures to promote the equal exchange of urban and rural factors and realize balanced allocation of public resources are as follows. First, we should safeguard the rights and interests of farmers’ production factors. This is the focus of promoting the equal exchange of urban and rural factors and realizing balanced allocation of public resources. The basic requirements can be summarized as the “three guarantees”, that is, to guarantee the equal pay for equal work for migrant workers, to ensure that farmers can share the benefits of land appreciation in a fair way, and to ensure that rural deposits in financial institutions are mainly used in agricultural and rural areas. Second, we need to improve the agricultural support and protection system, reform the agricultural subsidy system, and improve the benefit compensation mechanism in the major grain producing areas. This is an important aspect to promote the equal exchange of urban and rural factors and the balanced allocation of public resources. Third, we should encourage social capital to be invested in rural construction. This is an important form and way to promote the equal exchange of production factors between urban and rural areas. The investment of social capital in rural construction is conducive to making up for the impact of the outflow of production factors such as rural savings funds, labor, and land on rural development, as well as making up for the impact of the uneven urban–rural allocation of public resources on rural development. Fourth, we need to promote equalization of basic public services in urban and rural areas. This is an important goal to promote the equal exchange of urban and rural factors and the balanced allocation of public resources. It is necessary to coordinate urban and rural infrastructure construction and community construction, vigorously promote the development of social undertakings and infrastructure construction towards the interest of the countryside, and increase the coverage of public finance and rural infrastructure construction.92 92

Feng (2013).

14.3 “Three Rural” Issues in the New Era …

447

(2) We need to give farmers more property rights and encourage farmers to continuously increase their income with a faster pace Empowering farmers with more property rights is an important content and requirement to perfect the integrated mechanism of urban and rural development and to promote the integration of urban and rural development. It is a major breakthrough in the concept of safeguarding farmers’ legitimate rights and interests and promoting the integration of urban and rural development. Giving farmers more property rights is an inevitable requirement for realizing equal property rights for urban and rural residents. At present, a deep manifestation of inequality between urban and rural areas in our country is the unequal property rights enjoyed by rural and urban residents. For example, houses purchased by urban residents have complete property rights and can be mortgaged, guaranteed, and sold. However, houses built by farmers on their homesteads legally do not render farmers with complete property rights. They cannot be mortgaged, guaranteed, or sold to people outside the collective economic organization. The right to use state-owned land obtained by an enterprise can be used for mortgages, guarantees and other related purposes, but the collective land use right owned by farmers cannot be used for mortgages, guarantees and other related purposes. Farmers have ownership of rural collective assets, but these rights lack economically effective forms of realization. The lack of property rights has severely restricted the cultivation, accumulation, and expansion of farmers’ wealth, restricted farmers’ property from entering the social property value-added system, credit system, and mobility system, restricted the equality of farmers and urban residents in economic rights, and restricted the integration of urban and rural development. We need to give farmers equal property rights in order to realize their equal personality status in modernization, and let the majority of farmers participate in the modernization process equally, and share the results of modernization together, which is a major problem that China must solve in modernization, and is an inevitable requirement for the realization of equal rights of urban and rural residents. Giving farmers more property rights is an inevitable requirement for increasing farmers’ income and wealth and narrowing the gap between urban and rural incomes. The core issue of agriculture, rural areas and rural people is the issue of farmers’ income. The low and slow growing income level of farmers and the large income gap between urban and rural residents, are not only not conducive to agricultural and rural development and the improvement of farmers’ living standards, but also restrict domestic demand, especially the expansion of consumer demand and the sustained and stable growth of the economy, which will also have an adverse effect on consolidating the worker-peasant alliance and achieving social harmony and stability. Continued and rapid increase in farmers’ income is a requirement for narrowing the gap between urban and rural areas and promoting the integration of urban and rural areas. It is of great significance for solving the “three rural” issues and for the overall economic and social development. To increase farmers’ income, new space and new channels need to be cultivated. From the perspective of farmers’ income composition, among the four parts of family operating income, wage income, transfer

448

14 The “Three Rural” Issues in China’s Market-Oriented Economic Reform

income, and property income, the proportion of property income is very low, which constitutes the biggest potential for increasing farmers’ income. The increase of property income should be regarded as an important way to increase farmers’ income, and various measures should be taken to vigorously promote the increase in farmers’ property income. Empowering farmers with more property rights and promoting the effective and full realization of farmers’ property rights can effectively increase farmers’ property income and make property income a new growth point for farmers’ income, thereby effectively driving farmers’ income to continue to grow rapidly, thus gradually narrowing the income gap between urban and rural residents. The implication in giving farmers more property rights is to ensure that farmers enjoy equal property rights according to law. We should actively develop farmer’s shareholding cooperation, grant farmers the right to own, share, and withdraw through paying the collective assets, as well as the rights of mortgage and guarantee against collective assets and rights to inherit collective assets, so that farmers can receive dividends from collective asset shares according to law; we should also enrich farmers’ land use rights and empower farmers to occupy and use, make income from and circulate contracted land, as well as the right to take out mortgage and security of contracted management rights, allowing farmers to invest in contracted management rights to develop agricultural industrialization operations, so that farmers can obtain land equity investment income according to law. We need to encourage the transfer of contracted management rights to large agricultural households, family farms, farmer cooperatives, and agricultural enterprises, so that farmers can obtain land transfer income according to law. We should safeguard the rights of farmers to use the real estate, reform and improve the rural homestead system, and promote the mortgage, guarantee, and transfer of farmers’ housing property rights through pilot projects, so that farmers can obtain the benefits of homestead and real estate transfer according to law. We should allow rural collective operating construction land to be transferred, leased, and bought into stocks, implement equal access to state-owned land with equal rights and the same price, improve the reasonable, standardized, and multiple guarantee mechanisms for land-expropriated farmers, and establish a land value-added income distribution system that takes into account the interests of the state, collectives, and individuals to rationally increase personal income, enable farmers to share the benefits of land value-added, and facilitate property to become an important means for farmers to develop and become rich.93 (3) We should develop various forms of moderate-scale operations and steadily realize the two “leaps” In 1990, Deng Xiaoping explained the idea of “two leaps” for the first time when discussing the reform and development of Chinese agriculture. He pointed out that “the reform and development of China’s socialist agriculture requires two leaps from a long-term perspective. The first leap was the abolition of the People’s Commune and the implementation of a responsibility system based on household contracting. This is a great advance to which we must adhere in the long term. The second 93

Feng (2013).

14.3 “Three Rural” Issues in the New Era …

449

leap is to develop moderate scale operations and develop a collective economy in order to meet the needs of scientific farming and production socialization. This is another great advance which of course is a fairy long process.” The “second leap” pointed out by Deng Xiaoping is the development of moderate-scale operations and the development of modern agriculture, which constitute the fundamental way to solve agricultural problems in China and indicate the long-term direction of China’s agricultural development.94 In essence, the “two leaps” are the “two-step” strategy to achieve China’s agricultural development and then realize the modernization of agriculture. The “first leap” involves the implementation of a “double-layer management” system based on household contracting in rural areas. Under the guidance of national policies and market demand, it requires us to re-allocate production factors, develop commodity production, and realize farmers’ dominant position within the market, so to create a micro-system foundation for the “second leap”. The content and goal of the “second leap” is “to meet the needs of scientific farming and production socialization”, take the road of intensification and collectivization, and “develop moderate scale operation and develop collective economy”, the essence of which is to realize agricultural modernization. The two leaps constitute a complete system, with the “first leap” act as the foundation and support and the “second leap” as the purpose and destination. And the “two leaps” are closely linked.95 The acceleration of the transformation of agricultural development methods and the development of multiple forms of moderate-scale operations so to give full play to its leading role in modern agricultural construction, are important links to steadily realize the “two leaps”. The core of developing various forms of moderate-scale operations is to grasp the two key words of “multiple forms” and “moderate scale”. The key to “multiple forms” is to guide farmers to transfer the management rights of the contracted land in various ways, and to develop diversified and multiple types of large-scale operations adapted to specific conditions of economic and social development in different regions and specific resource endowment conditions through measures such as establishing trusteeship and acquiring shares through land management rights. There are two main ways to achieve scale management in agriculture. The first is the centralized scale management of land, the focus of which is to solve the problem of “who will farm the land”. In developed areas or suburbs of cities, the proportion of farmers’ income from non-agricultural industries is very high, especially in areas where there are more opportunities for employment, the trend of specialization is obvious, and a large amount of rural labor is basically or completely separated from agriculture, with a large number of rural laborers transferred and not returning to the village for a long time. Therefore, we should focus on cultivating newtype agricultural management entities through the circulation of land management rights to realize large-scale operation of production. Land circulation is still the main way to achieve moderate scale operation and to improve the efficiency of agricultural land use. The second is centralized scale operation of services, the focus of which is 94 95

Zou (2011). Liu and Li (2010).

450

14 The “Three Rural” Issues in China’s Market-Oriented Economic Reform

to solve the problem of “how to farm the land well”. In the large agricultural areas, a large number of young and middle-aged labor force has moved out, the phenomenon of part-time peasants has become prominent. Although elderly people and women who are left-behind have both the time and willingness to engage in agriculturerelated work, they may not achieve performance with acceptable quality. Therefore, we should focus on the cultivation of new type of agricultural service entities by developing productive services in agriculture so to realize large-scale management of services and improve the level of scale, intensiveness, organization, socialization, and industrialization in agricultural operations. The keyword of “moderate scale” means to adapt the scale of operations to specific condition of the transfer of rural labor, advances in agricultural science and technology, and the level of socialized services in agriculture. In particular, it should be pointed out that the leading role of the development of scale operation needs to be reflected in many aspects such as in ideology, market efficiency, green development, the driving force from dominant entities, and the leadership of technology application, etc. We should give full play to the leading role of multiple forms of moderate scale operation of agriculture during the reform of agricultural supply side structure and create lasting impetus for effectively promoting the quality, efficiency and competitiveness of agriculture.96 To implement multiple forms of moderate scale operation, we must adhere to the basic position of family-based operation in agriculture, at the same time, promote the innovation of agricultural management methods such as family-based operation, collective-based operation, cooperative operation, and enterprise-based operation, and accelerate the construction of a new type of agricultural operation system. The common development of family-based operation, collective-based operation, cooperative operation, and enterprise-based operation is the enrichment and development of the basic operation system in rural areas. The two-tiered operation system based on household contract management and the combination of integration and division is a major historical achievement of China’s rural reform and an important part of the socialist system with Chinese characteristics. It is suitable for China’s national conditions and adapts to the socialist market economic system. It is in line with the characteristics of agricultural production and can greatly mobilize the enthusiasm of farmers and liberate the development of rural social productivity. Therefore, it should be unwaveringly adhered to in the long run. This basic operation system was formed in the great practice of rural reform, and it has been constantly enriched, improved, and developed in the deepening of rural reform. The promotion of the innovation of agricultural operation methods for the common development of family-based operation, collective-based operation, cooperative operation, and enterprise-based operation is the promotion of innovation in agricultural operation system and methods from the two levels of “unification” and “division” to meet the objective needs of urbanization and modern agricultural development. The common development of family-based operation, collective-based operation, cooperative operation, and enterprise-based operation means we need to uphold the basic status of family-based operation in agriculture, stabilize the land contract relationship in the rural areas and maintain it 96

Zhang (2016).

14.3 “Three Rural” Issues in the New Era …

451

in the long run, maintain farmers’ rights in contract operation of land in accordance with the law, and give full play to the advantages of collective operation, cooperative operation and enterprise-based operation in terms of scale, efficiency, technology, market, etc.. In particular, we need to give full play the role of the advanced productivity achieved through transferring modern production factors and operation modes from enterprise operations into agriculture; we also need to promote the improvement of intensification, specialization, organization and socialization of agricultural production operation in order to make the agricultural operation methods richer and more competitive, and to infuse the basic rural operation system with more system vitality. To this end, it is necessary to encourage the transfer of contractual operation rights to large professional households, family farms, farmer cooperatives, and agricultural enterprises in the open market, and to develop multiple forms of scale operations. First, the transfer of contractual operation rights to large professional households, family farms, farmer cooperatives, and agricultural enterprises is the need to cultivate new types of agricultural operation entities. With the continuous transfer of rural labor to non-agricultural industries and into cities and towns, there are fewer and fewer young people staying in rural areas to work in agriculture. The aging of workers in agricultural production and the problem of lack of people in the later period are becoming more and more serious. “Who will grow the land in the future” has become a major issue related to the sound development of agriculture and the construction of agricultural modernization in China; it has also become a prominent issue affecting the safety of China’s agricultural industry. Therefore, it is very urgent to cultivate the new types of agricultural operation entities. Large professional households, family farms, farmer cooperatives, and agricultural enterprises are the main forms of new agricultural operation entities. The transfer of contractual operation rights to these business entities is conducive to the rapid growth of our country’s new agricultural business entities. Secondly, the transfer of contractual operation rights to large professional households, family farms, farmer cooperatives, and agricultural enterprises is the need to develop large-scale operations and modern agriculture, and then to realize the “two leaps”. The transfer of contracted operation rights to large professional households, family farms, farmer cooperatives, and agricultural enterprises is the fundamental way to promote agriculture to achieve large-scale operation, and is conducive to promoting the development of modern agriculture in our country and the realization of agricultural modernization. Finally, the transfer of contracted operation rights to large professional households, family farms, farmer cooperatives, and agricultural enterprises is the need to improve the profitability and market competitiveness of agriculture. The transfer of contracted operation rights to large professional households, family farms, farmers’ cooperatives, and agricultural enterprises and thus the increase of farmers’ income through the realization of largescale operations, is a fundamental measure to improve agricultural profitability and market competitiveness.97

97

Feng (2013).

452

14 The “Three Rural” Issues in China’s Market-Oriented Economic Reform

(4) We should promote the structural reforms on the agricultural supply side and promote the integrated development of the first, secondary and tertiary industries in rural areas In the new historical stage, while China’s agricultural development has continuously reached a new level, the main contradiction in agriculture has changed from insufficient total production to structural contradictions, and the main aspect of the contradiction is on the supply side. The supply-side structural reform is neither the general supply-side reform nor equivalent to simple structural adjustment; instead, it starts from the production side and the supply side and adopts comprehensive supporting reform methods in order to solve deep-seated structural contradictions, promote the optimization of the supply system and the optimization of the structure, improve the quality and efficiency of supply, and enhance comprehensive competitiveness and capabilities in sustainable development. It can be said that the supply-side reform and the structural reform are an organic whole. Supply-side structural reforms can be roughly divided into two types, with the first type focusing more on quantity and industrial growth, and the other focusing more on structural optimization and quality improvement. The former focuses on solving the contradiction of insufficient total volume, with an emphasis being put on the growth of quantity and output; the latter focuses on solving structural conflicts, with an emphasis being put on structural optimization and improving quality and efficiency. At present, as regard to the supply of agricultural products in China, on one hand, we see rapid upgrading of market demand; on the other hand, we also see serious misalignment of market supply. This is a real challenge and clearly highlights the urgency of structural reforms on the agricultural supply side in China. The major issues that need to be addressed in the structural reforms on the supply side in agriculture are the institutional and policy issues that exist on the supply side, that is, how to achieve balance between the supply of agricultural products and the constantly changing demand for agricultural products through institutional innovation and policy breakthroughs. The most important and urgent reforms should be concentrated on three levels: the first is to optimize the industrial structure, the second is to reduce production costs, and the third is to fill in the development shortcomings. Therefore, the structural reforms on the agricultural supply side are not only simply about compressing certain phased and structurally surplus grain varieties, but should also focus on the aspects of resource utilization, production methods, industrial integration, factor upgrades, structural optimization, and institutional reforms in order to form new momentum to promote the rapid and sustainable development of China’s agriculture.98 To achieve structural reforms on the agricultural supply side, it is necessary to change the single industrial structure in rural areas and promote the integrated development of the first, secondary and tertiary industries in rural areas. Based on agriculture, guided by new business entities, and linked by connection of interests, the integrated development of the first, secondary and tertiary industries in rural areas is a process of promoting the organic integration and close connection of agricultural production, agricultural products processing and circulation, agricultural product 98

Chinese Academy of Social Sciences think tank for urban–rural integration (2017).

14.3 “Three Rural” Issues in the New Era …

453

sales and leisure tourism as well as other service industries, through industrial chain extension, industrial function expansion and factor aggregation, technology penetration and organizational innovation, as well as intensive cross-border allocation of capital, technology and resource elements, thereby promoting the coordinated development of various industries and upgraded competitiveness in agriculture, and ultimately achieving agricultural modernization, rural prosperity and increase in farmers’ income. Our country has entered the middle and late stages of industrialization, and a new round of industrial technology revolution represented by information technology, biotechnology, new material technology, and new energy technology has created technical conditions for the integration and development of rural industries. The acceleration of the upgrading in consumption structure of residents, the increasingly growing concern on food safety, and the fact that consumer experience has become a hotspot in fashion, has set new and higher requirements for the transformation of agricultural development methods, and also created a huge market space for the integration and development of rural industries. In addition, with the advancement of agricultural informationization, specialization, scale-operation, and intensification, the formation of new industrial formats and models is accelerating, the ability of various new agricultural-related business entities to participate in rural industrial integration has been significantly improved, all of which has provided a good organizational foundation for the integrated development of rural industries. Our country is in a critical period of building a well-off society in an allround way. Our economic development has entered a new normal, with the environmental conditions and internal motivations of agricultural development undergoing profound changes. The promotion of the integrated development of the first, secondary, and tertiary industries in rural areas is not only an inevitable requirement for actively adapting to the new normal of the economy, but also a practical choice for advancing agricultural modernization. Under the background of rapidly rising production costs, increasingly deteriorating of ecological environment, and increasing resource constraints, the extensive development path for agriculture that relies on resource consumption, input of agricultural resources, and ecological environment is unsustainable, and the transformation of agricultural development methods must be accelerated. It is an important way of accelerating the transformation methods for agricultural development and promoting agricultural modernization to promote the integration of rural industries, achieve mutual penetration and coordinated development of the first, secondary, and tertiary industries, improve the technological level and innovation capabilities of the agricultural industrial chain, and promote its intensive, economical, and sustainable development. Compared with agricultural industrialization, the integration of the first, secondary and tertiary industries in rural areas has the following characteristics. (1) Its industrial format innovation is more active. The integrated development of rural industries not only includes contents of agricultural industrialization such as agricultural production, processing, and sales, but also has spawned new products, new technologies, and new formats. For example, rural tourism resulting from the development of multifunctional agriculture has created new formats such as rural e-commerce through the

454

14 The “Three Rural” Issues in China’s Market-Oriented Economic Reform

application of information technology. (2) Its industry boundaries are more blurred. The integrated development of rural industries has brought about the intersection of different industries in terms of technology, products, and business. The dominant feature of cross-border integration is obvious, which obscures the original industrial boundaries. (3) The degree of interest linkage is closer. The mode of rural industrial integration has become more diverse in its development with close-type interest linkage mechanisms such as the mechanisms of joint-stock and cooperative more and more adopted, which has more extensively and deeply involve farmers in the process of industrial integration. (4) The operating entity is more diversified. Compared with the operation of agricultural industrialization, rural industrial integration has more types of business entities, and the relationship between them is more complicated. The main business entities involved in rural industrial integration include ordinary farmers, large professional households, family farms, farmer cooperatives, leading enterprises, and industrial and commercial capital. The leading enterprises and industrial and commercial capital have a more prominent leading role in rural industrial integration, and even some citizens in towns and cities have become important participants in rural industrial integration through community supports provided to agriculture. (5) The function is more enriched. Compared with general agricultural industrialization, rural industrial integration has often spawned new industrial formats such as circular agriculture, leisure agriculture, creative agriculture, smart agriculture, and factory-based agriculture, and has produced new functions such as ecology, tourism, culture, science and technology, and education, which has shown more enriched implication. Of course, the industrialization of agriculture and the integrated development of the first, secondary, and tertiary industries in rural areas also has spatial coexistence and temporal succession. The integrated development of the first, secondary, and tertiary industries in rural areas has enriched the connotation of agricultural industrialization, expanded the denotation of agricultural industrialization. To a certain extent, it can be said that the integrated development of the first, secondary, and tertiary industries in rural areas is the extension and development of agricultural industrialization; it is the advanced stage and “upgraded version” of agricultural industrialization.99 The basic ideas as regard to the promotion of the integrated development of the first, secondary, and tertiary industries in rural areas are as follows. First, we need to vigorously cultivate new-type agricultural business entities. The promotion of the integrated development of the first, secondary, and tertiary industries in rural areas is inseparable from the extensive participation of new major agricultural operators such as large professional households, family farms, farmer cooperatives, and leading agricultural enterprises. Faced with the limitations in management scale, capital, and technology, it is difficult for traditional small farmers to play an important role in promoting the integration of rural industries. The main entities of new-type agricultural operation is the leading force for the development of modern agriculture, and they have the economic strength and subjective desire needed to promote 99

Research Group of Macroeconomics Institute of National Development and Reform Commission and Department of Agricultural Economy (2016).

14.3 “Three Rural” Issues in the New Era …

455

the integrated development of the first, secondary, and tertiary industries in rural area. We need to encourage and support new-type agricultural business entities to develop deep processing of agricultural products, establish sound sales networks, and develop rural tourism and leisure agriculture through various forms of cooperation and connection, which can help new-type agricultural business entities to bring more ordinary farmers into the integrated development of the first, secondary, and tertiary industries in rural area rural areas. Second, we need to actively use the resources of existing organizations in rural areas. In fact, for a long time, the operation of agricultural industrialization has practiced the historical task of promoting rural industrial integration to a certain extent. However, agricultural industrialization has focused more on the integration of production, processing and sales. It has become an important magic weapon for the deep integration of rural industries to utilize the foundation laid by the industrialization of agriculture, give full play to the role of leading agricultural enterprises and other economic organizations, promote agricultural production in the upstream, and promote the development of sales, logistics, tourism and leisure industries in the downstream, and break down the barrier among the first, secondary and tertiary industries. Some leading agricultural enterprises not only played an important role in promoting industrial integration, but even explored urban–rural integration and achieved good social benefits. In addition, giving full play to the role of resources of traditional rural organizations such as supply and marketing cooperative system and postal system, and innovating the working mechanism of serving the “three rural” issues, not only have a positive significance for the development of these traditional organizations themselves, but also can enrich the potential alternatives in selecting the path of rural industrial integration. Third, we need to rationally guide industrial and commercial capital into agriculture. The promotion of the integrated development of rural industries cannot rely solely on the internal forces of agriculture and rural areas. Even for those large-scale agricultural production operators with strong power, they can hardly break through the entire agricultural industry chain on their own. Industrial and commercial capital possessed funds, technology and advanced business philosophy. When industrial and commercial capital enters agriculture, it is easier to break the boundaries of the industries and develop various agricultural functions through overall planning, thus obtaining higher added value. The integrated development of rural industries requires the promotion and support of industrial and commercial capital. In the process of promoting the integrated development of the first, secondary and tertiary industries in rural areas, industrial and commercial capital should be guided into capital and technology-intensive fields that are more suitable for their development so to engage them in industries such as agricultural product processing and circulation, agricultural socialized services, and rural tourism and leisure agriculture. They should work with major professional households, family farms, farmer cooperatives, leading enterprises, and other business entities to achieve coordinated development through division of labor based on the advantages of each entity. Fourth, we should focus on developing rural tourism and leisure agriculture. As mentioned above, with the upgrading of the consumption structure of urban and rural residents, the cultural and ecological functions of agriculture are increasingly valued by consumers, and the

456

14 The “Three Rural” Issues in China’s Market-Oriented Economic Reform

consumption demand towards industries related to agricultural multi-functionality continues to expand, which includes the consumer demand for agricultural leisure tourism, cultural experience, ecological environmental protection, and science and technology education. Rural tourism and leisure agriculture highly embodies the concept of integration of the first, secondary, and tertiary industries, and is an important industrial format for promoting rural industrial integration. We should utilize the natural, ecological and cultural resources in rural areas, draw on the experience of developing “the sixth industry” in countries such as Japan and South Korea, attract and support various types of agricultural entrepreneurs including returning migrant workers, and vigorously develop creative agriculture, thus turning rural areas into places of vitality, turning the agricultural industry into an everlasting industry and promoting the integrated development of the first, secondary, and tertiary industries in the rural areas. We also need to take counties, major towns, central villages, and characteristic villages and towns as the main carriers to guide the integrated development of the first, secondary, and tertiary industries in rural areas, guide the layout optimization of the integrated development of the first, secondary, and tertiary industries in rural areas, and improve the layout benefits of the integrated development of the first, secondary, and tertiary industries in rural areas.100

Theoretical Exploration of Building the New Socialist Countryside “The building of new socialist countryside” is not a new concept in itself, but after the time when China’s economic and social development has generally entered a new stage of “promoting agriculture by industry and guiding countryside by cities and towns”, this concept is put forward again, which obviously has brought about new characteristics of the times, new connotations and new meanings. Some scholars believe that from the proposal of “unified and integrated urban– rural development” to the implementation of “industrial back-feeding agriculture and urban support for rural areas” and then to “building the new socialist countryside”, it is actually a continuous and deepening process from discussing ideology to being pragmatic. In view of the current severe imbalance between urban and rural development and its negative impact on sustainable economic and social development and the overall construction of a well-off society, “unified and integrated urban–rural development” is a major strategic concept for adjusting the relationship between urban and rural areas. The implementation of “industrial back-feeding agriculture and urban support for rural areas” is the major strategic orientation of adjusting urban–rural relations, and the construction of the new socialist countryside is a major strategic move to adjust urban–rural relations. Adhering to “unified and integrated urban–rural development” and implementing “industrial back-feeding agriculture and urban support for rural areas” should be the basic requirements for building 100

Wang (2016).

14.3 “Three Rural” Issues in the New Era …

457

the new socialist countryside. Eliminating the current excessive and unreasonable urban–rural gap, promoting coordinated urban–rural development and building a harmonious society should be the basic direction of building the new socialist countryside. Some scholars believe that the current re-proposition of “building the new socialist countryside” signifies that under the advocacy of the scientific development view, the policy guidance for solving the “three rural” issues has started to shift from mainly increasing farmers’ income at the beginning, gradually to simultaneously strengthening weak links such as the supply of rural public goods and rural social development. Attention has been shifted from emphasizing the immediate development of agriculture, rural areas, and farmers to promoting their sustainable development, which also marks the transformation of the focus of macro-policy to solve the “three rural” issues, that is, from the focus of promoting the increase of farmers’ income to comprehensive development with people-orientation in rural areas and coordinated development of urban and rural areas, as well as to the promotion of continued increase in farmers’ welfare. Some scholars specifically pointed out that from the perspective of the five-point, 20-word (in Chinese) goal of “production development, ample living, civilized atmosphere, clean village appearance, and democratic management” proposed by the central government, “building the new socialist countryside” is an all-around, comprehensive, and scientific concept. This includes both the development of rural productivity and the adjustment of rural industrial relations, both the economic foundation of the countryside and the superstructure of the countryside, both material civilization, spiritual civilization, and political development in rural areas, both the construction of living facilities such as roads, electricity, water, gas, and social undertakings such as education, health, and culture, as well as the construction of agricultural industry capacity in such aspects as farmland, water conservancy, science and technology. This also includes both the improvement of the village’s appearance and the environment, as well as the construction of a system that focuses on villagers’ self-government. Therefore, it is a grand goal that covers the entire rural area to deepen reform and promote development.101 There is no doubt that the construction of the new socialist countryside is bound to be a huge and complicated systemic project, and a goal that can be completed in a long period of time. It must be coordinated and arranged according to local conditions, and it cannot be achieved overnight. However, as to which aspect should be given priority as the entry point for building the new socialist countryside, different scholars have put forward some different ideas. Some scholars believe that the focus of the new rural construction, in the near future, should be on the development of rural infrastructure construction and public services. It is necessary to speed up the development of rural infrastructure construction and public services to narrow the current large gap between urban and rural areas. In the past few decades, China has issued hundreds of billions of national bonds, which are mainly used for the construction of urban infrastructure and has greatly improved the appearance of China’s cities. However, the state finance has made little 101

Zheng (2006), Jiang (2006).

458

14 The “Three Rural” Issues in China’s Market-Oriented Economic Reform

investment in rural infrastructure construction and public services in rural areas. The appearance of the countryside, especially in the central and western rural areas, has not changed much, and most farmers still live a backward way of life. Therefore, it is a strategic change to shift the focus of infrastructure construction from urban to rural areas. Others pointed out that taking rural public infrastructure construction as an entry point for building the new countryside can not only change the appearance of the countryside, but also increase farmers’ income. Because these constructions themselves are huge investment needs, and these constructions use local materials and employ local labor forces, which can increase farmers’ non-agricultural employment opportunities. At the same time, the improvement of rural infrastructure can also stimulate the consumption demand of 900 million farmers. Only when the rural markets are activated and the problem of overcapacity be resolved can the rural labor force be transferred to non-agricultural industries more quickly, can the income of farmers be continuously increasedand the “three rural” issues be finally resolved.102 However, some scholars believe that rural areas’ progress and agricultural development ultimately depends on farmers’ progress and development, and farmers’ progress and development depends on farmers’ education. Therefore, to promote the construction of new countryside, we must give priority to the cultivation of new farmers. In particular, the premise for raising the income level of farmers and narrowing the gap between urban and rural areas is that the rural labor force is continuously transferred to non-agricultural employment, and only those with modern awareness and professional skills can adapt to the requirements of urban life and work. At the same time, as the rural labor force shifts to non-agricultural industries, the labor force remained for farming will become fewer and fewer, and only highquality farmers can adapt to the pressure caused by the increasing demand for both the quantity and quality of agricultural products derived from increasing population and income level. Therefore, earnestly grasping the work of cultivating new-type farmers is an extremely important issue in building the new countryside and should be placed in the priority place of building the new countryside. Only by continuously improving the quality of the agricultural labor force and transforming our country’s abundant rural labor resources into human resources advantages can we give full play to the main role of hundreds of millions of farmers in the construction of new countryside. In this sense, comprehensively improving the comprehensive quality of farmers and cultivating and bringing up a large number of new farmers with comprehensive quality is the basic project and the ultimate goal of the construction of the new socialist countryside. Cultivating new-type farmers can not only provide lasting impetus for fully realizing the goal of new rural construction, but also promote the coordination, harmony and sustainable development of urban and rural areas.103 Some scholars believe that the construction of the new countryside is basically a solution to the problems of the “three rural” issues and the serious problems of uncoordinated urban and rural development. The existence of these problems basically reflects the widening gap in development capacity between urban and rural areas 102 103

Han (2006), He and Li (2006). Yu (2006).

14.3 “Three Rural” Issues in the New Era …

459

and between urban and rural residents under the guidance of both the modern and traditional production methods. The process of implementing “industry back-feeding agriculture and cities supporting the countryside” is not only a process of providing financial support from industry to agriculture and from cities to the countryside, but also a fundamentally transforming process where the new type of industrialized production methods and healthy urbanized lifestyles are adopted to take the place of the traditional production methods and lifestyles of rural areas and farmers in order to enhance the self-development capabilities of the “three rural” entities. According to the logical consistency from “unified and integrated urban and rural development” to “industry back-feeding agriculture and cities supporting the countryside”, and to “building the new socialist countryside”, the construction of the new socialist countryside should regard it as a main line from beginning to end to promote the fundamental transformation of rural production methods and lifestyles. Also, more emphasis should be put on the improvement of the development capabilities of agriculture, rural areas and farmers, especially the ability of farmers to participate in economic development, so that more farmers can obtain opportunities to participate in economic and social development and share the fruits of economic and social development. This should be the fundamental point of building the new countryside, and it is also the basic requirement of people-orientation that the construction of the new countryside should adhere to.104 Some scholars believe that the development of new socialist countryside must always put the development of rural productivity first. The development of production is the foundation and the premise. If we do not engage in production, everything else is just like water without a source or wood without a root. Since the launching of the construction of the new countryside, a prominent problem has emerged in some places, that is, people are too eager to achieve success, and want to complete the goal put forward by the five sentences and twenty characters in just two or three years. Because of the eagerness for success, some places tend to focus on the appearance of the village, with much emphasis being paid to just the superficial appearances or simple images. Some places even have the slogan such as “if you have much money, you can build a house; if you have less money, you need to paint your house; if you have no money, you need to at least put up a sign and make your intension shown”. This has ignored the problem that production development is the basis for building the new countryside. This shows that if we do not make the efforts to study how to develop production in the construction of the new countryside now, then the construction of the new countryside can easily become a slogan and become an “image project” or “a project merely showing political achievement”. Of course, under the conditions of new rural construction, the development of production should be different from that of the past, so the development of production in the construction of new rural areas should be promoted in accordance with the requirements of the development of modern agriculture. Clarifying the theme of modern agriculture is conducive to drawing attention from all regions and further lead the attention to the development of production and to the use of modern agricultural ideas and requirements to promote 104

He and Li (2006), Chen (2007).

460

14 The “Three Rural” Issues in China’s Market-Oriented Economic Reform

the development of production under the conditions of new rural construction. The process of building modern agriculture is the process of transforming traditional agriculture and continuously developing agricultural productivity. It is the process of transforming agricultural production methods and promoting the sound and rapid development of agriculture. In short, the development of modern agriculture is the primary task of the construction of the new socialist countryside. The development of rural productivity and the construction of modern agriculture are the core contents of the construction of the new countryside.105 Some scholars believe that the construction of a new socialist countryside must take farmers as the main body. This requires us, first of all, to fully respect the wishes of the peasants in the construction of the new countryside, and not to turn it to an “image project” for the interest of officials. Secondly, the purpose of the new rural construction is to improve the well-being of farmers, and it cannot be turned into a “damage project” that hurts the people. Finally, it is required to show that farmers are the real main force in the construction the new countryside, and that new countryside construction cannot be turned into a “star project” for the interest of experts and scholars. Finally, it is required to show that farmers are the real main force in the construction of new countryside, and that new countryside construction cannot be turned into a “star project” of experts and scholars. It is the key to the success of the new rural construction to rely on the farmers’ wisdom and hard work to ensure the farmers’ position as the main force in the construction of new rural areas and fully mobilize the enthusiasm of farmers to build their own homes. This is also the experience and lessons learnt of many Chinese intellectuals carrying out rural construction movement in the 1930s. To this end, it is necessary to innovate the rural organization system on the premise of cultivating new farmers who can promote the construction of the new socialist countryside, so that farmers can be truly organized. That is to continue to strengthen the collective economic power and service functions in rural areas, and play the role of national grassroot economic and technical service departments. At the same time we should encourage, guide and support the development of various kinds of new types of social service organizations in rural areas to guide farmers to independently develop public welfare facilities in rural areas and promote voluntary service activities at the grassroots level in rural areas. Of course, farmers are the main body of new rural construction, specific forms are needed to realize the new rural construction. Because without proper organizational forms, it is difficult for farmers’ wills to be expressed and turned into social goals, and there will be no power to ensure that these goals are achieved. Then it will be impossible to guarantee the construction of new countryside to ensure the wellbeing of farmers. Some scholars believe that the rural conditions in different parts of China are very different, and there should be different ways of organizing farmers. The establishment of farmer associations with agricultural ownership, agricultural governance, and agricultural enjoyment should be one of them.106

105 106

Tang (2007), Zhang (2007). Yu (2006).

14.3 “Three Rural” Issues in the New Era …

461

The Rural Revitalization Strategy—the Program for Solving the “Three Rural” Issues in the New Period107 The rural revitalization strategy is not only a summary of the practice and experience of the development and reform of the “three rural” issues since the reform of China’s market economy system in the past 40 years, but also a new strategy for the development of “three rural” issues in the new era established through the toplevel design starting from the background of socialism with Chinese characteristics entering a new era. In a certain sense, it can be said that the problem to be solved by the rural revitalization strategy is still essentially the “three rural” issues, and the rural revitalization strategy is essentially the “three rural” revitalization strategy. The strategy of rural revitalization is focused on the overall situation of the party and the state and the goal of achieving the “two hundred years” objectives. In the new era of socialism with Chinese characteristics, raising the “three rural” issues to the height of the national strategy is fundamentally a major strategic measure to solve the “three rural” issues. It has higher positioning, higher requirements, and longer-term design for the “three rural” issues in our country. It has become a program that guides China to fundamentally solve the “three rural” issues. Focusing on solving our country’s “three rural” issues, the rural revitalization strategy has proposed a series of new ideas, new measures and new requirements, which are specifically manifested as follows. (1) It is a new summary of the overall goal of rural revitalization The new summary can be expressed in five sentences and twenty words: “industry prosperity, ecological livability, rural civilization, effective governance, affluent living”. In comparison with the overall goal of “production development, ample living, rural civilization, clean and tidy village, and democratic management” that have been proposed before to build the new socialist countryside, a fundamental change has taken place. To scientifically understand the rich connotations of implementing rural strategies, we must scientifically grasp the profound implications of these changes. To replace “production development” with “industry prosperity”, it shows a higher level and richer meaning. First, it highlights the requirements for promoting changes in quality, efficiency and power of economic development by taking the supply-side structural reform as the main line and complying with the background of China’s economic transformation from the stage of high-speed growth to the stage of high-quality development, which is conducive to better meeting the people’s growing need for a better life. Second, it highlights the comprehensive development of the rural industry rather than simply agricultural development. During the stage of rapid development of industrialization and urbanization, many developing countries have encountered problems with the simplification of the rural economic 107

Kong (2018), Ye (2018), Guo (2018); Chen Xiwen. Implement Rural Revitalization Strategy and Promote Agricultural and Rural Modernization. Journal of China Agricultural University (Social Science Edition), 35(1); Jiang (2017), Li (2018), Deng (2018), Zhou (2018), Ji (2018).

462

14 The “Three Rural” Issues in China’s Market-Oriented Economic Reform

structure, the sideline agriculture, and the slump of rural development. The requirement of “industry prosperity” helps to circumvent these problems. Third, it highlights the inclusiveness for different paths taken for the transformation of industrial development mode. For example, it promotes industrial integration and industrial chain integration, emphasizes the transformation of agricultural development from production-orientation to consumption-orientation. “Ecological livability” includes the content of “tidy village appearance” for the construction of the new countryside, but the requirements are higher, and the emphasis is placed on the importance of ecological civilization and the people’s growing need for a better life. Putting it at the second place in the implementation of the rural revitalization strategy highlights the consciousness of implementing the new development concept and the peoplecentered development thinking. “Effective governance” includes the contents of “tidy village appearance and democratic management” for the construction of the new countryside, but the content is richer and demonstrates a more obvious shift from focusing on the process to focusing on the results. Highlighting “effective governance” is the emphasis on the modernization of the national governance system and governance capabilities. “Affluent living” is placed at the end of the general requirements for the implementation of the rural revitalization strategy, which is conducive to highlighting the goal orientation and highlighting the new requirements for solving the “three rural” issues in the new era. Replacing the wording of “ample living” in the general requirements for the construction of new countryside with the wording of “affluent living” in the general requirements for the implementation of the rural revitalization strategy is obviously more demanding in terms of goal orientation. This is closely related to the new era in which our country is currently in a decisive moment to build a moderately prosperous society in an all-round way, and thus to build a strong socialist modernization country. Previously, the main contradiction in our society was the contradiction between the growing material and cultural needs of the people and the declining social productivity. Entering a new era, the main contradictions in our society have been transformed into the contradictions between the people’s increasing need for a better life and the imbalanced development. Compared with before, the current income and consumption levels of urban and rural residents in our country are significantly improved, and the need for a better life is richer in content and higher in level. Therefore, it is difficult to cover the growing needs of farmers in the new era simply by “being ample”. Although the wording of “rural civilization” retains the literal consistency, the implication is also changing. In the process of modernization in the future, it is necessary to dig deeply into the ideological concepts, humanistic spirit, and moral standards contained in the excellent traditional culture of the village, and to inherit and innovate in accordance with the requirements of the times, so that the rural culture can show its permanent charm and style. It should be noted that the promotion of rural civilization is not only the need to improve the quality of life in rural areas, but also helps to improve the rural business environment and promote the development of rural productivity.

14.3 “Three Rural” Issues in the New Era …

463

(2) It has put forward the new principle of adhering to the priority of agricultural and rural development, and raise the status of agriculture and rural areas to an unprecedented new height Based on the basic national conditions of China, the “three rural” issues has always been a fundamental issue related to national economy and people’s livelihood. Solving the “three rural” issues has always been the “top priority” of the work of the whole party. Adherence to this “top priority” thinking has always been the conscious action of our party. At present, although socialism with Chinese characteristics has entered a new era and new major changes have taken place in the country, in the world and in agriculture, the resolution of the “three rural” issues must always be put at the top priority of the work of the whole party, and it will not be shaken in the slightest. On the contrary, it should be lifted to a higher status which needs a long-term vigorous adherence. The rural revitalization strategy proposes “to insist on giving priority to the development of agriculture and rural areas”, to a large extent, it is precisely because the issue of agricultural and rural people is a fundamental issue related to national economy and people’s livelihood, and is also the most prominent shortcoming in the current path of national economic and social development, which is one of the most prominent areas of uneven and insufficient development. Since reform and opening up, the focus of our country’s infrastructure and public service development has long been on the cities. This is not only an objective need to improve the efficiency of public resource allocation, but also an inevitable result of urban influence being greater than rural influence in the process of public resource allocation. It should also be noted that under the influence of market forces, other types of resource elements other than public resources will spontaneously flow to industries and cities with high return rates. And agriculture and rural areas often lose out in this battle for resource elements. Especially for our country, a late catch-up country, in the process of modernization, industrialization and urbanization are often fast variables, and the transformation of agricultural and rural people to modernization is often a slow variable. In the process of rapid industrialization and urbanization, in order to avoid the decline of agriculture and the decline of the countryside and achieve coordinated and balanced development of the country, we must firmly establish the concept of giving priority to agricultural and rural development, and effectively increase support for agricultural and rural development. (3) Expanding agricultural modernization to agricultural and rural modernization is an inevitable requirement for implementing rural revitalization strategies Because rural revitalization requires not only accelerating agricultural modernization, actively developing modern agriculture, promoting the integration and development of rural primary, secondary, and tertiary industries, and achieving “industry prosperity.” Moreover, it is necessary to accelerate the modernization of the countryside, build a beautiful and ecologically livable village, prosper the advanced socialist culture, build a modern rural governance system that combines autonomy, the rule of law and the rule of virtue, and realize “ecological livability, rural civilization, and effective governance”. On the basis of previous simple emphasis on agricultural modernization and the goal of new rural construction, the rural revitalization

464

14 The “Three Rural” Issues in China’s Market-Oriented Economic Reform

strategy has newly proposed the goal of rural modernization in that rural modernization includes both the modernization of “things”, that is, industry and infrastructure, and also the modernization of “people”, that is, the modernization of farmers. It is necessary to enable farmers to master the knowledge and skills of agriculture or economic production through learning, knowledge guidance, skill training, etc., to improve their ability to adapt to and control the environment, and to improve their comprehensive qualities as modern new farmers, so as to achieve the optimized structure for agricultural practitioners, accelerate the construction of requirements for building knowledge-based, skill-based and innovation-based teams of agricultural operators, and achieve the goal of modernizing agriculture and rural areas. (4) It has put forward a new concept of the integration of urban and rural development Previously, the reference to urban–rural relations has always been “urban–rural coordination” or “urban–rural integration”, which is mainly achieved by “leading rural areas by urban areas, promoting rural areas by urban areas, and promoting agriculture by industry”. This implies the reality of unequal urban–rural status. The rural revitalization strategy proposes the integration of urban and rural development, which puts more emphasis on the equality of urban and rural status, the interaction of urban and rural factors, and the integration of urban and rural spaces. The development from urban–rural co-ordination to urban–rural integration, and further to urban–rural integrated development, reflects our party’s new concept and new understanding of urban–rural relations and worker-farmer relations in the new era of socialism with Chinese characteristics, which shows a major leap in China’s urban–rural relations. Rural revitalization should not be realized in a closed-up fashion, and it cannot be limited to reconstruction and advancement within the countryside. Under the new historical conditions, rural revitalization is bound to be implemented in an open fashion. There must be the combination and integration of dual resources, which includes both the activation and aggregation of internal resources from rural areas and the integration of external resources from the cities. Urban–rural integration is not simply a process of coordinating the distribution of development resources under unified urban–rural conditions. It is not a question of how to cut more and less of a piece of cake between urban and rural areas. Furthermore, rural revitalization should not be a gift of welfare from the city to the countryside, nor a passive resource acceptance of the countryside from city, nor is it a new round of unscrupulous deprivation of the benefits of the weak villages by the strong cities. The integration of urban and rural areas means a major adjustment of the strategic thinking of urban and rural development, and it is a development from urban-led development of rural areas to the joint development of urban and rural areas. The integration of urban and rural areas includes at least the main connotations of equal and equitable free exchange of urban and rural resources, the joint development of urban and rural industries, and the interactive coexistence of urban and rural areas. Therefore, the realization of the mutual benefit of urban and rural areas through the integration of urban and rural areas and the construction of a new type of urban–rural relationship of symbiosis and coexistence are the fundamental requirements for the implementation of the strategy

14.3 “Three Rural” Issues in the New Era …

465

of rural revitalization. Regardless of whether it is factor integration, industrial integration or spatial integration, the establishment of an institutional mechanism for the integrated development of urban and rural areas is the key institutional support. Urban–rural integration pays more attention to the rich theoretical connotation, and does not stop at the level of narrowing the difference between urban and rural areas. Instead, it emphasizes the need to reduce urban–rural opposition, so to let cities and villages develop together and enjoy the results of social development, and ultimately achieve the integrated development of urban and rural areas. The realization of urban–rural integration can not only change the relationship between urban and rural areas and promote rural development, but also give full play to the role of “people” in rural revitalization, especially to maintain the main position of rural residents in rural revitalization, and ultimately form a virtuous circle for rural development with rural residents as the main body. On one hand, the process of urban–rural integration can unearth rural values, thereby attracting rural residents to participate in rural revitalization and inspiring their consciousness of their own subjectivity. On the other hand, urban–rural integration gives villages enough room for development, encourages rural residents to exert subjective initiative between villages, and maintain their dominance over rural development. The premise of urban–rural integration is that rural and urban areas, agriculture and industry, rural residents and urban residents have the same status in the process of rural revitalization. For the current situation, the integration of urban and rural areas can enhance the status of rural and rural residents. One-way urban support for rural areas and urban annexation cannot be called urban–rural integration. In contrast, it can be called a true urban–rural integration when rural residents can participate in the process of rural development and have the ability to resist risks after capital and markets enter the countryside. In short, the integration of urban and rural areas is the process of breaking the opposition between cities and villages and achieving benefit sharing. (5) It emphasizes on achieving an organic connection between small farmer households and modern agricultural development during the path of agriculture modernization with Chinese characteristics This is a new requirement and new development on the road of agricultural modernization with Chinese characteristics accomplished through taking into consideration the needs of agricultural modernization based on China’s national conditions of the development level of agricultural productivity. Because under the background that our country’s agriculture has not yet fully realized modernized large-scale production, small farmers still play an irreplaceable role in developing agricultural production and meeting farmers’ needs. The long-term existence of smallholder production is the basic reality of China’s agricultural production. Promoting agricultural modernization must be based on this basic national situation and agricultural conditions. As rural laborers continue to “wash their feet into cities”, there is a sign of excessive transfer of agricultural labor force in our country, and the tendency of

466

14 The “Three Rural” Issues in China’s Market-Oriented Economic Reform

aging and feminization are obvious. It is imperative to cultivate new types of agricultural operation entities and promote land circulation and moderate scale operation of agriculture. The big contrast is that although the agricultural land transfer rate has gradually increased through various policy efforts, the incidence of agricultural land transfer is still lagging compared to the mass labor transfer. The pattern of decentralized management has not undergone fundamental changes. Smallholder operation is still the main form of agricultural operation in our country for a long time now and further into the future. Small farmers are not only the fundamentals of the entire agricultural production and operation body, but also the policy starting point for ensuring national food security and effective supply of agricultural products. Rural revitalization depends not only on new types of business entities, but also on the joint participation of large and small farmers. In the stage of traditional agriculture, the household-based operation once radiated vigorous vitality, but with the emergence of the production method with socialized division of labor, the vigorous development of the market economy and the increasingly complex forms of market transactions, the problem of the mismatch between the traditional small farmers and the modern market economy is becoming more and more prominent. Although from the perspective of economic development reality, small farmer households do have many difficulties in connecting the market with modern agriculture, from the perspective of social and economic changes, small farmers are no longer isolated and self-sufficient. Instead, they have long been deeply embedded in the socialized division of labor network, with their ability of adapting to the modern society constantly improving. They are the so-called “socialized small farmers”. Therefore, under the condition that the current resource endowment situation cannot be fundamentally changed, it has become a major and urgent issue in the process of implementing the rural revitalization strategy to find a way to enhance the competitiveness of small farmers and promote the organic connection between small farmers and modern agriculture so as to better allow large and small farmers to participate in the modernization process and share the results of reform, development and modernization. Over the past 40 years since the reform and opening up, there have been three kinetic forces resulting from the innovation of the connection mechanism between small farmer households and modern agriculture. The first was the industrialization of agriculture that began in the 1990s which adopted the methods of “leading enterprises + production bases + farmers” or “leading enterprises + associations or cooperatives + farmers”. To a certain extent, it has solved the problem of small farmers entering the large market. It has driven small farmers to participate in largescale social production and formed the momentum for small farmers to develop modern agriculture. The second is the professional cooperation of agriculture that emerged in the first decade of the twenty-first century. It formed the momentum for small farmers to develop modern agriculture through joining farmers in the cooperatives to connect with the big market and participate in large-scale social production. At present, the vigorous development of agricultural productive service industry is becoming the third kinetic energy source of agricultural modernization with overall significance, and agricultural production trusteeship is the most contemporary form of agricultural production service industry connecting small farmers.

14.3 “Three Rural” Issues in the New Era …

467

(6) It has proposed the three tasks of constructing modern agricultural industry, production system, and operation system, improving the agricultural support and protection system, and perfecting the agricultural socialized service system for the realization of agricultural modernization with Chinese characteristics. The agricultural industrial system includes two aspects. Firstly, it is related to how to make full, scientific and reasonable use of agricultural resources, so that agricultural resources can be put in the right places and produce maximum efficiency. Secondly, it is related to how to adapt to the new changes in social needs and let it enter the fields of processing, circulation, storage and transportation after so many agricultural products are produced, and these fields must also be modernized. Therefore, to build an agricultural industrial system, one is to optimize the industrial structure, and the other is to extend the industrial chain and increase the value of the industrial chain. The production system mainly uses what means to engage in production. Modern agriculture should use modern means to engage in agricultural production, from the cultivation of improved varieties to planting and breeding techniques, to the use of various technical equipment, and to the subsequent processing and marketing, we must accelerate the transformation from traditional agriculture to modern agriculture. The transformation of production means is an important way to achieve modernization. The agricultural operation system is about how to optimize the combination of resources, capital, technology, labor and other factors to form a realistic production capacity and put it into production, management and operation. It was through the abolition of agricultural taxes and the gradual implementation of various subsidies and support policies that our country’s agricultural support and protection system was gradually established. So in this sense, our country’s agricultural support and protection system has not really been established for a long time, and it is still very inexperienced, but it has achieved very obvious results. How to improve the pricing mechanism, subsidy mechanism and purchasing and storage system of various bulk agricultural products in the future is a very important aspect for the development of modern agriculture in the future. The agricultural support and protection policy is also an industrial policy, which determines the status of agriculture in the national economy and the development direction and technical application of various agricultural specific products, which is of great significance to the development of modern agriculture. In the process of China’s modernization, the urbanization of agricultural population and the transfer of agricultural labor cannot be achieved overnight. It is from this perspective that one can understand why it is impossible to rush to propose the elimination of small farmers. Moreover, it is necessary for small farmers to integrate into the progress of modern agriculture in the process of agricultural modernization, so that they can organically connect with modern agriculture and become an integral part of modern agriculture. Such a goal needs to be achieved through the development of a modernized agricultural service system, in the form of trusteeship, subsidized farming, and purchase of services and so on. This is a very important and very special issue for China.

468

14 The “Three Rural” Issues in China’s Market-Oriented Economic Reform

(7) It has put forward the new “three-in-one governance” requirements of “selfgovernment, rule of law, and rule of virtue” for the rural governance system and the new task of cultivating a “three rural” workforce who understands agriculture, loves the countryside, and loves farmers The realization of rural revitalization is inseparable from the modern governance system. The rural revitalization strategy proposes to improve the rural governance system that combines self-governance, rule of law and rule of virtue, forming a new pattern of social governance with party committee leadership, government responsibility, social coordination, public participation, and legal protection. Selfgovernance, rule of law, and rule of virtue are is the new “three-in-one governance” requirements for our country to establish a modern rural governance system. Under the premise of fully guaranteeing the political leadership role of rural grassroots party organizations in rural governance, it can better play the basic role of villager autonomy in rural governance, the guarantee role of socialist rule of law in rural governance, and promotion role of the rule of virtue in rural governance, which is conducive to mobilizing the enthusiasm and initiative of farmers to participate in rural governance. The rural revitalization strategy also proposes to “cultivate a workforce that understands agriculture, loves the countryside, and loves farmers”. This is based on respecting the different roles of various political and social forces in rural areas in rural revitalization and is a universal, common and higher requirement to all “three rural” workers. It is related to not only rural grassroots party organizations and party member cadres, but also the vast number of farmers, as well as all other social organizations and individuals who are willing to engage in “three rural” work. In short, it can be seen from the above seven main aspects that the rural revitalization strategy was proposed based on a profound insight into the main social contradictions and changes in China’s society and the imbalanced and insufficient development of agriculture and rural areas in the new era. It captures the most direct and realistic interests of the people concerned with rural revitalization, highlights clear problem-orientation and goal-orientation, and is forward-looking and realistically targeted. Over the past 40 years, the reform and practice of China’s “three rural” issues has adhered to the main line of marketization. The reform of the basic rural operation system, the reform of the agricultural product distribution system based on the dominance of grain, the reform of the rural financial and taxation system, the reform of the land system, and the reform of the rural industrial system are all designed and implemented with the focus on building the socialist market economy with Chinese characteristics as the overall goal. Over the past 40 years, China’s reforms and development in the field of the “three rural” issues have made remarkable achievements, and basically established a rural economic system suitable for the development of our country’s rural productivity. The supply of agricultural products has ended the long-term shortage. The rural

14.3 “Three Rural” Issues in the New Era …

469

economic structure has been continuously optimized. The factors of modern agricultural production have increased significantly, and the level of modernization has increased significantly. Hundreds of millions of farmers have been liberated from the land and participated in the construction of secondary and tertiary industries in cities and villages, which has significantly increased farmers’ income levels. However, it should also be noted that despite the tremendous achievements, China’s basic national conditions that we are still in and will remain in the primary stage of socialism have not changed. The deep-seated contradictions that restrict agriculture and rural development have not been completely eliminated. China’s agricultural foundation is still weak and the long-term mechanism for promoting grain production and increasing farmers’ income has not yet been established. The steady development of agriculture and the continued increase in farmers’ income have become more difficult. The contradiction between the widening income gap between urban and rural residents is still prominent. The widening trend of the gap between development of urban and rural areas and among different regions has not been fundamentally reversed. The lagging situation of rural economic and social development has not been fundamentally improved, and the institutional and systemic obstacles to economic development are still quite prominent. There is still a long way to go to build a new pattern of urban–rural economic and social integration.108 This judgment still has practical significance for the current status of our country’s “three rural” issues. It can be said that we are still on the way to solve our country’s “three rural” issues and achieve rural revitalization. With the continuous innovation of the vast number of farmers in our country in the reform of the rural economic system and the practice of agricultural development, over the past 40 years, the economic theorists of our country have continuously summarized and improved thepractical experience of farmers in theory, which has sublimated perceptual knowledge to rational knowledge step by step, gradually deepened the scientific understanding of the development and modernization of socialist agriculture with Chinese characteristics suitable for our country’s national conditions, and achieved fruitful theoretical results. Of course, the reform of China’s rural economic system is still continuing, and it is still in the process of deepening the transition of the system. Therefore, the understanding of the reform of the rural economic system and the development of the rural economy in China’s economic theory circles must also have its historical limitations. Some theoretical assumptions about various rural reforms and agricultural modernization paths also need to be tested by practice. Therefore, it can be said that we have not yet reached a truthful understanding of the reform of the rural economic system and the path of agricultural modernization that suits our country’s national conditions in accordance with objective laws. There are still many theoretical problems that need to be solved urgently, which needs further exploration by our economic theorists.

108

Zhang (2008).

470

14 The “Three Rural” Issues in China’s Market-Oriented Economic Reform

References Bai xueqiu. (1998). Institutional Innovation: the Fundamental Premise of Agricultural Modernization. Seeking Truth, 6. Bai Zhiquan. (1988). Permanent Tenancy System: Policy Reflections on the Reform of Rural Land Relations. Economic Forum of Middle and Young People, 3. Cai Fang. (1986). A Preliminary Study on the Strategy of Land Nationalization. Review of Economic Research, 14. Cai Fang. (2010). The Experience and Lessons of China’s Policies on “Agriculture, Rural Areas and Farmers”. Journal of Agricultural Economy, 2. Chen Jiyuan. (1992). The Reform and Development of China’s Rural Economy in the 1990s, The Exploration of China’s Economic Development and Reform in the 1990s. Economic Science press. Chen Junsheng. (1995). On the Surplus of Rural Labor Force and the Basic Countermeasures. People’s Daily, January 28, 1995. Chen Xiwen. (1998, December 26). The Opportunity of Agricultural Development is the Success of Urban Reform. LiLun XinXiBao. Chen Xiwen. (2007, February 27). New Rural Construction Begins Well, Long Way to Go. Journal of Chinese Academy of Social Sciences. Chen Jiyuan, and Wu biliang. (1994). The Three-way Economic Structure and the Transfer of Agricultural Surplus Labor Force in China. Economic Research Journal, 4. China Labor Market and Wage Reform Policy Research Group. (1995). Rural Disease and Its Management in China’s Institutional Transition Period. Economic Research Journal, 4. China Rural Development Research Group. (1987). The Growth Stage of National Economy and Rural Development. Zhejiang People’s Publishing House. Chinese Academy of Social Sciences think tank for urban-rural integration. (2017). Research on the Theory and Practice of Supply-side Structural Reform. Chinese Rural Economy, 8. Deng Cundong. (1980). The Land Order Must Be Corrected. Rural Work Newsletter, 2. Deng Honghai. (1981). Problems of China’s Agricultural Development Strategy. Issues in Agricultural Economy, 11. Deng Wanchun. (2018, June 19). Stimulation of Endogenous Motivation of Rural Revitalization. China Social Sciences Today. Deng Yiming. (1991). Utilization and Transfer of Agricultural Surplus Labor in China. China Rural Reading Press. Dong Fuchu. (1986). The Development of Rural Commercial Economy in Wenzhou. Economic Research Information, 8. Du Zhixiong, Li Zhou, and Li Furong. (1990). Emphasizing Scientific and Technological Progress as the Fundamental Strategic Policy of Agricultural Development in China. Chinese Rural Economy, 3. Duan Yingbi. (1998, September 3). Unswervingly Promote the Reform of Grain Circulation System. People’s Daily. Editorial Department of Chinese Rural Economy. (1990). The Countermeasures for China’s Grain to Get out of the Wandering Situation: a Summary of the Symposium on the Reform of Grain Production, Purchase and Marketing. Chinese Rural Economy, 5. Editorial Department of Economic Research Journal, and Editorial Department of Economic Perspectives. (Eds.). (1981). Controversy on Important Issues of Political Economy since the Founding of the People’s Republic of China (1949–1980). China Financial and Economic Publishing House. Editorial Department of Economic Research Journal. (Ed.). (1985). Controversy on Socialist Economic Theory since the Founding of the People’s Republic of China (1949–1984) (Vol. 1, 2). China Financial and Economic Publishing House.

References

471

Editorial Department of Economic Research Journal, and Research Institute of Theories of Zhejiang Provincial Party School. (Eds.). (1985). Retrospect and prospect of socialist economic theory in China (outline of seminar). Editorial Department of Economic Research Journal (Ed.). (1986). Retrospect and Prospect of Socialist Economic Theory in China. The Economic Daily Press. Editorial Department of Economic Research Journal (Ed.). (1991). Controversy on Theoretical Problems of Socialism in China (1985–1989). China Financial and Economic Publishing House. Editorial Department of Issues in Agricultural Economy. (1997). Analysis and Analysis of Practice Progress in Agricultural Industrialization. Issuess in Agricultural Economy, 10. Editorial Department of Rural Economy and Society. (Ed.). (1993). Discussion on the Reform and Development of Rural Economy in China (1978–1990). Social Sciences Academic Press. Fan Gang. (1995). Long-term Strategy and Short-term Countermeasure for Solving the Problem of Food Supply in China. Chinese Rural Survey, 5. Feng Dongshu. (1987). Can We Just Rely on Raising Grain Prices? Outlook Weekly, 21. Feng Dongshu. (1988). Agricultural Problem Is Another Land Problem. Exploration of Rural Development, 2. Feng Haifa. (2013). Understanding of the Third Plenary Session of the Eighteenth Central Committee’s Decision on Several Major Issues Related to Rural Reform. Issues in Agricultural Economy, 11. Feng Jishi. (1997). An Effective Way to Change the Mode of Agricultural Growth. Issues in Agricultural Economy, 2. Gao Shangquan. (1979). Discussion on the Problems of Agricultural Modernization. Red Flag, 3. Gu Yikang, Huang Zuhui, and Xu Jia. (1989). Historical Evaluation of the Road of Township Enterprises and Small Towns. Issues in Agricultural Economy, 3. Guan Xikui. (2003, June 17). Ten reflections on the problem of Chinese farmers. China Economic Times. Guo Feng. (1996, January 30). Thoughts on Agricultural Industrialization. Economic Daily. Guo Ming. (1982). A Review of the Discussion on the Responsibility System of Agricultural Production in the Past Year. Economic Research Journal, 3. Guo Shiping. (1988). Using the Law of Value to Promote Grain Production. Economic Forum, 3. Guo Shutian. (1989). Some Reflections on Rural Industrialization, Urbanization and Agricultural Modernization. Chinese Rural Economy, 2. Guo Shutian. (1993). On China’s Rural Industrialization Relys. Issues in Agricultural Economy, 12. Guo Xiaoming. (2018). Observation on Several Dimensions of Rural Revitalization Strategy. Reform, 3. Han Changfu. (2006). Some Reflections on the Construction of a New Socialist Countryside. Issues in Agricultural Economy, 10. Han Jun. (2012). Six Path of Agricultural Modernization in China. Shanghai Rural Economy, 11. Han Xing. (1979, September 1). Agricultural Modernization from the Perspective of Economic Development. Guangming Daily. He Congzhi, and Li Yuqin. (2006). A Review of Research on the Construction of New Socialist Countryside. Issues in Agricultural Economy, 10. He Junwei. (1990). Towards Coordination: On the Industrial Policy of Township Enterprises. Chinese Rural Economy, 2. He Qinglian. (1998). The Trap of Modernization. China Today Press. Hou Zhongtian. (1979). Some Views on the Realization of Agricultural Modernization in China. Red Flag, 11. Hu Shudong. (1996). Family Farm: the Way Out of Agriculture in Mature Economic Development Area. Economic Research Journal, 5. Institute of Agricultural Economics, Chinese Academy of Agricultural Sciences. (1995). Macroscopic Analysis of China’s Food Problems. Issues in Agricultural Economy, 2. Ji Mingfeng. (2018). Agricultural Producer Services: The Third Kinetic Force in the History of Agricultural Modernization in China. Issues in Agricultural Economy, 3.

472

14 The “Three Rural” Issues in China’s Market-Oriented Economic Reform

Jiang Changyun. (2006). Some Ideas on the Construction of a New Socialist Countryside. Issues in Agricultural Economy, 6. Jiang Changyun. (2017). Comprehensively Grasping the Rich Conception of Implementing the Rural Revitalization Strategy. Rural Work Bulletin, 22. Jiang Yaping. (1988, August 7). Company + Farmer: New Growth Point. People’s Daily. Jiang Heping, Zhang Zhonggen, and Qian Yanmin (Eds.). (1995). Chinese Agriculture toward the 21st Century. China Agriculture Press. Jin Chao, and Luo Yun. (1996). Thoughts on the Evolution and Reform of China’s Grain Purchase and Marketing System. Issues in Agricultural Economy, 5. Kong Fanjin. (2018). Research on the Relationship between Rural Revitalization Strategy and Central Documents. Rural Economy, 1. Kong Jingyuan. (1995). Rural Joint Stock Cooperative Economy and Institutional Innovation. Economic Research Journal, 3. Le Zhang. (2006). What Are They Worrying About: Agricultural Problems from the Perspective of Risk and Security. Journal in Agricultural Economics, 2. Li Gucheng. (2018, April 25). Two-tier Management System Promote Small Farmers to Connect with Modern Agriculture. China Social Sciences Today. Li Jiapeng. (1983). The Progressive Reform of the Relationship of Production: The Guarantee to the Household. Economic Research Journal, 11. Li Kaihe. (1991). On the Share-holding Cooperative System in Rural Wenzhou. Issues in Agricultural Economy, 11. Li Na. (2006). Farmer’s Income: Growth and Policy (1978–2004). Issues in Agricultural Economy, 5. Li Peilin. (2010). New Trends and New Problems in the Study of Rural Development. Jilin University Journal Social Sciences Edition, 1. Li Qingzeng. (1986). On the Reform of China’s Land Ownership Structure. Issues in Agricultural Economy, 4. Li Xueliang. (1996). Practice and Reflection on the Reform of Land Property Rights System under the Condition of Market Economy. Issues in Agricultural Economics, 6. Li Yong. (1996). The Road of Small Towns Development Is Not Adorable. China Reform, 4. Li Yuanping. (1996). Orderly Flow of Rural Surplus Labor Force and Agricultural Industrialization. Issuess in Agricultural Economy, 9. Li Yueyun. (1996). The Dispute of “Who Will Feed China” and its Enlightenment. Issues in Agricultural Economy, 10. Li Zhou. (2017). Agricultural Reform and Development in China. Social Sciences Academic Press. Li Zhou. (2018). The Main Implications, Implementing Strategies and Expected Changes of Rural Revitalization Strategy. Quest, 2. Liang Xiufeng. (1989). Re-understanding of Agricultural Problems in China. Chinese Rural Economy, 4. Liao Shaoyun. (1981). China’s Agricultural Modernization Must Take the Road of Intensive Technology. Issues in Agricultural Economy, 7. Lin Jian. (1987). A Study on the Development Model of China’s Rural Economy. Economic Research Journal, 8. Lin Yifu. (2006). Building a New Countryside Is a Realist Choice to Solve the Problems of Three Rural Areas. People’s Daily, October 25, 2006. Lin Zili. (1983a). On the Contract System of Joint Production. Shanghai People’s Press. Lin Zili. (1983b).Speech on Joint Production Contract System. Economic. Material Science Press, Rural Reading Press. Liu Bijian. (1980). Whether to Insist on Public Ownership and Distribution According to Work? Rural Work Newsletter, 3. Liu Maosong. (1996). On the Transformation of Agricultural Growth Mode and the Strategy of Deepening Rural Labor Employment. Quest, 5.

References

473

Liu Qi. (2016). Eight Lectures on Agriculture, Rural Areas and Farmers in a Big Country. China Development Press. Liu Sihua. (1996). Fundamentals of Agricultural Ecology. Economic Research Journal, 6. Liu Xunhao. (1987). On the Way Out of the Food Problem in China. Issues in Agricultural Economy, 8. Liu Zhicheng. (1997). The Construction of Well-off and the Problems of Agricultural Industrialization. Issues in Agricultural Economy, 9. Liu Rongjin, and Li Yanling. (2010). Theoretical Innovation of Marxist Agricultural Cooperation Thought Based on “Two Leaps” in Agriculture. Theoretical Research, 12 (2). Liu Yunzhou, and Chen Jian. (1988, December 25). The Innovation of Rural Organization System. Economics Weekly. Liu Yunzi, and Song Yangyan. (1980). Is Agricultural Mechanization the Core and Basic Content of Agricultural Modernization? Social Science Journal, 4. Lu Xueyi. (1987). Current Rural Situation and Food Relation. Chinese Rural Economy, 12. Lu Xueyi. (2002). The Theory of Agriculture, Rural Areas and Farmers. Social Sciences Academic Press. Luo Haiping. (1988). The Reform Goal of Rural Property Rights System—Privatization. Issues in Agricultural Economy, 11. Luo Jiyu. (1987). A Preliminary Study on Land Ownership Reform. Issues In Agricultural Economy, 7. Luo Weixiong, and Cui Guozhong. (1994, September 5). The Obstacle to the Further Development of Township Enterprises. Workers’ Daily. Ma Dean. (1981). The Form of Organization and Management of Agricultural Production Should be Decided by the Development Level of Productive Forces. Economic Research Journal, 1. Mao Fei, and Kong Xiangzhi. (2012). The General Situation and Future Orientation of China’s Agricultural Modernization. Reform, 10. Min Yaoliang. (1989). Discussion on the Relationship between Rural Economic Reform and Development. Chinese Rural Economy, 12. Niu Ruofeng. (1987, December 4). China’s Food Problems in 2000. China Agricultural Management Daily. Niu Ruofeng. (1988). Relationship Between China’s Agricultural Periodical Fluctuation and Economic Development Strategy. Issues in agricultural economy, 10. Ouyang Xiabing. (1987, July 2). Increasing Input is an Important Condition for Increasing Agricultural Production. Hunan Daily. Qin Lisheng. (1980). Exploring Our Own Way of Agricultural Modernization from the Actual Situation of China. Red Flag, 9. Research Group of “Deepening the Trend of Rural Taxes and Fees Reform". (2006). Rural Reform under the Background of Building a New Rural Area: An Integral Policy Framework. Reform, 10. Research Group of Macroeconomics Institute of National Development and Reform Commission and Department of Agricultural Economy. (2016). A Research on Promoting the Integrated Development of the First, Second and Tertiary Industries in China’s Rural Areas. Agricultural Economics, 7. Research Group of Township Enterprises. (1990). The Development of Township Enterprises in China and Its Macro Coordination with National Economy. Chinese Rural Economy, 5–6. Research Group on the Transition of Traditional to Modern Agriculture in China. (1997). From Tradition to Modern: A Study of the Transformation of Agriculture in China. Issues in Agricultural Economy, 7. Research Institute of Economics, Henan Academy of Social Sciences. (1982). Theoretical Significance of the System of Compensation and Responsibility in Agricultural Joint Production. Academic Journal of Zhongzhou, 1. Rural Organizational Innovation and Economic Development Symposium Minutes. Chinese Rural Economy, 1988 (10).

474

14 The “Three Rural” Issues in China’s Market-Oriented Economic Reform

Shen Duanfeng. (2006). Some Relates to the Construction of a New Rural Area. Issues in Agricultural Economics, 2. Shen Jiqing. (1986, September 18). More Models Are Better. Wenhui Daily. Shi Shan. (1983). Chinese Style Agricultural Modernization and Its Start. Economic Research Journal, 1. Shi Shan, and Yang Tingxiu. (1981). Building Agricultural Production and Management on the Scientific Basis. Issues in Agricultural Economy, 9. State Council Information Office. (1996). China’s Food Problem. People’s Daily, October 25, 1996. Sui Fumin. (2017). Is Scale Management Important for Agricultural Development in China at the Present Stage? Research on the Theory of Mao Zedong and Deng Xiaoping, 5. Sun Anse, and Pan Yonghui. (1998). A Preliminary Study on the Strategy of Small Towns Sustainable Development. Chinese Rural Economy, 7. Tan Jing. (1996). Review of Agricultural Industrialization Research. Issues in Agricultural Economics, 11. Tan Xiangyong. (1995). Farmers’ Cooperatives: The Basic Form of Agricultural Management Organization in China. Chinese Agriculture Towards the 21st Century. China Agriculture Press. Tang Mingxi. (1983). The Rise of the New Family Economy in China’s Rural Areas. Economic Research Journal, 12. Tang Renjian. (1988, March 20). Going Out of the “Duality”: The Only Choice for China’s Agriculture to Get Out of the Dilemma. Economics Weekly. Tang Renjian. (1993). Institutional Barriers to Food Market and Countermeasures for Reform. Issues in Agricultural Economics, 11. Tang Renjian. (1997). The Historical Lessons of Neglecting Agriculture after Agricultural Harvest. Issues in Agricultural Economy, 1. Tang Renjian. (2007). Understanding the Spirit of Document No. 1, Promoting the Construction of Modern Agriculture Actively. Rural Work Bulletin, 3. Tong Dalin, and Bao Tong. (1978). Some Views on Agricultural Modernization, People’s Daily, December 8, 1978. Wang Bifeng. (2008). The Evolution of the Theory of Rural Reform in China. Theory and Contemporary, 11. Wang Feng. (2018). The Logical Necessity and Practical Model of the “Second Leap” of Agricultural Modernization with Chinese Characteristics in the New Era. Economist, 3. Wang Haidong. (1989, January 13). On the Crux of China’s Agricultural Problems and Its Countermeasures. Economic Daily. Wang Huaxin. (1997). On the Definition of the Connotation of Agricultural Industrialization, Issues in Agricultural Economy, 1. Wang Jialiang. (1992). Construction of Agricultural Commodity Production Base is an Important Way to Realize Agricultural Modernization. Research of Agricultural Modernization, 4. Wang Jue. (2004). Promoting Rural Marketization Reform and Institutional Innovation: A Causal Approach to Solving Three Rural Issues. Issues in Agricultural Economy, 7. Wang Wenyong. (1988). Thoughts on Innovation of Agricultural Cooperative Economic Organization in China. Journal of Zhongnan University of Finance and Economics, 3. Wang Xingguo. (2016). Research on the Thought and Policy of Promoting the Integrated Development of Rural First, Second ary and Tertiary Industries. Dongyue Tribune, 2. Wang Yijie. (1988). Private Ownership of Land under State Supervision. Issues in Agricultural Economy, 12. Wen Guifang. (1989). The Fundamental Solution to the Problem of Food Relation. Issues in Agricultural Economy, 12. Wei Houkai. (Ed.). (2017). Research on China’s Agriculture, Rural Areas and Farmers. China Social Sciences Press. Wei Jie. (1984). A Brief Discussion on the Role of Township Industry. Issues in Agricultural Economy, 8. Wei Wei. (1984, August 2). New Concept of Modern Agriculture. People’s Daily.

References

475

Wenzhou Rural Investigation Group, Institute of Economics, Chinese Academy of Social Sciences. (1986). Wenzhou Rural Commodity Economy Investigation and China Rural Modernization Road Exploration. Economic Research Journal, 6. Wu Ling. (1989). The Crux and Solution of China’s Agricultural Problems. Rural Economy and Society, 5. Wu Ling. (1992). On Agricultural Modernization with Chinese Characteristics. Research of Agricultural Modernization, 6. Wu Shanlin. (1980). A Brief Discussion on the Road of Agricultural Modernization in China. Journal of Nanjing University, 3. Xia Ying, and Niu Ruofeng. (1996). Theory and International Experience of Agricultural Industry Integration. Issues in Agricultural Economy, 12. Xiang Jiquan, and Zhou Changyou. (2017). The Evolution and Policy Choices of “New Agriculture, Rural Areas and Farmers”. Chinese Rural Economy, 10. Xiang Qiyuan, et al. (1988). A Review and Reflection of Socialist Economic Theory: a Summary of the History of Social and Political Economics in China. Jiangsu People’s Publishing. Xiao Weidong, and Liang Chunmei. (2016). The Conception, Essence and Rights Relationship of “Separation of Three Rights” in Rural Land. Chinese Rural Economy, 11. Xiong Xuegang. (1996, April 6). Industrialization: Reflection on China’s Agricultural Development. Guangming Daily. Xu Dixin. (1981). On the System of Production Responsibility in Agriculture. Issues in Agricultural Economy, 11. Xu Hui. (1994, March 23). Reasonable Thinking on the “Rural Workers Tide”. Guangming Daily. Xu Ming. (1997). The Critical Moment: 27 Issues to Be Solved in Contemporary China. China Today Press. Xue muqiao, Liu Guoguang, et al. (1992). Exploring China’s Economic Development and Reform in the 1990s. Economic Science Press. Yan Ruizhen. (1997). Agricultural Industrialization Is the Only Way for the Modernization of Rural Economy in China. Economic Research Journal, 10. Yan Zelong. (1979, September 21). Where should the Current Focus of China’s Agricultural Modernization be Placed? Guangming Daily. Yang Xun. (1989). State-owned Private Sector: Realistic Choice of Rural Land System Reform in China. Issues in Agricultural Economy, 5. Ye Qianji. (1988). Ecological Agriculture: the Future of Agriculture. Chongqing Press. Ye Xingqing. (2005). Reflections on the Adjustment of China’s Agricultural Policy. Issues in Agricultural Economy, 1. Ye Xingqing. (2018). Outline of China’s Rural Revitalization Strategy in the New Era. Reform, 1. Yu Jianrong. (2006). Socialist New Rural Construction Needs the Establishment of New Peasant Organizations. Henan Social Sciences, 5. Yu Xiaoshe. (2006). Cultivating New Peasants as the Key to the Construction of New Countryside. Rural, Agriculture, Peasant, 5. Yu Zuyao. (1983). The Pre-prelude to the Reform of China’s Economic System in the Implementation of Agricultural Guarantee to the Household. Economic Research Journal, 3. Yuan Yayu. (1995). The Migrant Worker Tide: the “Birth Pains” of China’s Modern Industrial Society. Social Science Research, 2. Yuan Yayu. (1996). Historical Review and Prospect of China’s Agricultural Modernization. Sichuan University Press. Yue Zhenfei, and Kong Xiangzhi. (2015). Four Guides and Realization Pads for Changing Agricultural Development Mode. Tribune of Study, 7. Yujiang E. (1993). The Choice of Mode of Deepening Reform of Rural Land System. Issues in Agricultural Economy, 4. Zha Zhenxiang. (1988). Urban and Rural Segmentation Is the Biggest Obstacle to China’s Grain Yield. Chinese Rural Economy, 4.

476

14 The “Three Rural” Issues in China’s Market-Oriented Economic Reform

Zha Zhenxiang. (1992). On the Essential Characteristics of Agricultural Modernization. Research of Agricultural Modernization, 5. Zhang Fancheng. (1995). The Development of Township Enterprises and the Transformation of Urban-rural Dual Structure. Chinese Agriculture Towards the 21st Century. China Agriculture Press. Zhang Hang. (1995). Farming: Cross-century Choice of Agricultural System Reform in Southern Jiangsu Province. Chinese Agriculture Towards the 21st Century. China Agriculture Press. Zhang Hongyu. (2016). Four Issues on Deepening Rural Reform. Issues in Agricultural Economics, 7. Zhang Lin. (1989). Several Issues on Improving Agricultural Economic Efficiency in China. Issues in Agricultural Economy, 7. Zhang Xiaoshan. (2007). Developing Modern Agriculture: The Priority Task of the Construction of New Socialist Countryside. QianXian Monthly, 4. Zhang Xiaoshan. (2008). 30 Years of Rural Reform in China: Review and Reflection. Study and Exploration, 6. Zhang Xinjing (Ed.). (1990). Summary of the Important Theories of Social Science in the Reform Decade (1978–1988). Xueyuan Press. Zhang Zhuoyuan (Ed.). (1999). Debate and Development: 50 Years of Chinese Economic Theory. Yunnan People’s Publishing House. Zhang Zhuoyuan. (2002, January 30). To Solve the Problems of Agriculture, Rural Areas and Farmers: Moving Out of the Dual Economic Structure and Transference of Rural Surplus Labor Force. Economic Information Daily. Zhang Lin, and Guo Ming. (1989). Scale Economy and Scale Operation in Agriculture. Economic Research Journal, 8. Zhang Lin, and Xu Baiyuan. (1987). The Commercialization of Agriculture and the Mechanization of Agriculture. Economic Research Journal, 5. Zhang Zongli, and Gu Zhenming. (1980). The Road and Index of Chinese Style Agricultural Modernization. Economic Research Journal, 12. Zhang Fushan, Wang Songyu, and Zhang Siqian. (1979). The Position of Agricultural Mechanization in Agricultural Modernization. Economic Research Journal, 11. Zhao Tianfu. (1983). Several Theoretical Problems on Contract Responsibility System of Joint Production. Agricultural Economy. Zhao Yuhong. (2007). Several Relations in the Development of Modern Agriculture. Theoretical Exploration, 3. Zhao Zhijun, and Chen Yao. (2015). Theory, Practice and Policy of “Internet + Agriculture”. Journal of Agrotechnical Economics, 11. Zheng Linzhuang. (1980). The Goal of Agricultural Modernization Is to Improve Agricultural Production Efficiency. Economic Research Journal, 6. Zheng Xinli. (2006). Several Issues on the Construction of a New Socialist Countryside. Issues in Agricultural Economy, 1. Zhou Dafu. (1987). Improving Land Contract Management by Implementing Two-field System. Chinese Rural Economy, 12. Zhou Lin Lang. (2007). Several Relating Questions to the Development of Modern Agriculture. Inquiry Into Economic Issues, 5. Zhou Maifu. (2004). The Fundamental Way to Solve the Problems of “Agriculture, Rural Areas and Peasants”: Rural Marketization Reform. Issues in Agricultural Economy, 5. Zhou Shaoan. (2017). “Internet +” Promoting the Reform of Agricultural Production Mode—A Study Based on the Perspective of Marxist Political Economy. Agricultural Economic, 2. Zhou Yue. (2018, May 16). Maintaining the Principal Status of Rural Residents through “UrbanRural Integration”. China Social Sciences Today. Zhou Jinting, and Tang Huibin. (1993). Economic Development and Institutional Change: A Discussion on the Development and Growth of Rural Joint Stock Cooperative System in China. Issues in Agricultural Economy, 3.

References

477

Zhu Daohua. (1979, July 26). Accelerating the Realization of China’s Agricultural Modernization by Drawing on Foreign Experience. Guangming Daily. Zhuang Hongjing. (1987). Improving Grain Yield Stably and High by Scientific Progress. Decision and Information, 8. Zou Limin. (2011). Household Contract Responsibility System is a Successful Model of Socialist Market Economic System Reform. Rural Economy, 10.

Chapter 15

The Main Progress and Innovation of Regional Economic Theory Research

China is a large country with a large territory, a large population, large differences in natural and human conditions, and extremely uneven development. The regional economic problems are very prominent. The field of economics and economic geography in our country has been studying regional economic issues since the early 1950s, with a focus on the distribution of productive forces. However, a more comprehensive and systematic study of regional economic theory was carried out still after the reform and opening up. Chen Dongsheng, a well-known regional economist, believes: “The distribution of productive forces and regional economics are economic theories that specifically study the development and operation of the national economy. Productivity layout analyzes the distribution and flow of resources and elements, as well as spatial aggregation from a bird’s-eye perspective; regional Economics studies the structure, differences, development, coupling and inter-regional correlation of regions from a head-up perspective. The two are like a coin, showing different pictures from different perspectives centering on the same entity”.1 This chapter treats these two concepts as the same, but uses the term regional economics more. Since the founding of the People’s Republic of China, the theoretical study of our country’s regional economy has generally experienced two different periods before and after the reform and opening up. This chapter focuses on the main progress and innovations in the theoretical research of our country’s regional economy in the past 40 years of reform and opening up. There are three main issues: (1) the research object of regional economics; (2) the regional economic development strategy; (3) the road to urbanization. Since the Third Plenary Session of the Eleventh Central Committee of the Communist Party of China, China’s economics community, economic geography community, and the planning departments of the government have conducted a large number of investigations and practical work on regional economic issues, and the research results have sprung up. Since regional economics is an emerging discipline with a 1

Cheng (1991, p. 557).

© China Social Sciences Press 2023 Z. Zhang, Handbook of Chinese Economics, https://doi.org/10.1007/978-981-99-0420-4_15

479

480

15 The Main Progress and Innovation of Regional Economic Theory Research

short history of development and a theoretical system that is not yet mature, it is not difficult to understand some major theoretical and practical issues.

15.1 On the Research Object of Regional Economics The uniqueness of the research object of any discipline determines the necessity of its formation and development. The primary problem facing regional economics is that the discussion of its research objects is also widely divided. According to incomplete statistics, in the past 40 years, there have been more than 10 kinds of books with the same name in “Regional Economics” or “Regional Economic Theory”. These works often express their own definitions of regional economic objects that differ from those of foreign scholars. Regardless of whether it is accurate or not, these statements are all efforts to innovate in the long-term exploration process of the regional economic theory research in our country. Among the many expressions, the following are just a few examples. Cheng Biding believes: “The research object of regional economics is the law of regional organization of national economic development.” This law, in short, is the law of regional allocation of production factors and regional management of economic development”.2 This view seems to focus on geographical distribution, economic spatial procedures or regional organization laws, which is similar to the research object of economic geography. Zhou Qiye et al. believed: “Regional economics is also called regional science. It is to study how to establish a national economic regional system, and organize the development and layout of the first, secondary, and tertiary industries in each region of the system according to the principles of regional division of labor and cooperation, so as to form an industrial structure that not only follows the trend of world economic development, but also maximizes regional advantages. Thus, the science as regard to a unified economic organism comes into being which integrates large, medium and small enterprise, with multi-level cities as nodes and a network system connecting urban and rural areas of the district into one. This network system consists of transportation network, information network, service distribution network, etc.”3 . This view emphasizes that regional economics is the science of studying regional economic development within the country. Chen Dongsheng pointed out in the preface of “Regional Economics” edited in 1993 that regional economics is a decision-making science that studies the development of various regional economies in China and their interrelationships from a macro perspective.4 He also divided its research field into the three parts of regional economic development, inter-regional economic relations and regional economic policies. Firstly, this view emphasizes the “macro” nature of regional economics 2

Cheng (1991). Zhou et al. (1989, pp. 4 and 10). 4 Zhu et al. (2007). 3

15.2 On the Regional Economic Development Strategy

481

research, which is different from the early view of western regional economics in which the location selection of a single manufacturer is the main object. Secondly, it emphasizes the scientific “decision-making”. Thirdly, the three major fields of economic research have their own unique features. The second edition of “Regional Economics” by Zhu Chuangeng et al. in May 2007 believes that in a narrow sense, regional economics is a science that studies the optimal allocation and combination of regional (internal) resources and the laws of regional (internal) economic operation. It is an applied science that takes regional situation analysis as the “starting point”, strategy and planning as the “main body”, formulation of regional economic policy and implementation of regional economic management as the “end point”, and regional sustainable development as the “goal”.5 Starting from the actual operation of China’s regional economy, this view attempts to explore the formation of a theoretical system of regional economics, and discusses the “starting point”, “main body” and “end point” of regional economic research, and conducts an in-depth exploration by following the cue of “condition analysisstrategy formulation-planning formulation-policy formulation-management implementation”, which shows high level of innovation and is conducive to enhancing the practical application value of regional economics with its strong operability. In addition, Gu Chaolin, Lu Dadao, Hu Zhaoliang, Yang Kaizhong, Hu Xuwei, Cui Gonghao, Hao Shouyi, An Husen, Yang Yunyan, Chen Xiushan, Zhang Keyun, Chen Cai and other experts and scholars have carried out in-depth discussion on the theoretical and practical issues of China’s regional economic development. They have made their respective contributions in exploring the objects of regional economics and constructing the theoretical system of regional economy.

15.2 On the Regional Economic Development Strategy Since the reform and opening up, the theoretical research of regional economics in China has generally gone through three stages. The first stage is the unbalanced development stage of accelerating the development of coastal areas in the “Sixth Five-Year Plan” (1981–1985) and the “Seventh Five-Year Plan” (1986–1990); the second stage is the unbalanced and coordinated regional development stages of the “Eighth Five-Year Plan” (1991–1995) and the “Ninth Five-Year Plan” (1996–2000); and the third stage is the coordinated regional development stage with the scientific development view during the period from 2001, especially from 2003, to the present. The main contents of the exploration and innovation as regard to the three-stage regional economic theory are discussed below.

5

Zhu et al. (2007, p. 5).

482

15 The Main Progress and Innovation of Regional Economic Theory Research

The Stage of Unbalanced Development with Accelerated Development of Coastal Areas The Third Plenary Session of the Eleventh Central Committee of the Communist Party of China has established new guidelines for the development of the national economy centered on economic construction and with reform and opening up as the main content. Corresponding to this, the layout of China’s productive forces and regional economic development strategies have also taken place. The previous model of pursuing “balanced” regional development has gradually shifted to an unbalanced and “inclined” model aimed at pursuing the “efficiency” of regional economic development. This transformation has its profound background of realistic and theoretical significance. Liu Zaixing et al. pointed out in their book “Research on the Overall Layout of China’s Productivity”: (1) Reform and opening up and changes in economic development strategies have made the “balanced” productivity layout strategy lose its conditions for existing. At the same time, the pursuit of efficiency and the catch-up psychology have pushed the “inclined” productivity layout strategy to the foreground. (2) The reflection on the “equilibrium” layout strategy has made people realize that we had paid a huge price to carry out the previous “equilibrium” layout strategy and we needed to turn to an unbalanced “inclined” strategy. (3) The re-pondering of the relationship between “equilibrium” and “efficiency” has laid the theoretical foundation for this transformation. Through the summary of the economic construction experience and lessons learnt before the reform and opening up, we can recognize that when an economic system is in a stage of insufficient effective supply, the unbalanced development among regions is a necessary condition for the overall effective economic growth. Such theoretical exploration and generalization are compelling. At this stage of unbalanced development, Deng Xiaoping’s regional economic theory has been respected and recognized by the majority of theoretical and practical workers, and has become an important guiding ideology for regional economics with Chinese characteristics. In December 1978, Deng Xiaoping pointed out: “In terms of economic policy, I believe that part of the region, part of the enterprises, part of the workers and peasants should be allowed to make more money and get a better life through working harder and achieving higher performance. When some people are living a better first, they will inevitably have great demonstration power which will affect their neighbors and drive people from other regions and other units to learn from them. In this way, the entire national economy will continue to develop in a wave-like manner, and the people of all ethnic groups in the country will become prosperous at a relatively quick pace.” “This is a big policy, a policy that can influence and drive the entire national economy.”6 The reasons for acknowledging and consciously applying the laws of unbalanced development of regional economies, and integrating the arguments of regional economic theorists, are generally shown as follows. (1) China is a large country 6

Selected Works of Deng (1993, p. 152).

15.2 On the Regional Economic Development Strategy

483

with large regional differences and limited accumulation of resources. If financial resources, material resources and human resources are allocated and utilized in a spread-out manner, the result would be that no one can advance forward or develop fast. (2) The course of economic development of all countries in the world, especially of big countries with vast territories, has also proven this complementary path taken gradually from unbalanced development to balanced development. (3) Experience from both home and abroad also shows that the realization of a balanced layout must take the improvement of the original center of focus as the starting point and basis for the development of other new areas. In the stage of unbalanced development, the gradient transition mode of regional economic development (referred to as gradient theory) has become one of the hotly discussed issues. The main arguments are: (1) The ups and downs of the regional economy mainly depend on the pros and cons of its industrial structure, especially the life cycle stages that the leading sectors are at (i.e. the unavoidable biological life cycle with stages of innovation, development, maturity, and aging). (2) Innovative activities are gradually transferred from high gradient areas to low gradient areas. (3) Gradient transfer is mainly realized through the expansion of multi-level urban systems. Over time, the emergence of every new industry, new product, and new technology in the world will be passed on level by level from regions on high gradients to regions on low gradients.7 Many scholars also have their own unique expositions on the theory of gradients. Although these expositions are essentially similar, there are several views that worth being briefly introduced to intrigue further discussion. The first is the anti-gradient theory. It believes that the gradient order of existing productivity levels is not necessarily the order in which advanced technology and economic development are introduced. As long as there are economic development needs and the conditions allow, the low-gradient areas that have fallen behind can also directly introduce the latest technologies in the world, develop their own high-tech, implement transcendental development, and then proceed to the second-gradient and first-gradient areas. Moreover, it also believes that the gradient theory will inevitably hinder the development and construction of backward areas.8 However, since the anti-gradient theory does not clarify the sufficient and necessary conditions for the implementation of “anti-gradient progress” in China at this stage, nor does it have a specific operational plan to choose from, and it does not have a successful case of larger regional economic activities, therefore, it can basically be said that its views are only limited to the field of academic discussion. The second is the theory of the coexistence of gradient shift and gradient jumping. This argument holds that in an era of low productivity, due to limited space, the speed of spatial transition of technologies is very slow, and the role of gradient transition is obvious at this time. With the development of productive forces, especially with the modernization of transportation and communication methods, the scale of spatial transition of technologies has greatly expanded and the speed has accelerated, and this is when gradient jumping has come into play. Within a certain historical 7 8

Zhou et al. (1989, p. 127). Zhou et al. (1989, p. 151).

484

15 The Main Progress and Innovation of Regional Economic Theory Research

period, gradient jumping predominates in developed countries while incremental gradient shift predominates in less developed countries. This argument is actually the concretization and supplement of the gradient theory, which does not contradict, but instead, complements the gradient theory. Gradient theory correctly reflects the objective laws of spatial transition of technologies. However, the rich resources in economically underdeveloped regions are indeed an important factor leading to the flow of technology. Whether it can become a reality depends on whether these regions can create a better policy environment and form a strong magnetic force for new technologies.9 At this stage, the overall strategic layout of regional development is leaning towards coastal areas with better conditions. In 1979, the Party Central Committee put forward the policy of “exploiting strengths, avoiding weaknesses, giving full play to advantages, protecting competition, and promoting cooperation”. The Sixth FiveYear Plan clearly stated that it is necessary to actively utilise the existing foundations in coastal areas, give full play to their strengths, and promote the further development of the mainland economy. At the same time, we should continue to actively support and effectively help minority areas develop production and prosper the economy. The “Seventh Five-Year Plan”, for the first time, divided the country into three major economic zones: eastern, central and western regions, and accordingly proposed to accelerate the development of the eastern coastal zone during the “Seventh Five-Year Plan” period and in the 1990s, while focusing on energy and raw material construction in the central region is actively and preparing for the further development of the western region. The division of the three major zones is conducive to recognizing the advantages and constraints of each zone, and conducive to realize guidance in a classified manner macroscopically. The adoption of corresponding countermeasures and deployments is beneficial to the common development of various regions of the economy. Although this division is relatively rough and variable, it still has the practical significance to guide the regional development, which is conducive to playing respective advantages of each zone and forming a reasonable regional division of labor and regional economic structure through mutual openness and equal exchange.10 The regional economic development guidelines have changed; the national investment layout has shifted eastward; the coastal opening policies were implemented, including the implementation of special policies and flexible measures for Guangdong and Fujian provinces, the establishment of special economic zones, the opening of coastal port cities, and the development and opening of Pudong New Area and the investment zone for Taiwanese businessmen; a more flexible and open economic policy for the Hainan Special Economic Zone was implemented; a poverty alleviation and development policy for the poor areas was implemented, and the policy for the ethnic areas was further improved. All these above have effectively promoted the rapid development of the coastal areas, which constitute the most important force

9

Chen (1993, p. 228). Fang and Gui (1986).

10

15.2 On the Regional Economic Development Strategy

485

promoting the rapid economic growth in China and shows remarkable results of the implementation of the policy of unbalanced development.

The Stage of Regional Unbalanced and Coordinated Development At this stage, the main issues of regional economic theory research are as follows. (1) The theory of unbalanced and coordinated development After more than ten years of unbalanced regional development, due to the imperfection of institutional mechanisms and policies, and the spontaneous role of market forces, there were many problems in our country’s regional development during this period. The “Modern Regional Economics” edited by Wei Houkai summarizes these problems as follows: (1) The regional gap, especially the gap between the east and the west, continues to expand. (2) The problem of poverty alleviation in rural areas in the central and western regions still has a long way to go. Even in areas where food and clothing have been resolved, the basic production conditions have not fundamentally changed, the ability to withstand natural disasters is low, and the rate of returning to poverty is high. (3) The economic growth of the old industrial bases continues to be sluggish, and the development stamina was seriously insufficient. From 1981 to 1990, the growth rate of the old industrial base was only 1/3–1/2 of that of the emerging industrial area. (4) Interregional contradictions and trade frictions continue to intensify, forming a so-called “princely economy”.11 For these problems, regional economic theorists have made new explorations, seeking ideas and strategies for solving the problems. To this end, Li Shugui put forward in his “A Study of Regional Economic Problems in China” that “From the perspective of the historical experience and lessons learnt of China’s regional economic development”, it is the best option to change the balanced development strategy and the unbalanced development strategy and implement the strategy of unbalanced, complementary and coordinated development.12 The reason why Li Shugui proposed such an option is as follows: First, the gap between regions with unbalanced economic development in China is too large and we were still at the primary stage of regional economic growth. In order to produce a large polarization effect, it is advisable to adopt an unbalanced layout that slopes towards the eastern coast. Second, although there is currently a great imbalance in our country’s regional economy, the final result of regional economic development is the process from imbalance to balance, so unbalanced development should be carried out in a moderate way and should be combined with coordinated development. Third, unbalanced and coordinated development may be achieved through interregional complementarity, 11 12

Wei (2006, pp. 561–562). Li (1997, p. 27).

486

15 The Main Progress and Innovation of Regional Economic Theory Research

mutual promotion, and mutual benefit.13 In short, in the author’s view, the implementation of an unbalanced, complementary and coordinated development strategy can balance fairness under the premise of improving efficiency. Therefore, this strategy is an excellent choice to correctly deal with the relationship between “efficiency” and “fairness”, thus realizing both improved efficiency and fairness. Excellent choice. To this end, Li Shugui also proposed four countermeasures to promote unbalanced, complementary and coordinated development. A similar problem to regional unbalanced and coordinated development is what kind of regional development strategy can be adopted to solve the major problems such as the further expansion of the regional economic gap. Regional economic academics have various opinions on this. In general, as Ren Xinbao pointed out: “At the current stage of China’s system transition, to change this situation, we must neither use the traditional method of allocating resources through government administration, nor let the market dominate. Instead, under the guidance of national industry policies and with the help of fiscal, financial, legal, government policies and other means, we should promote inter-regional economic coordination and healthy development in accordance with the principles of adaptation to local conditions, reasonable division of labor, utilizing strengths and complementary advantages of each region, and common development”.14 However, when it comes to regional development strategies, they have different understandings and creative ideas. In summary, there are four main types. (1) The decision-making strategy of the eastern area. In view of the current economic development and technological advancement, the eastern area demonstrates much greater strength than the western area. Focusing on the prioritized development of the eastern area can produce the best economic benefits and promote the gradient shift among eastern, central and western areas. (2) The breakthrough strategy of the central area. It is believed that the central area is the major base of China’s energy and raw material industries, which are the “bottleneck” industries restricting the development of the national economy. So it is advocated that the construction focus should be broken through from the central area before it can drive the development of the “two wings” of the Eastern and western areas.15 Professor Zhang Peigang proposed the “bull belly theory” and used it as the theoretical basis for “the rise of central China”. The main point of this theory is: “The eastern coastal area is the bull’s nose, the western area is the bull’s tail, and the central area is the bull’s belly. The great national revival that the Chinese people has long dreamed of is largely dependant on whether the central area can be developed”.16 (3) The leap-forward strategy of the western area. The proposition of this strategy is diametrically opposed to the decision-making strategy of the Eastern area. It believes that since the west lags far behind the east, we should focus on developing the west, seek balanced development, eliminate regional differences as soon as possible, and change the situation of 13

Li (1997, p. 28). Ren (1996). 15 He (1986). 16 Ziang (2005). 14

15.2 On the Regional Economic Development Strategy

487

poverty. (4) The combining strategies. It advocates not only to focus on the role of the eastern coast, but also to speed up the development of the central and western areas so that they can develop their individual strengths, complement each other’s advantages, and achieve coordinated development.17 (2) The main axis of the overall layout of productivity Related to the regional development strategy, during this period, the regional economic theory circle also explored the main axis of the overall layout of our country’s productivity, and put forward many fresh ideas and proposals. Among them, there are a total of 11 representative proposals, mainly the Chinese character “three”shaped theory of “east-central-west gradient progression”, the “T” shaped theory of the combination of coastal and Yangtze rivers advocating “the forerunner role of the river and sea”, the “兀” shaped “two-line theory of the coastal area” of the coastal, Yangtze and Longhai and the Lanxi Line, the “four alongside” pattern theory of the Lanxin Line, namely the network structure alongside the sea, the river, the roads and the border (the Beijing-Guangzhou, Beijing-Kowloon, and Longhai-Lanxin lines), and the theory claiming that around a dozen of economic zones should be set up instead of dividing different zones.18 These insights have their own strengths and weaknesses, and they basically revolve around the relationship between the coastal and the interior areas. Among them, the “three”-shaped “gradient progression theory” is the one that has great influence and is promoted in practical work. However, at that time, some experts and scholars pointed out its major shortcomings, especially that it is not conducive to the further formation of a network-based regional economy, which must undergo future adjustment. Now it seems that this kind of comment is not unreasonable. Several other views lack comprehensiveness and operability to varying degrees. (3) The theory of regional income disparity Since the reform and opening up, regional income differences, especially the differences between the east and the west areas and between urban and rural areas, have continuously expanded. Naturally, this has become a key topic of concern for regional economic theorists. Most people think that the gap is widening. Jiang Qinghai believes that national income per capita is a comprehensive indicator to measure the level of regional development. In 1980, if the value of the national income per capita in the eastern area was 100, then, in the central area it was equivalent to 67.4, and in the western area it was equivalent to 54.6. By 1991, if the value of the national income per capita in the eastern area was 100, the number for the central area has dropped to 61.1, and the number for the western area has dropped to 54.2.This is mainly because that after reform and opening up, in order to improve the overall macroeconomic benefits, the country has adopted a policy slanting to the east, which not only increased 17 18

Gao et al. (1991, pp. 11–17). Yang (1991, p. 221).

488

15 The Main Progress and Innovation of Regional Economic Theory Research

investment in the east, but also gave various preferential policies to the east granting the east priorities in the system reforms. This has accelerated the development of the eastern economy, which boasts better existing foundation and stronger economic strength. Therefore, the gap between the eastern and the central and western regions is constantly widening.19 However, still there are some people believing that “the empirical analysis shows that the rapid economic growth in the 1980s, that is, the achievement of efficiency, did not sacrifice overall fairness, that is, the overall gap in the level of economic development did not widen, but instead, narrowed. In this case, what reason do we have to change this development strategy which takes into consideration of both fairness and efficient?”.20 Shortly after the article was published, some scholars questioned it and discussed it successively in the same journal, pointing out that the arguments, evidence and methods in the article are debatable and concensus can be hardly reached. As of how to view the problem of widening gap, economic theorists generally believe that it is high time to raise and solve this problem. In 1998, the famous economist Ma Hong pointed out: “It is precisely because of the pioneering development of the coastal areas that the 20 years since the reform and opening up have become the period with the fastest economic growth and the longest duration in the history of China, and this also made China one of the most dynamic regions in the world. However, when the gap between the central and western regions and the eastern regions has clearly widened, it is time to raise and resolve this issue prominently, because the development of the central and western regions is not only an economic issue, but also involves political, social, and stability issues. Starting from the overall situation of reform, development and stability, we will comprehensively examine the regional differences in the central and western regions”.21 Ma Hong examines the widening regional income gap in the east, central and west China from an in-depth and overall perspective, which represents a mainstream and representative view. The unbalanced and coordinated development stage is also the period during which the “Eighth Five-Year Plan” (1991–1995) and the “Ninth Five-Year Plan” (1996–2000) were implemented. During this period, the Party Central Committee and the State Council put forward a series of major decisions and measures, as follows, related to regional economic development strategies while reviewing the situation to ensure they advance with the times. (1) In March 1991, the ten-year plan and the outline of the “Eighth Five-Year Plan” further clarified that: “The relationship between giving full play of regional advantages and national overall planning, between coastal and inland areas, between economically developed areas and less developed areas should be properly handled, in order to promote the regional economy in the direction of achieving coordinated development with reasonable division of labor 19

Liu (1995). Yang (1992). 21 Ma (1998). 20

15.2 On the Regional Economic Development Strategy

(2)

(3)

(4)

(5)

22

489

while giving full play of each region’s strength based on their complementary advantages.” At the beginning of 1992, Deng Xiaoping’s “Southern Talks” pointed out: “Some regions have the conditions to develop first, some regions have a slower developing pace, and the regions developed first can drive the regions that develop later, and eventually common prosperity can be achieved.” “It can be imagined that at the end of this century (note: twentieth century), when we reach a well-off level, we will prominently propose and solve this problem”.22 In September 1995, the “Recommendation of the Central Committee of the Communist Party of China on Formulating the Ninth Five-Year Plan for National Economic and Social Development and the 2010 Vision” adopted by the Fifth Plenary Session of the 14th Central Committee of the Communist Party of China clearly stated: “From a strategic perspective, it is an overall plan that coastal regions should be developed first and continue to exert their advantages, and inland regions should make certain compromises and take this overall situation into serious consideration. And beyond certain point of the development, the coastal regions should make more contributions to support the development of the inland regions. This is also the overall situation, to which the coastal regions should also obey. Starting from the Ninth Five-Year Plan, we must pay more attention to supporting the development of the inland regions, implement policies that are conducive to mitigating the widening gap, and gradually increase our efforts to actively work towards narrowing the gap.” In March 1998, the “Outline of the Tenth Five-Year Plan for National Economic and Social Development” approved by the Fourth Session of the Ninth National People’s Congress clearly put forward the guideline of “implementing the strategy of developing the western regions, accelerating the development of the central and western regions, rationally adjusting the regional economy layout, and promoting the coordinated development of regional economies”. On October 26, 2000, the “State Council’s Notice on Several Measures for the Implementation of the Western Development” was issued. Subsequently, the State Council also issued a number of policies and measures concerning the development of the Western Regions. After the strategy for the development of the western regions was put forward, the 16th National Congress of the Communist Party of China, held in November 2002, officially decided to “support the accelerated adjustment and transformation of old industrial bases such as those in the Northeastern regions.” To this end, in January 2003, the State Council established the “Leading Group for the Revitalization of Northeast China and Other Old Industrial Bases” headed by Comrade Wen Jiabao. In April 2006, the Central Committee of the Communist Party of China and the State Council issued the “Several Opinions of the Central Committee of the Communist Party of China and the State Council on Promoting the Rise of the Central Region”. In January 2008, the State Council approved the establishment of an inter-ministerial joint conference system for promoting

Selected Works of Deng (1993, p. 374).

490

15 The Main Progress and Innovation of Regional Economic Theory Research

the rise of the Central Region. It can be said that this has fundamentally reversed the idea of the “Seventh Five-Year Plan” proceeding according to the gradient of the east, middle and west, and began to form the “four major sectors” of the regional economy in the east, middle, west and northeast regions,23 thus, the “four-wheel drive” system for regional economic development is achieved.

The Stage of Regional Coordinated Development with the Scientific Outlook on Development (1) The implication of the overall regional coordinated development In October 2003, the Decision of the Central Committee of the Communist Party of China on Several Issues Concerning the Perfection of the Socialist Market Economic System adopted by the Third Plenary Session of the Sixteenth Central Committee of the Communist Party of China proposed to adhere to the principle of putting people first, establish a comprehensive, coordinated, and sustainable scientific outlook on development, and proposed the concept of “Five co-ordination”, namely co-ordination of urban and rural development, overall regional development, co-ordination of economic and social development, co-ordination of the harmonious development of people and the nature, and co-ordination of domestic development and opening up to the outside world. The overall and coordinated regional development can be said to be the advanced stage of the coordinated development strategy of the regional economy. It is also the inherent requirement and important content of adhering to a comprehensive, coordinated and sustainable scientific outlook on development and building a harmonious society. Many scholars has carried out exploration and discussion to define the implication of the overall regional development from different perspectives. In “Research on Strategic Issues and Policies for Overall Regional Development” edited by Chen Xuanqing and Zhang Keyun, the following main points are discussed. Jiang Shiyin believes that the emphasis of the overall regional development is not on “gradient advancement” but on coordinated development.24 Qian Fuxin also pointed out that overall regional development is by no means a return to the egalitarianism with “one leveling and two tones”; since egalitarianism emphasizes “equal distribution”, while coordinated development emphasizes equal opportunities. Therefore, the overall and coordinated regional development is a new concept that focuses on equality at the starting point.25 23

In the western region 12 provinces (cities, districts), including Chongqing, Sichuan, Yunnan, Guizhou, Guangxi, Tibet, Shaanxi, Gansu and Ningxia, Qinghai, Xinjiang and Inner Mongolia, northeast three provinces (Liaoning, Jilin, Heilongjiang), the six provinces in central China (Shanxi, Henan, Hubei, Hunan, Anhui, Jiangxi), as well as the eastern region of 10 provinces (municipalities), including Beijing, Tianjin, Hebei, Shandong, Jiangsu, Zhejiang, Shanghai, Fujian, Guangdong, Hainan. 24 Jiang (2003). 25 Qian (2004).

15.2 On the Regional Economic Development Strategy

491

Hu Naiwu and Zhang Keyun believe that “the so-called overall regional development is to comprehensively resolve various types of regional problems in a focused and phased manner from the perspective of the regional economic development pattern of the country, and to gradually coordinate regional relations and promote various types of socio-and-economic development in different types of regions through purposeful regulation and control of the government”.26 This definition stresses the subject and the overall view, and embodies the idea of the key theory. Huang Le believes that “overall means unified planning, coordination, compatibility, and common development. Overall regional development is to integrate all levels of regions into the overall national economic and social development for overall planning and comprehensive consideration, and promote the spatial flow of various resource elements through rational use and protection of natural resources, the layout of productive forces, the layout of urban and rural areas and so on, in order to optimize the spatial structure and ultimately achieve coordinated spatial development. Decomposed at different spatial levels, it is to coordinate the relationships between the three major regions of the east, the middle and the west, between the administrative economic areas and the economic core area across the administrative areas as well as the special type areas, between cities and villages as well as between different cities”.27 This definition stresses the level of regional co-ordination, which has innovative significance, but its division of regional levels is still relatively vague. Hu Angang believes that the core concept of the overall regional development is “people-orientation”. The fundamental purpose of the reform is to promote the overall development of all people and promote “common prosperity”. He also believes that there exist first-generation and second-generation regional development strategies in China. The first-generation development strategy is reflected in limited coastal development, while the second-generation development strategy, including overall regional development, emphasizes coordinated development, comprehensive development, and sustainable development, advocating common development, mutual sharing and common prosperity. China is undergoing a transition from the firstgeneration development strategy to the second-generation development strategy.28 This definition closely follows the scientific outlook on development. The concept of overall regional development proposed by the Macroeconomic Research Institute of the National Development and Reform Commission in the report of “The Research on Overall Regional Development” demonstrates very similar viewpoints to a large extent. Li Hanlin and Wei Fenzi point out that “the so-called overall and coordinated regional development refers to the efficient allocation of resources and production factors among industries, regions, and groups in the process of regional development, enabling development in all aspects with mutual connection, mutual promotion and benign interaction; therefore, the interests of all parties can be fully reflected, so to ensure the balanced development and improvement of overall strength for different 26

Hu and Zhang (2004). Huang (2004). 28 Hu (2004). 27

492

15 The Main Progress and Innovation of Regional Economic Theory Research

regions”, as a result, “a pattern of mutual promotion and common development between regions can be formed”.29 This conceptual definition fully reflects the idea of interactive development. Wang Mengkui believes that the essence of overall regional development is to grasp the “two overall situations” proposed by Deng Xiaoping and promote common development.30 After commenting on the above points, Chen Xuanqing and Zhang Keyun gave their own conceptual definitions: “Overall regional development is the government’s efforts taken with an overall and comprehensive consideration of all aspects and links of regional development under the guidance of the scientific outlook on development. It takes government’s resources as a foundation, the system construction as a guarantee, integrates social resources, encourages the development of various regions on the basis of taking advantage of comparative advantages, reasonably controls the development gap between regions, manages regional issues with focus, gradually coordinates regional relations and promotes the all-around economic and social development of various types of regions, thus eventually achieving dynamic and coordinated economic development of various regions”.31 The innovation of this concept lies in the definition of encouraging development, controlling gaps, focused governance and relation coordination as the four major themes or four elements of overall regional development. It is worth paying attention to the opinions in the report of the Research Group of the National Development and Reform Commission on “Overall Regional Development”. The report believes that the country should proceed from the people-centered requirements, coordinate the allocation of public resources, and gradually reverse the trend of widening regional gaps, especially to gradually narrow the gaps in people’s lives between regions, including gaps in income levels and in the enjoyment of public products. It also clearly stated that the main bodies of overall regional development are national and local governments at all levels, and the means of overall planning is the various resources that the government can control, including financial and material resources, with the aim of achieving coordinated development between regions and controlling development gaps within the control range of the society. This view is new and rare. The report also believes that the overall regional development is a further deepening of the idea of regional coordinated development and inheritance and development of the regional coordinated development strategy that has been implemented since the “Eighth Five-Year Plan” period. From the perspective of inheritance, both “coordination” and “overall” emphasize that each region should develop its own strengths and become prosperous together, and the development gap between regions should be kept within the range that people can afford. From the perspective of development, “overall” puts more emphasis on the development process, while “coordination” puts more emphasis on the results of development; “overall” puts more emphasis on the living gap between residents 29

Li and Wei (2004). Editorial Department of Theoretical Trends (2004). 31 Chen and Zhang (2007, p. 9). 30

15.2 On the Regional Economic Development Strategy

493

in different regions, while “coordination” puts more emphasis on controlling the development gap between regions.“Overall” emphasizes the relationship between the “four sectors” (four regions), while “coordination” emphasizes the relationship between the East, Middle, and West China.32 These explorations are of great value in deepening the understanding of overall regional development from various perspectives. (2) Overall strategic deployment of regional coordinated development The “Outline” of the “Eleventh Five-Year Plan” puts forward that we must adhere to the overall strategy of advancing the development of the western region, revitalizing the old industrial bases such as the Northeast, thus promoting the rise of the central region, encouraging the eastern region to take the lead in development, perfecting the regional coordination and interaction mechanism, and forming a reasonable development pattern. This is the overall strategic deployment of regional coordinated development in the new period. Regional economic theorists have carried out research and made comments on this, believing that this is based on the overall construction of a moderately prosperous society and speeding up the modernization drive. It is also based on the basic situation of our country’s regional development. This basic situation is that since the implementation of the “Tenth Five-Year Plan”, the economic aggregate of all regions has increased significantly, and the economy has continued to develop steadily. The regional economic structure has been further optimized, forming some economically dense areas. Interregional ties between regions have increased significantly. Strategies and policy frameworks to promote coordinated regional development are gradually taking shape. At the same time, there exist some outstanding problems. First, the regional economic development gap is still widening. Second, there is a large gap in social development between regions. Third, the economic development of some underdeveloped regions and resource-based cities is still facing much difficulty. Fourth, the problems of unfair competition and duplicated construction between regions are relatively prominent. Fifth, the system of policies and laws that promotes coordinated regional development is not sound enough. If the abovementioned problems are not solved with a steady pace, it will not only aggravate the contradiction that our country’s economic and social development is facing with its population, resources, and environment, but also reduce the efficiency of the overall national resource allocation and affect the overall regional development.33 This is a review and analysis of the overall regional development from a practical perspective. Zhu Chuangeng fully affirmed this overall strategy and believed that “this strategy covers the entire land area and population of our country and is committed to achieving the common development and prosperity of various regions, so it is a comprehensive and complete regional development strategy”.34 They also put 32

Research Group of Macroeconomic Research Institute of National Development and Reform Commission (2004). 33 Ma (2006, pp. 216–220). 34 Zhu et al. (2007).

494

15 The Main Progress and Innovation of Regional Economic Theory Research

forward constructive suggestions on the regional development strategies and regional development policies of the “four sectors”. Chen Xuanqing and Zhang Keyun believe that: “The core of this new regional development strategy is coordination, and to achieve the unity of fairness and efficiency through overall planning, thus promoting coordinated development. The proposal of the overall regional development strategy is also an intrinsic requirement and important content for adhering to a comprehensive, coordinated and sustainable scientific outlook on development and for building a harmonious society.” They also proposed that “from the perspective of the law of development, when a country’s national economy and regional economy develop to a certain stage, regional problems will gradually increase.” They suggested that “whether it is for the central government or the local governments, when dealing with regional issues, the “regional approach” rather than the traditional “one size fits all” approach should be adopted. The suggestion of this “regional approach” is very targeted, because each regional problem is not evenly distributed in each region, but is relatively concentrated in a specific region. In fact, the strategy that implies the “four sectors” needs to be more concrete and more targeted, and should implement the scientific outlook on development when planning the overall development of the region. (3) Promote the formation of the main functional areas The “Outline” of the “Eleventh Five-Year Plan” proposes that, we should consider the future population distribution, economic layout, land use and urbanization pattern of China based on the carrying capacity of resources and environment, the current development density and development potential, and divide the land space into four types of main functional areas such as the types for optimized development, focused development, restricted development and prohibited development; we should adjust and improve regional policies and performance evaluation according to the positioning of main functions, standardize the order of space development, and form a reasonable space development structure. This is a major strategic measure to implement the scientific outlook on development in regional development, and a new way of promoting coordinated regional development. Experts and scholars have carried out analyses on the essence of the incoordination appearing in regional development, and the results show that the inconsistency in regional development is not simply about a gap between the economic aggregates among regions, but a spatial imbalance in population, economy, resources and environment.15% of the population in the three major economic circles of BeijingTianjin-Hebei, the Yangtze River Delta, and the Pearl River Delta constitutes 35% of the total economic output, the direct result of which is that the gap in income per capita between regions has widened and the contradictions have become prominent. Due to institutional and policy constraints, the mechanism by which population mobility facilitates the narrowing of regional gaps is difficult to play. The spatial separation between the working population and the population which working population is feeding and supporting has led to an excessive gap in public services between regions. The spatial imbalance between economic distribution and resource distribution has also led to increased pressure in cross-regional mobilization of resources. Cognitive

15.2 On the Regional Economic Development Strategy

495

deviations and unreasonable system and policy orientation have led administrative regions at all levels to pursue the expansion of economic aggregates in accordance with each individual administrative region’s own interests. This thinking has led to the deterioration of the ecological environment in some regions. Therefore, it is imperative to construct a new situation of regional development based on the main functions of each area. This major move reflects the following new concepts and ideas in development. One is the concept of people-oriented development, and the overall development is positioned around “people” rather than the regional GDP. Narrowing the regional gap is to narrow the gap in per capita income, public services, and living standards between different regions, so that people living in different regions can enjoy fundamentally equal basic public services, and all can enjoy a generally equivalent standard of living. The second is the concept of respecting the laws of nature and seeking development, breaking the traditional thinking of economic development in all regions. The third is to break through the idea of seeking development in the administrative area and change the thinking method of formulating regional policies and performance evaluation according to the administrative area. The fourth is to proactively coordinate the contradiction between the limited space and the unlimited demand of the region, and attach importance to the adjustment of the spatial structure to facilitate the long-term development and survival of the Chinese nation.35 Chen Dongsheng summed the above ideas up as follows: “This is a fundamental measure taken from the perspective of harmony between man and the nature as well as the respect for the laws of nature; it adapts local development to specific local conditions to ensure the structure of space development and regulate the order of space during the path of utilizing, protecting and constructing the land of the country”.36 Correspondingly, the “Outline” of the “Eleventh Five-Year Plan” clearly points out the functional positioning and development direction of the four main functional areas. On the basis of the definition of the main functional areas in the Outline of the National “Eleventh Five-Year Plan”, Gao Guoli conducted research in breadth and depth on the main functional areas, and proposed the theoretical and methodological system for policy formulation as regard to the division and classification of main functional areas in China. He believes that the wording of “development” in the main functional areas mainly refers to large-scale industrialization and urbanization activities. Optimized development pays more attention to the mode, quality and efficiency of economic growth and the realization of good and rapid development. Focused development refers to the development activities that focus on maintaining the main functions of the areas. Restricted development refers to the protective development carried out in order to maintain the regional ecological function, which restricts the content, intensity and method of development. Prohibited development refers to the prohibition of development activities that do not conform to the functional positioning of the main body of the area. The division of main functional areas is not 35 36

Ma (2006, pp. 235–238). Chen (2007).

496

15 The Main Progress and Innovation of Regional Economic Theory Research

only the basis for formulating national economic and social development strategies and plans at the macro level, but also the basis for project layout, urban construction and population distribution at the micro level. Therefore, it has both comprehensive and strategic characteristics. The type, boundary and scope of the main functional areas should remain stable for a long period of time, but it can be adjusted as the situation of regional development changes. The construction of the main functional area system is divided into the central and provincial levels. In the long run, the country’s land and sea areas should all be covered, but partial coverage can be considered at present. In theory, the basic unit should not be confined to the administrative area, but in actual operation, it is more realistic and feasible to select the county-level unit as the basic unit. The criteria for dividing the central and provincial main functional areas should be unified, but the key content and threshold levels of the standards may not be exactly the same. The central government and the provinces are responsible for the design and management of the classification policies for the main functional areas at their respective levels.37 (4) Improve the interaction mechanism and implement the regional policies for classified management The general layout of overall regional development is a strategic deployment carried out from the spatial perspective, and a sound interaction mechanism is an institutional arrangement for implementing this strategy. Only by achieving regional interaction can the optimal allocation of various resources and production factors be achieved, the free movement of population be realized, and ultimately the per capita income and public service level between regions be generally matched. And only in this way can the fragile areas of ecological environment be protected and restored effectively. The reason is that the regions with large economic aggregates in China have not been able to absorb a considerable proportion of the population, which has led to the widening of the regional per capita income gap. At the same time, for the large number of migrant workers coming from the central and western regions, their dependent family members who live on their income as the living support still remain in the central and western regions. So, the taxation of migrant workers stays in the east, leading to the slow improvement in the financial situation in the central and western regions, and limited level of public services that can be provided. Therefore, it is imperative to promote a balanced population and economic layout and increase fiscal transfer payments to the central and western regions. The comments of Chen Xuanqing and Zhang Keyun are: “It should be said that compared with the previous five-year plan, the ‘Eleventh Five-Year Plan’ raised the issue of regional coordinated development to an unprecedented height, which was a turning point for the government to regulate the regional economy”.38 This includes a clear requirement to improve the interaction mechanism for regional development. The improvement of interaction mechanisms include the improvement of market mechanisms, cooperation mechanisms, mutual assistance mechanisms and support 37 38

Bai Yongxiu. (Ed.). Regional Economics (5). (pp. 168–176). China Economic Press. Chen and Zhang (2007, p. 221).

15.2 On the Regional Economic Development Strategy

497

mechanisms. Based on the comprehensive discussion of all aspects, the market mechanism refers to breaking the boundaries of administrative divisions, continuously expanding market space, promoting the free flow of production factors, guiding industrial transfer, and realizing the optimal allocation of resources and factors in a larger area, thus achieving common prosperity in the process of making “the big cake”. The cooperation mechanism refers to encouraging and supporting various forms of regional economic cooperation and partnership in technology and talents in various regions to form a pattern of common development of the east, the middle and the west part of China with the development of the east area leading that of the west. The mutual assistance mechanism means that developed regions should help less developed regions through building one-on-one supporting relations and social donations and so on. The support mechanism refers to increasing support for lessdeveloped areas in accordance with the principle of equalization of public services, and accelerating the economic and social development of the old, immature, border, and poor areas. Our country’s current policy does not yet meet the requirements of constructing the main functional area, and it is in urgent need to be adjusted and perfected to ensure the realization of the positioning of the main functional areas of the region. To this end, the country must implement a regional policy for classified management. Lin Zhaomu believes that “the national regional policy is also an important tool for coordinating regional interests under the socialist market economy system. The market often fails to solve the regional redistribution of national income. The ‘Matthew effect’ in regional economic development is inevitable if relying solely on the market mechanism. In order to overcome its limitations and make up for its shortcomings, the government should carry out correct and active interventions in regional economic development through national regional policies.39 Such as fiscal policy, we must improve the national public financial system and fiscal transfer payment system in accordance with the principle of equalization of per capita financial resources and public services, strengthen the provision of financial security for local governments in restricted development regions and prohibited development regions to facilitate performing of public service duties and ensure the operation of grassroots governments. Also, corresponding compensation should be made for ecological protection. Another example is related to the investment policy. We should gradually form an investment policy that is formulated based on the consideration of both the functional areas and different regions. Government investment should focus on the development of public service facilities and eco-environmental construction in restricted development areas and prohibited development areas, with a focus on supporting the infrastructure construction in key development areas. Another example is the industrial policy. In accordance with the requirements of industrial policy regionalization, it is necessary to reasonably guide the development of regional industries, including promoting the optimization of development areas and upgrading of the industrial level, through restricting continued development of general processing industries and industries with low added value that occupy more land, consume more energy, 39

Wang (1998, p. 2).

498

15 The Main Progress and Innovation of Regional Economic Theory Research

and pollute heavily. There is also a land policy, the implementation of which needs to be in conformity to the positioning of the functional area so that its constraints and guidance functions can be given into full play. Others include the establishment of population management policies that are in line with the development trend of market mechanisms, the strengthening of coordination mechanisms for spatial planning, and the transfer of performance assessment and political performance evaluation to a scientific development track. Only by implementing these classified regional policies can a new pattern of regional development be formed which is constructed according to the main functional areas.

15.3 The Debate on the Path of Urban Development in China The modern city is the core of the regional economy, the space support of the national economy and regional economic activities, and the node and carrier of the regional economic organization. The study of the regional economy must involve the study of the urban economy. This is a relatively independent field of research, covering a wide range. This section focuses only on the debate about the road of urban development in our country. Stiglitz, one of the Nobel Prize winners in economics in 2001, said: “There are two major events affecting human development in the twenty-first century. One is the urbanization in China, and the other is the high-tech in the United States. China’s urbanization will be the locomotive of regional economic growth and will produce the most important economic benefits”.40 The Director of the United Nations Environment Programme also wrote an article in which he pointed out: “The success of the cities is the success of the country”.41 No matter how these views are interpreted, one thing is for sure: cities have a very important position in our country’s modernization. Studying the path selection of urbanization and taking the road of urbanization with Chinese characteristics are with equal significance. Since the founding of the People’s Republic of China, especially in the past 40 years, our country’s urban construction has made great achievements. The proportion of our country’s urban population has increased from 17.92% in 1978 to 43.9% in 2006. During this period, it increased at a rate of nearly 1% per year. Especially since 2000, our country’s urbanization is accelerating. Urbanization is an important symbol of the degree of modernization of a country or region. At present, developed countries have achieved urbanization, which urban population accounting for more than 70% of the total population, and some countries exceeding 90%. Today, on average, more than 50% of the world’s population live in cities. It can be said that the whole world has entered the era of urbanization. 40 41

Tan (2006). Tan (2006).

15.3 The Debate on the Path of Urban Development in China

499

According to the population size, cities and towns are generally divided into megacities, large cities, medium-sized cities, small cities, and organized towns. “The socalled urbanization is the process of the rural population entering the city”.42 Urbanization is an inevitable trend and the only way for economic and social development in all countries and regions of the world. The question is what kind of urbanization road should our country take? There are different understandings in all aspects, including the theories emphasizing large cities, the theories emphasizing small cities and towns, and the theories placing equal importance to both large and medium-sized cities and small towns. (1) The view of strictly controlling the development of big cities At the beginning of the reform and opening up, the prevailing understanding was to strictly control the development of large cities, reasonably develop mediumsized cities, and actively develop small cities (including small market towns below the county), so that different types and sizes of towns could be better developed, forming compatibility with multi-level productivity. This urban system and structure is conducive to the transformation of hundreds of millions of surplus people in rural areas into urban areas.43 In March 1978, based on the suggestion proposed by Mao Zedong in the past that “It is not good for cities to become too big, and more small towns are needed”, the Central Committee of the Communist Party of China stated clearly in the “Opinions on Strengthening Urban Construction” that: “we need to control the size of large cities.” “The development of more small towns and the controlling of the size of large cities” is mainly about controlling the population and land use in urban areas, but not to control the development of production and various undertakings. It also stipulates that mega-cities with a population of more than one million will not arrange new projects and large-scale expansion projects in urban areas and suburbs in the future. In 1985, the state once again clarified that one of the key technical points of urban construction is “controlling the size of large cities, rationally developing medium-sized cities, and actively developing small cities.” This was also the guideline written into China’s “Urban Planning Law” at that time. It should be admitted that this is related to the relatively low level of economic development at the time. Gao Qingxia believes that these views are one-sided and should be fully analyzed. First, as a historical process, urbanization has its inevitability. However, it is wrong to regard the concentration of population in large cities as a general rule and to conclude that the size of large cities should not be controlled. After the Second World War, especially after the 1950s, the population and industry of many developed countries have evacuated to areas other than large cities. Recognizing the harm of the unlimited expansion of big cities, it is unnecessary for us to take the detours these countries have already taken. Second, it is one-sided to think that controlling the size of large cities will hinder development. The economic benefits of the development of industry must be measured from the level of the whole country, at least from the whole picture 42 43

Zhao (2008). Rong (1984).

500

15 The Main Progress and Innovation of Regional Economic Theory Research

of an economic region. From an overall perspective, the existing land, water sources and infrastructure of large cities are already quite tight, and some cities have reached the level of saturation or even an overloaded status. Rebuilding factories may not be economically beneficial, while it may lead to better overall economic benefits if small and medium-sized towns or other regions are developed, which is beneficial to economic development in the long run. Finally, we shouldn’t think one-sidedly that because big cities have limitations so we should constrain their development. In fact, control and limitation, or control and development are totally two different things. Control does not mean limitation, since limitation is not flexible, while control is. The key to the economic development of a big city is to take the development path of “connotation” rather than “denotation”.44 This is a proposition to control large cities and further discusses the reasons for controlling large cities. (2) Amendments to the policy to “strictly control the size of large cities” This opinion holds that the policy to “strictly control the size of large cities” is no longer suitable for the changing reality and the national conditions of China’s large population. As long as the economy of large cities develops, the increase in population reflecting the size of cities and the expansion of urban areas are inevitable, especially for China, a large developing country that still needs to rely on volume expansion to develop its economy. And to a certain extent, the economic development of large cities plays the role of “locomotive” of national economic development. In the past 20 years (Note: 20 years before 1998), the rapid economic development and rapid expansion of the scale of super-large cities such as Shanghai, Beijing, and Guangzhou have proved with facts how difficult it is to strictly control the size of large cities. This policy may be a good policy in other countries, but it is very unrealistic in China. Perhaps because of this, this policy has not been implemented, let alone local governments and metropolitan governments. Even for policies implemented by the central government, some of them are obviously contrary to the urbanization policy or at least not connected to it. In Shanghai, the largest city in China, the policy of developing Pudong area is the most direct way to expand the size of megacities. Therefore, the policy of urbanization should be the orderly development of urban belts (circles), the proper development of mega-cities and large cities, and the vigorous development of small and medium-sized cities. Perhaps this diversified urban development policy is the way to choose. Any policy that emphasizes the development of a certain type of city simply by scale is one-sided and unrealistic (he 1998). It should be said that this kind of argument combining empirical research and normative research is very convincing. Because, since 1978, the annual growth rate of our country’s urbanization rate has lagged behind that of industrialization. In particular, the lag in the development of small towns is obvious. Large and mediumsized cities (including mega-cities) still have considerable room for development in China, and small towns have even broader development prospects.45 44 45

Xu et al. (1989). Liu (1998).

15.3 The Debate on the Path of Urban Development in China

501

In fact, the provisions of the “Ninth Five-Year Plan for National Economic and Social Development and the Outline of the 2010 Vision” approved by the Fourth Session of the Eighth National People’s Congress in March 1996 are: “we need to coordinate urban and rural construction and strictly control urban and rural construction land. We need to strengthen the legal management of urban and rural construction. We also need to gradually form a large-, medium- and small-sized urban system with proper scale, reasonable layout and structure.” “We should develop a number of small cities and towns in an orderly manner, and guide a small number of small cities with better performance, and other small cities and towns, to develop in the direction of convenient transportation, complete facilities, all-around functions, and beautiful environment.” The “Outline” no longer requires “strict control of the size of large cities”, but it sets clear requirements for the orderly development of small towns. (3) Take the road of urbanization with Chinese characteristics The report of the 17th National Congress of the Communist Party of China stated: “taking the road of urbanization with Chinese characteristics, we will promote the coordinated development of large, medium and small cities and small cities and towns in accordance with the principles of coordinating urban and rural areas, rational layout, land saving, perfect functions, and leading the small cities with large ones. We need to focus on enhancing the comprehensive carrying capacity and rely on megacities to form urban clusters with a large radiation effect and foster new growth poles.” It can be said that this argument is based on lessons learnt from our country’s urban construction and useful practices abroad; it has established a new model of urban development in the future and indicated the direction of urbanization. Zhao Zhenhua put forward the following points when interpreting the road of urbanization with Chinese characteristics: (1) In terms of urban size, big cities have the advantages of their own, such as land saving and high labor productivity, but there are problems such as that the production factors are too intensive and the requirement of management and infrastructure is very high. On the other hand, small cities also have the advantages of their own, such as the relatively low cost of rural population transfer and livability, but there are also shortcomings such as large unit GDP or per capita land area, relatively low labor productivity, and underdeveloped tertiary industries. Urbanization must proceed from China’s reality, promote strengths and avoid weaknesses, and coordinate development. (2) China has a large population, and it is impossible for the vast majority of residents to move to large cities or allow all residents to live in small cities and small towns. It is necessary to actively develop large cities and effectively prevent “big city diseases”, and develop small and medium-sized cities and small cities and towns. (3) From the perspective of urban–rural relations, it is necessary to break the dual urban–rural structure and achieve urban–rural integration. (4) From the perspective of the relationship between cities and towns, it is necessary to break down the barriers between regions and towns, promote the rational flow of production factors between cities and towns, and

502

15 The Main Progress and Innovation of Regional Economic Theory Research

make urban clusters the new economic growth pole of our country in the future.46 In October 2007, our country promulgated the new “Urban–Rural Planning Law”, which embodies the spirit of coordinating the urban–rural spatial layout, promoting the comprehensive, coordinated and sustainable development of urban and rural economy and society, and there is no longer a requirement for the size of towns. Ning Jijie believes that to adhere to the path of urbanization with Chinese characteristics, we must shift from the one-sided pursuit of quantitative expansion to more emphasis on quality improvement, and gradually raise the level of urbanization. On one hand, we must continue to actively promote urbanization, boost the transfer of surplus rural labor and population to cities, and improve the ability of various production factors to support urban development. On the other hand, it is necessary to rationally grasp the size of cities, optimize and adjust the urban structure, focus on improving the quality of urban construction and development, and continuously and steadily exert the role of urbanization in promoting economic and social development.47 This view is Regarding the formation of urban clusters with great radiation effects and the cultivation of new growth poles, some experts point out that first, we must correctly understand the basic connotation of urbanization. Urbanization is the process of agglomeration of multiple resources into specific areas, and urbanization should not be simply understood as expanding the urban area, which may lead to much faster urbanization of land than urbanization of the population. Also, we should not engage in urbanization with only statistic significance, such as the superficial urbanization of “county to city”, “county to district” or “township to town”. Second, international experience shows that urban agglomerations have become the main form of urbanization in developed countries. They are not only urban dense areas for job creation and population living, but also core areas for supporting economic development and participating in international competition. These multi-center structures can prevent the “urban disease” caused by the excessive expansion of a single city, and also avoid the waste of land caused by decentralized urbanization, which is conducive to protecting the land and the ecological environment. International experience also shows that the so-called industrialization, urbanization, and modernization does not necessarily need to be realized in every inch of a country. It is necessary to change the mode of promoting urbanization mainly by administrative districts rather than economic zones, and form a reasonable spatial layout of urbanization. Third, these experts put forward the following suggestions: (1) We need to optimize and integrate the existing three major urban agglomerations, mainly the Beijing-Tianjin-Hebei area, Yangtze River Delta, and Pearl River Delta regions. In fact, as of 2007, the National Development and Reform Commission reported to the State Council that Tianjin, Chengdu, Chongqing, Changsha, Zhuzhou, Xiangtan, Wuhan, and Shenzhen will be pilot cities of comprehensive supporting reforms, with an expectation to better exerting the attraction and radiation effects of urban agglomerations. (2) We 46

Zhao (2008). (2005). The Suggestions of the Central Committee of the Communist Party of China on the Formulation of the 11th Five-Year Plan for National Economic and Social Development. (pp. 242– 243). People’s Publishing House.

47

15.4 The Innovation of Regional Economic Development Strategy in China

503

should focus on cultivating several urban agglomerations, such as Liaodong Peninsula, Shandong Peninsula, Southeast Fujian, Central Plains, Wuhan, Changzhutan, Guanzhong Basin, Chengdu-Chongqing, Beibu Gulf Coast and other areas. (3) We also need to develop other cities according to local conditions.

15.4 The Innovation of Regional Economic Development Strategy in China Our country has a vast territory, a large population, a wide range of conditions, and uneven levels of development. Regional coordinated development strategy is a major issue in the development process. In particular, China is in a period of stable economic development and continuous system reform, with increasing opening to the outside world, widening regional gaps and readjustment of inter-regional interests. Issues related to regional coordinated development are of much greater significance. Since the reform and opening up, in response to this situation, the country has put forward corresponding plans including the development goals of the three major regions of the East, Middle and West in multiple five-year plans, and has achieved significant results. Now China has entered a new era and has reached a generally much higher productivity level. The overall improvement has been significant, but the more prominent issue is to call for a more balanced and thorough development, which will lead to the stage of adjusting structure, improving quality, and increasing benefits. 2006 is the first year of the Eleventh Five-Year Plan (2006–2010). In order to implement the scientific outlook on development, the main tasks and measures for implementing the overall regional development strategy and promoting the coordinated development of the regional economy in 2007 were proposed, including: (1) Continue to promote the development of the western region. (2) Actively promote the revitalization of old industrial bases such as Northeast China. (3) Implement policy measures for the rise of central China. (4) Encourage the eastern region to continue to promote innovation in systems and mechanisms, accelerate the optimization and upgrading of industrial structures, and take the lead in the country in terms of promoting reform and opening up, promoting scientific development, and transforming the growth mode. (5) Accelerate the economic and social development of the old revolutionary base areas, ethnic areas, border areas and poor areas (old, immature, border, and poor areas), increase support for infrastructure construction and public services in less developed areas, and actively support the development of those ethnic groups with fewer populations. (6) Actively and steadily promote urbanization. (7) Ensure sound planning in marine development and support the development of marine economy. The reason why we regard promoting the coordinated development of regional economies as the basic requirement of the scientific outlook on development is because: on one hand, after long-term development, the country has accumulated

504

15 The Main Progress and Innovation of Regional Economic Theory Research

relatively strong material and technical conditions. In 2010, China’s GDP reached 41.3 trillion yuan. It ranks the second in the world, but its per capita GDP ranks more than 60th in the world. We can achieve more in promoting comprehensive, coordinated and sustainable development. On the other hand, problems have become more prominent such as uneven and uncoordinated regional economic development and its unsuitable matching with population, resources, and environment, which has led to the coexistence of the developed east and the lagged-behind western, as well as coexistence of the prosperous cities and backward villages. Only by consciously advancing comprehensive, coordinated and sustainable development can our country better resolve the various problems that restrict its development and better ensure the achievement of its strategic goals. In 2012, when we summarized the implementation of the “Eleventh Five-Year Plan”, we must have successfully promoted this plan, the regional development coordination has been strengthened, and the level of urbanization has been significantly improved. At the same time, it was also pointed out that the problems of unbalanced, uncoordinated and unsustainable development are very prominent. The overall level of industrialization presents a gradient gap gradually decreasing in the eastern, central and western regions. The regional development gap and residents’ income distribution gap are still relatively large. There are many aspects concerning the reasons for these problems. One of the most important reasons is the lack of understanding of the essence of our country’s regional coordinated development, which in turn leads to misunderstandings in development concepts. Therefore, the “Outline” of the “Eleventh Five-Year Plan” in 2006 proposes to promote the formation of main functional areas, adjust and improve regional policies and performance evaluations according to the positioning of main functional areas, and standardize the structure of spatial development. This embodies new insights for promoting coordinated regional development. In 2007, the National People’s Congress confirmed this work, and subsequently issued the “Opinions on the Preparation of National Major Functional Area Planning”, after which major work was carried out accordingly. In fact, the planning of regional economic development is closely related to the planning of the layout of productive forces, both of which reflect aspects in the development and operation of the national economic space. The layout of productive forces reflects the distribution, flow and spatial aggregation of economic resources and elements from a bird’s-eye perspective; while regional economic development reflects the differences, development, coupling and inter-regional correlation of regional economic structures from a head-up perspective. Adhering to the coordinated development of regional economies cannot rely solely on the role of market mechanisms; we also need to formulate a “national regional policy” with national binding and authority.48 In July 2018, Li Keqiang inspected the progress of the construction of the Lalin section of the Sichuan-Tibet railway. At present, the infrastructure in the central and western regions is still relatively weak. Promoting effective 48

Zheng (1999).

15.4 The Innovation of Regional Economic Development Strategy in China

505

investment in shortcomings will not only help narrow the regional development gap, but also respond to economic downward pressure. We need to focus on what needs to be done and accelerate the full-scale construction. There are different views on whether the central government should address regional disparities. There is a “neutral” policy theory, which holds that both developed and undeveloped areas should be treated equally; while there is also an efficiency paramount theory, which advocates supporting rich areas first; in addition, there is a “self-narrowing” theory, which holds that there is no need for the country to use regional policies, and the regional gap will narrow itself with economic development. These are all one-sided and harmful views.49 After the Eighteenth National Congress of the Communist Party of China in November 2012, our country’s regional economic development has entered a new era. The Eighteenth National Congress of the Communist Party of China proposed to continue to implement the overall regional development strategy and gradually implement it. In October 2017, the 19th National Congress of the Communist Party of China proposed to implement the new development concept and build a modern economic system, including the implementation of a coordinated regional development strategy. It is suggested that we should increase efforts to support the accelerated development of “old, immature, border, and poor” regions, while strengthening measures to promote the development of the western region to form a new pattern, and strengthening the work of assisting Tibet and Xinjiang. We should also deepen the reform to accelerate the revitalization of old industrial bases such as Northeast China. Advantages should be utilized to promote the rise of the central region. The leading role of innovation should be used to realize the optimized development of the eastern region in the first place. We need to scientifically plan the construction of the Guangdong-Hong Kong-Macao Greater Bay Area and strengthen support for the economic transformation and development of resource-based regions. We also need to improve the quality of urban agglomerations and promote the network construction of large, medium and small cities. A more effective new mechanism for regional coordinated development should be established. The report of the Nineteenth National Congress of the Communist Party of China made important judgments on the transformation of major social contradictions, which ignited much discussion among many economic experts. Some say that this new conclusion is in line with the reality of our country’s current economic and social development, and there are indeed imbalances and inadequacies in the current development. Due to the imperfect market economy system and inadequate distribution system, in addition to the large differences in development opportunities and levels among different regions, different industries, and different groups of people, urban–rural gaps, regional gaps, and industry gaps have emerged. At the same time, our development also pays a high price in resources and environment. What should we do to achieve a more balanced and adequate development? Some said that it is necessary to take “building a moderately prosperous society in an all respects” as

49

Wei et al. (1997).

506

15 The Main Progress and Innovation of Regional Economic Theory Research

the strategic goal, continue to increase the total economic volume, solve the problems of imbalance and insufficiency in development, and form a joint force to solve the problems of “imbalanced and inadequate” in the whole society. While some have expressed that we must deeply understand the two “no changes”, that is, the basic national conditions of our country that we are still in and will remain in the primary stage of socialism for a long time have not changed, and the international status of our country as the world’s largest developing country has not changed. On the basis of continuing to promote development, we must work hard to solve the problem of imbalanced development and inadequate development. The new development concept is to allow the economy to improve the quality and efficiency of development in a more moderate state.50 We need to carry out the new development concept of innovation, coordination, green, openness and sharing. Carrying out the new strategy of the new era, building a modern economic system, and adjusting the new starting point of the domestic spatial layout of economic development are important issues in realizing the development strategy of the new era. This includes the following aspects.

A New Start with the Collaborative Development of Beijing-Tianjin-Hebei Beijing-Tianjin-Hebei covers 21.6 million square kilometers and has a population of more than 110 million. In 2016, the GDP was 7.46 trillion yuan, accounting for 9.7% of the country, and 25% of foreign investment in the country settled in the district. The R&D expenditures of this district also account for 15% of the country. For a long period of time, the population has expanded, the ecological environment is under severe challenge; traffic is congested; housing prices are skyrocketing and resources are overloaded. Beijing has gathered too many non-capital functions. On the other hand, the per capita GDP of Hebei is only about 40% of that of Beijing and Tianjin, and the per capita income is only half that of the two cities. At the level of public services and in the aspects of quality and efficiency, there are obvious differences from Beijing and Tianjin, and the development is uneven. On February 26, 2014, President Xi Jinping emphasized that the coordinated development of Beijing, Tianjin and Hebei is a major national strategy. On April 30, 2015, the Political Bureau of the Central Committee of the Communist Party of China reviewed and approved the “Outline of the Beijing-Tianjin-Hebei Coordinated Development Plan” and issued 12 special plans. This national development strategy has entered a new stage of accelerated progress. The report of the 19th National Congress of the Communist Party of China stated that it is necessary to establish a more effective new regional development mechanism and further promote the coordinated development of Beijing, Tianjin and Hebei. This collaborative development includes three parts. 50

Wang et al. (2017).

15.4 The Innovation of Regional Economic Development Strategy in China

507

(1) The development of Beijing Unraveling the “non-capital” function of Beijing is the “bull nose”, i.e. the main contradiction to be solved to promote the coordinated development of Beijing, Tianjin and Hebei. The construction of the Beijing city sub-center and the Xiong’an New District will form the new “two wings” for Beijing. To unravel the non-capital function, we must start with the plan. In February 2014, Beijing and other relevant parties launched the new version of the General Development Plan of Beijing City, adhering to the principle of planning prior construction. On September 13, 2017, the Party Central Committee and the State Council formally approved the “Beijing City General Development Plan (2016–2035)”, and it is believed that this general plan has new breakthroughs in ideas, priorities, and methods, and has played a demonstrative role for the development of other major cities in the country. This approved document requires Beijing to strengthen the functional construction of the “four centers”, namely the National Political Center, Cultural Center, International Exchange Center, and Science and Technology Center, as well as to optimize city functions and spatial layout. We should strictly control the size of the city and do a good job in the protection of historical and cultural cities and the shaping of urban features. Efforts should be made to control the “big city disease” and enhance the people’s sense of gain. The high-level construction of the Beijing city sub-center is required. Beijing is implementing this approved document through accelerating the preparation of detailed control plans for the city’s sub-center, and integrating the three major functions of administrative office, business services, and cultural tourism into the spatial layout. This shows that Beijing is realizing a major shift from gathering resources for growth to loosening functions, improving quality, and seeking development. (2) The development of Tianjin In the collaborative development plan, Tianjin took Binhai New Area as the leader, actively adjusted and optimized the industrial structure, accelerated the transformation of economic development mode, and promoted the development of industrial integrated and intensive clusters. At the same time, the development of the service industry was accelerate and a service economic system that is compatible with the status of a modern metropolis was formed. Practice shows that Tianjin Binhai New Area has made new achievements in exploring the “new”. In the first half of 2017, Binhai New Area’s GDP has accounted for more than half of the city, the added value of the tertiary industry reached 12.9%, the proportion of which has reached 45.6%, and the contribution rate to economic growth was 7.4%.51 Beijing and Tianjin will accelerate the promotion of environmental technology, health care, culture and education, tourism and leisure vacation, high-tech R&D and high-end business and trade as demonstration areas for cooperation.

51

Hu et al. (2017).

508

15 The Main Progress and Innovation of Regional Economic Theory Research

(3) On April 1, 2017, the establishment of Xiong’an New District was confirmed The planning scope involves the three counties of Xiong County, Rongchengand Anxin in Hebei and some surrounding areas. The positioning of Xiong’an New District is first to serve as a concentrated carrying area to unravel the non-capital functions of Beijing. Choosing to build a Xiong’an New District with a high starting point, high quality planning and high standards in Hebei is to build another innovative central city with national significance that can drive the transformation and upgrading of the regional economy after the Shenzhen Special Economic Zone and Shanghai Pudong New District. In October 2017, the overall plan of the new district is being deepened and refined, with 22 special plans basically taking shape, streamlined, efficient and unified management institutions formed, and corresponding policy systems being built. In just three months, the EMU train has been launched from Beijing to Xiong’an New District, and high-speed rail is under construction. The 10,000 mu (a unit of area) cooperative afforestation project has been officially launched. There are dozens of four major banks, central enterprises and local state-owned enterprises entering and settling here. On April 14, 2018, the Party Central Committee and the State Council approved the “Hebei Xiong’an New District Planning Outline” and agreed to implement this plan. It pointed out that it is necessary to use this plan as a guide to promote the construction of the Xiong’an New District into a centralized bearing place for Beijing’s non-capital functions, a new concept of innovative development demonstration zone, an open development pioneer zone, and a green and livable new urban area. Since the implementation of the Beijing-Tianjin-Hebei coordinated development strategy in 2014, the regional development index has steadily increased to 153.99 in 2017, an increase of 36.29 points compared with 2013, with an average annual increase of 9.07 points; the regional urbanization rate has increased from 55.7% in 2010 to 64.9% in 2017, higher than the national average. The average growth rate of the Green Development Index from 2013 to 2017 was 9.42 points; the regional average annual PM2.5 concentration in 2017 has decreased by 39.6% compared with that of 2013.

The Promotion of the Development of the Yangtze River Economic Belt The Yangtze River is the most important east–west axis of our country’s national space development, and it has a pivotal position in the regional development layout. The Yangtze River Economic Belt includes 11 provinces and cities from Yunnan to Shanghai, accounting for about one-fifth of the country’s land area, and its population and GDP each exceed 40%. Its total imports and exports account for about 40% of the country. In 2016, its GDP was 33.29 trillion yuan, accounting for 43.1% of

15.4 The Innovation of Regional Economic Development Strategy in China

509

the country. Its per capita GDP reached 56,970 yuan, which was higher than the national average of 2,490 yuan. This zone is not only an economic community, but also a closely related ecological community, or an important link connecting the “Belt and Road”. The total amount of water resources accounts for about 35% of the country. As a river basin economy, it is a integral part including multiple aspects such as water, roads, ports, shores, industries, cities and living things, wetlands, and the environment. It is a whole. However, the development level presents a gradient distribution pattern with obvious differences and huge potential to be explored. As early as 1999, Xu Guodi, Wang Yiming and other scholars in the book “Comprehensive Development of the Yangtze River Economic Belt in the 21st Century” proposed relatively clear overall development ideas as regard to the strategy and objectives of the comprehensive development of the Yangtze River Economic Belt during the “Tenth Five-Year Plan” period until 2020. Among them, the innovative ideas are mainly: taking the Yangtze River Economic Belt as the focus of our country’s regional development; setting the development goal of this economic belt as the largest inland economic belt in the Asia–Pacific region; carrying out focused and guided comprehensive development emphasizing on structural adjustment; large enterprise groups should play a leading role in regional comprehensive development. These viewpoints are of great reference value for studying the development of the Yangtze River Economic Belt.52 To promote the development of the Yangtze River Economic Belt, the country has successively proposed a series of scientific guidelines and action guidelines. On May 30, 2016, the Party Central Committee and the State Council issued the “Outline of the Yangtze River Economic Belt Development Plan”. Since then, 10 special plans including the “Ecological Environmental Protection Plan of Yangtze River Economic Belt” have also been basically completed. These top-level design contents include the following main aspects. (1) Take the road of scientific, green and sustainable development On January 5, 2016, President Xi Jinping pointed out at the symposium to promote the development of the Yangtze River Economic Belt that the development of the Yangtze River Economic Belt must be based on the long-term interests of the Chinese nation, take the path of ecological priority and green development, and utilize the lucid waters and lush mountains to produce huge ecological benefits. The economic and social benefits will keep the Mother River alive forever, and build the Yangtze River Economic Belt into a leading demonstration belt, innovation-driven belt, and coordinated development belt for the construction of ecological civilization in China. The protection and restoration of the ecological environment of the Yangtze River should be given top priority. A pattern with “overall protection based on joint efforts” should be formed.

52

Xu (1999).

510

15 The Main Progress and Innovation of Regional Economic Theory Research

(2) Enhance systematic thinking We need to coordinate the reform and development of various regions, coordinate various inter-regional policies, construction in various fields, and use of various resource elements to make the coordination of provinces and cities along the Yangtze River more obvious, work together to promote coordinated integration, and accelerate the optimization of resources in a wider area. To this end, the contents of institutional coordination are planned in this “Outline”, positioning the Yangtze River Delta urban agglomeration, the middle reaches of the Yangtze River urban agglomeration, and the Chengdu-Chongqing urban agglomeration as the three major growth poles of the Yangtze River Economic Belt, which are developed in a staggered manner with an aim to improve the quality of urbanization of the Yangtze Economic Belt. (3) Work together to improve the new mechanism of regional coordinated development The development of the Yangtze River Economic Belt requires the establishment of a leadership system and working mechanism for overall coordination, planning guidance, and market operation. To this end, a multi-level consultation and cooperation mechanism and planning system have been initially formed, committed to breaking the boundaries and barriers of administrative divisions, collaboratively protecting the ecological environment of the Yangtze River, promoting the interconnection of infrastructure, and promoting the coordinated development of regional economies. Among them, the Leading Group for the Development of the Economic Belt has given full play to its leading role, the consultation mechanism has been fully established, and the four provinces and cities of Shanghai, Jiangsu, Zhejiang, and Anhui have established a coordination mechanism of “three-level operation with integration of unity and division, and a stress on pragmatic and efficient operation” The four provinces and cities, which account for 3.8% of the country’s area and nearly 25% of the country’s total economy, are using the development plan as a starting point to drive the new process of coordinated development in the Yangtze River Delta region. In 2017, the GDP growth rate of 11 provinces and cities along the Yangtze River Economic Belt stayed at the same or higher level than the national average. (4) In April 2018, President Xi Jinping delivered an important speech on further promoting the development of the Yangtze River Economic Belt He emphasized that to promote the development of the Yangtze River Economic Belt under the new situation, the key is to correctly grasp the overall advancement and key breakthroughs, ecological environmental protection and economic development; Based on overall and long-term planning, we will eliminate old functions and cultivate new functions, and achieve balanced relationship between self-development and coordinated development. This is an important decision of the central government.

15.4 The Innovation of Regional Economic Development Strategy in China

511

The Proposition and Promotion of the Belt and Road Initiative In the autumn of 2013, based on the concept of mutual consultation, joint construction and sharing, President Xi Jinping proposed the Belt and Road Initiative to build the Silk Road Economic Belt and the 21st Century Maritime Silk Road in Kazakhstan and Indonesia. On December 2, 2014, the Party Central Committee and the State Council issued the “Strategic Plan for the Construction of Silk Road Economic Belt and the 21st Century Maritime Silk Road.” Scholars such as Zhang Yansheng believe that the Belt and Road Initiative has been in progress for four years and has been promoted in an orderly manner from scratch, with many countries actively participating and widely supported by the international community, injecting strong new impetus into the development of the world economy. So far, more than 100 countries and international organizations have responded positively to support this initiative. 74 countries and international organizations have signed cooperation agreements with China. China has carried out institutionalized cooperation in production capacity with more than 30 countries. Also, China has achieved docking with ASEAN’s overall plan for connectivity and other development strategies, and accelerated the construction of regional integration. Since 2015, the previous summits of the “Shanghai Cooperation Organization” have clearly supported the Belt and Road Initiative, played a role in the regional cooperation model of “Shanghai Cooperation”, and connected with relevant national development strategies to harvest the benefits from regional economic integration. One of the six consensuses reached at the Qingdao Summit of “Shanghai Cooperation Organization” is that economic globalization and regional integration are the general trend. In the year of 2014–2016, our country’s total trade with countries along the “Belt and Road” exceeded US$3 trillion, and cumulative investment in these countries exceeded US$50 billion. Chinese companies have built 56 economic and trade cooperation zones in more than 20 countries along the route. This shows that the construction of the Belt and Road Initiative is conducive to the conduction of more extensive economic cooperation, the opening up of a wider space for cooperation, the achieving of strategic transfer and docking through complementing each other’s strengths; it is also beneficial for the adherence of better integration of coastal and inland border opening-up, as well as the optimization of the regional opening-up layout; it is also contributive to the strengthening of the exchanges and mutual learning among different civilizations, the promotion of world peace and development, and the stimulation of the formation of a fair and reasonable international economic order. Practice has shown that through the interconnection of infrastructure, including the interconnection of transportation networks, energy transmission channels, and information and communication networks, it will inject new impetus into development, add new vitality, and expand new space. Through international cooperation in production capacity, China’s technology, capital, and management are combined with the market demand, labor, and resources of participating countries in the Belt and Road Initiative. Through the construction of project groups, industrial chains, and economic zones, we will achieve complementary advantages and share risks.

512

15 The Main Progress and Innovation of Regional Economic Theory Research

The regional governance model focuses on reducing barriers to regional cooperation and driving the development of regional economic circles. The successful convening of the Belt and Road Summit Forum in Beijing on May 14, 2017 has vigorously promoted the Belt and Road construction and deepened the implementation path of Policy Coordination, Facilities Connectivity, Unimpeded Trade, Financial Integration, and People-to-people Bond, thus achieving coordinated and synergized development. As of 2017, Chinese enterprises have established 99 overseas economic and trade cooperation zones in 44 countries, with a total investment of US$30.7 billion, creating US$2.42 billion in taxes and 258 thousand jobs for the host country. By expanding cooperation in production capacity, the global industrial layout was improved.

The Adherence to Targeted Poverty Alleviation and Targeted Poverty Elimination Our country is a developing country with a large population and many people still living in poverty. For a long time, the central and local governments at all levels have been committed to eradicating poverty, and have successively implemented the Program of State’s Storming the Fortifications in the Work of Helping the Poor (1994– 2000), the China Rural Poverty Alleviation and Development Program (2001–2010), and the China Rural Poverty Alleviation and Development Program (2011–2020). The poverty problem of China has regional characteristics. The key point is to accomplish the poverty elimination task in the deeply impoverished areas. In 2017, the national plan proposed to increase support for special types of areas (old, young, border, and poor areas). First of all, we need to increase support for deeply impoverished areas. It is proposed that we need to further strengthen the planning and research of the contiguous poverty-stricken areas, and continue to implement measures such as work-for-relief and ex-situ- or relocation-based poverty alleviation to further improve the basic production and living conditions in the poverty-stricken areas. From 2013 to 2017, the central government increased the allocation of special poverty alleviation funds from 39.4 billion yuan to 86.1 billion yuan, an average annual increase of 22.7 percent, and a total investment of 278.7 billion yuan. A total of 338.1 billion yuan in poverty alleviation loans were issued, supporting 8.55 million poor households. Together with other effective measures, poverty alleviation has made remarkable achievements. From 2012 to 2017, the rural poverty population decreased from 98.99 million to 30.46 million, and the incidence of poverty fell from 10.2% to 3.1%, which means that China has taken the lead in fulfilling the UN Millennium Development Goals. China has announced that it plans to achieve poverty alleviation in accordance with current standards by 2020, marking the country’s historic solution to the problem of absolute poverty. Absolute poverty is usually measured by an income standard that meets the most basic standard of living. Those who fall below this standard belong to the poor population. At present, the average annual income of

15.4 The Innovation of Regional Economic Development Strategy in China

513

2300 yuan per capita is used as the standard to assess the achievement of elimination of absolute poverty in China. As regard to poverty elimination, the following key issues should be concerned. (1) The standard of poverty elimination According to the current standard, people are counted as impoverished rural population if the annual income per person is below 2,300 yuan (based on constant prices in 2010). However, the country’s rural poverty elimination standard has been raised to 2,800 yuan in 2014. The World Bank has also raised the international poverty standard in daily living cost from US$1.25 to US$1.9. In addition, some regions have also set their own standard which has exceeded 2,300 yuan. Besides, poverty is not only reflected in annual per capita income. Therefore, it seems worthy of study to conclude if it is reasonable to use the 2,300 yuan standard in determining the elimination of poverty. Some scholars believe that improving the viable capacity of the poor should be used as the standard. Because the manifestations of poverty are diverse. In addition to the average annual income, there are other forms reflecting the level of poverty. For example, poverty can be also reflected by the inability to enjoy public goods, the inability to obtain employment opportunities, the failure to receive basic education, the lack of basic risk prevention capabilities, and increase of the proportion of returning to poverty due to illness. Correspondingly, various methods, mechanisms and policies should be adopted to eliminate poverty. Fundamentally, more reasonable institutional arrangements should be put in place to realize the reduction of the impact of economic factors, institutional factors, legal factors and social welfare factors on the rights of the poor, to change the disadvantaged position of the poor, thus enabling the poor to acquire and improve functions and capabilities that meet their minimum needs.53 Measures can be carried out such as organizing cooperatives, linking small production with large markets, providing unified services and enhancing voice in the market. (2) Key areas for poverty elimination Poverty counties were identified in China in 1986. After 30 years of hard work till February 2017, Jinggangshan and Lankao counties have taken the lead in poverty elimination. In November 2017, the Poverty Alleviation Office of the State Council announced the removal of the poverty hats for 26 poverty counties including Tori County in Xinjiang, Yadong County in Tibet, and Chishui City in Guizhou, which signaled the reduction of the number of poor counties for the first time in 30 years. However, the Party Group of the Poverty Alleviation Office of the State Council recently pointed out that there are still some difficulties and problems such as the improper implementation and inaccurate targetting of poverty elimination. For example, the task of poverty elimination in deep poverty-stricken areas such as Tibet, Xinjiang and other border ethnic areas is still very arduous. The total number of the poor is still large, and by the end of 2017, the east regions show the highest level in 53

Meng (2017).

514

15 The Main Progress and Innovation of Regional Economic Theory Research

reduction in poverty population, while the west regions show the lowest level. There are 6 provinces in the country with a poverty population of more than 3 million, 54 provinces with a poverty incidence of more than 10%, and the number of poverty counties and villages with poverty incidence of more than 20% is nearly 200 and 30,000, respectively. From the perspective of total number of people, there are still more than 30.46 million rural poverty population in China at the end of 2017. By 2020, in order to reach the poverty alleviation target, we need to reduce the poverty population by nearly 11 million people annually. On November 21, 2017, the China Office and the State Council issued the “Implementation Opinions on Supporting to Overcome Difficulties in Elimination Poverty in Deep Poverty-stricken Areas”. The document pointed out that the focus of central planning is to support the “three areas and three prefectures”. “Three areas” refers to three consecutively destitute areas in Tibet, the Tibetan area connecting four provinces, and four counties and cities in southern Xinjiang. “Three prefectures” refers to the three autonomous prefectures of Liangshan Prefecture in Sichuan, Nujiang Prefecture in Yunnan, and Linxia Prefecture in Gansu, and other poverty counties with incidence of poverty exceeds 18% and poverty-stricken villages with a poverty incidence rate of more than 20%. These places all have poor natural conditions, weak economic foundations, and deep level of poverty. They are the critical areas of poverty elimination. Overcoming shortcomings in these places is the key to a decisive victory in poverty elimination. Coordinated by the central government, the focus is placed on supporting the “three areas and three prefectures” with funds, projects, and initiatives for poverty elimination mainly used in areas which was stricken the most seriously by poverty. Efforts need to be increased in seven areas: central government investment, financial poverty alleviation support, tilted project layout, ex-situ poverty alleviation and relocation implementation, ecological poverty alleviation support, cadre talent support, and social assistance. Specifically, provincial governments shoulder the overall responsibility for poverty alleviation, and the deep poverty issues in the jurisdiction are solved by determining poverty counties, townships, towns and villages by the provincial governments; municipal and county governments are responsible for the implementation of poverty elimination projects. The establishment of archives and the management of documents should be carried out in a practical and meticulous manner. And the three major mechanisms of precise target management, precise policy implementation and advancing, and precise command support should also be actively explored. It is also imperative to cultivate the overall development stamina and potential of the areas. We should adhere to the coordinated advancement of policies, markets, rural people and the society. In July 2018, the Poverty Alleviation Office of the State Council deployed pragmatic plan in promoting cooperation between the East and the West to jointly achieve poverty alleviation. It called for strengthening industrial cooperation, giving play to the respective advantages of the East and the West, and improving the coordination mechanism. It is emphasized that the western region should strengthen the consciousness of opening up the market, and actively connect and cooperate with the east region.

15.4 The Innovation of Regional Economic Development Strategy in China

515

(3) The adherence to the basic strategy of targeted poverty alleviation and targeted poverty elimination In 2013 and 2015, President Xi Jinping proposed that the key to poverty alleviation is to be targeted. “Six targeted” aspects were emphasized, i.e., targeted supporting objects, targeted project arrangements, targeted use of funds, targeted measures to households, targeted assignment of people to villages, and targeted results in poverty alleviation. The whole process of poverty alleviation must be precise. And the relationship between regional development and targeted poverty alleviation should be well balanced. Attention should be paid to the integration of poverty alleviation with ambitionbuilding and intelligence-support with a focus on improving the ability of the poor to survive, produce and develop. We need to ensure that the rural poor population will be lifted out of poverty under the current standards of our country by 2020, and all poverty-stricken counties will take off their poverty-hats, solve the overall poverty problem in the region through really effective measures implemented targeted at real poverty issues. It is necessary to increase the precision of poverty elimination, strengthen inspection and supervision, and investigate and deal with violations of poverty elimination and corruption issues. To this end, the State Council forwarded the new “Measures”, fully deployed the management of the performance of funds for poverty alleviation projects, and included the National Audit Office for the first time in the new Leading Group for Poverty Alleviation and Development of the State Council. We also need to guard against political, economic and moral risks with a major target at deep poverty areas and villages where poor people are concentrated. For villages with poor living conditions and fragile ecological environment, efforts should be enhanced to implement ecological resettlement. The work to deal with issue regarding poverty caused by illness or returning to poverty due to illness should also be strengthened.

The Promotion of the Formation of Main Functional Areas The “Outline” of the “Eleventh Five-Year Plan” proposed to promote the formation of main functional areas. This is because the main functional area is a spatial unit that determines a specific area as having a specific main function through scientific analysis and evaluation based on factors such as resource and environmental carrying capacity, existing development density, and development potential. In doing so, first, it is conducive to changing the concept of development, changing the development idea of pursuing only regional GDP to fully considering the resource and environmental carrying capacity of each region, and gradually reducing the per capita GDP between regions by supporting economic development in less-developed regions. Thus, the gap between per capita GDP and per capita financial resources will be gradually bridged and coordinated regional development will eventually be

516

15 The Main Progress and Innovation of Regional Economic Theory Research

achieved. Second, it is conducive to achieving spatial equilibrium. From the perspective of economic layout and population distribution, the total economic volume of the eastern part of China accounts for more than half of the national economic total, but the population accounts for only about 1/3; on the contrary, the total economic volume of the western region accounts for about 1/5 of the whole country, but the population is about 1/3 of the whole country. The promotion of the formation of main functional areas is to guide the population and economy in the country to gather in areas with good resource and environmental conditions, optimize the layout of land and space development, adjust the industry layout of different regions or river basins, and promote green development, thus fundamentally reversing the trend of excessive consumption of resources and deterioration of ecological environment in China. Third, it is conducive to strengthening regional regulation, adapting to the development direction of different regions and adapting to local resource and environmental conditions, implementing more targeted guidance and regulation, and constructing a system of national land space development and protection. China’s national land and space resources are extremely scarce. The per capita land area is 1/4 of the United States and 1/2 of Europe. The per capita cultivated area and forest area are only equivalent to 2/5 and 1/5 of the world average, respectively. It is required to speed up the establishment of land and space development and protection system, including the implementation of the most stringent land and space use and efficiency management system, significantly improve the modernization level of governance capacity, and make full use of market mechanism to restrict and guide the rational development and protection of land and space. Since 2007, China has begun to promote the formation of main functional areas. This includes: first, the establishment of a national leadership group and office for planning and preparation of main functional areas. Specifically, the planning and preparation work is carried out through national and provincial levels, of which national-level planning involves the planning of the number, location and scope, as well as the corresponding policy directions of the four types of main functional areas including optimized development, key development, restricted development and prohibited development. The second is to guide local governments to carry out their planning work. The third is to strengthen coordination with relevant departments. The fourth is to organize basic research work on major issues. At present, China’s economy has shifted from the stage of high-speed growth to the stage of improving quality and increasing efficiency. Coordinated regional development has played an important supporting role in improving the quality and efficiency of our country’s economy. After several years of work, in 2010, the State Council released the “National Main Functional Area Plan”. In 2014, the provincial main functional planning was completed. On August 1, 2015, the State Council issued the “Planning of National Marine Functional Areas.” The report of the 19th National Congress of the Communist Party of China requires adherence to the overall planning of the land and sea and speeding up the construction of a maritime power. Our country has more than 3 million square kilometers of marine land. In 2017, the gross national marine product reached 776.11 billion yuan, accounting for 9.4% of GDP. One of the main tasks of land and sea co-ordination is to develop new space and

15.4 The Innovation of Regional Economic Development Strategy in China

517

promote the extension of the marine economy from near-shore seas and islands to deep seas and polar regions. The “Thirteenth Five-Year Plan” for the national marine economic development was accelerated. On January 3, 2017, the State Council issued the “National Territorial Planning Outline”. On October 1, 2017, the Central Office and the State Office issued documents related to “optimizing the main functions and spatial layout of agriculture.” So far, our country’s main functional area strategy has achieved full coverage of land space and sea space. With the development of the situation and the summary of implementation experience, the planning itself and the corresponding institutional mechanisms and policy systems will continue to be reformed and optimized.

Urbanization in the New Situation (1) The formation of the main body of the new urban agglomeration In the modern commodity economy, the city is the hub of the commodity economy. Under the medium of the market, regional economies are closely linked. With the development of the economy and the deepening of reforms, more and more people gather in cities, and the main body of urban agglomerations spreading everywhere is gradually formed. New urbanization is a process of continuous accumulation and deepening. Since the 18th CPC National Congress, the CPC Central Committee and the State Council have attached great importance to the new urbanization work. For example, in 2014, the Central Office and the State Council issued the National New Urbanization Plan (2014–2020). The nationwide solid promotion of new urbanization has led to the urbanization rate of the permanent population increasing from 52.57% in 2012 to 58.52% in 2017, and the urbanization rate of the registered population increasing from 35.3% to 42.35%. The people are enjoying more and more dividends and achievements from urbanization. However, due to differences in regional economic development levels, the proportion of urban population also varies greatly. In 2016, the proportion of urban population in Shanghai was 87.90%, Beijing was 86.50%, while Guizhou was only 44.15%, and Tibet was the lowest, only 29.56%. In 2016, the income of urban and rural residents still had a large gap of 2.7:1. Some experts believe that if the population dependency ratio is low, more things can be saved to form investments, in the meantime, with the unlimited supply of labor, the diminishing return of capital will not occur prematurely, so the rate of return on capital can also be high. New urbanization immigrants are composed of a younger and more productive population, making the overall age composition of the city more reasonable, and thus making it more beneficial for capital accumulation and improving the rate of return on capital. New urbanization and household registration system reforms can effectively bring profound benefits and new dividend of urbanization. However, historical experience at home and abroad also shows that the formation of the main body of urban agglomeration should be appropriate, not the bigger the better. For example, the number of registered urban unemployed

518

15 The Main Progress and Innovation of Regional Economic Theory Research

in our country was 5.3 million in 1978 and 9.72 million in 2017. To this end, it is necessary to scientifically plan the functional positioning and industrial layout of urban agglomerations and cities, alleviate the pressure on the central urban areas of mega-cities, strengthen the industrial functions of small and medium-sized cities, enhance the public service and residential functions of small cities and towns, and promote the integrated construction of infrastructure and networked development in large and medium-sized cities. The construction of a strategic pattern of urbanization must be carried out in accordance with the characteristics of different regions. The report of the 19th National Congress of the Communist Party of China stated that “the urban agglomeration shall be the main body to build a coordinated development of large, medium and small cities and small towns.” For example, Guangdong joins hands with the construction of the Hong Kong and Macao Greater Bay Area to build the first-class bay area, world-class city cluster and technological innovation center in the world’s four major bay areas. It is a grand bay area with 56,000 square kilometer, 68 million permanent resident population and 10 trillion yuan economic gross. It shows the advantage of one country, two systems. This planning outline has been basically completed. The construction of the Greater Bay Area is proceeding in an orderly manner. Under the new situation, the eastern region is gradually building a more internationally competitive urban agglomeration. The areas that satisfies certain conditions in the Midwest have cultivated and strengthened several urban agglomerations. Urban agglomeration is the main spatial form of urbanization in various countries, and it is the area with the most efficient use of space resources. With certain conditions being met, we will gradually develop central towns in the eastern region, county towns in the central and western regions, and important border ports into small and medium-sized cities. (2) The acceleration of the citizenization of agricultural transfer population The section of “actively and steadily promoting urbanization” in the “Tenth Five-Year Plan” “Outline” (2011–2015) put forward the requirements of “steadily advancing the transfer of agricultural population to urban residents”. It stresses that it is an important task to gradually turn the agricultural transfer population meeting the settlement conditions into urban residents. In December 2017, the Central Economic Work Conference made it clear that it is necessary to accelerate the pace of reform of the household registration system and guide the healthy development of characteristic towns. We need to fully respect rural people’s rights to make independent choices on entering the city or staying in the countryside, and effectively protect the legitimate rights and interests of farmers on contracted land and homesteads. We are required to persist in adapting to local conditions and advancing at different levels, and gradually convert migrant workers and their families who have a stable labor relationship and live in urban areas for a certain number of years into urban residents. At the same time, mega-cities must reasonably control the population size, large and mediumsized cities must strengthen and improve population management in order to continue to play an important role in attracting foreign population, and small and medium-sized

15.4 The Innovation of Regional Economic Development Strategy in China

519

cities and small towns should relax the conditions for settlement according to actual conditions. All regions are encouraged to explore relevant policies and methods, and reasonably determine the scale of agricultural transfer to urban residents. (3) The enhancing of the comprehensive carrying capacity of cities and towns The main job is to scientifically compile urban planning, formulate different rural revitalization strategies based on the characteristics of different regions, reasonably determine the boundary of urban development, prevent and cure “urban diseases”, coordinate the construction of urban public facilities, and promote the transformation of “urban villages” and urban–rural junctions, as well as to strengthen the comprehensive management of the city and promote the development of urban safety. Only through fine management, operation and maintenance can the charm and vitality of the city be enhanced. (4) The establishment and development of national new areas The national new areas were established with the approval of the State Council. These are comprehensive functional areas based on relevant administrative areas and special functional areas which undertake strategic tasks of major national development and reform and opening up. Since the establishment of Shanghai Pudong New Area, there have been 19 new areas, including Tianjin Binhai New Area, Guangzhou Nansha New Area, Sichuan Tianfu New Area, etc., covering a land area of 22,400 square kilometers. As of 2016, the total population of the new district is 26 million, and the regional GDP is about 3.9 trillion yuan, accounting for 5.3% of the national economy. It has become a model platform for leading the new normal of economic development and implementing the new development concept. (5) The joint efforts to promote the construction of new smart cities according to the “Guiding Opinions on Promoting the Healthy Development of Smart Cities” issued by the CPC Central Committee and the State Council One of its construction paths is to integrate with regional coordinated development: first, to promote the integrated development of urban agglomerations; second, to enhance the radiating and leading role of central cities; third, to create new advantages for small and medium-sized cities and give full play to the role of small and mediumsized cities as nodes, supports and supplements in urban agglomerations. On April 10, 2018, the Central Committee of the Communist Party of China and the State Council issued the “Guiding Opinions on Supporting the Comprehensive Deepening of Reform and Opening-up in Hainan”, requesting that the country’s largest provincial special economic zone established 30 years ago be constructed into a national deepening reform and opening-up pilot zone, a national ecological civilization pilot zone, an International tourism consumption center, and a national key strategic service guarantee zone under the new situation.

520

15 The Main Progress and Innovation of Regional Economic Theory Research

References Chen Dongsheng. (1991). My View of Space Economy. My View of Economy: the Report of 100 Economists in Contemporary China. Jiangsu People’s Publishing House. Chen Dongsheng. (2007, May 17). Implementing the Overall Strategy of Regional Development, Promoting Regional Coordinated Development. Journal of Chinese Academy of Social Sciences, 3. Chen Dongsheng. (Ed.). (1993). Regional Economics. Henan People’s Publishing House. Chen Xuanqing, and Zhang Keyun. (Eds.). (2007). Strategic Issues and Policies of Coordinating Regional Development. China Market Press. Cheng, Biding. (1991). A Review of the Research Object of Regional Economics. In Chinese Association of Regional Economics (Ed.). The New Starting Point of Regional Economic Research. (pp. 46–47). Economy and Management Publishing House. Editorial Department of Theoretical Trends. (2004). Establishing and Implementing the Scientific Outlook on Development. CPC Central Party School Press. Fang Weizhong, and Gui Shiyong (Eds.). (1986). Speech on the Seventh Five-Year Plan. (pp. 176– 177). People’s Publishing House. Gao Chunde, et al. (1991). Industrial Structure in China. (pp. 11–17). China Planning Press. He Zhukang. (1986). The Strategic Significance of Accelerating the Development of Central Plains. In Tian Fang (Ed.). The Reasonable Distribution of Productivity in China. China Financial and Economic Publishing House. Hu Angang. (2004, March 22). China: Towards Regional Coordinated Development. China Economic Times. Hu Guo, et al. (2017, September 24). Exploring the New Binhai New Area. People’s Daily, 1. Hu Naiwu, and Zhang Keyun. (2004). A Study of Regional Development in China. Economic Theory and Business Management, 1. Huang Le. (2004). Some Thoughts on Coordinating Regional Development and On the Task of the New Round of Territorial Planning in China. Journal of Southwest Minzu University, 4. Jiang Shiyin. (2003). On Macro-control of Regional Economic Development. (pp. 277–279). Sichuan People’s Publishing House. Li Hanlin, and Wei Fenzi. (2004). Evaluation and Improvement of China’s Coordinated Regional Development Capacity. (p. 5). CPC Central Party School Press. Li Shugui (Ed.). (1997). A Study of Regional Economic Problems in China. Chengdu University of Science and Technology Press. Liu Shijin. (1998). Seven Ways to Promote Economic Recovery. Economics and Information, 12. Liu Zaixing. (Ed.). (1995). Research on the Overall Layout of China’s Productivity. China Market Press. Ma Hong. (1998). Comments on Xue Jun’s “Development of the Central and Western Regions”. People’s Daily, August 25, 1998. Ma Kai. (Ed.). (2006). Guide Reader of the Eleventh Five-year Plan for National Economic and Social Development of the People’s Republic of China. Beijing Science and Technology Press. Meng Qingtao. (2017, September 29). Implementation of Targeted Poverty Alleviation Strategy, Improving the Availability of the Poor. People’s Daily, 22. Qian Fuxin. (2004, February 12). How to Realize Overall Coordination. People’s Daily. Ren Xinbao. (1996). The Development and Opening of Pudong and the Harmonized Development of Regional Economy in Jiangsu Province. In Economic Development in the Yangtze River Basin. (p. 157). Shanghai Academy of Social Sciences Press. Research Group of Macroeconomic Research Institute of National Development and Reform Commission. (2004). Research on Coordinating Regional Development (p. 5). Rong Donggu. (1984). Problems in China’s Urban Development Strategy. In Liu Guoguang (Ed.). Research on China’s Economic Development Strategy. (pp. 298-299). Shanghai People’s Publishing House. Selected Works of Deng Xiaoping. (1993). Vol. 3. (p. 374). People’s Publishing House.

References

521

Tan Zhongchi. (2006). Preface of New Theory on Urban Development. China Economic Press. Wang Yiming. (Ed.). (1998). The Study of Regional Economic Policy in China. (p. 2). China Planning Press. Wang Yukai, and Bai Jingming, et al. (2017, October 22). Making Development More Balanced and Full. People’s Daily, 4. Wei houkai, et al. (1997). China’s Regional Development. Economic and Management Publishing House. Wei Houkai. (Ed.). (2006). Modern Regional Economics. Economy and Management Publishing House. Xu Guodi. (1999). Comprehensive Development of the Yangtze River Economic Belt in the 21st Century. China Planning Press. Xu Wentong, et al. (1989). The Economics of Urban Construction. (pp. 56–58). China Materials Publishing House. Yang Chengxun. (1991). On Font Network Layout. A New Starting Point for Regional Economic Research. Economic and Management Publishing House. Yang Weiming, (1992). An Empirical Analysis of the Change of Regional Income Inequality. Economic Research Journal, 1. Zhang Peigang. (2005). Bull Belly Theory. Decision Making, 1. Zhao Zhenhua. (2008, January 12). Taking the Road of Urbanization with Chinese Characteristics. People’s Daily, 7. Zheng Xinli. (Ed.). (1999). Development Planning. China Planning Press. Zhou Qiye, et al. (1989). Regional Economics. China Renmin University Press. Zhu Chuangeng, et al. (2007). Regional Economics (2nd ed.). China Social Sciences Press.

Chapter 16

Exploration and Development of Natural Resource Economics

16.1 The Origin of Natural Resource Economics Theoretical Retrospect of Natural Resources Economics The theoretical research on natural resource economics can be traced back to William Pedi in the seventeenth century and Malthus in the eighteenth century. The former economist’s famous saying “Land is the mother of wealth, and labor is the father of wealth” is the earliest germination of the resource value theory. The latter economist put forward the contradictory relationship between population growth and land production potential in his book “An Essay on the Principles of Population” published in 1798. He pointed out that this relationship is limited by the natural environment, mainly referring to the limitation of land; it is believed that population growth would be restricted by resources and the environment.1 The scale of economic activities continues to expand, resulting in resource problems that transcend geographic and intergenerational boundaries, and how society should respond is a question that natural resource economics must answer. The industrial revolution has accelerated population growth and economic development, and has also caused more serious resource shortages and environmental pollution problems. The resource problems involved in the study of classical economics mainly include Malthus’ “law of diminishing land fertility”, the theory of “differential land rent” proposed by Ricardo and Marx, which was the earliest discussion of resource economic problems. Based on the “marginal revolution”, neoclassical economics has studied the economic problems of natural resources from a new perspective. For example, Marshall used modern economic methods to carry out some studies on land resources, and Jevons studied the problems of coal resources. However, at that time, the research on resource economic issues had not been isolated from economics, and no independent resource economics had been formed.

1

Guo and Wang (2005).

© China Social Sciences Press 2023 Z. Zhang, Handbook of Chinese Economics, https://doi.org/10.1007/978-981-99-0420-4_16

523

524

16 Exploration and Development of Natural Resource Economics

Based on the perspective of effective allocation of natural resources, economics theory believes that the way producers and consumers use resources depends on the property rights of the resources. According to the definition of static efficiency, under the assumption of “economic man”, property rights can improve the efficiency of resource allocation, but this effect can only be limited to contemporary people. In fact, the allocation of natural resources often goes beyond the scope of contemporary people and involves inter generational resource allocation. In this case, sustainable resource utilization was proposed and used as a criterion for dealing with human intergenerational relations, becoming the basic norm of natural resource economics. Only under the premise of first meeting the standard of sustainability, that is, to ensure that intergenerational relations are handled in accordance with sustainability, can we talk about pursuing the optimization of resource allocation within the scope of contemporary people under the assumption of “economic man”. According to data from the United Nations, the global population is expected to reach 9.2 billion by 2050. Population growth will lead to increased demand for food, fresh water, energy, etc., and will inevitably aggravate resource problems. The scarcity of natural resources determines that natural resources economics mainly studies the effective allocation of resources and the income distribution effect of resource allocation decisions.2

The Development of Western Natural Resource Economics The core of the emergence and development of natural resource economics is the effective allocation of natural resources. Roger Perman and other scholars determined the research topics of natural resources and environmental economics as efficiency, optimality and sustainability3 ; Tom Tittenberg et al. used property rights theory and externalities in economic analysis to explain market failures and misleading resource allocation by price alienation4 ; resource economics first took its shape in the late 1920s and early 1930s in America; representative works include Principles of Land Economics by Ely and Morehouse, and the book Land Economics published by Ely and Wehrweln later in 1940, in which land was used for the first time as a whole to explain related economic issues5 ; Harold • Hotelling’s Economics of Depleted Resources raises the issues of resource protection and scarce resource allocation. He believes that resource economics is to study the use and allocation of scarce resources; in the late 1970s, with the deepening of the eco-protection movement, the study of resource issues entered a glorious period, represented by Chalres W • Howe’s Natural Resources Economics which focuses on economic issues related to natural resources; specifically, he discusses the attributes of natural 2

Yang (1999). Roger et al. (2002). 4 Tom et al. (2016). 5 Illi (1982). 3

16.1 The Origin of Natural Resource Economics

525

resources, the evaluation of the non-market benefits of natural resources, the measurement of scarcity, the optimal utilization conditions of natural resources, the economic analysis of projects, and the Pareto efficiency; in the 1980s, resource economics has formed a complete disciplinary system. Alan Randall believes in his work Resource Economics: A Discussion on Natural Resources and Environmental Policy from an Economic Perspective6 that, as a branch of microeconomics, resource economics is an applied economics discipline that studies natural resources and environmental policies. It uses economic theory and quantitative analysis methods to analyze, evaluate and guide policies on natural resources and environment.7 ,8

Self-development and Exploration of Natural Resource Economics in China At the beginning of the reform and opening up, there was no independent research on resource economics. At that time, political economics was mainly studied. Later, advocated by famous scholars Yu Guangyuan and Xu Dixin, researches in resource economics was independently carried out, but the main focus was on the introduction of resource economics theories of the Western world. Yu Guangyuan once pointed out that the task of resource economics is to study the role of resources in improving social productivity from the perspective of productivity economics, and to study the contradictions between the economic interests of all parties related to resources from the perspective of political economics. It is to study and calculate the achievement and growth of the entire social and economic benefits and the distribution of the economic benefits of the parties from the perspective of economics. Resource economics is a combination of natural sciences and social sciences, especially economic sciences, and is a discipline that intersects natural sciences and economic sciences.9 Gu Shuzhong believes that resource economics is about the economic factors and economic issues in resource development, utilization, protection and management, as well as the science of the relationship between resources and economic development, research on resource scarcity and its measurement, resource market, resource price and its assessment, configuration and planning, resource property rights, resource accounting, resource trade, resource industrialization management, etc. As the result of the intersection of resource science and economic science, resource economics belongs to the category of resource science and economic science in the discipline classification.10 6

Alan (1989). Lou (1994). 8 Huang and Fan (1988). 9 Yu (1986). 10 Gu (1998). 7

526

16 Exploration and Development of Natural Resource Economics

Scholars have carried out a large number of theoretical studies. Early research mainly focused on the development and use of natural resources, and they are more biased towards the research characteristics of natural sciences, such as Jia Zhixi’s Mineral Resources Economics,11 Li Jinchang and Zhong Weizhi’s Resources Industry Theory,12 He Xianjie’s Research on Mineral Resources Management,13 He Xianjie’s General Theory of Mineral Resources Management,14 Li Jinchang’s Resource Accounting Theory,15 Qin Dexian’s Mineral Resources Economics,16 Zhang Ruiheng, etc.’s The Economic Theory of Mineral Resources17 and Zhu Yong’ing’s “An Introduction to Mineral Resources Economics”.18 In the later period, the integration of natural disciplines and economics gradually became apparent, such as Ma Chuandong’s Resource Economics,19 Zhang Fan’s Environment and Natural Resource Economics,20 Ma Zhong’s An Introduction to Environment and Resource Economics,21 Li Jinchang’s New Theory of Resource Economics,22 as well as An Introduction to Natural Resources23 by Liu Chengwu, etc., Resource Economics by Qu Futian,24 and Resource Economics by Liu Xuemin, etc.25 In general, resource economics is a comprehensive discipline that studies the relationship between economic development and the development, utilization, protection, distribution, and management of resources.26 The fundamental purpose of the research is to realize the rational development and utilization of natural resources and to support the sustainable development of social economy with the best social, economic and ecological benefits. In the economics discipline system, resource economics belongs to a branch of applied economics. In the resource science discipline system, resource economics is an important basic branch discipline, and its theory and methods provide a theoretical basis for other branch disciplines of resource science.27

11

Jia (1992). Li and Zhong (1990). 13 He (1998). 14 He et al. (2002). 15 Li (1991). 16 Qin and Liu (2002). 17 Zhang (2006). 18 Zhu (2007). 19 Ma (1995). 20 Zhang (1989). 21 Ma (1999). 22 Li (1995) 23 Liu and Yang (2002). 24 Qu (2001). 25 Liu et al. (2008). 26 Sun (2000). 27 Chinese Society of Natural Resources (2007). 12

16.2 The Development of the Discipline System of Natural Resource …

527

16.2 The Development of the Discipline System of Natural Resource Economics in China The Research Object of the Discipline The research objects of natural resource economics can be divided into three categories: the first category is natural resources, mainly including land resources, water resources, mineral resources, biological resources, etc.; the second category is human resources, including labor resources, management and technical resources, of which human resources are reflected in human physical and intellectual aspects; the third category is capital resources, including non-monetary tangible capital resources, currency capital resources, and information capital resources.28 Natural resource economics is based on the main fields of research objects. At the theoretical level of the discipline, it can be subdivided into land resource economics, water resource economics, mineral resource economics, biological resource economics, marine resource economics, etc. Due to the different growth characteristics, use directions and methods of various natural resources, different economic problems will arise.29 Natural resource economics is a relatively young subject that studies the science of rational utilization, effective protection and sustainable development of natural resources, taking natural resources and their management as the object.30 As its name suggests, natural resource economics mainly studies policy issues related to natural resources, such as land, forests, water resources, atmosphere, and ecosystems, as well as the economic relationships people encounter during the development and utilization of natural resources.31 Natural resource economics tries to analyze the optimal allocation of natural resources in the process of economic and social development, and puts forward relevant policy recommendations.32 The research scope includes natural resource classification, resource scarcity and its measurement, resource market, resource price and its evaluation, resource allocation and planning, resource property rights, resource accounting, resource trade, resource industrialization management, etc.33 ,34

28

Tom et al. (2016). Shi and Xiao (1989). 30 Cheng and Wu (2001). 31 Zhang (2004). 32 Yang and Cheng (2006). 33 Gu (1988). 34 Chen (1998). 29

528

16 Exploration and Development of Natural Resource Economics

Major Research Methods As far as research methods are concerned, the rational use of natural resources is a dynamic optimal allocation issue, not only involving the optimal allocation of natural resources during the lives of contemporary people, but also involving the rational allocation of natural resources across generations. Therefore, the research method must be based on dynamic analysis. Natural resource economics initially involves natural resources that can be exploited commercially, such as mineral resources, forestry resources, etc., but does not involve an environment where commodity development cannot be carried out. With the progress of research, economists gradually recognize the impact of the development of natural resources on the environment, so the external cost of this impact is included in the corresponding price of resource products, and some economists even consider the environment as possible exhaustible resources, therefore, the main research methods of natural resource economics focus on the two areas of property rights and externalities.35 The theory of externality is applied to natural resource economics, mainly to study the excessive development of resources, low resource allocation efficiency and unnecessary loss of social and economic surplus caused by external diseconomies. The first theorem of welfare economics assumes that individuals and enterprises are both self-serving price makers, and the equilibrium of competition is Pareto optimal. On the one hand, the short-term behavior of most resource mining enterprises meets the needs of the enterprise’s own interests, and on the other hand, it also causes a huge waste of resources during the mining period. This deviates from the goal of long-term effective utilization of resources, which will inevitably lead to the welfare loss of the whole society. The allocation of resources is inefficient, and the self-interest goal makes the market mechanism inefficient.36

The Relationship Between the Discipline of Natural Resource Economics and Other Disciplines The research ideas and methods of economics provide a series of effective tools for the study of the scarcity of natural resources. The analysis methods of natural resource economics are related to environmental economics and ecological economics. When analyzing the connections and differences between disciplines, it is found that resource economics focuses on the economic problems and economic relations that arise when nature provides services to human society, and environmental economics focuses on the nature to provide comfort services and waste sedimentation for human society. As for the economic problems and economic relations arising from service, ecological economics focuses on the economic problems and economic relations 35 36

Zhang (1997). Li and Liu 2007).

16.2 The Development of the Discipline System of Natural Resource …

529

arising when nature provides life support services for human society.37 Although there are many common points between the disciplines, the research methods of ecological economics are not limited to the maximization of the welfare level emphasized by neoclassical economics. Because environmental economics mainly studies economic activities to prevent and control natural environmental pollution, its theory is based on the standard paradigm of neoclassical economics, which encourages the use of economic incentives to adjust destructive activities.38 In actual research, these disciplines are closely linked, especially, the research objects, theoretical views and analytical methods of environmental economics and natural resource economics are largely overlapping, so some studies will carry out combined analysis based on these two disciplines.

The Main Characteristics of Discipline Development The research in the field of resource economics started late in our country. Before the 1980s, research on resource economics was generally limited to comprehensive investigations of natural resources, regionalization, and geographic research. The real and more systematic study of resource economics was carried out after the 1980s. In view of the characteristics of the transitional economic system in which the Chinese economy is located, for a long time, the research in the theoretical community has mainly focused on such two big themes as the price theory of natural resources and the use of natural resources.39 The research in the resource economics discipline in China is developed under the coexistence of multiple economic components of the socialist market economy, with some key strategic resources managed by the state’s monopoly, which is quite different from Western resource economics. First of all, with Chinese scholars mainly drawing on the theories and methods of western resource economics, environmental economics, etc., combined with the actual domestic research on resource economics, the resource economics theory and methods with Chinese characteristics have not yet formed. The establishment of a resource economics discipline system is urgently needed in China. Secondly, resource economics, as an interdisciplinary subject, should focus on carrying out interdisciplinary interdisciplinary research, constantly drawing new progress and new achievements from disciplines such as economics, management, geography, sociology, resource science, and departmental resources, and expanding new fields and new directions in the study of resource economic theory and methods.40 Beijing Normal University has promoted the development of the discipline of natural resource economics earlier, and has set up a specialty 37

Tang Xianzheng, and Wang Juan. On the Research Object of Resource Economics. Journal of Natural Resources, 3. 38 Tom et al. (2016). 39 Cheng and Wu (2004). 40 Dong et al. (2010).

530

16 Exploration and Development of Natural Resource Economics

of natural resources (self-recorded specialty filed by the Ministry of Education), specifically subdividing the direction of “resource economics and management”. The cultivation of students has been continuously promoted, especially in the field of bachelor, masters and doctoral admissions of natural resources majors. A number of graduate students in the field of resource economics have been trained to engage in professional work. At present, under the discipline training system of colleges and universities in our country, more disciplines of “population, resources and environmental economics” are set up. According to the classification of disciplines, in 1997, when the Academic Degrees Committee of the State Council adjusted the postgraduate professional catalogue, it took population, resources and environmental economics as the second-level disciplines under theoretical economics, and rigidly pieced together the three disciplines of population economics, resource economics and environmental economics. Putting highly practical applied disciplines under theoretical economics has limited the development of the disciplines, which is also inconsistent with the original intention of the disciplines to solve practical application problems. Professor Shi Peijun of Beijing Normal University once proposed that the resource discipline system should include secondary disciplines such as resource science, resource technology, and resource management. Among them, resource management includes tertiary-level disciplines such as resource law, resource policy, and resource economics. In terms of subject classification, it should belong to the secondary discipline under applied economics.41

16.3 Main Branches of Natural Resource Economics Energy: Research on Renewable Energy Energy is the natural resource on which human beings depend for their survival. According to the statistics of the International Energy Agency, coal, oil and natural gas are the main energy sources that supply most countries in the world. The practice of the 40 years of reform and opening up shows that economic and social development has not reduced its dependence on energy. China has a resource endowment structure which is rich in coal and poor in oil and gas. This has created supply pressure for the continuous increase in energy demand. At the same time, per capita reserves are relatively short, which is not conducive to the solution of environmental issues such as emissions. The current situation of energy supply and demand requires that the sustainable development path of energy production and use must be taken. Due to the non-renewable characteristics of primary energy sources such as coal, oil and natural gas, people are actively looking for alternative renewable energy sources such as hydropower, wind power, solar energy, geothermal, Nuclear energy, etc. However, 41

Shi (2003).

16.3 Main Branches of Natural Resource Economics

531

some recent studies believe that clean energy production itself also has problems, such as possible water pollution and natural gas leakage during shale gas extraction.42 In 2005, the “Renewable Energy Law of the People’s Republic of China” was passed, which is applicable to the development and utilization of non-fossil energy sources such as wind energy, solar energy, water energy, biomass energy, geothermal energy, and ocean energy. It aims to improve the energy structure and ensure energy security, thus achieving sustainable development of energy. The implementation of this law specifically clarifies the legal systems and investment, tax, price, and financial support that different entities such as the government and the market should follow in the development and utilization of renewable energy, which guarantees the market entities to develop renewable energy.43 According to data released by the National Energy Administration, as of the end of 2016, China’s hydropower installed capacity was 33.2 billion kilowatts, an increase of about 6% over the previous year; wind power installed capacity was 149 million kilowatts, an increase of about 30%; nuclear power installed capacity was 3356 kilowatts, an increase of 26%; the installed capacity of photovoltaic power generation increased by 74%, equivalent to 20 million tons of standard coal; the installed capacity of biomass energy is 12 million kilowatts, and the actual power generation is 65 billion kilowatt hours. The contribution of the various types of renewable energy included in the power supply system is equivalent to 541 million tons of standard coal, accounting for 12.4% of the national energy consumption, an increase of 5% compared with 2011. Among them, hydropower has the largest proportion, about 8.2%, wind power and nuclear energy account for 1.7% and 1.5%, and photovoltaic solar power accounts for 0.5%.Renewable energy has become an important support for economic development. Hydropower development is stable; wind power and solar photovoltaic power generation are developing rapidly; the proportion of non-fossil energy in primary energy is gradually increasing, and the energy structure is continuously optimized.44 , 45 The core problem in energy use lies in the improvement of energy efficiency. The low energy efficiency in our country is mainly manifested in the extensive and inefficient energy extraction, conversion, processing and use. Some studies have pointed out that the energy efficiency level of our country’s old industrial bases is lower than the national average, and the national average lags behind that of developed countries. Among the many policy recommendations to improve energy efficiency, the most effective measure to realize the energy potential is to adjust the energy structure, rely on innovative technological progress to improve energy intensity, especially the energy intensity of manufacturing, and constantly research

42

Tom et al. (2016). China Government Website. The Renewable Energy Law of the People’s Republic of China. Retrieved from http://www.gov.cn/fwxx/bw/gjdljgwyh/content_2263069.htm. 44 Jin and Cao (2017). 45 See http://data.stats.gov.cn/staticreq.htm. 43

532

16 Exploration and Development of Natural Resource Economics

and develop new processes, new technologies, new materials and new equipment to tap the potential of energy structure to improve energy efficiency.46 , 47

Water Resources: An Innovative Management Mechanism of River Leadership System In 2015, the 2030 Agenda for Sustainable Development was adopted by the United Nations. Its core lies in guiding the specific process of global sustainable development by 2030. Water resources are indispensable resources for mankind, and it is explained in detail in the sixth goal of the agenda. The sixth goal is to provide water and sanitation for all and manage it in a sustainable manner, access to safe drinking water and sanitation, and sound management of freshwater ecosystems, which are critical to human health and environmental sustainability and economic prosperity. The data of the United Nations Sustainable Development Progress Report shows that as of 2015, more than 2 billion people in the world live in countries with extremely high water stress, and the rates of water stress in North Africa and West Asia have reached to over 60%. This shows that many regions of the world are facing current and future water shortage. The shortage of water mainly deprives people living in rural areas of access to drinking water sources and sanitation facilities. Although the official development and aid in the water sector has steadily increased, the proportion of total expenditure in official development and aid remains relatively stable at about 5% since 2005.48 The “Country Plan for China’s Implementation of the 2030 Agenda for Sustainable Development” proposes effective water management measures against the 2030 Agenda, aimed at solving the problem of water scarcity and security. It mainly focused on the implementation of the consolidation and upgrading projects in drinking water safety of the rural areas. By 2020, China’s centralized water supply rate in the rural areas will reach to over 85%, and the tap water penetration rate will reach to more than 80%; by 2030, we will ensure universal and equitable access to safe and affordable drinking water for everyone, and basically complete the harmless construction of rural household toilets throughout the country. We need to implement the “Water Pollution Prevention Action Plan”, substantially improve the high-quality ratio of water quality in key river basins, improve the proportion of wastewater treatment meeting certain standards, and the ratio of water quality in coastal waters; we also need to strengthen the supervision and monitoring of key water functional areas and sewage outlets, and strengthen the classification and management of water 46

Xu (2013). Pan (2015). 48 United Nations (2017). 47

16.3 Main Branches of Natural Resource Economics

533

functional areas; efforts should also be made to promote the construction of a watersaving society in an all-round way, implement the most stringent water resources management system, strengthen water demand and water process management, and implement dual-control actions for total water consumption and intensity. By 2020, the effective utilization coefficient of farmland irrigation water nationwide will be increased to more than 0.55, and the water consumption of every 10,000 yuan of GDP and every 10,000 yuan of industrial value-added will be reduced by 23% and 20%, respectively, from 2015; we need to build a national ecological security framework, protect and restore water-related ecosystems, and implement governance actions in areas where groundwater over-exploitation is more serious; we should actively carry out South-South cooperation in water and environment and other related fields, help other developing countries to strengthen resource conservation, climate change and green and low-carbon development capacity building, and provide support and assistance within their range of ability; we should continue to promote the working mechanism involving participation of water users throughout the process to support, strengthen and urge water users and local communities to participate in improving water and sanitation management.49 In 2016, “Opinions on the Comprehensive Implementation of the River Leadership System” was introduced to explore the establishment of a four-level river leadership system at the provincial, municipal, county, and township levels. Provinces (autonomous regions and municipalities) nominate general river chiefs to the major rivers and lakes within each provincial (autonomous region and municipality) administrative area. River directors are set up in cities, counties and townships where rivers and lakes are located, and corresponding river leadership system offices are set up for river leaders at and above the county level.50 From the perspective of the management mechanism, the river leadership system has innovatively strengthened the implementation of territorial responsibilities and established a platform for social co-governance. It has achieved good results in Jiangsu and Zhejiang provinces where the system was started earlier. It represents an important progress in water resources utilization, protection and management. From the perspective of the new institutional economics, the biggest advantage of the river leadership system is that the sources of responsibilities are clearly identified, the rights and responsibilities are made clear; it is an institutional innovation based on reasonable path dependency.51 , 52

49

See China’s National Plan for the Implementation of the 2030 Agenda for Sustainable Development, 2016. 50 National Ministry of Water Resources. About the Comprehensive Implementation of the Views of the Long River System. Retrieved from http//www.mwr.gov.cn/ztpd/2016ztbd/qmtxhzzhhghkxj/zyjs/201612/t20161212774116. Html. 51 Wang and Mengmeng (2011). 52 Zhu 2017).

534

16 Exploration and Development of Natural Resource Economics

Land Resources: The Positive Role of Main Functional Areas The spatial distribution of land resources in our country is uneven, the development history is quite different, and regional land use has its own characteristics. From the perspective of regional spatial characteristics in a larger picture, the water and soil resources in southeastern part of China are abundant and the land productivity is relatively high. Data from the 2016 China Land and Resources Bulletin show that as of the end of 2015, China has a total of 645.4568 million hectares of agricultural land, including 134.9987 million hectares of arable land (2.025 billion mu), 143.233 million hectares of garden land, 252.992 million hectares of forest land, 219.4206 million hectares of pasture land, and 38.5933 million hectares of construction land (including 31.4298 million hectares of urban, rural and industrial land). The country reduced the area of cultivated land by 301,700 hectares due to construction occupation, disasters, ecological reclamation, and agricultural structure adjustment, and increased the area of cultivated land by 242.3 million hectares through land remediation and agricultural restructuring.53 .54 According to the resource and environmental carrying capacity of different regions, the current development density and development potential, the planning of the main functional areas of the country is carried out to plan the future population distribution, economic layout, land use and urbanization pattern, and divide the land space into the four categories of optimized development, key development, restricted development and prohibited development; also the function positioning of each area is determined, the development direction is clarified, the development intensity is controlled, the development order is standardized, the development policy is improving, so as to gradually form a spatial development pattern in which population, economy, resources and environment are coordinated. The national main functional area planning aims at the overall planning of the coordinated development of economy, population, resources and environment from the source, breaking the administrative division, and carrying out the overall regional development from the perspective of resource functionality. The main functional area planning has been prepared at the national and provincial levels to guide the land use at all levels.55 The functional area planning is based on the theory of regional functions. The main functional area planning adopts the land suitability evaluation as the basis. The main functional area planning determines the principles of regional development and should be used as the top-level design of the regional spatial development planning. According to the characteristics of land resources carrying capacity in different regions, the development density and future development potential are determined.56 Judging from the development of the theoretical research and practical planning of the 53

See China’s Land and Resources Communique 2016. See http://data.stats.gov.cn/staticreq.htm. 55 National Development and Reform Commission. Guidance on Comprehensive Utilization of Resources during the Eleventh Five-Year Plan Period. Retrieved from http://hzs.ndrc.gov.cn/zhly/ 200701/120070117602323.html. 56 Fan (2015). 54

16.3 Main Branches of Natural Resource Economics

535

promulgation and implementation of the main functional areas, multiple plans that guide the development of economic and social resources in a region coexist, and the top-level guidance of the main functional area planning needs to be strengthened.57 Some studies believe that the main functional areas have played an important role in standardizing and optimizing the order of space development. The current problems mainly include regional differences in space development, especially areas with slower economic growth, which are usually areas where development is restricted, and then difficulties in the development of backward areas are formed.58 The formulation and implementation of various plans such as land use planning and general urban planning in the process of land resource use.59

Climate Change: A Low Carbon Economy Perspective Since the Industrial Revolution, the use of fossil fuels by human activities has continued to increase. Due to the gradual accumulation of greenhouse gas emissions in major areas due to energy activities, industrial production processes, agricultural activities, land use change and forestry activities, and waste disposal, carbon dioxide is used on a global scale. The global level of greenhouse gas emissions represented by carbon dioxide continues to rise, and the greenhouse effect is enhanced, leading to global warming. More and more scientific researches show that global climate change is accelerating, and the scientificity of climate change is certain. Extreme climate events caused by climate change occur frequently, such as the melting of glaciers, the melting of bipolar sea ice, the rise of sea level, the rise of snow lines, the frequent occurrence of weather events such as typhoons, heavy rainfall, flood disasters and extreme droughts; in addition, the proportion of atmospheric pollution weather has been gradually increasing; high-temperature weather occurs more frequently, and both land and ocean levels are rising with increases in temperatures. MIT research shows that the duration and intensity of large-scale storms in the Atlantic and Pacific have increased by about 50% since the 1970s. By the end of the twenty-first century, the total number of hurricanes will decrease, but the number of category 4 and category 5 hurricanes will be nearly doubled. Severe weather events caused by climate change have caused economic losses to both the world and China.60 , 61 , 62 The economics of climate change was originally proposed by the famous British economist Stern. To interpret climate change from the perspective of economics, it is essentially to analyze global climate change issues from the perspective of market behavior and low-carbon economic costs and benefits. Stern believes that global 57

Huang et al. (2018). Wei (2017). 59 Gao (2007). 60 IPCC (2007). 61 Qin et al. (2007). 62 Pan et al. (2007). 58

536

16 Exploration and Development of Natural Resource Economics

climate change is caused by serious market failures, that is, the prices of goods and services related to carbon emissions do not correctly reflect their environmental losses. The market should affect consumption through prices. Once the market price does not send the correct signal, it does not reflect the negative externality of greenhouse gas emissions. Both producers and consumers have to bear the problems caused by climate change.63 Stern’s report summarizes the development of a low-carbon economy as reducing dependence on fossil energy to achieve a low-carbon transformation of economic growth, energy consumption, and people’s lifestyles. Subsequent research on active response and mitigation of greenhouse gas emissions gradually increased, and the representative is the proposal and practical development of low-carbon economy. From a theoretical research perspective, the main goal of a low-carbon economy is to limit greenhouse gas emissions below a certain level to prevent the serious negative effects of global warming, and seek energy security, new economic growth point, and new sources of national competitiveness during this process. The aim is to achieve low natural resource consumption, low emissions, and low pollution in order to realize higher carbon productivity, higher levels of economic and social development, and better quality of life. The core content is to develop low-carbon energy technologies, improve energy efficiency, improve energy structure, transform the economic growth mode, establish a low-carbon economic development model and a low-carbon social consumption model, and achieve nearzero greenhouse gas emissions in the long run.64 The method of pricing the carbon emissions is adopted to reduce greenhouse gas emissions and increase the cost of emissions. For example, based on the specific situation in carbon trading market, it sets regional and industry emission ceilings, as well as emission quotas based on enterprise capacity differences, and uses market measures to promote emissions reductions in industries.65

16.4 Important Research Fields of Natural Resource Economics Resource Valuation and Pricing (1) Resource value and its value type The economic value of natural resources mainly stems from the use of natural resources by human beings. How to coordinate economic development, population growth and limited and scarce natural resources has spawned the idea of estimating the economic value of natural resources. Natural resources not only have direct use 63

Stem (2006). Zhuang (2007). 65 Research Center for Energy and Environmental Policy (2016). 64

16.4 Important Research Fields of Natural Resource Economics

537

value, they can also be monetized in economic analysis. Using quantifiable assessment methods, on one hand, the value of resources can be assessed; on the other hand, the damage to resources caused by use can be assessed. The value of resources is an effective way to show that resources are valuable to human society. Without economic interpretation of the value of resources, the problems of resource damage will be more difficult to solve.66 , 67 The core idea of natural resource value assessment is to evaluate the relationship between natural resources and people. Although the value is expressed in a monetized way, the more important aspect is to reveal the degree of resource utilization or resource damage and the quantified intensity of the impact. Based on this basic idea, economists divide the economic value of natural resources into use value, choice value, and non-use value. The use value usually reflects that the resource directly meets the use of people’s production and life, and it is the benefit that people can obtain directly from the resource. Choice value represents people’s willingness to retain a certain value in the future, which actually reflects people’s future use value. Non-use value mainly reflects people’s willingness to pay for resources not being damaged. When these values are added together, the total economic value of certain natural resource is formed.68 , 69 (2) Main methods of resource value assessment Generally speaking, the evaluation methods of natural resource value can be divided into two categories: statement preference method and disclosure preference method. Among them, the statement preference method is widely used in mainly conditional value evaluation and selection experiments, and disclosure preference method includes travel cost method, characteristic asset value, characteristic salary, preventive expenditure and other evaluation methods.70 Specifically, the conditional value assessment method is relatively widely used. This method creates a virtual market, assuming that the consumer’s willingness to pay is obtained through questionnaires in this market, and this willingness is further divided into willingness to pay (WTP) and willingness to accept (WTA). The essence this two different valuation methods is to reveal consumers’ preference for use. The conditional value evaluation method is applicable to the evaluation of the value of a single attribute change, and the selection test is applicable to the change of multiple attributes. In practice, the resource value evaluation method is widely used. Understanding this evaluation method from the perspective of resource economics can be traced back to the quantitative study of consumer surplus on resource welfare in neoclassical economic principles. The conditional value assessment method is based on the 66

Costanza et al. (1997). Tom et al. (2016). 68 Ma (1999). 69 Zhang (2002). 70 Wang et al. (2015). 67

538

16 Exploration and Development of Natural Resource Economics

principle of random utility. By randomly selecting survey samples and answering the questions in the questionnaire, the process of a market’s obtaining the consumer’s preference is simulated. The individual preference is extended to the hypothetical market, and the individual’s consumption preference is transformed into the market preference, and then the value of resources is evaluated in the form of monetization. The conditional value evaluation method conforms to the basic principles of measuring consumer welfare in welfare economics, but it also has its own defects in application, that is, the questionnaire survey is the basis of resource value evaluation, and in practice there are many factors that affect the questionnaire data, so there will also be an overestimate or underestimate bias.71 In practical work, this valuation method is widely used in the evaluation of the value of resources in the sea area (coastal zone), the evaluation of the value of tourism-related resources, and the evaluation of agricultural land prices.72

Externality and Circular Economy (1) Main performance of externality Economic welfare is not only subject to its own activities, but also affected by the activities of other external parties, that is, there are externalities in economic behavior. Generally speaking, there are two types of externalities: one is positive externality, and the affected subjects get positive benefits, also known as external economy; the other is negative externality. The affected subjects have suffered losses, also known as external diseconomies. The externality theory reveals the root causes of price signal failure and inefficient resource allocation in market activities. In the field of resource economics, the problem that is often studied is external diseconomies. From the perspective of total social surplus, it is mainly manifested in the unnecessary loss caused by the unrealized allocation of resources.73 The main reason for externality is the structure of property rights. If the attribute of the resource is public, open and accessible, and the property rights are not clear, anyone can get hold of it and can use it. It is a non-exclusive resource, and negative externalities are prone to occur at this time. If property rights are exclusive, people will have an incentive to protect scarce exclusive resources. Once such exclusiveness does not exist, it is easy to promote unrestricted use. When people are pursuing their own economic surplus maximization, the degree of resource scarcity is further exacerbated, leading to excessive development and waste of resources. Therefore, in terms of scarce resources, non-exclusiveness is an important reason for the inefficient allocation of the market, and externality is the source of market failure. Economists

71

Yu et al. (2010). Shan (2002), Su (2007), Xiao et al. (2013), and Wen et al. (2014). 73 Wei et al. (2018), Song et al. (2018), Xie (2010), and Xu and Wang (2014). 72

16.4 Important Research Fields of Natural Resource Economics

539

believe that internalizing the external costs of public goods is an effective way to solve the externalities of natural resources.74 (2) Circular economy-the solution to the externality of resources The proposal of circular economy is different from the existing development model of linear economy, which is mainly aimed at solving the problem of negative externalities in the use of resources. The circular economy is characterized by the closed-loop flow of materials. The goal is to promote economic growth without degrading or even improving resources. It discusses how materials are used rationally throughout economic activities, with efficient use of resources and recycling as the core.75 The theoretical basis of the laws of thermodynamics in the field of natural science provides the scientific nature of circular economy and shows that the development of circular economy is feasible. In 2009, the “Circular Economy Promotion Law” was implemented. The central and local financial funds supported the construction of key circular economy projects. As an important starting point for adjusting the economic structure and changing the development mode at that time, the development of circular economy has played a positive role in the use of renewable resources in China. The promotion of recycling economy is an important way to build a resource-saving and environment-friendly society and achieve sustainable development.76 The basic feature of the circular economy is to insist on equal emphasis on development and saving, and priority in saving. According to the “3R” principle of reduction, reuse, and recycling, the goal is to save all kinds of resources and encourage enterprises to recycle resource waste in the production process, so as to improve resource utilization while reducing environmental burden. According to the laws and methods of material circulation within the natural ecosystem, the green economic operation mode is used to guide human economic activities, so that the entire production, economy and consumption process does not generate or generates less waste, and the economy is developed on the basis of the continuous circulation of materials in order to minimize the impact of economic activities on the natural environment. Circular economy is the product of economic growth, social development and resource and environmental practices; it starts from the input end, production process and output end of the entire production link. The input end emphasizes to reduce the material quality entering the production and consumption process, and design the reuse and resource-aspects of products from the source. Process control requires that the product or packaging be used multiple times in the initial form to achieve a circular economy in the form of products. Output control requires that the waste 74

Tom et al. (2016). Liu (2007) 76 National Development and Reform Commission. Guidance on Comprehensive Utilization of Resources during the Eleventh Five-Year Plan Period. Retrieved from http://hzs.ndrc.gov.cn/zhly/ 200701/120070117602323.html. 75

540

16 Exploration and Development of Natural Resource Economics

after consumption becomes a renewable resource, and the practice of implementing circular economy in the form of garbage has been achieved.77 Certain achievements are mainly focused on reducing the consumption of resources in the production, circulation and consumption process, promoting the reduction of the industrial chain based on eco-industrial parks, the construction of recycling parks in the agricultural field, and the recycling of renewable resources.78

Resource Curse and “Dutch Disease” (1) Performance of resource curse Resource curse usually refers to the phenomenon of economic-growth ups and downs due to resource-related reasons. Specifically, regional economic growth is initially driven by the rich resource endowment in certain area within a specific period of time, but after the rapid economic growth, the regional economic development slows down due to other resource-related reasons. Economists have conducted extensive empirical studies and found that countries with abundant natural resources generally do not grow as fast as countries with scarce resources. Abundant natural resources are not a blessing to these countries. Instead, they have restricted economic growth. Countries with rich resource endowment first achieve short-term economic growth due to reasons such as sufficient supply of resources and international trade surplus, but then they will fall into a stagnation of growth. Economists attribute this phenomenon to the excessive dependence of economic growth on certain resources. An extrusion effect was produced.79 The restricting effect of the resource curse on economic growth is especially evident in the comparison between resource-rich countries and resource-poor countries, and the growth rate of per capita income varies greatly. As far as China is concerned, the western region is rich in natural resources, but the level of economic growth is at the bottom of the country. Some scholars have conducted empirical research on the basic relationship between energy development and economic growth in the western region, and believe that energy development does hinder economic growth. It also shows that for resource-rich areas, we cannot only focus on developing with high intensity.80 Some scholars put forward the resource curse index and distinguished the differences in the degree of resource curse. They believed that provinces exporting coal, oil, natural gas and non-ferrous metals and other resources are faced with potential risks, while resource import provinces are not exposed to such risks.81

77

Cao (2018), Lv (2018), Tang and Lin (2013), and Guo (2015). Sustainable Development Strategy Research Group, Chinese Academy of Sciences (2011). 79 Auty (2001), Sachs and Warner (2001), and Yanglin (2017). 80 Shao and Qi (2008). 81 An and Wang (2015). 78

16.4 Important Research Fields of Natural Resource Economics

541

(2) The principle of “Dutch disease” This is the case with the famous “Dutch disease”. In the 1960s, the Netherlands extracted a large amount of natural gas, which caused a substantial increase in natural gas supply in the short term and increased exports, which created a shortterm economic growth point. However, in the 1970s, due to serious inflation in the Netherlands, coupled with the fact that the extraction of natural gas resources had attracted a large number of labor transfers, the competitiveness of the nonresource production sector continued to decline, and ultimately the natural gas industry that had promoted Dutch economic growth also became the cause of its economic decline. This phenomenon has occurred not only in the Netherlands, but also in other resource-rich countries and regions.82 The transmission mechanism of the “Dutch Disease” is an early manifestation of the resource curse. The prosperity of the resource industry has attracted capital and labor; international investment has entered; the domestic currency has appreciated, and other industries in the country have been hit. Economists abstracted the theory of “Dutch Disease” and explained the problem of resource curse from the perspective of market supply and demand. They believed that the effect of resource transfer increased domestic manufacturing costs, then income effects further increased costs, and the appreciation of local currency leads to the decrease of monetary income of manufacturers. Under the double squeeze of costs and benefits, manufacturers were forced to withdraw from the market due to reduced profits, which ultimately led to the decline of other industries in the country except the resource industry.

The Transformation of Resource-Based Cities (1) Overview of China’s resource-based cities In 2013, the State Council issued the National Sustainable Development Plan for Resource-Based Cities (2013–2020), which defined for the first time 262 resourcebased cities across the country, and based on the differences in capacities in resource security and sustainable development, cities are divided into four types: growth type, mature type, decline type and regeneration type, which clarifies the development direction and key tasks of different types of cities. Among them, the decline-type cities include 67 cities including Fuxin, Fushun, and the area of Greater Xing’an Mountains.83 At present, there are more than 600 cities in the country and more than 1/3 of resource-based cities. Due to their own resource endowment characteristics, 82

Feng et al. (2010). People’S Daily Online. First Definition of 262 Resource Cities, Including 67 Recession Cities such as Fuxin and Fushun. Retrieved from http://politics.people.com.cn/n/2013/1203/CL001-237 27583.html. 83

542

16 Exploration and Development of Natural Resource Economics

resource-based cities are usually closely related to the type of local industry development, and have played an important role in promoting the development of national industrialization. The resource types of our country’s resource-based cities are mainly coal, forestry, nonferrous metallurgy, petroleum, ferrous metallurgy, etc. Due to the rapid development of resources and the depletion of resources, this type of city is moving towards a period of economic growth recession. Taking the resource-based cities in the Northeast as an example, the industrialization in the Northeast started earlier, with rich reserves and a long history of resource development. The industrial layout characterized by old industrial bases and the market management mode of stateowned enterprises have formed an economic and social structure with dense cities and high dependence on resources. Facing the requirements of resource depletion and economic and social transformation, a series of problems such as slow economic development, declining living standards of residents, employment difficulties, and brain drain have gradually emerged.84 According to the analysis of the economic growth model, regional economic growth is directly related to capital, labor and innovation factors. From the perspective of factor input, resource-depleted cities lack the motivation for economic growth. (2) The main methods of transformation for resource-depleted cities In response to the development of resource-depleted cities, a series of policies and measures have been issued at the national level to begin research and resolution. During the “Tenth Five-Year Plan” period, it was proposed to “actively and steadily close resource-depleted mines, promote the development of continuous industries and substitute industries in cities and large mining areas based on resource exploitation, and study and explore new models of mine development”. The “Eleventh FiveYear Plan” once again put forward the strategic policy of “promoting the economic transformation of resource-depleted cities and achieving revitalization in reform and opening up”, and the policy of “establishing a resource development compensation mechanism and an assistance mechanism declining industries”85 In 2007, the State Council promulgated “Several Opinions on Promoting the Sustainable Development of Resource-based Cities”, focusing on the establishment of a resource development compensation mechanism in the process of resource exploitation, as well as strengthening the assistance mechanism for declining industries in an effort to promote the reemployment of laid-off and unemployed people, and guarantee the smooth exit of resource-depleted enterprises.86 In 2011, the State Council agreed to extend the financial transfer payments for the first batch of resource-depleted cities from 2010 to 2015 based on the evaluation report on the transformation of the first batch of resource-depleted cities; In 2016, the national development and Reform Commission 84

Qiu (2011). China Government Website. Review of the Tenth Five-Year Plan, Prospect of the Eleventh FiveYear Plan. Retrieved from http://www.gov.cn/zwgk/index.htm. 86 China Government Website. Several Opinions of the State Council on Promoting the Sustainable Development of Resource Cities. Retrieved from http://www.gov.cn/zwgk/2007-12/24/content_8 41978.htm. 85

16.4 Important Research Fields of Natural Resource Economics

543

issued the “Implementation Opinions on Supporting the Industrial Transformation and Upgrading of Old Industrial Cities and Resource-Based Cities”, requiring the construction of a number of industrial transformation and upgrading demonstration zones and demonstration parks in qualified old industrial cities, exploring effective ways to promote industrial transformation and upgrading, and rebuilding new industrial competitive advantages, aiming at docking with Made in China 2025 to optimize the economic structure of resource exhausted cities.87 Resource-depleted cities are built according to their individual situation of resource-endowment. The overall economic growth and industrial layout are planned around the development of industrial industries. Various problems caused by industrial production have also emerged. The transformation, upgrading and development of resource-depleted cities is a relatively complicated system engineering, which requires the continuous exploration of the path of sustainable development.

The Main Achievements of Natural Resource Economics in the Past 40 Years The development of natural resource economics in our country has gone through 40 years, and has achieved certain results in theoretical research and practical exploration, which has promoted the development of disciplinary research and actively promoted the innovation of natural resource management mechanism and system. From the perspective of theoretical research, the main academic contribution lies in the research on recycling economy and ecological civilization construction, including the relationship between resource development and regional development, resource carrying capacity, resource security, resource flow, resource recycling and recycling economy, resource-based urban economic transformation and world resource economy.88 In 2018, the Central Committee of the Communist Party of China issued the “Plan of Deepening the Institution Reform of the Party and State”, implemented the concept of “lucid waters and lush mountains are invaluable assets.” coordinated the management of the landscape, forests, fields, lakes and grasses, and changed the development history of multiple-end management of natural resources. The Ministry of Natural Resources exercises the responsibility of all land use control and ecological protection and restoration in a unified way, and strives to solve the problems of insufficient natural resource owners and overlapping spatial planning.89 Restricted by the extensive production and use of resources in the past, the efficiency of resource 87

National Development and Reform Commission. Implementation Opinions on Supporting the Industrial Transformation and Up-upgrading of Old Industrial Cities and Resource-based Cities. Retrieved from http://www.ndrc.gov.cn/GZDT/201610/120161009_822002.html. 88 Dong et al. (2013). 89 See the Program for Deepening the Reform of Party and State Institutions issued by the Central Committee of the Communist Party of China, Ministry of Natural Resources, PRC.

544

16 Exploration and Development of Natural Resource Economics

utilization is low, especially the problem of primary energy depletion. The traditional resource management mechanism also needs to be changed. After its establishment, the new Ministry of Natural Resources has changed the previous multi-end management into one-end management, strengthened the overall planning and coordination of various resources, better considered the regional natural resources endowment, and linked up with local economic growth, industrial layout, ecological environment protection, etc., which is conducive to the protection and use of natural resources.

References Alan Randall, translated by Shi Yizheng. Resource Economics: An Economic Perspective on Natural Resource and Environmental Policy. Beijing: The Commercial Press, 1989. An Jin, and Wang Jianwei. (2015). Resource Curse: Measurement Correction and Policy Improvement. China Population, Resources and Environment, 3. Auty, R. M. (2001). Resource Abundance and Economic Development. Oxford: Oxford University Press. Cao Yuanping. (2018). Research on Evaluation Index System Based on Circular Economy. Recyclable Resources and Circular Economy, 5. Chen Xiaoli. (1998). Resources, Resource Economics, Technical Resources. Dynamics Of Social Sciences, 4. Cheng Jinhua, and Wu Qiaosheng. (2001). The Advantages of Resource Economics and Curriculum Construction. Resources and Industries, 7. Cheng Jinhua, and Wu Qiaosheng. (2004). A Review of China’s Natural Resources Economics. Journal of China University of Geosciences (Social Sciences), 1. China Government Website. Review of the Tenth Five-Year Plan, Prospect of the Eleventh Five-Year Plan. Retrieved from http://www.gov.cn/zwgk/index.htm. China Government Website. Several Opinions of the State Council on Promoting the Sustainable Development of Resource Cities. Retrieved from http://www.gov.cn/zwgk/2007-12/24/con tent_841978.htm. China Government Website. The Renewable Energy Law of the People’s Republic of China. Retrieved from http://www.gov.cn/fwxx/bw/gjdljgwyh/content_2263069.htm. Chinese Society of Natural Resources. (2007). Report on Advances in Resources Science (20062007). Beijing: Science and technology of China Press. Costanza, R. et al. (1997). “The Value of the World’s Ecosystem Services and Natural Capital”. Nature, 38(7). Dong Suocheng, Li Zehong, et al. (2013). The Academic Contribution and Innovation Direction of Resource Economics to the Construction of Ecological Civilization-Comemoration of the 30th Anniversary of the Chinese Society of Natural Resources. Resources Science, 9. Dong Suocheng, Shi Guangyi, et al. (2010). China’s Resource Economy and World Resource Research Progress and Prospects. Journal of Natural Resources, 9. Fan Jie. (2015). Plan of Major Function Regionalization in China. Acta Geographica Sinica, 2. Feng Zongxian, Jiang Xin, and Zhao Chi. (2010). The Dutch Disease of the Transmission Mechanism of Resource Curse: Theoretical Model and Empirical Study. Modern Economic Science, 4. Gao Guoli. (2007). How to Understand the Main Function Zoning and Its Connotation Characteristics in China. China Development Observation, 3. Gu Shuzhong. (1988). The Economics of natural Resources. Foreign Economics and Management, 9.

References

545

Gu Shuzhong. (1998). The Discipline Nature, Status and Thinking of Resource Economics. Resources Science, 1. Guo Chunrong, and Wang Wanshan. (2005). The Context of Resource Economics. Productivity Research, 5. Guo Qingfang. (2015). Research on Technological and Economic Characteristics of Circular Economy and Price Operation Mechanism. Special Zone Economy, 1. He Xianjie (Ed.). (1998). Research on Mineral Resources Management. Seismological Press. He Xianjie, Yu Haoke, and Liu Bin (Ed.). (2002). General Theory of Mineral Resources Management. China Land Press. Hu Yanglin. (2017). A Brief Analysis of China’s Current Economic Phenomena Based on “Dutch Disease” and Resource Curse Theory. China Collective Economy, 4. Huang Yimao, and Fan Shuilian (Ed.). (1988). Resource Economics. China Agricultural University Press. Huang Yong, Zhou Shifeng, and Wang Lin. (2018). Multi-Planning in Integration with MultiPlanning: Alternative Solutions. Globalization, 4 (in Chinese). Illi, Moore Moorhouse, Translated by Teng Weizao. (1982). Principles of Land Economics. The Commercial Press. Intergovernmental Panel on Climate Change (IPCC). (2007). Summary far Policy Makers of Climate Change 2007: Mitigation, Contribution of Working Group HI to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change. London: Cambridge University Press. Jia Zhixi. (1992). Economics Mineral Resources. Seismological Press. Jin Lang, and Cao Feishao. (2017). China’s Renewable Energy Development Status and Trend. Ecological Economics, 10 (10). Li Jinchang (Ed.). (1991). Resource Accounting Theory. China Ocean Press. Li Jinchang, and Zhong Weizhi (Ed.). (1990). Economics Resource Industry Theory. China Environmental Science Press. Li Jinchang. (1995). New Theory of Resource Economics. Chongqing University Press. Li Min, and Liu Liqiu. (2007). Study and Reflection on the Externality of Natural Resource Production-Analysis of Resource Tax Reform from the Perspective of Economics. Journal of Inner Mongolia Agricultural University (Social Science Edition), 9. Liu Chengwu, and Yang Zhirong. (2002). An Introduction to Natural Resources. Science Press. Liu Xuemin, Jin Jianjun, and Li YongTao, (2008). Resource Economics. Higher Education Press. Liu Xuemin. (2007). Research on Mechanism and Mode of Circular Economy. Economic Review, 1. Lou Huixin. (1994). A Few Basic Problems of Resource Economics. Chinese Journal of Agricultural Resources and Regional Planning, 6. Lv Yingshan. (2018). Analysis of Environmental Management in Circular Economy. New Technology and New Products of China, 11. Ma Chuandong. (1995). Resource Economics. Shandong People’s Press. Ma Zhong. (1999). An Introduction to Environment and Resources Economics. Beijing: Higher Education Press. National Development and Reform Commission. Guidance on Comprehensive Utilization of Resources during the Eleventh Five-Year Plan Period. Retrieved from http://hzs.ndrc.gov.cn/ zhly/200701/120070117_602323.html. National Development and Reform Commission. Implementation Opinions on Supporting the Industrial Transformation and Up-upgrading of Old Industrial Cities and Resource-based Cities. Retrieved from http: // www.ndrc.gov.cn/GZDT/201610/120161009_822002.html. National Development and Reform Commission. The State Council on the Opinions of the Preparation of the National Development Planning. Retrieved from http://www.ndrc.gov.cn/fzgggz/ fzgh/zcfg/200708/t20070801_151751.Html. National Ministry of Water Resources. About the Comprehensive Implementation of the Views of the Long River System. Retrieved from http//www.mwr.gov.cn/ztpd/2016ztbd/qmtxhzzhh ghkxj/zyjs/201612/t20161212_774116.Html .

546

16 Exploration and Development of Natural Resource Economics

Pan Jiahua, Sun Cuihua, Zou Ji, et al. (2007). Climate Change Mitigation: Recent Scientific Cognition. Advances in Climate Change Research, 3. Pan Jiahua. (2015). China’s Environmental Governing and Ecological Civilization. China Social Sciences Press. People’s Daily Online. First Definition of 262 Resource Cities, Including 67 Recession Cities such as Fuxin and Fushun. Retrieved from http: //politics, people, com.cn /n/2013/1203/ CL001– 23727583.html. Qin Dahe, Chen Zhenlin, Luo Yong, et al. (2007). Recent Understanding of Climate Change Science. Advances in Climate Change Research, 2. Qin Dexian, and Liu Chunxue (Ed.). (2002). Mineral Resources Economics. Science Press. Qiu Song. (2011). Research on the Effects of Economic Transformation of Resource-exhausted Cities in Northeast China. Doctoral Dissertation, Jilin University. Qu Futian. (2001). Resource Economics. Beijing: China Agriculture Press. Research Center for Energy and Environmental Policy, Beijing Institute of Technology. (2016). The Impact of Carbon Emission Trading on the Cost of Emission Reduction in Industrial Sector during the 13th Five-Year Plan Period. Retrieved from www.ceep.net.cn. Roger Perman, et al., Translated by Hou Yuanzhao. (2002). Natural Resources and Environmental Economics. Economic Press China. Sachs, J. D., Warner, A. M. (2001). “The Curse of Natural Resources”. European Economic Review 9(45). Shan Shengdao. (2002). Application of Environmental Resource Valuation Method in Agricultural Land Price Evaluation. Territory and Natural Resources Study, 2. Shao Shuai, and Qi Zhongying. (2008). Energy Development and Economic Growth in Western China: An Empirical Analysis Based on the “Resource Curse” Hypothesis. Economic Research Journal, 4. Shi Peijun. (2003). On the Orientation of Resource Discipline and the Construction of Discipline and Talent Training System. Journal of Natural Resources, 5. Shi Zhongliang, and Xiao Siru. (1989). On the Conception of Resource Economics. Academic Monthly, 11. Song Yi, Huang Jianbai, and Zhong Meirui, et al. (2018). Alternative Tariff Policy of Strategic Mineral Resources from the Perspective of Internalization of External Costs: A Case Study of Rare Earth Minerals. Resources Science, 3. Stem, N. (2006). Stem Review: The Economics of Climate Change. University of Cambridge. Su Guangshi. (2007). Study on the Value of Natural Resources and Its Evaluation Method. Academic Forum, 4. Sun Honglie. (2000). Encyclopedia of resource science in China. Beijing: Encyclopedia of China Publishing House. Sustainable Development Strategy Research Group, Chinese Academy of Sciences. (2011). Report on China’s Sustainable Development Strategy-Realizing Green Economic Transformation. Beijing: Science Press. Tang Jing, and Lin Huilong. (2013). Analysis of Circular Economy Characteristics of Grassland Agriculture. Acta Prataculturae Sinica, 1. Tang Xianzheng, and Wang Juan. On the Research Object of Resource Economics. Journal of Natural Resources, 3. Tom Tittenberg, et al., translated by Wang Xiaoxia. Environmental and Natural Resources Economics. Beijing: China Renmin University Press, 2016. United Nations. (2017). Progress towards the Sustainable Development Goals. Wang Erda, Li Li, and Wei Jianhua. (2015). Economic Value Evaluation of National Forest Park Resources and Management Attributes Based on Selection Experiment. Resources Science, 1. Wang Shuming, and Cai Mengmeng. (2011). Review and Analysis of the “River Chief System” from the Perspective of New Institutional Economics, China Population. Resources and Environment, 9.

References

547

Wei Houkai. (2017). A Cold Thought on Promoting the Formation of Main Function Zoning. China Development Review, 3. Wei Ningning, Li Li, and Gao Lianhui. (2018). Research on Ecological Externality Value Calculation and Compensation of Cultivated Land Resources Use. Science and Technology Review, 2. Wen Demei, Jiang Xuchao, and Liu Tieying. (2014). A Review of Marine Resources Evaluation Methods. Resources Science, 4. Xiao Jianhong, Yu Qingdong, Zhang Yunlei, et al. (2013). A Study on Expansion Method of Total Scope of Tourism Related Resources Evaluation Based on CVM. Journal of Natural Resources, 9. Xie Liuying. (2010). The System Optimization of Natural Resources Externality Incentives and Suppression. Journal of Jiangxi Agricultural University (Social Sciences Edition), 2. Xu Guoquan. (2013). Research on Energy Efficiency in China. Beijing: Economic Science Press. Xu Jun, and Wang Weiwei. (2014). State Ownership of Natural Resources from the Perspective of Negative Externalities. Journal of Hehai University (Philosophy and Social Sciences Edition), 1. Yang Yunyan, and Cheng Guangshuai. (2006). The New Development of Population, Resources and Environmental Economics. Seeking Truth, 1. Yang Yunyan. (1999). The Economics of Population, Resources and Environment. Beijing: China Economic Press. Yu Bo, Zhang Feng, and Lu Wenbin. (2010). A Review of Conditional Valuation Method for Environmental Resources Evaluation. Environmental Forum, 1. Yu Guangyuan. (1986). Resource Economics, Resource Strategy. Journal of Natural Resources, 1. Zhang Fan. (1989). Environment and Natural Resources Economics. Shanghai: Shanghai Renmin Press. Zhang Guanghai. (2002). A Comprehensive Study on the Ecological and Economic Value of Resources and Environment. China Population Resources and Environment, 5. Zhang Ruiheng (Eds.). (2006). Economic Theory of Mineral Resources. Beijing: China Land Press. Zhang Wenju. (2004). The Discipline Attribute and Orientation of Resource Science. Journal of Natural Resources, 1. Zhang Zheng. (1997). Environment and Natural Resources Economics. Environmental Protection, 9. Zhu Mei. (2017). On the Development Practice and Promotion of River Chief System. Environmental Protection, 21. Zhu Yongling (Eds.). (2007). An Introduction to Mineral Resources Economics. Beijing: Peking University press. Zhuang Guiyang. (2007). Low-carbon Economy: China’s Development in the Context of Climate Change. Beijing: China Meteorological Press.

Chapter 17

The Transformation of Mode of Economic Growth and the Structural Reform of Supply-Side

Economic growth is generally achieved through two channels: one is to increase factor input; the other is to increase labor productivity. The economic growth relying on the increase of factor inputs is extensional growth, which is also called extensive growth; while the economic growth relying on improving labor productivity is connotative growth, which is also called intensive growth. Both of these are called economic growth mode. Obviously, due to limited resources, the growth mode that relies on increased investment is not as good as the growth mode that relies on improving efficiency. Thus, the “transformation of economic growth mode” is to change from relying on factor growth to relying on labor productivity growth. These two different modes of economic growth often coexist in the economic growth of a country, but at different development stages, the combination of the two is different. Generally speaking, in developing countries, at the initial stage of economic development, external growth dominates; while the growth of developed countries mainly depends on internal growth. Therefore, the transformation of economic growth mode is not only a logical evolution in line with history, but also a major theoretical issue that meets the needs of reality for a late developing country like China, which has achieved high-speed growth for many years and has reached the upper middle income level. The transformation of economic growth mode is closely related to the stage of our country’s economic development. From reform and opening up to the early 1990s, our country has been in a situation of shortage economy. In the era of shortage economy, material supply is tight, the core contradiction in economic operation is insufficient production and supply, and extensive economic growth mode is bound to prevail. The Chinese government also recognizes the need to pursue efficient growth. The Third Plenary Session of the Eleventh Central Committee of the Communist Party of China established the basic line centered on economic construction, and proposed that all economic activities should emphasize economic benefits; The Twelfth National Congress of the Communist Party of China proposed to shift all economic work to a track centered on improving economic efficiency; The Thirteenth National Congress

© China Social Sciences Press 2023 Z. Zhang, Handbook of Chinese Economics, https://doi.org/10.1007/978-981-99-0420-4_17

549

550

17 The Transformation of Mode of Economic Growth and the Structural …

of the Party proposed that economic development should gradually shift from extensive operations to intensive operations. However, in the actual economy, our country’s economy still emphasizes speed and efficiency, input and output, quantity and quality, and external expansion and technological progress. After more than ten years of development in reform and opening up, in the early 1990s, after our country established the reform goal of the socialist market system, the market played a fundamental role in resource allocation. The market economy makes our country quickly bid farewell to the shortage economy, and the economy has entered the era of buyer’s market. At this time, the poor quality of economic development, waste of resources, and low efficiency brought about by the extensive economic growth mode have become increasingly prominent. Under such circumstances, China proposed in the “Ninth Five-Year Plan” to realize “the transformation of economic growth mode”. Entering the twenty-first century, especially after China’s accession to the World Trade Organization, the economy has taken off rapidly. However, the original extensive economic growth mode has become more and more intense, the situation of high energy consumption and high pollution has become more and more serious, and the carrying capacity of resources and environment has reached a critical point. The report of the 17th National Congress of the Communist Party of China proposed to change the mode of economic development. After 2012, as our country enters an upper-middle income country, the potential economic growth rate declines, our country’s economy has entered a new normal, and the economic growth rate will return to a medium-to-high speed level. Under the new economic normal, the disadvantages of our country’s old economic growth model, such as environmental pollution, severe overcapacity, and low corporate efficiency, have been exposed. In this context, supply-side structural reforms have emerged, which require the transformation of economic growth patterns by improving supply quality, advancing structural adjustments, and increasing total factor labor productivity. Therefore, the three formulations of transforming the economic growth mode, transforming the economic development mode, and supply-side structural reforms are in the same line with the same fundamental tasks. They all focus on improving labor productivity and focus on long-term and sustainable economic growth. According to the above discussion, the policy adjustment for the transformation of economic growth mode in the development process of our country can be divided into three stages, namely, the transformation of economic growth mode proposed in the Ninth Five-Year Plan, the transformation of economic development mode proposed by the 17th National Congress of the Communist Party of China, and the supplyside structural reform proposed in 2015. Similarly, the theoretical exploration of the economics circle is roughly carried out based on these three stages.

17.1 The Policy Implementation of the Transformation of Mode of Economic …

551

17.1 The Policy Implementation of the Transformation of Mode of Economic Growth in China Transformation of Economic Growth Mode Proposed in the Ninth Five Year Plan The Fifth Plenary Session of the 14th Central Committee of the Communist Party of China proposed that the key to achieving the “Ninth Five-Year Plan” and the 2010 long-term goals is to achieve two fundamental changes of overall significance: First, the economic system should be changed from a traditional planned economic system to a socialist market economic system; the second is the transformation of economic growth mode from extensive to intensive. This is the first time that our country has proposed a change in economic growth mode in a central government document. Then, why did our country put forward this proposition after more than ten years of reform and opening up? Prior to the “Ninth Five-Year Plan”, the party and government documents also contained discussions on the importance of improving economic efficiency in economic development. For example, the report of the Twelfth National Congress of the Communist Party of China stated that “we should turn all economic work to a track centered on improving economic efficiency”, and the report of the 13th National Congress of the Communist Party of China stated that “we should turn economic construction to the track that relies on scientific and technological progress and improve the quality of workers.” The report of the 14th National Congress of the Communist Party of China stated that “we need to strive to increase the share of scientific and technological progress in economic growth and promote the transformation of the entire economy from extensive operation to intensive operation.” These statements are essentially indistinguishable from “transformation of economic growth mode”. However, these formulations were not further elaborated in the report. It was not until the “Ninth Five-Year Plan” that the party documents discussed this topic in detail. This is because the extensive economic growth mode in reality has brought serious economic problems. The characteristics of the extensive economic growth mode are high input, low output, high consumption and low efficiency. At the micro level, it shows that stateowned enterprises are generally experiencing operating difficulties. The state-owned enterprises have encountered common operational difficulties, which are unprecedented since the reform and opening up. Because since the reform and opening up our country has been in a shortage economy for a long time, the main contradiction between supply and demand is that supply exceeds demand. And when supply exceeds demand, state-owned enterprises on the supply side will not encounter general operating difficulties. With the resumption of reforms in 1992, the role of the market in allocating resources has been greatly enhanced, and the supply capacity of China’s economy has increased significantly. The whole society has quickly got rid of the shadow of

552

17 The Transformation of Mode of Economic Growth and the Structural …

shortage economy that has been shrouded for many years, and various ticket systems in the society have been completely cancelled. China has entered a buyer’s market economy. According to statistics from the Ministry of Commerce, in the late 1990s, more than 80% of consumer goods were oversupplied. At this time, the main contradiction between supply and demand is oversupply. Under buyer market conditions, the problem of low supply efficiency has become increasingly prominent, which reflects structural contradictions in economic operations. The specific manifestation of micro-enterprises is that state-owned enterprises have experienced general operating difficulties. At the end of 1997, there were 16,874 state-owned and state-controlled large and medium-sized industrial enterprises, of which 6,599 were loss-making, accounting for 39.1%. The operation of small state-owned enterprises was experiencing even more difficulties. According to statistics in 2000, there were more than 50,000 small state-owned industrial enterprises nationwide with approximately 14 million employees. The profits and losses were equalized. By 1999, it had suffered losses for 6 consecutive years with a loss of about 30 billion yuan. At the same time, stateowned financial enterprises were also facing a major crisis. The non-performing loan rates of the four major state-owned banks have all exceeded the recognized international warning line, and have fallen into technical bankruptcy. The crisis in the banking system is a manifestation of the operating difficulties of state-owned industrial enterprises in the financial system. The operating difficulties of state-owned enterprises highlight the characteristics of extensive economic growth. From the perspective of property rights, in the stateowned property rights system of state-owned enterprises, the state is nominally the main resource possessor; however, in actual operation, the owner is prone to be absent. The operating objectives of state-owned enterprises no longer reflect the will of the owners, the operation is often dominated by the management and have serious soft budget constraints, and there are various problems such as blind expansion, lowlevel repeated construction, maximum production scale, and maximum cost; at the same time, state-owned enterprise reform is lagging behind, and enterprise reform has become a weak link in the reform of the entire economic system. The problems of state-owned enterprises are reflected in the real economy, and the most prominent ones are overcapacity and low efficiency. The “Ninth Five-Year Plan” proposes to actively promote the transformation of economic growth mode, and make economic efficiency the center of economic work. Relying on economic system reforms, we need to form an enterprise operating mechanism that is conducive to resource conservation, lower consumption, and increased efficiency, and a technological progress mechanism that is conducive to independent innovation, as well as an economic operation mechanism that is conducive to fair market competition and optimal allocation of resources. The “Ninth Five-Year Plan” proposes that the transformation of the economic growth mode mainly depends on the following aspects. First, we need to give full play to the vitality brought by system reforms and the role of market competition mechanisms, promote the survival of the fittest and optimize the allocation of resources. Second, we should give full play to the potential of the existing foundation and

17.1 The Policy Implementation of the Transformation of Mode of Economic …

553

improve input–output efficiency. Third, we need to rely on scientific and technological progress and improve the quality of workers to increase the content of scientific and technological progress in economic growth. Fourth, we should pay close attention to resource conservation and comprehensive utilization, and greatly improve the efficiency of resource utilization. Fifth, the requirements of production and reasonable economic scale are to optimize the organizational structure of enterprises. Sixth, we need to accelerate the reform of the circulation field and improve the efficiency of circulation. Seventh, we should utilize planning methods and industrial policies to promote the transformation of economic growth patterns. The reform of state-owned enterprises is the main starting point for transforming the economic growth mode. The Chinese government has implemented reform measures for state-owned enterprises to “grasp the large and let go of the small”, “encourage mergers, standardize bankruptcy, divert laid-off workers, reduce staff to increase efficiency, and implement reemployment projects”. The state must focus on a number of large enterprises and enterprise groups that play a key role in the national economy to ensure the regulation and control of the national economy. For small state-owned enterprises, different situations can be treated with differentiated measures, and various forms such as reorganization, alliance, mergers, shareholding cooperative system, leasing system, contract operation and sale can be adopted to accelerate the pace of reform and reorganization. The state has carried out drastic reforms on the supply side. According to statistics, as of 2002, a total of 27.5 million state-owned enterprise employees had been diverted across the country. At the same time, the state has also taken measures on the banking system, such as issuing special treasury bonds to increase capital, stripping off non-performing assets, and listing to raise funds to help the state-owned commercial banks get out of the predicament.

The Transformation of the Economic Development Mode After joining the World Trade Organization, our country’s economy has gotten rid of the adverse effects of the Southeast Asian financial turmoil, and the economy has returned to the track of rapid growth. With years of high growth, resource constraints and environmental pressures continue to increase, and the issue of sustainable development has become increasingly prominent. From the late 1990s to the first few years of the twenty-first century, our country’s economic development mode showed the following three characteristics. First, the economic growth is highly dependent on investment and exports, and consumption has a weak role in driving economic growth. Second, the economic growth is highly dependent on the expansion of the secondary industry, and the development of the service industry is relatively lagging. Third, the economic growth is highly dependent on low-cost resources and high-intensity inputs in production factors, and the contribution rate of technological progress and innovation to economic growth is low. This economic development method is unsustainable. The high dependence on

554

17 The Transformation of Mode of Economic Growth and the Structural …

investment and exports will lead to excess liquidity and increased inflationary pressure; the high dependence on the secondary industry will bring about the imbalance of industrial development, and the dependence on resources and production factors will lead to increased pressure on resources and the environment. The constraints of the resources and environment are reflected as follows. Our country’s per capita arable land is about 40% of the world average, and it was 1.41 mu per capita in 2004. With the advancement of industrialization and urbanization and the increase in population, the per capita arable land will decrease. our country’s per capita freshwater resources are only 25% of the world average, and they are unevenly distributed in time and space. Currently, more than 400 of more than 600 cities are short of water and 110 are severely short of water. China’s per capita reserves of oil, natural gas and coal resources are 11, 4.5 and 79% of the world average; the per capita share of 45 mineral resources is less than half of the world average level; the reserves of iron, copper and aluminum are 1 / 6, 1 / 6 and 1 / 9 of the world average, respectively. The degree of foreign dependence on major mineral resources has risen from 5% in 1990 to more than 50% at present.1 The report of the 17th National Congress of the Communist Party of China pointed out: “the key to achieving the goal of future economic development is to accelerate the transformation of the mode of economic development.” “We should vigorously promote the strategic adjustment of the economic structure, pay more attention to improving the ability of independent innovation, improving the level of energy conservation and environmental protection, and improving the overall quality of the economy and international competitiveness.” We need to speed up the transformation of economic development mode. The report of the Seventeenth National Congress of the Communist Party of China pointed out that three changes should be realized: “We must adhere to the path of new industrialization with Chinese characteristics, adhere to the policy of expanding domestic demand, especially consumer demand, and promote economic growth from relying mainly on investment and export to relying on the coordinated promotion of consumption, investment and export. We also need to promote the transformation of economic development mode from relying mainly on the secondary industry to relying on the coordinated transformation of the primary, secondary, and tertiary industries, from mainly relying on increasing material resource consumption to relying mainly on technological progress, improvement of labor quality, and management innovation.”

The Structural Reform of the Supply-Side In response to the 2008 international financial crisis, our country introduced the “4 trillion” economic stimulus policy. The implementation of this economic stimulus policy quickly lifted our country’s economy out of the crisis, but it also left a series of sequelae. The “four trillion” economic stimulus policy, from the perspective of 1

Zhang (2005).

17.1 The Policy Implementation of the Transformation of Mode of Economic …

555

economic growth, is a typical mode of extensive growth, relying on a large amount of input (investment) in production factors to stimulate rapid economic expansion in the short term. These newly increased investments, coupled with a large amount of investment formed in history, have formed huge actual and potential production capacity on the supply side. At the same time, as our country’s potential economic growth rate declines and the economic growth rate shifts from high-speed to medium– high speed, the contradiction between total supply and total demand has become increasingly prominent. Total supply exceeds the total demand, and the quality of the supply is not high. These are the concrete manifestations of the extensive growth mode. After entering the new normal, a major problem faced with our country is the overcapacity of some industries. In October 2013, the “Guiding Opinions on Resolving Serious Overcapacity Contradictions” issued by the State Council pointed out that our country’s steel, cement, electrolytic aluminum, flat glass, shipbuilding and other industries have serious overcapacity conflicts. At the end of 2012, the capacity utilization rates of our country’s steel, cement, electrolytic aluminum, plate glass, and ships were only 72%, 73.7%, 71.9%, 73.1%, and 75%, respectively. Overcapacity is widespread in our country’s industrial sector, which can be seen from the changes in our country’s industrial capacity utilization rate in Table 17.1. The contradiction between aggregate supply and aggregate demand is also reflected in the continuous negative growth of the producer price index (PPI) of industrial products. From 2012 to 2016, China’s PPI fell for five consecutive years, exceeding the situation at the end of 1990s when deflation occurred. This shows the structural imbalance, low supply quality and distortion of factor allocation in the Chinese economy. In 2015, the Central Economic Work Conference proposed to implement the “three removals, one reduction and one making-up” policy, that is, removing capacity, stocking, leveraging, reducing costs, and making up for shortcomings. These policies are the short-term focus of supply-side structural reforms. The supply-side structural reform specifically addresses the five major production factors, namely labor, land, capital, technology and systems, and proposes a series of targeted measures, including adjusting and improving population policies, consolidating the supply foundation; advancing the reform of the land system, and releasing supply vitality; it is proposed to accelerate the reform of the financial system and lift financial repression and to implement innovation-driven strategies to open up supply space, as well as to deepen the reform of streamlining administration and delegating power, and promote the quality of supply. After several years of supply-side structural reforms, some positive changes have occurred in China’s industrial sector. Since 2017, the producer price index (PPI) of China’s industrial products has reversed the continuous negative growth, the utilization rate of industrial capacity has been significantly improved (see Table 17.1), and the performance of some enterprises in industries with severe overcapacity has also improved.

556

17 The Transformation of Mode of Economic Growth and the Structural …

Table 17.1 Utilization rate of industrial capacity in China Period

Utilization rate of industrial capacity

Period

Utilization rate of industrial capacity

First quarter 2013

75. 30

First quarter 2016

72. 90

Second quarter 2013

75. 20

Second quarter 2016

73.10

Third quarter 2013

75. 90

Third quarter 2016

73.20

Fourth quarter 2013

76. 80

Fourth quarter 2016

73. 80

First quarter 2014

75.40

First quarter 2017

75. 80

Second quarter 2014

75. 50

Second quarter 2017

76. 80

Third quarter 2014

75.20

Third quarter 2017

76. 80

Fourth quarter 2014

76. 10

Fourth quarter 2017

78.00

First quarter 2015

74.20

First quarter 2018

76. 50

Second quarter 2015

74. 30

Second quarter 2018

76. 80

Third quarter 2015

74.00

Fourth quarter 2015

74. 60

source:Wind

17.2 The Research Scheme of the Transformation of Mode of Economic Growth Research on the Mode of Economic Growth in the 1990s (1) Summary of historical experience The mode of extensive economic growth are not uncommon in other countries, such as the Soviet Union and East Asia. Lu Nanquan made a historical review of the transformation of Soviet economic growth mode. The Soviet Union has long implemented the pursuit of speed as the goal, relying on continuous and massive investment of new manpower, material and financial resources, and taking the road of extensive development. It is a consumption-oriented economy. By the 1970s, the CPSU (Communist Party of the Soviet Union) proposed that the economy should shift to an intensification-based development path. The main measures taken by the Soviet Union include accelerating scientific and technological progress, adjusting investment policies, adjusting the sectoral and technological structure of the national economy, improving the educational and technological level of workers and accelerating intellectual development, and reforming the economic system. These measures did not turn the Soviet Union towards intensification. Lu Nanquan believes that the fundamental reason for the difficulties encountered by Soviet Union’s economic development intensification is the economic system, which is specifically reflected in the following aspects. Enterprises lacked the internal motivation to adopt new technologies; the material technology supply system hindered the technological innovation of enterprises; there were contradictions between the producers and users of new

17.2 The Research Scheme of the Transformation of Mode of Economic Growth

557

technology products; the material reward system had many drawbacks; the supply of products exceeded demand and lacked competition; enterprise funds insufficiency hindered equipment renewal; and the system of science and technology management has many defects. Yu Yongding analyzed the main policy measures of East Asian governments in maintaining high resource input, which includes the following. First, encouraging savings and maintaining a high savings rate for a long time; second, encouraging investment and striving to maintain a high investment rate; third, paying attention to accumulating human capital and vigorously popularize basic education. Corresponding to East Asia, the production efficiency problems in the economic growth process of developed countries are mainly solved through market mechanisms, including the following approaches. First, fierce competition is the most important driving force for improving production efficiency; second, large monopoly enterprises and organizations play important roles in promoting technological progress; the third is related to the spirit of entrepreneurship; the fourth is about government intervention.2 (2) Analysis of China’s economic growth mode Lu Baifu summarized the performance and harm of the extensive growth mode. He believes that the old economic growth mode is an extensive growth mode, and its main characteristics can be summarized as “three highs” and “three lows.” “Three highs” refer to high speed, high input, and high consumption; “three lows” refer to low quality, low output, and low efficiency. Specifically, this is manifested as follows. From a macro point of view, it emphasizes the balance of physical quantity and neglects the balance of value quantity; from the perspective of investment, it emphasizes the expansion of denotation and neglects the deepening of connotation; from the point of view of production, it emphasizes quantity and speed and neglects quality and performance. Obviously, this economic growth method is a non-economic growth method that wastes resources and lacks economical concerns. Lu Baifu believes that the old mode of economic growth is unfavorable to the longterm stable development of the economy and is obviously harmful. Its main harm can be summarized in the following four aspects. First, the total economic output can not be controlled, the total social supply and demand are difficult to balance, inflation rises from time to time, and the price rise exceeds the social affordability. Second, with “investment hunger” continuing to expand, the input–output ratio is declining, construction is conducted repeatedly and blindly with a large amount of duplication and starting of new but unnecessary projects, ignoring reasonable allocation and upgrading of existing projects. Third, there exists unwillingness to invest in “weak industries” although with sufficient funding, which has caused the failure to optimize and upgrade the structure and serious lagging in the development of agriculture; additionally, with the constraints of basic industries and infrastructure “bottlenecks”, the goal of production and operation is derailed; with the pursuit of output value and output volumes, the occurrence of extended input and price transfer 2

Lu (1995).

558

17 The Transformation of Mode of Economic Growth and the Structural …

is frequent. Fourth, factors such as technological progress, quality variety, cost and profit are ignored. If we determine to really improve our economic strength, comprehensive national strength and people’s living standards, it is impossible to improve the per capita level without getting rid of the old economic growth mode.3 Regarding the reasons for the extensive economic growth mode, Zhang Liqun believes that there are three aspects as follows: First, it is related to the stage of economic development in our country. Our country is at the early-to-middle stage of industrialization. International experience has shown that, in this stage, economic growth generally shows the characteristics extensive growth. The second is related to the characteristics of the economic system. The highly centralized planning system and the transitional economic system in the later transitional process from a planned economy to a socialist market economy lack strict and effective internal economic constraints, which is not conducive to encouraging competition and promoting technological progress. The third is related to the specific national conditions of our country. China’s national condition of large population and rapid growth determines that the economic scale will inevitably expand rapidly.4 The extensive economic growth mode is closely related to the lagging stateowned enterprise reform. Under the traditional system, state-owned enterprises tend to increase in quantity, which is a microscopic manifestation of extensive economic growth. Gao Shangquan believes that if the regulatory role of the market mechanism is not fully exerted, there will be no fundamental change in the mode of economic growth; and without speeding up the process of state-owned enterprise reform, and without establishing state-owned enterprises as the main players in market competition, the role of market mechanism will not be given into full play. State-owned enterprises, on one hand, occupy most of the funds and resources of the whole society; on the other hand, they are in a state of high input, low output and low efficiency. From the perspective of the status quo of state-owned enterprises, due to the serious failure of their systems and mechanisms, except for a few enterprises whose efficiency and vitality are relatively good, most of the state-owned enterprises lack vitality, are showing low efficiency and excessive debt burden, and are experiencing difficulties in normal operation. Due to the unsmooth system and mechanism, stateowned enterprises lack the motivation to strengthen management, reduce costs and improve efficiency, so they can not really eliminate the internal causes and serious threats leading to inflation. Zhou Shulian believes that the results of the transformation of economic growth mode are concentratedly reflected by the improving of economic efficiency. The most important task is to deepen economic reforms, especially the reform of state-owned enterprises. The fundamental reason for the difficulty in optimizing China’s industrial structure still lies in the economic system. Because most state-owned enterprises have not yet become real market players, and they generally lack vitality, the market mechanism is not fully functional, and the macro-control often fails to achieve the expected goals. Therefore, it is difficult to

3 4

Lu (1995). Zhang (1995).

17.2 The Research Scheme of the Transformation of Mode of Economic Growth

559

reasonably allocate resources among industries. From the perspective of the enterprise, the widespread phenomenon of “being large and complete”, “being small and complete”, blind construction and duplicated construction are all inherently related to the regional division and departmental division that inevitably arise from the traditional system. Only by making enterprises real enterprises, giving full play to the role of market mechanisms, coupled with correct macro-control, can it be possible to achieve the requirements of economies of scale. Enterprises are the main body of technological progress. Only when state-owned enterprises become vigorous commodity producers and operators can they become the main body of technological progress and reap benefits from technological progress. Regarding scientific management, there is a decline in corporate management. It is necessary to emphasize the strengthening of corporate management, but the reason why corporate management is generally ignored is not only related to insufficient understanding and leadership, but more fundamentally because of the fact that the traditional old system is still working.5 (3) How to transform the economic growth mode The transformation of economic growth mode depends on reform and opening up. Reform means to change the original economic system and operating mechanism, and to change the soil for the survival of the extensive economic growth mode, and to allow market mechanisms to play a greater role in resource allocation. Opening up means to further expand our country’s foreign economic relations and to use opening up to increase total factor productivity, thereby changing the extensive economic growth mode. Fundamentally speaking, the key to the transformation of the economic growth pattern lies in changing the institutional basis of the growth pattern. Guo Kesha believes that the basic reasons for the slow pace in the transformation of our country’s economic growth mode from a speed-based type to a performancebased type are so slow. First, the market mechanism fails to perform an effective regulatory function. Second, macroeconomic policy failed to play its due role in promoting the economic growth. Therefore, the author proposes that the basic condition for promoting the transformation of economic growth mode is to accelerate reform and opening up, including accelerating the establishment of a modern enterprise system, further improving the market system and market rules, and increasing the level of opening up to enhance market mechanism’s function in adjusting the economy. In addition, macroeconomic policies need to be adjusted, including controlling economic growth, adjusting investment priorities, and optimizing industrial structure. This is an important guarantee for promoting the transformation of economic growth mode.6 Jiang Xiaojuan analyzed the relationship between attracting foreign investment and the transformation of economic growth mode. She established an analysis framework involving zero foreign investment and the transformation of economic growth mode, which includes the relationship between the utilization of foreign capital and

5 6

Gao (1996). Guo (1995).

560

17 The Transformation of Mode of Economic Growth and the Structural …

the quality of capital formation, technological progress, human resource development, trade structure and international competitiveness, changes in industrial structure and industrial organization, and system transition, etc.. The utilization of foreign capital can play a positive role in the above aspects. Therefore, she proposed that, with the goal of promoting the transformation of economic growth mode, to further improve the level of foreign capital utilization, related measures mainly includes formulating medium and long-term industrial and technological development strategies which are suitable for an open environment, creating an equal competitive environment for foreign-invested enterprises and domestic enterprises and strengthening the guidance of foreign investment.7 Ma Jiantang pointed out that the reason for the low product quality, low competitiveness, and slow technological progress of enterprises is due to the failure to establish a mechanism for survival of the fittest; the disconnection between scientific research and production is due to the lack of institutional arrangements that promote the close integration of scientific research and production, and scientific research and the market. Local duplicated investment, repeated construction, and strong investment impulse are the results of the fact that the government’s direct economic management system has not been completely changed and both the governments of all levels and enterprises are competing for investment and projects. There are also problems in the system of assessment, evaluation and use of government cadres. Therefore, he proposed that only by deepening the reform of the enterprise system, investment system, science and technology system, and government management system can the transformation of the economic growth mode be realized.8

The Transformation of Economic Development Mode at the Beginning of the Twenty-First Century After joining the World Trade Organization, our country’s economy quickly integrated into the world economic system. In the international division of labor, based on our own advantages, China has achieved unprecedented economic development. Behind the rapid economic growth, resource “bottleneck” constraints and increasing environmental pressures have put the issue of sustainable development on the agenda. At the beginning of the twenty-first century, China proposed to change the economic development mode. (1) Why it has been so hard to realize the transformation of economic growth mode Wu Jinglian believes that our country’s economic growth mode has been unable to change since the “Ninth Five-Year Plan” because of institutional reasons. He summarized it into the following four aspects. First, the government still maintains the power to allocate some important resources. Although the 14th National Congress 7 8

Jiang (1999). Ma (1995).

17.2 The Research Scheme of the Transformation of Mode of Economic Growth

561

of the Communist Party of China established that the reform goal is to establish a socialist market economy, and that the market economy is to allow the market mechanism to play a fundamental role in the allocation of resources, this is not in place in reality. Many resources are still determined by non-market factors, the most important of which is in the financial and land sectors. Financial reforms are lagging behind. To a large extent, financial resources mainly come from banks. Because bank reforms are not in place, bank credit is still largely influenced by local party and government leaders; land allocation is also determined by governments at all levels. The second aspect is related to the use of GDP growth as the main criterion for assessing the performance of cadres. The third aspect is related to the tax system. Production-based value-added taxes link government revenue directly with output value. The fourth aspect is related to the administrative intervention in pricing, where administrative power tries to lower the prices of various production factors, such as wages, land, interest rates, and exchange rates. These four aspects determine that local officials at all levels have a spontaneous tendency to return to the old growth model, which is to use a large amount of investment and a large amount of resources to support the production of products with high prices, large output values, and can bring high level of taxes.9 There are also some economists who believe that the original economic growth mode is reasonable. Lin Yifu and Su Jian believe that the target of an economic growth mode is to minimize the production cost of the economy. This growth mode is determined by the economy’s factor endowment structure. Our country’s target growth mode should be a growth mode that can make full use of labor advantages, not a capital-intensive growth mode that creates no advantages, and it is not necessarily a growth mode that promotes productivity through independent research and development. The actual economic growth mode of an economy depends on the behavior of enterprises, because economic growth is realized by enterprises, and enterprises make decisions in a certain macroeconomic environment. The most fundamental feature of this macroeconomic environment is the factor price system. Therefore, the actual economic growth mode of an economy ultimately depends on the economy’s factor price system. The kind of factor price system determines the kind of economic growth mode. In recent decades, our country’s capital and land-intensive growth is the inevitable result of its long-term policy of low interest rates, low land prices, low energy prices, and low raw material prices. Therefore, to transform the economic growth mode, we must first change our country’s target growth mode; secondly, we should carry out reforms in the factor price system and other aspects, so that the factor price system actually supported by the payment of enterprises can conform to China’s factor endowment structure, thereby making the optimization of enterprises as close as possible to the optimization of the entire economy.10 The mode of economic growth is closely related to the population structure. Cai Fang and Wang Meiyan examine the relationship between population structure and the transformation of growth modes from a population perspective. The type of 9

Wu (2005). Lin and Su (2007).

10

562

17 The Transformation of Mode of Economic Growth and the Structural …

population reproduction changes from the stage of “high birth rate, high death rate, and low growth rate” to the stage of “high birth rate, low death rate, and high growth rate” and then to the stage of “low birth rate, low death rate, and low growth rate”. Due to the continuity and time difference of the birth rate and death rate decline in time, three stages of the population age structure change are formed accordingly. These three stages have, respectively, the characteristics of high child dependency ratio, high working-age population ratio and high old-age dependency ratio. During the entire period of reform and opening up, China was in a period when the proportion of working-age population was the highest. A highly productive population structure not only provided sufficient labor supply, but also created conditions for the formation of a high savings rate, thereby supporting capital accumulation. Due to the existence of the demographic dividend, the quantity, quality and price of labor have obvious advantages, and a high level of savings and capital accumulation rate can be formed and maintained, making it sufficient for this growth mode that mainly relies on inputs to support the rapid growth of the Chinese economy. Once the changes in population structure, labor supply and demand, and labor costs occur, it will inevitably lead to the Lewis turning point of labor from unlimited supply to shortage, which will cause the rise of wage levels and labor costs, then the conditions under which traditional growth methods depend will change. The transformation of the economic growth mode to the one relying mainly on productivity increase becomes imminent.11 (2) The transformation of the economic growth mode through reforms The mode of extensive economic growth is closely related to government behaviors. First of all, the central government’s assessment of officials is characterized by the “GDP-only” standard for a long period of time. Under the promotion mechanism of GDP competition, local officials are pursuing political achievements and blindly invest in projects, especially taking “industrial park construction” as the starting point for investment. The construction of development zones can quickly stimulate GDP growth in a short period of time. In the micro level, it is manifested as excessive entry of low-end production capacity. Secondly, local protectionism prevails. Through distorting factor market prices, such as through financial support, fixing low land prices or even zero land prices, or through tax incentives and financial subsidies, etc., market competition is made insufficient, and backward production capacity and backward enterprises are eliminated. Zhang Zhuoyuan proposed to deepen reforms and promote the transformation of economic growth mode. We should deepen the reform of the economic system, especially the reform of the fiscal and taxation system and the price reform, so that the prices of various production factors and products, such as land, water, energy, and minerals, can better reflect the scarcity levels of resources; in the meanwhile, we need to promote the marketization of interest rates and improve the mechanism of the formation of exchange rates. The deepening of reforms also includes changing government functions, transforming the government from the protagonist of economic activities to a public service-oriented government, reforming the cadre 11

Cai and Wang (2007).

17.2 The Research Scheme of the Transformation of Mode of Economic Growth

563

performance evaluation and promotion and appointment system, deepening enterprise reform, especially the reform of state-owned enterprises, deepening the reform of the financial system and so on. Through deepening of reforms, we can utilize economic levers to force production enterprises and consumers to use resources sparingly, improve resource utilization efficiency, fundamentally reduce environmental pollution, and truly realize the transformation of economic growth modes.12 (3) The relationship between open economy and the transformation of economic growth mode China’s outward economic relations can quickly integrate into the global division of labor system with the help of local resources and labor advantages. There are two different views as regard to the effect of foreign economic relations on the mode of economic growth. One view is that the technological proliferation and spillover of foreign capital in developed countries is conducive to technological progress in developing countries, the improvement of total factor productivity and the promotion of the transformation of economic development modes. Yu Yongze and Wu Peng put forward the hypothesis of the “potential energy of technology”, believing that the potential ability of foreign-invested enterprises to promote the technological progress of the host country is also affected by the technological gap between domestic and foreign enterprises and the degree of entry of foreign-invested enterprises. The high level of total factor productivity of foreign-funded enterprises has produced positive and significant technology spillover effects on domestic-funded enterprises. Bai Junhong and Lu Xiaohong believe that the quality of FDI has a significant role in promoting the transformation of China’s economic development mode; from a regional perspective, the improvement of FDI quality in both coastal and inland regions contributes to the transformation of economic development mode, and the influence of FDI quality in coastal areas is significantly greater than that in inland areas.13 Another view is that the open economy has not lead to the transformation of economic growth mode, on the contrary, it has negative effects. Lu Feng and Yu Yongding believe that China’s achievements in maintaining high-speed growth for many years are characterized by export-oriented and foreign capital dependence. Therefore, it has maintained a surplus in current and capital accounts for the past 20 years. The problem that has been masked under the boom is that China’s technology and capabilities, in general, have not grown enough in the process. The substantive problem reflected in this “double surplus” paradox of balance of payments is that China has a capacity gap in the process of economic development, and its dependence on foreign capital is mutually causal, thus hindering industrial upgrading, and stubbornly continuing or even worsening the extensive development mode. It also makes China’s economy more and more vulnerable to external forces.14

12

Zhang (2005). Yu and Wu (2010). 14 Lu and Yu (2012). 13

564

17 The Transformation of Mode of Economic Growth and the Structural …

(4) How to realize the specific growth path Wang Guogang believes that urbanization is the focus of the transformation of our country’s economic development mode. The transformation of China’s economic development mode is a process of shifting from the industrial economy as the main driving force to the co-promotion of the industrial economy and the urban economy. After solving the problem of “food, clothing, and utility” through industrialization, we must effectively solve the current severe shortage in areas of “housing, transportation, and education”, and accelerate the development of the urban economy. Solving the problem of “housing, transportation, and education” is not only the main content of urbanization, but also the main content of realizing a well-off society in an all-round way on the basis of a well-off society with adequate food and clothing, and the main driving force for the long-term sustainable development of China’s economy.15 Zeng Zheng inspected the reforms in many countries and regions in history. These reforms transcended the “middle income trap” and realized the transformation of economic development mode. South Korea, Japan, Singapore, and Taiwan in China have similar cultures and national conditions to the mainland, and their experience in the transformation of economic development modes is of particular significance for China. By summarizing the experience of the transformation of the economic development mode of these typical Asian countries and regions, he drew the following four enlightenments. The first one is to transform the economic development mode, including the harmonious development of economy and society; the second one is that the transformation of economic development mode should adhere to the combination of market orientation and government intervention; third, economic restructuring is the key direction of the transformation of economic development mode; fourth, independent innovation is an important support for the transformation of economic development mode.16 The China Economic Growth and Macro Stability Research Group believes that the mode of economic growth is closely related to a country’s productivity and social development. In the early stage of industrialization, there will be a long or short period of extensive growth. The overall trend of the evolution of the economic growth mode is from labor and capital input-driven to the mode in which management and knowledge innovation improve production efficiency, which is reflected in the dynamic evolution path of “factor accumulation-intensive management-knowledge innovation”, and the degree of intensification and the degree of innovation is getting higher in this path. Although an economy cannot cross its own development stage and choose a certain economic growth mode at will, efforts can be made to shorten the transition time from a more extensive growth mode to an intensive growth mode (such as through technological progress, entrepreneurial innovation, institutional improvement, and policy regulation). To change the economic growth mode of our country, 15 16

Wang (2010). Zeng (2011).

17.2 The Research Scheme of the Transformation of Mode of Economic Growth

565

we must start from the two aspects of supply policy and market-oriented condition reform. The recommendations of the China Economic Growth and Macro Stability Task Group include the following. First, we need to strengthen access management and reduce the cost of external or intergenerational transfer of enterprises. Costcompetitive companies should strengthen access restriction management, such as environmental protection access management, labor protection access management, etc., so as to avoid the entry and excessive competition of reckless “malicious arbitrageurs” in the process of technological evolution. The second is to gradually correct the price of distorted factors and resources, reduce the arbitrage behaviors of micro entities on distorted prices, so that competition has a fair basis. The third is to deregulate and open the modern service sector to domestic funds. The fourth is to make good use of the capital market to allocate factor resources. Fifth, through tax cuts and increased R&D investment in supply policies, Chinese companies should be encouraged to upgrade technology-products and accumulate independent innovation capabilities.17 Cai Fang and other scholars believe that the inherent needs of the change of growth mode caused by the change of economic development stage, and the higher requirements for environmental quality caused by the increase of per capita income level are the key to whether the energy conservation and emission reduction policy can be compatible with the development motivation of local government and the incentive of enterprise behavior, and also the key to the earnest implementation of the energy conservation and emission reduction policy. By fitting the environmental Kuznets curve and predicting the turning point of emission levels from rising to falling, they examined the inherent energy-saving and emission-reduction requirements of the Chinese economy. The research results show that for the reduction of greenhouse gas emissions, passively waiting for the arrival of the Kuznets turning point plays no effect in coping with the increasing environmental pressure. Under such circumstances, it is necessary to rely on the determination of the central government, the motivation of local governments and enterprises to transform the growth mode and increase incentives to achieve sustainable economic growth.18 (5) Measurement and evaluation of transformation in economic growth mode Zhang Youguo empirically analyzed the impact of changes in economic development modes from 1987 to 2007 on China’s GDP carbon emission intensity based on the decomposition method of input–output structure. The analysis results show that changes in economic development modes have reduced China’s GDP carbon emission intensity by 66.02%. Among them, the continuous decline in the energy intensity of the production sector, the direct energy consumption rate of demand, and the change in the energy structure have reduced carbon emission intensity by 90.65%, 13.04%, and 1.16%, respectively. However, the distribution structure of demand measurement, the three-industry structure, changes in the internal structure of the three industries, changes in the internal structure of the manufacturing industry, 17 18

Research Group on China’s Economic Growth and Macro Stability (2006). Cai et al. (2008).

566

17 The Transformation of Mode of Economic Growth and the Structural …

and changes in the import rate and intermediate input structure have led to increases in carbon emission intensity by 4.61%, 2.50%, 1.02%, 3.85%, 2.89% and 27. 63%, respectively.19 Wang Xiaolu and other scholars investigated the ongoing transformation of China’s economic growth mode and found that our country’s total factor productivity has been on the rise since the reform and opening up, and it has been around 3.6% in the last decade. The sources of total factor productivity are changing; factors that increase exogenous efficiency are declining, and factors that improve technology and endogenous efficiency are on the rise. In terms of factor input, the improvement in the quality of human capital brought about by education is replacing the simple expansion of the labor force. The world economic crisis is having a negative impact on China’s economic growth, but it is not insurmountable. The empirical analysis found that the expansion of administrative costs and the continuous decline of consumption rate are two internal factors affecting economic growth. If these negative effects can be overcome, China’s economy may still maintain a growth rate of over 9% between 2008 and 2020.20

Supply-Side Structural Reform and Transformation of Economic Growth Mode (1) Research on the issue of overcapacity An important economic consequence of the extensive economic growth mode is excess capacity. Korean senior officials believe that the unreasonable economic growth mode is the deep-seated cause of China’s overcapacity. China’s extensive economic growth mode that mainly relies on investment has made it the main form of economic growth to produce more products by investing more production factors. At the same time, the intervention of local governments on microeconomic entities has led to distortions in corporate investment behaviors, which has led to excessive investment in production capacity.21 Lin Yifu and other scholars analyzed the specific mechanism of overcapacity. They believe that overcapacity is not only caused by fluctuations in the business cycle, but is more likely to be caused by investment. It is easy for companies in developing countries to come to a consensus on the next promising industry, and there is a tendency of the occurrence of a “surge phenomenon” in investment. The micro-theoretical basis of the “surge phenomenon” is that the seemingly “blind” result is actually a rational result caused by insufficient understanding of the other companies and the lack of aggregate information.22 19

Zhang (2010). Wang et al. (2009). 21 Han et al. (2011). 22 Lin et al. (2010). 20

17.2 The Research Scheme of the Transformation of Mode of Economic Growth

567

Zhong Chunping and Pan Li believe that there are many specious controversies about overcapacity, and China has a chronic problem of overcapacity, but the more we manage it, the more serious it becomes. They believe that China’s overcapacity problem is due to the lack of proper measurement and more credible statistical data, and there are problems with existing data. Secondly, overcapacity is over-emphasized and may be distorted. Thirdly, the causes of such problems mainly include the common effects of macro-demand shocks, government policy distortions, and the interest mechanism of state-owned enterprises. Fourth, it is necessary to revive the early warning function of capacity utilization rates. Fifth, it is difficult to effectively implement the current policies to resolve overcapacity because the executors do not have sufficient incentives and the restraint mechanism is not strong enough. Sixth, in the way of resolving overcapacity, it is more necessary to improve the price and benefit mechanism and construct the market-oriented development mode and supervision system.23 (2) Key points of supply-side structural reform Liu Wei and Cai Zhizhou believe that the current supply side structural reform includes the following five aspects. One is to realize the sustainable development of economy, society and environment, especially to realize economic growth on the basis of environmental protection. The second is to increase the market competitiveness of state-owned and state-holding enterprises by promoting mixed ownership reform. The third is to achieve a balanced distribution of productivity across regions. The fourth is to continuously promote the upgrading of the industrial structure and improve the efficiency of economic growth. The fifth is to promote the reform of the distribution and redistribution field, while reducing the burden on enterprises and improving market competitiveness, increase the remuneration of workers and expand the demand with the ability to pay in the society.24 Hong Yinxing believes that there are three goals for supply-side structural reforms. The first one is to solve effective supply; the second is to increase total factor productivity; and the third is to release enterprise vitality. He systematically discussed the relationship between “three removals, one reduction and one supplement” and supply-side structural reforms. Cost reduction is to seek economic development motivation on the supply side. Cost reduction includes the reduction of excessive factor allocation costs and excessive institutional costs. Making up for shortcomings, decapacity and de-stocking can improve the quality and efficiency of the supply system. De-leveraging and cost reduction can release corporate vitality. He believes that the structural reforms on the supply side should emphasize the following points. First, to stimulate growth, the supply side and the demand side must work together. The main aspect of the current contradiction is the supply side, but the role of the demand side cannot be ignored. Second, reform is to solve long-term problems. De-capacity, de-inventory, and de-leveraging are the tasks of the reform. The goal of supply-side structural reform is to prevent and overcome the creation of new ineffective low-end 23 24

Zhong and Pan (2014). Liu and Cai (2016).

568

17 The Transformation of Mode of Economic Growth and the Structural …

production capacity and inventory in the system and mechanism, and establish the institutional mechanism that can increase effective supply. The vitality of enterprises can be stimulated through de-leveraging, cost reduction and so on. The third is that the supply side and the demand side are not opposed, but interdependent.25 (3) Supply-side structural reform and transformation of economic growth mode Yu Yongding believes that short-term or long-term economic growth issues can be divided into two categories: structural reform and macro-demand management. Growth problems that cannot be solved by macroeconomic policies are called structural problems, and reforms that solve structural problems are called structural reforms. For the five major tasks of supply-side structural reforms (destocking, decapacity, de-leveraging, cost reduction and overcoming shortcomings), Yu Yongding believes that these tasks themselves are not structural reforms, but structural reforms are necessary measures to take in order to complete these tasks.26 Cai Fang believes that the supply-side structural reform refers to the idea that is different from the economic cycle analysis framework and the search for policy measures from the demand side; through structural reforms, it starts from the institutional obstacles that hinder the supply of production factors and the increase in total factor productivity to tap new growth momentum to increase potential growth rate and eventually promote sustainable economic growth. This includes the following three aspects. The first one is to carry out supply-side structural reforms to overcome institutional obstacles, including adjustments to existing excess production capacity, high leverage ratios, and zombie companies, and at the same time to accelerate the formation of new institutional mechanisms to put an end to and prevent the cycle caused by increment. Second, starting from reducing transaction costs and increasing total factor productivity, reforms should be deepened in areas such as administrative approval, fiscal, taxation and financial systems, household registration systems, state-owned enterprises, and competition policies, all of which can eliminate the “bottlenecks” in the supply of production factors and the institutional obstacles hindering the increase in total factor productivity. This can help increase the potential growth rate and therefore can create significant reform dividends. The third is to improve the function of social policies underpinning people’s livelihood, and integrate reform dividends into shared development.27 Wu Jinglian believes that the root of the problems in economic development lies in the low efficiency on the supply side. He believes that it is necessary to distinguish two “structures” with different meanings. The first “structure” involves the supplyside issue, referring to structural distortions and resource allocation distortions, the so called “economic structure”; the other “structure” is related to “structural reform”, which refers to the “system structure”. Our country has repeatedly proposed to adjust the economic structure and transform the economic development mode, but the results have not been great. This is due to the existence of institutional obstacles. The core 25

Hong (2016). Yu (2016). 27 Cai (2016). 26

17.3 Some Comments and Prospects

569

content of institutional obstacles is that the government still plays a decisive role in resource allocation. “Three removals, one reduction and one supplement” is difficult to achieve by administrative orders. He believes that structural reform is a reform of the institutional structure. Through institutional and structural reforms, a unified, open, and orderly competitive market system will be established. The market will play a decisive role in the allocation of resources and establish an effective incentive mechanism to achieve structural optimization. He believes that in order to achieve structural optimization and change the passive state that the economic growth rate is going down while the efficiency has not been improved, the urgent reforms at present should include: formulating and implementing the negative list of market access, financial reform, reform of state-owned economy, implementation of competition policy, experiment of free trade zone and construction of a country ruled by law.28

17.3 Some Comments and Prospects The transformation of economic growth mode is fundamentally to achieve long-term sustainable economic growth. Deng Xiaoping said at the beginning of reform and opening up that science and technology are the primary productive forces, which also pointed out that long-term sustainable economic growth must rely on technological progress. With the gradual disappearance of our country’s demographic dividend and people’s increasing attention to environmental protection, our country’s economic growth will rely more and more on the improvement of labor productivity. Fundamentally speaking, the realization of the transformation of economic growth mode is to properly handle the problem of resource allocation, that is, to realize the decisive role of the market in resource allocation and to better play the role of the government. Nevertheless, we must realize that the transformation of economic growth mode is a long-term historical process. Since the “Ninth Five-Year Plan”, our country has proposed to change the economic growth mode for more than 20 years; the 19th National Congress of the Communist Party of China proposed that economic growth should shift from high-speed growth to high-quality growth, and high-quality growth is also the connotation of the transformation of economic growth mode. In the foreseeable future, our country will continue to work hard to achieve a transformation in the economic growth mode. Judging from the actual economic operation, our country has achieved certain results in the transformation of economic growth mode (see Table 17.2), but compared with developed countries, it still has a long way to go.

28

Wu (2016).

570

17 The Transformation of Mode of Economic Growth and the Structural …

Table 17.2 Energy consumption per unit GDP of China, Japan, and the United States. Unit: USD/kg oil equivalent

Year

China

Japan

The United States

1990

1.99

8.57

4. 83

1995

2.96

8.24

5. 08

2000

4. 12

8.29

5.71

2005

4.10

8.78

6.34

2015

5.70

11.05

7. 80

Note: The 2011 constant price is based on the purchasing power parity method, and the data for China in the table is for 2014 Source: World Bank

References Cai Fang, and Wang Meiyan. (2007). Labor Cost Rising and the Change of Growth Mode. China Development Observatioon, 4. Cai Fang, Du Yang, and Wang Meiyan. (2008). The Transformation of Economic Development Mode and the Internal Dynamics of Energy Conservation and Emission Reduction. Economic Research Journal, 6. Cai Fang. (2016). Understanding the Supply Side, New Normal, Structural Reform: A Discriminating Analysis of Current Economic Policies. Exploration and Free Views, 5. Gao Shangquan. (1996). Accelerating the Reform of State-owned Enterprises and Promoting the Transformation of Economic Growth Pattern. Economics Information, 10; Zhou Shulian. (1996). Change the Mode of Economic Growth and Deepen the Reform of State-owned Enterprises. Management world, 1. Guo Kesha. (1995). The Conditions and Ways of the Transformation of the Mode of Economic Growth. Social Sciences in China, 6. Han Han Gao, Gao Tiemei, Wang Liguo, Qi Yingfei, and Wang Xiaoshu. (2011). Study on the Measurement, Fluctuation and Causes of China’s Manufacturing Excess Capacity. Economic Research Journal, 12. Hong Yinxing. (2016). Accurately Understanding the Objectives and Tasks of Supply-side Structural Reform. China Industrial Economics, 6. Jiang Xiaojuan. (1999). Utilization of Foreign Capital and the Transformation of Economic Growth Pattern. Management World, 2. Lin Yifu, and Su Jian. (2007). On the Transformation of China’s Economic Growth Mode. Management World, 11. Lin Yifu, Wu Hemao, and Xing Yiqing. (2010). Tidal Surge Phenomena and the Formation Mechanism of Overcapacity. Economic Research Journal, 10. Liu Wei, and Cai Zhizhou. (2016). The New Normal of Economic Growth and Supply-side Structural Reform. Seeking Truth, 1. Lu Baifu. (1995). Realizing the Transformation of Economic Growth Mode is a Strategic Choice for China’s Economic Development. Management World, 6. Lu Feng, and Yu Yongding. (2012). Double Surplus, Capacity Gap and the Transformation of Economic Development Mode: Macro and Micro Perspectives. Social Sciences in China, 6. Lu Nanquan. (1995). A Review of the Economic Growth Pattern of the Former Soviet Union. Economics Information, 11; Yu Yongding. (1995). Theory and Practice of Foreign Economic Growth Pattern. Reform, 6. Ma Jiantang. (1995). The Key to Changing the Mode of Economic Growth: Establishing a New Institutional Foundation. Reform, 6. Research Group on China’s Economic Growth and Macro Stability. (2006). Learning by Doing, Low Cost Competition and the Transformation of Growth Path. Economic Research Journal, 4.

References

571

Wang Guogang. (2010). Urbanization: The Focus of the Transformation of China’s Economic Development Mode. Economic Research Journal, 10. Wang Xiaolu, Fan Gang, and Liu Peng. (2009). China’s Economic Growth Mode Transformation and Sustainability. Economic Research Journal, 1. Wu Jinglian. (2005). Growth Model and Technological Progress. The Tide of Science and Technology, 10. Wu Jinglian. (2016). What is Structural Reform and Why is it so Important? Tsinghua Business Review, 11. Yu Yongding. (2016). Supply-side Structural Reform. Government Finance, 6. Yu Yongze, and Wu Peng. (2010). FDI, Technology Potential and Technology Spillover: An Empirical Study from China’s High-tech Industry. Journal of Financial Research, 11;Bai Junhong, and Lu Xiaohong. (2017). FDI Quality and the Transformation of China’s Economic Development Mode. Journal of Financial Research, 5. Zeng Zheng. (2011). A Study on the Transformation of Asian Countries and Regions’ Economic Development Pattern-An Analysis Based on the “Middle-income Trap” Perspective. Economist, 6. Zhang Liqun. (1995). On the Transformation of China’s Economic Growth Mode. Management world, 5. Zhang Youguo. (2010). The Impact of Economic Growth Pattern on China’s Carbon Emission Intensity. Economic Research Journal, No.4. Zhang Zhuoyuan. (2005). Deepening Reform and Promoting the Transformation of Extensive Economic Growth Mode. Economic Research Journal, 11. Zhong Chunping, and Pan Li. (2014). The Misunderstanding of “Excess Capacity” -The Progress, Controversy and Practical Judgement of Capacity Utilization Rate and Excess Capacity. Economics Information, 3. Zhou Shulian. (1996). Change the Mode of Economic Growth and Deepen the Reform of Stateowned Enterprises. Management world, 1.

Chapter 18

The Development and Review of the Opening Up Theory

In the 40 years since the Third Plenary Session of the 11th Central Committee of the Communist Party of China in 1978, an all-round opening up theory has been formed. In the past 40 years, opening to the outside world has become a long-term basic national policy of our country, and opening-up theory has also entered a golden period and played a major role. Deng Xiaoping, the chief architect of reform and opening up, clarified the importance of opening up. He said: “Opening up to the outside world is of great significance. It is impossible for any country to develop if it is isolated and be kept closed without strengthening international exchanges. It is impossible for any country to develop without introduction of advanced experience, advanced science and technology and funds from developed countries.”1 “If China is to seek development and get rid of poverty and backwardness, it must open up. Opening up is not only to develop international exchanges, but also to absorb international experience.”2 Deng Xiaoping’s theory of opening to the outside world has two notable features; one is “long-term”, and the other is “all-round”. First, he linked the opening-up policy with the “threestep” strategy of socialist modernization. He said: “Opening to the outside world is not a short-term policy. It is a long-term policy. It will not change for at least 50– 70 years. The reason why is because that our first step is to quadruple, which will take 20 years, and the second step is to reach the level close to that of the developed countries, which will take another 30–50 years, or even 50 years. The two steps add up to exactly 50–70 years.”3 He believes that opening up to the outside world will help achieve the strategic goal of quadrupling: “When our country’s annual GDP reaches one trillion US dollars, what about our products? Will they all be sold domestically? Will we make everything all by ourselves? In fact, we still need to buy a batch of goods from outside and sell a batch of our own to the outside? Therefore, without an opening-up policy, it is difficult to quadruple, and it is even more difficult to 1

Selected Works of Deng (1993, p. 117). Selected Works of Deng (1993, p. 226). 3 Selected Works of Deng (1993, p. 79). 2

© China Social Sciences Press 2023 Z. Zhang, Handbook of Chinese Economics, https://doi.org/10.1007/978-981-99-0420-4_18

573

574

18 The Development and Review of the Opening Up Theory

move forward after quadrupling.”4 Second, Deng Xiaoping advocated full opening to the outside world. He said: “We are opening up in three areas. One is opening up to Western developed countries, where we mainly absorb foreign capital and introduce technology. One is the opening up to the Soviet Union and Eastern European countries, and this is also an important aspect. …The last is opening to developing countries in the third world… So, opening to the outside world involves three aspects, not just one aspect.”5 Deng Xiaoping stated on many occasions that opening to the outside world is not only China’s choice, but also a common requirement of the law of world economic development for all countries. Globalization, marketization, and informationization are the trends of world economic development, and their profound foundation lies in the new development of the international division of labor. He also emphasized that openness involves two elements, one is for the inside and the other is for the outside. Deng Xiaoping’s thought is a powerful ideological weapon for opening up theories for the past 40 years, and a basic program guiding opening up. Under the guidance of Deng Xiaoping Theory, our country’s theoretical circles got rid of the shackles of self-reliance, theoretically demonstrated the necessity and inevitability of developing foreign economic relations, and carried out fruitful research in various aspects of foreign-related economics. Gu Mu pointed out: “Opening to the outside world is an urgent need for socialist modernization.” “Our capital is still insufficient, our technology is still backward, and the economic management of modern socialized mass production is still lacking experience.” Therefore, we must “actively introduce capital and technology, introduce talents, knowledge and experience, and use the best of the world to accelerate the pace of the construction of the four modernizations.” Ji Chongwei believes: “our country’s lack of urgency for international economic and technological exchanges in the past is related to our low level of productivity and underdeveloped commodity economy.” In the future, we should “persist in opening up to the outside world, and strengthen foreign economic and technological exchanges through various appropriate forms to promote the development of our country’s modernization.” Luo Yuanzheng and other scholars believe that studying and learning from foreign countries’ advanced experience in the introduction of advanced technology, utilization of foreign capital, enterprise management, state intervention, and organizational economy can increase the consciousness of acting in accordance with objective laws and accelerate the construction of the four modernizations. Theorists also demonstrated the inevitability of opening up from the perspective of new trends in world economic development. Scholars pointed out that the new scientific and technological revolution, the adjustment and transfer of industrial structure, the great development of international division of labor and the internationalization of economic life caused by it all require us to open up to the outside world and strive to develop foreign economic and technological exchanges and cooperation. China’s economy has entered a new normal. In his report to the 19th National Congress of the Communist Party of China, General Secretary Xi Jinping clearly 4 5

Selected Works of Deng (1993, p. 90). Selected Works of Deng (1993, p. 99).

18.1 The Foreign Trade Theory

575

stated that it is necessary to focus on the construction of the Belt and Road Initiative and insist on bringing in and going out at the same time; following the principles of mutual consultation, co-construction and sharing, we should strengthen the opening up and cooperation in innovation capacity, and form a new pattern of opening-up with land, domestic and overseas linkage and east–west mutual aid. The Belt and Road Initiative focuses on policy coordination, facility connectivity, unimpeded trade, financial integration, and people-to-people bond. It is committed to linking scattered resources, production, services, and consumption in Eurasia, and promoting countries to allocate resources more rationally, so to realize integration into the global industry chain, value chain and logistics chain. We summarize the development of the theory of opening to the outside world over the past 40 years in terms of foreign trade, foreign investment and foreign exchange as follows.

18.1 The Foreign Trade Theory Since the reform and opening up, foreign trade theory research has become active and has made great progress. The theoretical circles have concentrated on the following issues.

The Role of Foreign Trade Before the reform and opening up, the role of foreign trade was simplified as the exchange of what is needed and the adjustment of the remaining and the deficiencies. Essentially, the role of foreign trade is viewed from the perspective of use value. In the early 1980s, some scholars proposed that we should attach importance to the role of foreign trade in value exchange and look at foreign trade from the perspective of profitability of the national economy. Related to this, we must re-examine the economic benefits of foreign trade. Yuan Wenqi and Wang Jianmin published “Recognizing and Evaluating the Role and Status of Foreign Trade in China’s National Economic Development” in the first issue of the journal International Trade in 1982; Wang Linsheng published “The Status and Role of Socialist Foreign Trade” in the second issue of the journal International Trade in 1982; Chen Dezhao and Tan Shizhong published “Opening up to the outside world is China’s unswerving strategic policy” in the fifth issue of the journal International Trade in 1983; Ji Chongwei published Enhancing Economic Benefits and Expanding New Situation in Foreign Trade in the third issue of International Trade. All of the above are representative articles of this view. After the 1990s, the discussion on this issue became more in-depth. Jiang Xiaojuan, from the perspective of the integration of industrial economic development and foreign economic and trade, proposed that the principle of comparative interest can

576

18 The Development and Review of the Opening Up Theory

be used to explain the current situation of the international trade pattern. However, it is impossible to obtain comparative benefits as the long-term goal of the foreign trade of backward countries. “Lagging advantage” of developing countries should be recognized, and we should be committed to enabling foreign trade to play an important role in promoting domestic industrial growth, structural adjustment and technological progress.6 In fact, to understand the role of foreign trade from such a perspective has gone beyond looking at foreign trade in terms of foreign trade. Actually, it is looking at the role of foreign trade from the overall national economic development. Therefore, it should be said that the understanding in the 1990s was deeper than that in the 1980s. Entering the twenty-first century, the discussion of the role of trade is no longer limited to mainly discussing the impact of foreign trade on China’s economic growth rate, but has risen to the transformation and upgrading of economic growth quality and structure. Wu Yi pointed out that only by accelerating the optimization of the structure of China’s export commodities, the structure of business entities, and the market structure, strengthening the stamina of foreign trade and economic development, and realizing sustained growth that meets the requirements of foreign trade and economic development, can China truly transform from a major trading country to a powerful trading country, thus making greater contributions to the sustainable development of the national economy.7 Long Yongtu said in his World Trade Organization Knowledge Book that foreign trade is the engine and condition of economic growth,8 and he believes that foreign trade is conducive to the transformation of the economy and industrial structure, to capital accumulation, and to accelerating technological progress and diffusion. It is also conducive to improving the quality of the labor force, maintaining the balance of international payments, maintaining the stability of the RMB exchange rate, and enhancing China’s comprehensive national strength in participating in economic globalization. In addition, scholars also discussed the role of foreign trade in improving overall national strength from the perspective of using global resources and increasing the level of participation in the international division of labor. Fan Mingtai believes that foreign trade plays an irreplaceable major role in the introduction of new products and their embedded new technologies and modern management experience, and in enhancing economic growth and realizing economic structural transformation and upgrading. Based on a detailed analysis of the dependence of economic growth on foreign trade and the contribution of foreign trade to economic growth, he pointed out that the impact of foreign trade on China’s economic development is not mainly reflected in the impact on economic growth. It is reflected in the transformation and upgrading of the quality and structure of economic growth, in maintaining the balance of international payments and maintaining the stability of the RMB exchange rate.9 Yu Xintian pointed out that China should make full use of the advantages of abundant resources and low labor costs in neighboring 6

Jiang (1993). Wu (2000). 8 Long (1999, pp. 169–174). 9 Fan (2000). 7

18.1 The Foreign Trade Theory

577

developing countries, and gradually transfer labor-intensive and resource-intensive industries and industrial links to enhance China’s performance in international trade and investment.10 Zhong Changbiao discussed the important role of foreign trade in economic development in the context of economic globalization from the perspective of improving the competitiveness of enterprises through foreign trade.11 Long Guoqiang proposed that China’s current foreign trade must meet the two goals of China’s development. One goal is to upgrade in the global value chain and make good use of two markets and two kinds of resources to promote China’s structural upgrading. The other goal is to create a sound external environment which guarantees the peaceful development and peaceful rise of the country.12 From the perspective of the relationship between supply-side structural reforms and foreign trade, Ye Qi proposed that in the process of adapting to and leading the new normal, building a more open and higher-level opening to the outside world can not only expand the strategic space for China’s economic growth, but also gain the initiative in international competition; supply-side structural reforms provide new ideas for the construction of a new pattern of opening up in China, and clearly establish China’s goals and status in opening up. At the same time, the supply-side structural reform also requires China to change its role in terms of external advantages, market development, international division of labor and cooperation, and opening-up regions in accordance with high standards and new requirements in opening-up; We should deepen the adjustment and optimization of market structure, industrial structure, enterprise structure, product structure, and factor structure at the supply level, and constantly open up new situations and new spaces for China’s opening up.13 Chen Xi and other scholars proposed that China’s foreign trade adjustment should be based on the establishment of an open economic system which is diversified and balanced, safe and efficient, and aims at achieving mutual benefits and win–win situation. This is conductive to the healthy and sustainable development of the domestic economy, and is in compliance with the principle of fostering new dynamic comparative advantages so that we can carry out comprehensive adjustment and optimization through fulfilling the strategic focuses of creating a favorable external development environment, coordinating with domestic economic transformation and upgrading, as well as upgrading the value chain. In terms of policy, an active import strategy should be implemented to promote trade balance; strengthen innovation capacity building, increase product added value, and optimize foreign trade commodity structure; we also need to promote diversification of trading partners, optimize foreign trade location structure, promote industrial structure upgrade, and optimize foreign trade mode structure.14

10

Yu (1999). Zhong (2001). 12 Long (2015). 13 Ye (2017). 14 Chen and Bian (2017). 11

578

18 The Development and Review of the Opening Up Theory

The Theoretical Basis of Foreign Trade There are mainly the following views. The first view is that “comparative cost theory” and “international division of labor theory” can be used as a guiding principle for our country’s foreign trade. Scholars holding this view emphasized that comparative cost cannot be regarded as a theory of service to imperialism and cannot be regarded as a theory of our country’s foreign trade. In this regard, a particularly influential article needs to be mentioned, namely “International Division of Labor and China’s Foreign Economic Relations” published by Yuan Wenqi, Dai Lunzhang, and Wang Linsheng in the first issue of Chinese Social Sciences in 1980. This article breaks through the theoretical forbidden zone and first puts forward the inevitability of international division of labor by proposing that the comparative cost theory has a “reasonable core”, and that socialist countries should treat international division of labor in a correct way. Other scholars who hold this same view are Ji Chongwei with “Applying Comparative Cost Theory to Guide China’s Foreign Trade, and Achieve Better Economic Results in International Trade” (Foreign Trade Teaching and Research, 1981 issue 3), Chen Qiwei with “The Scientific Core of Comparative Interest Theory” (World Economy 1981 issue 3), etc. In the “Scientific core of Comparative Interest Theory”, Chen Qiwei demonstrated that countries with different labor productivity can achieve social labor savings to varying degrees through foreign trade and international division of labor, thereby bringing economic benefits to both parties. Zhu Guoxing and Wang Shaoxiong demonstrated the issue of mutual benefit for both sides of trade through international exchange in “On Marx’s Evaluation of ‘Comparative Cost Theory’ of Ricardo” (International Trade, 1982, Issue 8). The second point of view clearly opposes to consider the comparative cost theory and the international division of labor theory as one of China’s foreign trade theories. It believes that the comparative cost theory is against the labor theory of value and is a theoretical tool for developed countries to exploit developing countries. It holds that the international division of labor is contradictory to the “general goal” of establishing a complete socialist national economic system. For example, Gao Hongye pointed out in “The Theory of Comparative Cost Should Not Form the Theoretical Basis of China’s Foreign Trade Development Strategy” that the theory of comparative cost has brought disasters to backward countries in the past, even today, it is still not beneficial to backward countries. Otherwise, China will always remain as an exporter of primary products and labor-intensive products (Economic Research Reference Materials, 1982, issue 44). Xue Rongjiu’s “Ricardo Comparative Cost Theory Cannot Guide China’s Foreign Trade” (Economic Science, 1982, issue 2), and Yang Zhanlin’s “International Division of Labor and The Foreign Economic Relations of Socialist Countries (Economic Science, 1980, issue 4), etc. all demonstrate this view. Xue Rongjiu clearly pointed out that the comparative cost theory cannot guide our country’s foreign trade. He believes that capitalist international trade and international division of labor are not guided by the theory of comparative cost theory. Capitalists have always been very sensitive to the changes in world

18.1 The Foreign Trade Theory

579

market prices. Yao Zengyin believes that the international division of labor and international trade based on the theory of comparative cost only exists in textbooks and the theoretical thinking of some economists, and it no longer exists in the real world. Developed countries are unwilling to give up protective trade measures for the socalled saving of social labor, and most third world countries cannot act according to the comparative cost theory (“Discussion on Several Theoretical Issues of China’s Foreign Trade”, People’s Daily, July 13, 1987). The third viewpoint stands somewhere between the above two viewpoints. Most people believe that under certain conditions, comparative cost theory or international division of labor theory can be used as a reference point, but not necessarily as the theoretical basis of foreign trade. For example, Wang Yaotian and Ye Songnian’s “Evaluation of the Classical Bourgeois Trade Theory—The Theory of Comparative Cost” (International Trade Issues, 1981, issue 1) believe that using the reference to the “comparative cost theory” as a guidance to participate in international division of labor and international trade is definitely not about abandoning the policy of selfreliance, on the contrary, it can make a country’s economy develop rapidly and further consolidate the foundation of self-reliance. Zhu Gangti emphasized how to successfully utilise comparative cost theory in “Comparative Cost Theory” and China’s Foreign Trade” (Foreign Trade Teaching and Research, 1981, issue 2), and illustrated his points of view through the example of Japan’s successful and rapid economic restructuring by using “comparative cost theory”. Since the 1980s, the introduction of foreign trade theory in market economy countries has greatly enriched the content of discussions, strengthened the market economy orientation of discussions, and played a role in promoting reform and opening up. For example, the introduction of the production factor endowment theory, the product cycle theory, and the theory of preference similarity have made foreign trade discussions more theoretical with more updated perspectives and broader horizon. After the mid-1980s, there were also some important points of controversy, with a relatively small impact. For example, some scholars mentioned that the theoretical basis of China’s foreign trade is Marx’s theory of international value. Some scholars think that it should be based on Marx’s international value theory while absorbing the reasonable content of comparative interest theory at the same time. And some other scholars think that the classical comparative cost theory should be transformed into modern comparative interest theory by using international value theory as the basic theory of China’s foreign trade. But the debate was less intense during this period. In the late 1990s, Chinese economic theory circle once again launched theoretical discussions and debates on the theory of comparative advantage. The academic community has shifted from comparative advantage research to competitive advantage research, and to the research of national competitive advantage (overall competition) and the role of the government in forming competitive advantages of a country’s industries and products in the international market. Hong Yinxing proposed the concept of “comparative advantage trap” and believed that comparative advantage determined solely by resource endowment does not necessarily guarantee a competitive advantage in international trade. It is possible to fall into the “comparative advantage trap” if we decide our own international trade structure purely based on resource

580

18 The Development and Review of the Opening Up Theory

endowment and try to take labor-intensive products as our export orientation. The essence is to warn people not to look at the theory of comparative advantage statically and rigidly, and to warn those who formulate their own long-term development strategies for foreign trade development based solely on the theory of comparative advantage, which will inevitably lead to the decline in the country’s resource allocation and industrial structure. Falling into the “comparative advantage trap” will be detrimental to the healthy development of the national economy of developing countries and the adjustment and upgrading of the industrial structure in the long run.15 Wang Zixian empirically analyzed and studied the changes in the comparative advantages of China’s import and export commodities in its foreign trade since the reform and opening up. He pointed out that the comparative advantage of a country’s resource endowments is not equivalent to the competitive advantages of the country’s industries or products in the international market. However, comparative advantage is the basis of competitive advantage; only when comparative advantage is finally transformed into competitive advantage can we form real export competitiveness. At the same time, it is pointed out that the ability of domestic enterprises and industries to transform comparative advantage into competitive advantage is still poor. In order to meet the needs of the vigorous development of knowledge-based economy and high-tech industries, it is an inevitable choice for China’s foreign trade development strategy to shift from comparative advantage orientation to competitive advantage orientation.16 Chen Wenling pointed out that how to re-understand the laws of international trade in the new situation is a very important and urgent issue. In order to re-understand the laws of international trade, we should start from at least the following aspects, namely, international trade and the transfer of world manufacturing centers, the rapid development of the grand global circulation, the comprehensive advantages formed by various dividends payable of producing countries in international trade, the position and role of currencies of producing countries in the world monetary system, and the close relationship between the capability in innovation, creativity and sustainable development of producing countries in international trade.17

The Development Strategy of Foreign Trade The discussion of foreign trade development strategy is also a hot topic discussed by scholars in the economic and trade academic circles. It mainly focuses on the conceptual meaning of foreign trade development strategy, and the guiding ideology, theoretical basis, strategic goals, strategic priorities, strategic procedures and measures of in formulating the strategy. Specifically, it is aimed at several main models of China’s foreign trade development strategy, namely, import substitution strategy, 15

Hong (1997). Wang (2000). 17 Chen (2011). 16

18.1 The Foreign Trade Theory

581

export-oriented strategy, international circle strategy, balanced development strategy, grand economic and trade strategy, technology-based trade strategy and so on. Since the early 1980s, some experts have believed that the adoption of import substitution policies can reduce the degree of impact faced with a country in the international market; it is conducive to stability and suitable for our national conditions. We can continue to implement the protection policy and promote the development of national industry. Under the current production level, it is difficult to implement export-orientation; we need to implement the strategy of import substitution, develop domestic production, and gradually replace imported industrial products from abroad, especially consumer goods for daily use; we should also implement the strategy of import substitution, and establish our national industrial system through the introduction of a large number of industrial projects; and the accumulated experience by doing so can lay the foundation for the continued implementation of import substitution strategy.18 However, other scholars believe that the import substitution strategy puts too much emphasis on protecting the domestic market and cannot effectively make use of the two markets and two kinds of resources, which will inevitably limit the role of foreign trade in promoting the development of the national economy. Therefore, the weight of the export-oriented strategy should be increased. Teng Weizao pointed out that export incentives for primary product, import substitution and export substitution are typical development strategies adopted or being adopted by developing countries. The development from an import-orientation towards an export-orientation is an objective requirement for the continuous deepening of production socialization and we should not consider their transformation order and development stage in an absolute or simplified manner. Although a country tends to focus on a certain trade strategy at a certain stage of economic development, it does not exclude the implementation of certain contents in other forms.19 In the middle and late 1980s, with the improved status of foreign trade in economic development, especially in the industrial development planning, foreign trade development strategy and economic development strategy research were combined. From the coast to the inland, the establishment and development of an export-oriented economy has become a trend, and the influence of export-oriented strategies is also expanding. Wang Jian’s theory of the international cycle has a great influence. He believes that our country’s economy is a coexistence of developed heavy industry and backward agriculture. The strategy of giving priority to the development of agriculture and light industry domestically, attracting foreign investment and developing manufacturing exports cannot drive the long-term rapid development of our country’s economy. To resolve this structural contradiction, we must follow the path of the international grand cycle, that is, to obtain foreign exchange through the development in exporting labor-intensive products, so as to acquire necessary funds and technology for the development of heavy industry, and then to use the funds accumulated with the development of heavy industry to support the growth of agriculture; through the conversion mechanism of the international market, the circular relationship between 18 19

Zhang (1984a), Liu (1987), Bian (1989), Yao (1983). Teng (1981).

582

18 The Development and Review of the Opening Up Theory

agriculture and heavy industry is established, and the goal of eliminating the deviation of China’s “dual structure” is attained.20 There have been heated discussions on the theory of the international grand cycle, with both supporters and opponents. This new idea was valued by the leading comrades of the central government at the time and played a positive role in the formation of policies. Shishui believes that the concept of the international grand cycle conforms to the wave of overseas transfer of traditional industries, and through the development of labor-intensive industries and the road of “export-oriented” economic development, it provides a golden key for China’s rural industrialization, opens up a lucrative way for the accumulation of funds for the advancedization of heavy industry in China, and makes opening-up a link between development and reform.21 In the early 1990s, some scholars put forward a balanced development strategy, trying to find a neutral and impartial path in the comprehensive development of import substitution and export-orientation. The so-called balanced development strategy is a policy system and production system that neither discriminates against exports nor belittles imports, and neither excessively subsidizes export industries nor excessively protects import substitution industries. It aims to establish an impartial and neutral open economy. They believe that this strategy is suitable for our country’s national conditions, because it combines the two strategic elements of import substitution and export orientation, and is suitable for a large economy like our country that has established a relatively complete industrial system.22 Gui Shilei and Wei Liqun proposed that the strategy of combining export orientation and import substitution should be implemented. They believe that based on the national conditions that China is a large country and has established a certain industrial base, it is not advisable to simply adopt an “import substitution strategy” or an “export-oriented strategy”, and a combination of the two should be adopted. We must give priority to the development of exports in the processing industry, focus on more exports and earn more foreign exchange, while actively introducing advanced technologies, transforming and developing domestic manufacturing, energy, and raw material industries to reduce and replace imports in these sectors.23 This view was accepted by most people and had a great influence on policy making. In the mid-1990s, the foreign trade management department proposed a “big economic and trade strategy”, which had a great impact. The main content of this strategy is to implement a foreign economic and trade development strategy based on import and export trade, mutual penetration and coordinated development of commodity, capital, technology, and labor cooperation and exchanges, so that foreign

20

Wang (1988). Shi (1988). 22 Ren (1991); Hu and Tang (1992). 23 Gui and Wei (1988). 21

18.1 The Foreign Trade Theory

583

trade and production, science and technology, finance and other sectors can all participate.24 Wang Zixian believes that the implementation of the “big economic and trade strategy” will help break the boundaries of departments and regions, increase competition, promote professional collaboration, promote industrial restructuring, and promote China’s reform and opening up, especially in the field of foreign trade and economics.25 Quite a few experts agree with this idea, but they have given different interpretations based on their own understanding. For example, some people think that is a combination of domestic and foreign trade, and there is no longer a two-sector management in the trade field. Some scholars understand it as the combination of trade and production; it is just like what Japan has adopted where direct government intervention in production and circulation was reduced. This strategy has changed the traditional way of confining the discussion of foreign trade to the narrow understanding of foreign trade, and has played a useful role in practice. It has contributed to the development of non-governmental foreign trade and the promotion of the reform of the foreign trade system, breaking the division of departments, promoting departmental alliances, and promoting institutional reforms. In the late 1990s, in order to cope with the difficulties caused by the Asian financial crisis, we accelerated our country’s transformation from a big foreign trade country to a strong foreign trade country, vigorously promoted the export of high-tech products, and accelerated our country’s adaptation to the needs of the era of knowledge economy. China has put forward the strategy of “rejuvenating trade through science and technology”. Zhang Xiang, the Vice Minister of Foreign Trade and Economic Cooperation during that period, pointed out that the implementation of the strategy of “rejuvenating trade through science and technology” is of great significance to the development of China’s foreign trade at present and in the future. The strategy of “rejuvenating trade through science and technology” is a concrete manifestation of the strategy of “rejuvenating the country through science and education” in the field of foreign economy and trade. It is the inevitable need for our country to adapt to international competition and the only way for a major trading country to become a strong trading country.26 You Hongbing specifically discussed the necessity of implementing the strategy of “rejuvenating trade through science and technology” from the perspectives of China’s need to participate in international competition at a deeper level, realize the adjustment of China’s export product structure, cultivate new growth points in China’s foreign trade exports, and develop the knowledge economy.27 The strategy of “prospering trade through science and technology” is richer in connotation and is more in line with a long-term strategy for China’s foreign trade development. It will also become the only way to promote China from a major trading country to a powerful trading country. During this period, strategies proposed in the process of 24

See Wu Yi’s speech at the International Symposium on China’s Foreign Economic and Trade Strategies in the 1990s on May 11, 1994, in China’s Foreign Economic and Trade Yearbook 1995, China Society Press. 25 Wang (1994). 26 Zhang (1999). 27 You (2001).

584

18 The Development and Review of the Opening Up Theory

foreign trade, such as “winning by quality”, brand strategy, the “going out” strategy, and mutually beneficial and win–win strategy, have all had practical impacts and have been widely recognized. The foreign trade development strategy is related to the general idea of opening up. China’s entry into the WTO in 2001, has added many new features for opening up under the background of globalization, and scholars have also discussed the approaches to deal with the new situation. Professor Li Xiaoxi put forward the new thinking of opening-up to the outside world in 2004, and proposed 10 changes: first is to change the orientation of “opening to the outside world” from government-led to market-led; second is to change our role from a representative of the interests of developing countries to a defender of international public law and rules change; the third is to shift from only caring about the stable development of the domestic economy to the comprehensive balance of domestic and foreign economies; the fourth is to shift from pursuing a surplus of international payments to the pursuit of a balance of international payments; the fifth is to transform from a world factory to a world market; the sixth is to shift from the government’s enthusiasm for foreign investment to the enterprises’ enthusiasm for foreign investment; seventh, we must move from large-scale investment promotion to treating foreign businessmen with a calm mind; eighth, we must shift from emphasizing the particularity of developing countries on intellectual property rights to safeguarding international intellectual property rules; ninth, we need to change from emphasizing the technology introduction of domestic enterprises to encouraging technological innovation of domestic enterprises; Tenth, we must extend the scientific outlook of development to the field of opening to the outside world, and expand the publicity of the general thinking and values of the coordination of economic and social development, and the harmonious development of man and the nature.28 These views have had a practical impacts, especially, the proposal to shift from pursuing a balance of payments surplus to pursuing a balance of payments has been highly recognized by the decision-making departments. Under the new situation that the central government puts forward the scientific outlook of development, scholars have raised questions that need further research. For example, Pei Changhong, director of the Institute of Finance and Trade Economics of the Chinese Academy of Social Sciences, proposed that we need to explore how to further develop an open economy under the guidance of the scientific outlook of development; we need to understand the transformation of foreign trade growth mode, and the approaches to coordinate the relationship between domestic reform and development and opening up; we should examine how to strengthen independent innovation, expand independent knowledge brands, and deal with the relationship between expanding domestic demand and developing foreign markets, as well as how to resolve trade frictions by establishing a trade balance mechanism.29 Li Jiguang and other scholars proposed that China should implement a “neutral” trade 28

Li (2004); Changan Forum. Social Sciences Academic Press; China Business and Market, 2005(2). 29 Pei Changhong Talks about the New Problems That Need To Be Studied in Opening to the Outside World. (January 9, 2006). Retrieved from http://manage.org.cn.

18.1 The Foreign Trade Theory

585

strategy. The strategic goal is to focus on national interests and pursue multiple goals. These multiple goals include both economic goals and non-economic goals. Among them, economic goals include balanced and coordinated trade development, sustainable development of the economy, fair and free trade; non-economic goals mainly include national security, social coordinated development, and mutual benefit and win–win foreign economic relations.30 The international financial crisis has led to a slowdown in world trade growth, while China’s economy has entered a new normal, and theories on foreign trade strategies have emerged one after another. Based on the analysis of the global value chain, Wang Zixian proposed that in response to the international financial crisis and to meet the requirements of the new industrial technological revolution and the major adjustment of the world economy, multinational companies have made partial adjustments to their global value chain, and the global value chain has also entered a round of rapid reshaping; China should promote a new round of opening-up led by the service industry, expand market access for the service industry, promote the liberalization and facilitation of service trade, and embed in a global value chain led by the service industry.31 Long Guoqiang pointed out that the current focus of China’s foreign trade strategy should be to rely on quality, technology, brand, and service to form new advantages for participating in global competition. The following five points need to be done. The first is to enhance the ability to participate in global and regional governance, and strive to create a mutually beneficial and win–win international economic and trade environment; the second is to enhance the international competitiveness of China’s technology and capital-intensive products, and improve export structure; the third is to enhance the export competitiveness of China’s service industry; the fourth is to develop a group of Chinese-funded multinational companies; and the fifth is to ensure China’s resource and energy security.32 Zhou Tianyong analyzed the opening-up strategy since the founding of the People’s Republic of China from the perspective of development economics. China has shifted from an import substitution strategy to an export-oriented strategy after reform and opening up. After 2012, the domestic and international economic situation and international economic relations have undergone reversal changes. Economic opening to the outside world has changed from a net inflow to a net outflow of factors, consumption and purchasing power, and strong exports of manufactured goods have turned into negative growth. China’s opening-up strategy needs to shift to the posttraditional industrialization development model of industrial upgrading and export substitution. Specific measures include: first, we need to promote the implementation of the “Made in China 2025” strategy, promote smart manufacturing, transform and improve equipment levels; second, we should encourage the development of hard technologies and applied them to China’s manufacturing; third, we need to form selfdominated trade channels to realize the substitution of export sales; fourth, we need to promote export substitution in industries such as inbound tourism, education, 30

Li et al. (2008). Wang (2014). 32 Long (2015). 31

586

18 The Development and Review of the Opening Up Theory

trade in medical and health services.33 Lin Yifu proposed that the policies of the free trade zone and the Belt and Road initiative are new reforms and opening-up strategies put forward in China at this stage of development in accordance with changes in domestic and international situations. The implementation of this strategy will enable China to have a more complete market economy system and also can provide China with a better external environment.34 Dai Xiang et al. pointed out that with the current slowdown in the evolution of the division of labor in the global value chain, and with the loss of our country’s traditional comparative advantages, we need to focus on building new types of comparative advantages and build an industrial and technological foundation for further integration into the global value chain. At the same time, China should build its own global value chain based on the Belt and Road Initiative, which can not only promote the development of export trade, but also improve the level of export trade development; therefore, we can improve the efficiency and level of China’s export trade development during the process of achieving “steady growth”, and achieve a higher level of open economic development.35

Discussion on Reform of Foreign Trade System This is the most discussed topic raising the highest level of enthusiasm in foreign trade theory circles since the reform and opening up. The main aspects are as follows. Regarding the direction of foreign trade system reform, in the early 1980s, some experts pointed out that the direction of our country’s foreign trade system reform is: the Ministry of Foreign Trade is responsible for researching and developing policies, in charge of the implementation of guidelines and policies, and responsible for the supervision and management of national foreign trade activities; specialized foreign trade companies will deal in some important import and export commodities, and are responsible for the coordination and management of local commodities; some qualified and important enterprises and consortia will directly operate foreign trade, and they will independently account for their own profits and losses.36 Ge Hui believes that “it is the fundamental goal of the foreign trade system reform to improve its level of strength and balance”37 . Zhong Pengrong proposed four major changes in the reform of the foreign trade system.38 Yuan Wenqi believes that only by reforming the old foreign trade system, separating government and enterprise functions, changing highly concentrated operations into decentralized operations, and making each foreign trade enterprise an economic entity that operates independently 33

Zhou (2017). Lin (2017). 35 Dai and Xu (2017). 36 Zhang (1991). 37 Ge (1987). 38 Zhong (1988). 34

18.1 The Foreign Trade Theory

587

and is responsible for its own profits and losses, can the goal of socialist foreign trade be realized.39 Scholars believe that the separation of government and enterprise is the direction of the reform of the entire foreign trade system, and it is also the key to solving the main contradiction between rigid way of management and flexible way of management, and between the country and the enterprise in the foreign trade system. After the reform and opening up entering a new era in the 1990s, the direction of the reform of the foreign trade system was: unified policies, equal competition, selffinancing, integration of industry and trade, the implementation of an agency system, and the establishment of a foreign trade operation mechanism that conforms to international rules. The main contents are: implementing a new foreign exchange management system, using legal and economic means, improving the macro-management of foreign trade, transforming the operating mechanism of foreign trade enterprises, gradually establishing a modern enterprise system, and strengthening the coordination service mechanism of the Chamber of Commerce for Import and Export. Some scholars have proposed that we need to create a foreign trade operation mechanism that has the self-regulating ability which can trigger timely, flexible and correct reaction to dynamic comparative benefits based on obtaining the benefits of the international division of labor and promoting domestic economic development with the core to reconstruct the micro-foundation of foreign trade and formulate macrocontrol methods. Some scholars believe that the emphasis of China’s foreign trade system reform is to deepen the internal reform of enterprises. While the key to enterprise reform is to realize the fundamental transformation of the operating mechanism as soon as possible, and establish a new mechanism that is efficient, agile, dynamic, and fully self-financing.40 Qiu Jie and others discussed the necessity and possibility of the reform of the foreign trade system that is relatively independent of the reform of the entire national economic system, and designed a new “packaged” transitional path for the foreign trade system based on the methodology of system theory and cybernetics.41 Regarding the stages of the foreign trade system reform, Zhou Xiaochuan proposed five stages for the gradual liberalization of foreign trade: the first is the stage of high-level administrative management and quantitative control; the second stage involves the starting of the integration of both indirect control and direct control using economic leverage; the third stage is related to the rationalization of exchange rate; the fourth stage concerns the gradual replacement of unnecessary administrative means by economic and price means; and the fifth stage is the stage of free exchange of currencies.42 Discussions on the practical issues that have emerged in the reform of foreign trade mainly involves the following: liberalization of foreign trade and the emergence 39

Yuan (1990). Thoughts and Explorations on Deepening the Reform of Foreign Trade System Adapting to the Socialist Market Economy System. International Trade Forum, 1993(1). 41 Qiu and Chang (1996). 42 Zhou (1988). 40

588

18 The Development and Review of the Opening Up Theory

of unfair competition and domestic peer competition, reflected by “purchases with increased prices in the domestic market, compared to price-cutting and bidding when selling to the international market, which leads to the flow of fertilized water (benefits) to the outsiders”; the impact of liberated business operations and exchange rate adjustments on domestic inflation; the matching and linkage of foreign trade reforms with other reforms, etc.. These issues have all become the concern of the theoretical circles and government departments and have been discussed. In the final conclusion, most people believe that we should support and improve various major reforms from a market-oriented perspective, and strive to reduce reform costs and build a new foreign trade system. In 2013, our country became the world’s largest country in terms of import and export volume of goods trade. Since then, our country’s opening to the outside world has entered a new stage of opening up as a major country. The Third Plenary Session of the Eighteenth Central Committee of the Communist Party of China proposed the establishment of a new open economic system. It pointed out: “to adapt to the new situation of economic globalization, we must promote the mutual enhancement between opening to the domestic and outside world, better integrate “bringing-in” and “going-out”, promote the orderly and free flow of international and domestic factors, the efficient allocation of resources, and the in-depth integration of markets, and accelerate the cultivation of new competitive advantages for participation and leadership in international economic cooperation, thus promoting reform through opening up.” In 2015, the State Council promulgated the “Several Opinions on Building a New System for an Open Economy”, stating that China’s reform and opening up is at a new starting point, and a new mechanism for market allocation of resources must be established to promote the orderly and free flow of international and domestic factors, efficient global resource allocation, and the in-depth integration between international and domestic markets; in accordance with the requirements of internationalization and rule of law, we must create a sound legal environment, manage and open up with compliance to the law, and establish a new model of economic operation and management that is compatible with high-standard international investment and trade rules. Zhang Haiyuan and others pointed out that the important task for the construction of our country’s new open economic system is to promote enterprises to cultivate new competitive advantages, climb to the higher end of the value chain, construct a global value chain, and promote the coordinated development of trade and industry.43 We need to grasp the key link in building a new system of open economy, further improve the degree of trade facilitation, relax foreign investment access, improve foreign investment environment, give full play to the dual functions of opening experiments and radiated driving of pilot free trade zones, and accelerate the negotiation progress of free trade agreements in order to maintain the momentum of regional economic cooperation, improve the management system and coordination mechanism of opening to the outside world, and contribute to leading the new normal of the economy and promoting economic transformation and upgrading. 43

Zhang and Liu (2017).

18.1 The Foreign Trade Theory

589

The development of foreign trade theory in the past 40 years is inseparable from Deng Xiaoping’s thought of opening to the outside world. In 1978, Deng Xiaoping proposed the reform ideas to break through the over-concentration of power in the economic management system, to boldly delegate power in a planned way, to give full play to the enthusiasm of the state, localities, enterprises, and individual workers, and to give more autonomy in economic planning, finance, and foreign trade, etc. At the Central Work Conference in April 1979, Deng Xiaoping, after listening to the report from Guangdong Province, proposed to take advantage of the coastal advantages, pilot special economic zones, and grant the zones with adequate foreign trade autonomy; in June and July of the same year, Guangdong and Fujian provinces were approved to implement special policies and flexible measures in foreign trade. Since then, Deng Xiaoping’s theory has been driving the practice of foreign trade reform, and has also pointed out the direction for the study of foreign trade theory. Looking forward to the twenty-first century, our country’s foreign trade theory and practice will see major developments. As of the import and export aspects of foreign trade, the state-owned sector will continue to decline, but will develop towards the direction of increasing the control of the state-owned economy; also, the export of the non-public sector of the economy will see great developments. The process of domestic and foreign trade integration will accelerate. Foreign trade theory will be developed closer to the international academic community, and there will be more and more research results on the interrelationship of globalization and internal and external economies.

Discussion of International Trade Friction Since joining the World Trade Organization, our country has faced increasing international trade frictions. According to WTO statistics, since the 2008 international financial crisis, about one-third of the trade remedy investigations initiated by various countries have targeted at Chinese exports. Our country has become the world’s largest victim of abuse of trade remedy measures; we have also become the country that has encountered the most anti-dumping investigations for 23 consecutive years, and the country that has encountered the most anti-subsidy investigations for 11 consecutive years. At present, other countries have implemented more than 600 trade relief measures against our country, and more than 100 billion US dollars worth of exports are restricted each year. In recent years, due to the economic downturn of various countries, trade protectionism has risen globally. U.S. President Trump proposed a “fair trade view”. He clearly stated at the World Economic Forum in Davos in 2018 that the United States supports free trade, but free trade must be “fair” and “equal”. Being “fair” and “equal” means that the tariff level and import openness of other countries should be in line with that of the United States. The United States is the benchmark. Other countries should adopt the same level of tariff and openness as the United States and provide the same competitive environment as the United States. The United States

590

18 The Development and Review of the Opening Up Theory

attributed its own problems of employment and trade deficit to unfair trade, and took the implementation of trade fairness as a breakthrough to solve this problem. This theory became the theoretical basis for the United States to launch a trade war. Scholars have different opinions on the reasons for the increase in international trade frictions. Some scholars believe that deep-rooted trade protectionism is the root cause of the intensification of trade frictions, and this protection tendency is particularly serious when the economy is down.44 Others believe that due to imperfect international trade rules, many aspects of the protection of intellectual property rights in the TRIPS Agreement exceed the protection level of the current international conventions. It is set by some developed countries based on the protection of their own economic interests. Such excessive protection makes it easy to incur abuse of rights, which may lead to hidden trade frictions.45 In addition, some scholars believe that the technology and product specifications of Chinese companies are too different from international standards, and that Chinese companies’ lack of knowledge and understanding of international trade laws and insufficient estimates of predictable risks are also the reasons for trade frictions. Chen Wenling proposed that new trade protectionism should be broken and prevented. The essence of trade protectionism is to set up international trade barriers and affect the rapid flow of business, logistics, information and capital flows. Current trade protectionism emphasizes a country’s international balance of payments. In fact, a country’s trade surplus or deficit has little to do with the country’s exchange rate. This is the result of the flow and reorganization of factors in global circulation and a combination of behaviors in market transactions. Relying on suppressing exporting countries to force their currencies to appreciate to reduce their own trade deficit is supported by traditional and narrow international trade theory, which should be adjusted and updated.46 Chen Deming and others pointed out that it is necessary to clarify and improve trade remedy rules. While the current WTO trade remedy rule system provides corresponding rules for protecting the domestic industries of importing countries and safeguarding the export interests of exporting countries, there are also some issues worthy of attention, for example, there exists room for the abuse of trade remedy measures. It is necessary to clarify and improve trade remedy rules, and related efforts and actions have also emerged. The rules negotiations at the WTO Doha round is a concrete manifestation of this.47 Li Chunding proposed that trade statistics methods should be changed according to actual conditions and value-added trade statistics should be adopted. Value-added trade statistics use “trade value-added” as the standard to count the import and export trade flows of a country or region, and the statistics are the value-added gained by trade products in the country. One of the reasons is that the current trade statistics use the total value of import and export commodities as the statistical standard. The total 44

Jiang (2005). Cai (2006). 46 Chen (2011). 47 Chen et al. (2014). 45

18.2 Theories on Foreign Investment

591

value of import and export products of a country or region is counted. According to the current total product value trade statistics, as the largest trade surplus country in the world, China is regarded as the main responsible country for the global trade imbalance, which is often used as an excuse for trade friction and sanctions against China. The issue of trade frictions has become one of the main obstacles and barriers to China’s foreign trade, and the losses caused are immeasurable.48

18.2 Theories on Foreign Investment The Third Plenary Session of the 11th Central Committee of the Communist Party of China confirmed that our country will implement the policy of opening to the outside world, and the use of foreign capital has entered a new stage. By the end of 2006, a total of 600,000 foreign-invested enterprises had been approved nationwide, and the actual use of foreign capital reached 700 billion US dollars. In 2006, the foreign direct investment introduced reached 70 billion US dollars, ranking third in the world. Our country’s use of loans from foreign governments and international financial institutions, international commercial loans and other forms of foreign investment has accumulated to more than 320 billion US dollars.49 External borrowings are mainly used to strengthen the bottleneck projects of the national economy. A number of important projects have been completed in energy, transportation, coal, and chemical industries, such as the Beijing-Qinhuangdao electrified railway and the expansion project of Qinhuangdao Port. The advanced technology and management experience brought about by foreign direct investment have filled some gaps in domestic production, such as elevators, color picture tubes, cars, etc., expanded China’s exports and foreign trade, and promoted market competition. It has played an important role in the development of China’s economy, especially in the economic development of the coastal regions. In particular, it should be pointed out that during this period, there has been great progress in foreign investment theory. A considerable number of papers and monographs have been published, and some major issues have been discussed in depth. The following is a brief summary.

The Guiding Ideology of Introducing Foreign Capital Earlier views mainly emphasized Marxist-Leninist discourse on the use of foreign capital. It is believed that as Marx and Engels have long pointed out: “the past local and national self-sufficiency and self-seclusion state were replaced by the interaction

48 49

Li (2014). See China Statistical Yearbook 2007, the figures in the paper are rounded to the whole number.

592

18 The Development and Review of the Opening Up Theory

and interdependence of various ethnic groups.”50 Lenin proposed: “when our country is still extremely weak economically, how can we accelerate economic development? The answer is to utilise capital of the bourgeoisie.”51 This proves the rationality of the use of foreign capital. Deng Xiaoping summarized the historical experience and lessons learnt from the economic construction since the founding of the People’s Republic of China, and pointed out that the use of foreign capital is very necessary during the practical process of socialist modernization in China’s reform and opening up. After presiding over the work of the central government in 1977, he began to think about how to expand financing channels to accelerate China’s economic development. In October 1978, he instructed that “joint ventures can also be set up” and pointed out that “absorption of foreign funds can definitely be an important supplement to our country’s socialist construction”.52 In the late 1980s, the introduction of foreign investment was mainly analyzed in terms of the pros and cons towards our country’s economic development. Scholars mainly used actual results to show whether they agreed or doubted the introduction of foreign investment. In the 1990s, the report of the 14th National Congress of the Communist Party of China pointed out: “At present, it is necessary to further expand opening up and make more and better use of foreign funds, resources, technology and managerial experience.” The report of the 15th National Congress of the Communist Party of China once again called for “making great efforts to improve the level of opening up to the outside world and actively, rationally and effectively utilizing foreign capital”; The report of the 16th National Congress of the Communist Party of China proposed to “further attract foreign direct investment and improve the quality and level of foreign capital utilization”. Since the 18th National Congress of the Communist Party of China, the Party Central Committee with Comrade Xi Jinping at its core has taken over the overall situation through promoting innovation in the theory and practice of opening up, establishing a new concept of open development, and raising the theory of using foreign capital to a new height. The report of the Nineteenth National Congress of the Communist Party of China put forward that “we need to implement a high-level trade and investment liberalization and facilitation policy, fully implement the pre-access national treatment with a negative list management system, greatly relax market access, expand the opening up of the service industry, and protect the legitimate rights and interests of foreign investors. All companies registered within the border of China must be treated equally and fairly.”

50

Marx and Engels (1992). Lenin (1986). 52 Selected Works of Deng (1993, p. 90). 51

18.2 Theories on Foreign Investment

593

Basic Principles and Strategies for Using Foreign Capital Since the reform and opening up, this issue has been discussed. One view is: “our country’s basic principles and guidelines for the use of foreign capital can be summarized as: independence, self-reliance, equality and mutual benefit.”53 This view emphasizes safeguarding national sovereignty and independently formulating guidelines, policies and regulations on the use of foreign capital; it emphasizes the use of foreign capital on the basis of self-reliance, instead of over-reliance on foreign capital, we need to protect our own industries; it also emphasizes equality and mutual benefit between Chinese and foreign parties in joint ventures and cooperation with foreign investors, as well as the protection of the legitimate rights and interests of foreign investors. This view was a dominant view for quite a long time in the 1980s and has played a useful role. However, it can be seen that this view is over-cautious and not positive enough. It only sees the introduction of foreign investment from the perspective of making up for the lack of funds in our country. After the 1990s, there was a debate about how to adjust the strategy of introducing foreign capital. One view is that we have now reached a new stage from the introduction of small and medium-sized foreign capital to the introduction of multinational companies, from the expansion of quantity to the new stage of improving quality. The summary of the strategy of introducing investment in this way mainly takes the perspective of the development view. Another view is proposed from the perspective that the introduction of foreign capital is conducive to promoting reform and legalization. It is believed that “China’s strategy for introducing foreign capital in the mid to late 1990s was to continue to utilize foreign capital in an active and effective manner by taking accelerating the pace of China’s economic development as the core, and the promotion of marketization, legalization and internationalization of China’s economy as the objective.”54 This view is an argument against the concern about the negative impact of the introduction of foreign investment, which emphasizes the role of the introduction of foreign investment in promoting our country’s economic reform. China’s strategy of utilizing foreign capital in the 1990s can be summarized as a strategy of “trade market for technology”. The implementation of this strategy has had a certain effect on accelerating the technological progress of Chinese enterprises. With the continuous deepening of our country’s reform and opening up and the improvement of domestic industrial competitiveness, especially after China’s entry into the WTO, the limitations of this strategy have become increasingly obvious. After the mid-1990s, the most discussed question is: What is the appropriate scale for introducing foreign capital? Is there too much foreign investment now? Some scholars believe that China’s savings rate is as high as 35%, ranking first in the world. Recent years have witnessed an over inflow of foreign capital. Since 1992, China’s level of bank deposits have been much higher than loans, which has led to a surplus of domestic funds and caused a large amount of domestic funds to flow overseas. As a result, foreign exchange reserves have grown too fast, so there is no 53 54

Lin (1989). Li (1997).

594

18 The Development and Review of the Opening Up Theory

need to introduce large amounts of foreign capital.55 Representative scholars with this view include Chen Bingcai and others. Other scholars believe that China’s labor resources are intensive and need to be combined with capital; the development of the central and western regions requires foreign investment; the investment of large multinational companies in China is only the beginning and is far from the time limit; China’s lack of construction funds will be long-term issue, the introduction of foreign investment not only made up for the lack of funds, but also shared the investment risk. Therefore, it is still necessary to vigorously introduce foreign investment.56 Li Xiaoxi believes that: first of all, we must admit that the scale of foreign investment is the result of market regulation. You need to, first of all, be attractive, show a promising future for development, and have a sound investment environment before foreign investors are attracted into Chin. Therefore, it is impossible to plan the scale of foreign investment in advance. At this stage, our country’s economy still has a great demand for foreign investment; it is true not only for the central and western regions and basic industries (especially for agriculture and the power industry), but also for the eastern coastal areas where there still exist needs to attract and utilize foreign capital. Introducing foreign investment should be regarded an opportunity which we should seize and we should not limit our attention only to ourselves. It is also necessary to conduct specific analysis of the high level of domestic savings in China. Among the deposits of urban and rural residents, the amount of money that can be really used to invest is still quite limited. It is also unrealistic and risky to invest with foreign exchange reserves in the medium and long term.57 Entering the twenty-first century, a new perspective58 shows that China’s opening to the outside world has entered a new stage: “a new pattern has begun to take shape in which both directions of capital-flow and the flow of other factors is laid equal stress on, compared to the previous pattern dominated by one-way inflow of capital and other factors. The ability of enterprises to allocate resources globally has increased, and the interaction between domestic and external economy is more complicated.” China must “consider the balance of interests between its role as the host country of investment and the home country of investment, the balance of interests between commodity flow and factor flow, and the balance of interests between protecting the domestic market and promoting the opening of other countries’ markets. China need to participate in multilateral negotiations with a more active and proactive attitude, and balance the rights and interests of all parties with the help of multilateral rules”; we need to “integrate into the global economy in a more balanced and reasonable manner”, and “promote a more reasonable and open global trade and investment system, striving for a better external environment for China’s medium and longterm economic development”. As our country’s economy continues to develop at a medium-to-high speed, domestic savings have grown significantly; China’s foreign 55

From Yao Shuhai. (1997). A Review of Foreign Investment Issues, China Reform Foundation project materials. 56 Li (1997). 57 Yang (1997). 58 Jiang (2006).

18.2 Theories on Foreign Investment

595

exchange reserves have long ranked first in the world, and its level of technological development has improved significantly. Since 2015, China has become a net capital exporter, signaling its entrance into a new stage of development in the use of foreign capital. In January and August 2017, the State Council issued and implemented the “Notice of the State Council on Several Measures for Expanding Opening-up and Actively Utilizing Foreign Investment” and the “Notice of the State Council on Several Measures to Promote the Growth of Foreign Investment”. The two documents clearly stated that in the future, it is necessary to further expand opening to the outside world, create a legalized, internationalized and convenient business environment, further reduce restrictions on foreign investment access, promote foreign investment growth, and improve the quality of foreign investment utilization. Lu Jinyong pointed out that today’s international division of labor is more between products, parts and components, service links, production links or production processes. More and more countries and enterprises are participating in the global value chain or industrial chain. For a certain country, the extent and level of its participation in global value chains and industrial chains, as well as the amount of domestic value added, are closely related to the scale and quality of its foreign capital utilization. At present, China is facing the task of improving the extent and level of its participation in global value chains and industry chains, which has made it necessary for China to attract more high-quality foreign investment.59 Sang Baichuan and others pointed out that China needs to walk on both legs, which means that we should not only enhance the attractiveness of the processing-type foreign capital, but also release the market opportunities of economic structure upgrading and consumer market expansion, so to attract foreign capital of the domestic demand type; in this way the foreign investment pattern driven by the dual-wheels of “processing type + domestic demand type” can be built.60

The Role of Introducing Foreign Capital After more than 30 years of development, China has become one of the developing countries attracting the most foreign direct investment. “In general, foreign direct investment has made a positive contribution to China’s economic development.”61 At the same time, as the scale of China’s foreign investment introduction continues to expand, some of the problems and issues arising from the introduction of foreign investment have also aroused extensive thinking in the academic community. Yu Yongding believes that in the past time, foreign investment has played an active role in promoting employment in China. However, while foreign investment creates jobs, it also destructs the job opportunities originally provided by stateowned enterprises through competition… FDI’s contribution to the creation of new 59

Lu et al. (2017). Sang and Zhang (2018). 61 World Bank (2007). 60

596

18 The Development and Review of the Opening Up Theory

jobs is moderate.62 Jiang Xiaojuan believes that the technology spillover effect of multinational companies is obvious and has greatly accelerated the upgrading of domestic industrial structure.63 Lv Gang from the Foreign Economic Research Department of the Development Research Center of the State Council believes that “the technology spillover effect of foreign capital is not obvious, and it has failed to promote the cultivation of China’s domestic technological capabilities”.64 Professor Huang Yasheng from the Massachusetts Institute of Technology believes that China’s dependence on FDI reflects the lack of domestic private investment. The influx of large amounts of FDI may lead to the suppression of domestic private capital.65 Hu Zuliu believes that “there is no empirical evidence that FDI has ‘squeezed out’ efficient domestic investment. FDI and private investment complement each other and gradually grow together under a publicly owned economic system, which has become the engine of China’s economic growth today.”66 “The benefits of FDI to China’s capital formation are obvious, and it has also contributed a lot to the increase of employment.”67 “FDI has brought technology transfer to China’s economy, resulting in a spillover effect.”68 “FDI’s greatest contribution to China’s economy is the introduction of brand-new business models and management models, not necessarily high-technology.”69 Sang Baichuan and others believe that the processing-type foreign investment, as the driving force of China’s processing industries, not only has brought China with the positive effects through which its economy has developed from weak to strong, its technology has advanced greatly from scratch, and its international competitiveness has grown substantially; in addition, it can provide a strategic fulcrum for China’s current and future stable growth and structural adjustment.70 Lu Jinyong and others believe that high-quality production factors are mainly distributed in technology-intensive, knowledge-intensive, information-intensive, service-intensive, capital and technology-intensive, capital and knowledge-intensive industries. Objectively speaking, even the most economically developed countries cannot have all the resources or factors needed for economic development, nor can they choose not to introduce foreign capital, and they also need to utilise foreign forces to accelerate the development of their own productivity. The introduction of high-quality foreign investment plays an important role in our country’s development of an innovative economy, optimizing and upgrading the industrial structure, accelerating the conversion from new to old drivers of economic development, promoting supply-side structural reforms, deepening reform

62

Yu (2004). Jiang (2004). 64 Lv (2006). 65 Huang (2006). 66 Hu (2004). 67 Ibid. 68 Ibid. 69 Ibid. 70 Sang and Zhang (2018). 63

18.2 Theories on Foreign Investment

597

and opening up, and realizing a mid- to high-end economy.71 He Manqing pointed out that foreign direct investment is the main channel to promote international technology transfer. The technical benefits of foreign investment are mainly reflected in four aspects: technology introduction, technological innovation, investment in high and new-technology industries, and technology diffusion/spillover. In the next five years, China should firmly seize the opportunities of industrial transformation led by new technologies, further optimize the innovation environment, increase the introduction and support of high-tech enterprises, R&D and innovation centers and high-quality talents, and leverage various forces to boost profound changes in the domestic industrial structure. Establishing joint R&D institutions with multinational companies and striving to establish long-term and stable cooperative relations is the most effective way for Chinese and foreign companies to cooperate. It is also a powerful measure to realize knowledge spillover and technology diffusion. This is also a shortcut for Chinese companies to grow stronger and go into the outside world.72

Introducing Foreign Capital and National Economic Security Since the 1990s, foreign investors have invested in China’s state-owned enterprises, and the focus of mergers and acquisitions has shifted to large and medium-sized stateowned key enterprises with better returns. Some mergers and acquisitions occurred industry-wide in a certain city, such as the mergers and acquisitions of China Strategic Holdings of Hong Kong taking place in Quanzhou City, Fujian Province and Dalian City, Liaoning Province; such kind of mergers and acquisitions have had a great impact on China’s economic field; the entry of multinational enterprises have brought with them high quality products and strong competitivness, which have imposed a huge pressure on Chinese enterprises. In this context, the calls for the protection of national industry began to rise, and discussions on the relationship between the introduction of foreign investment and the protection of national industry were also heated. Researchers from some industrial authorities believe that the present introduction of foreign investment is like attracting wolves into the house and dancing with wolves. Our country’s own industry is about to fail to support itself, and state-owned enterprises will be defeated by multinational enterprises. Thus, foreign investment should be restricted and state-owned enterprises should be protected. On the other hand, scholars who advocate expanding the introduction of foreign capital believe that the first thing to do is to clarify what national industry really is. Secondly, we need to look at our national industry based on the fact that the capital introduced from Hong Kong SAR and the Taiwan region accounts for 70% of the total foreign investment introduced; although Hong Kong SAR and the Taiwan region are regarded as foreign capital in the statistics, it cannot be denied that the capital of Hong Kong SAR and the 71 72

Lu et al. (2017). He (2017).

598

18 The Development and Review of the Opening Up Theory

Taiwan region is also national. It should also be noted that the domestic market share of foreign enterprises is not really large. For example, at the height of the debate on this issue in 1995, the industrial output value of foreign enterprises accounted for less than 5% of our country’s total industrial output value. However, since most of the goods produced by foreign-funded enterprises are needed by the market, people may feel that foreign products are everywhere in the market. Under this situation, the market share of foreign-funded enterprises will continue to expand, but a new generation of domestically-funded enterprises will grow, and the Chinese power of joint ventures and cooperative enterprises will eventually grow. The protection of the domestic market ultimately relies on entrepreneurs, not administrative power. A more important issue is how to protect national industry. Our national industry must be protected by methods that conform to international practices rather than administrative measures. It is necessary to make national industry an organic part of the socialist market economy, rather than a special entity under protection. We need to support appropriate protection from an open perspective and a positive attitude, rather than from the negative angle of closing doors in order to protect national industries.73 “With the deepening of economic globalization, the scale and influence of international investment have greatly increased, and the connotation of ‘national security’ has expanded significantly, and has expanded from the traditional defense and military fields to the economic and social fields. The concepts of ‘economic security’ and ‘social security’ thus came into being.”74 Especially since the mid1990s, foreign-funded enterprises have carried out several mergers and acquisitions of leading companies in important domestic industries in China, such as: The Carlyle Group (U.S.A.)’s acquisition of Xuzhou Construction Machinery Group Co., Ltd. (XCMG) and LYC Bearing Corporation, France’s SEB’s acquisition of Supor, etc.; some domestic enterprises have encountered political discriminative incidents in overseas mergers and acquisitions., such as: Lenovo Group’s acquisition of IBM’s PC business, Haier’s acquisition of Mattel and China National Offshore Oil Corporation (CNOOC)’s acquisition of Unocal, etc. Such incidents continue to occur, constantly awakening our awareness of foreign mergers and acquisitions affecting national security, which has triggered widespread domestic concerns about foreign mergers and acquisitions affecting our national economic security. According to one view, “with China’s accession to the WTO, restrictions on foreign investment have been reduced which led to some governments’ blind introduction of foreign capitals. Alongside the benefits it may have brought, our national economy has also lost certain level of sovereignty, which has seriously threatened the national economic security”.75 “While encouraging the introduction of large amounts of foreign capital, it is also necessary to restrict foreign capital mergers and acquisitions in certain important industries, such as equipment manufacturing, finance, energy, mining, etc. Only by firmly grasping these key industries and improving relevant laws, regulations and 73

Wang et al. (1996). Xing (2007). 75 Wu and Li (2007). 74

18.2 Theories on Foreign Investment

599

systems can the country’s economy be stabilized and developed under any circumstances, and the impact of foreign capital on the lifeblood of China’s economy can be reduced.”76 Another view proposes that “the general assumption that foreign mergers and acquisitions of key equipment manufacturing enterprises will threaten national economic security is too exaggerated.”77 “Foreign merger and acquisition is only one form of global FDI absorption, and it is also an effective market approach. Mergers and acquisitions do not necessarily constitute industry monopolies, and mergers and acquisitions themselves will not endanger industry and economic security. The key is to strengthen review and surveillance.”78 Since the establishment of the Shanghai Pilot Free Trade Zone in 2013, currently 11 pilot free trade zones have implemented the foreign investment management model of “pre-access national treatment + negative list”. The 2017 version of the foreign investment negative list is further slimmer than the 2015 version, with 10 items and 27 measures reduced in total. After the implementation of the negative list management model for foreign investment, the scope of foreign investment has become more relaxed, leading to more issues involving national security. While attracting foreign capitals, countries all over the world attach great importance to the security review of foreign mergers and acquisitions. For this purpose, countries have established an independent security review procedure for foreign mergers and acquisitions. Huang Yong et al. pointed out that China has already participated in the international capital market and signed more investment agreements. In the future, the introduction of foreign capital is bound to move towards a more prosperous path. If a complete foreign capital merger review system can be established, a better guarantee for China’s all-round security can then be realized; by doing so, we can provide an effective balance mechanism between achieving investment opening, trade liberalization, and maintaining national political and economic stability. The utilization of foreign capital is an important part of Deng Xiaoping’s theory. He said: “in socialism, the central task is to develop social productive forces. We will adopt all methods that are conducive to the development of social productive forces, including the use of foreign capital and the introduction of advanced technology.”79 This is to evaluate the introduction of foreign capital from the perspective of productivity, which is very convincing. Deng Xiaoping believed that the positive effects of using foreign capital to accelerate development far outweigh the possible negative effects. He said: “when a foreign-funded enterprise is established, workers can get wages; the country can get taxes; and part of the income of joint ventures and cooperative enterprises is owned by socialism. More importantly, we can learn good management experience and advanced technology from these enterprises, which can be used to develop the socialist economy.”80 Therefore, although foreign business

76

Same as above. Sang (2007). 78 Peng (2007). 79 Selected Works of Deng (1993, p. 130). 80 Selected Works of Deng (1993, pp. 138-139). 77

600

18 The Development and Review of the Opening Up Theory

have reaped benefits and profits in this process, more benefits are actually on our own side. Looking into the twenty-first century, the general trend of our country’s scale of introducing foreign investment will gradually decline, but it will maintain a certain amount at high and low levels, and it can still reach 40 billion US dollars at high times, and the medium-term average level will not be less than 10 billion US dollars. This is because, firstly, our country will adhere to the basic national policy of opening to the outside world, more actively go global, improve the all-round, multi-level and wideranging opening-up pattern, and develop an export-oriented economy. And secondly, China is expanding the scope of introducing foreign investment and further opening up the domestic market. For example, the opening of commercial retail industry, foreign trade and tourit industry is being piloted or expanded, and accounting, legal and other intermediary agencies are also expanding pilot programs for introducing foreign investment, while the introduction of foreign-funded enterprises into banking and insurance industry has also been in progress. It cannot be ruled out that at a certain stage in the twenty-first century, due to the emergence of a new upsurge in our country’s economic development, especially the acceleration of the development of the central and western regions, there will be a period of upsurge in the introduction of foreign capital. Thirdly, because of the continuous growth of our country’s economy and the continuous improvement of the macro environment, the confidence of foreign investment has been enhanced. Fourth, some policies to encourage foreign investment will continue for a period of time. For example, hightech projects and foreign funded projects encouraged by industrial policies will be exempted from tariffs and import value-added taxes for imported equipment that cannot be produced domestically, etc. Therefore, the effect of encouraging foreign investment will continue for quite a while. In the research of foreign investment theory, systematic and breakthrough theoretical results are expected to be realized in the next decade. This is because the practice of introducing foreign capital in recent years and the existing research results have provided the basis for major theoretical breakthroughs; and further international and academic exchanges will prompt Chinese scholars to make breakthroughs on a number of major issues. These issues may include: first, the research on the role of multinational companies will become more and more important, with the difference from existing research results that these researches will be stronger theoretically, more systematic, and more focused on global analysis. The second research focus is on how to manage foreign-funded enterprises that have already invested in China and urge them to act in accordance with our country’s laws. The issue of how to introduce more foreign capital will not become a hot topic, and the resulting disputes will also be greatly reduced. Thirdly, the two-way research on China’s introduction of foreign capital and China’s overseas investment will be strengthened. The latter will be paid more and more attention. Fourth, in the field of introducing foreign capital, research on foreign direct investment will decrease, while research on foreign investment in the form of introducing securities will increase, and research on indirect foreign investment in the form of national debt and borrowing from international organizations or commercial loans

18.3 Foreign Exchange Theory

601

will also increase. Fifth, it is necessary to strengthen the research on the national security review towards foreign capitals to ensure national economic security.

18.3 Foreign Exchange Theory In the 40 years since the reform and opening up, great progress has been made in the reform of our country’s foreign exchange system, and foreign exchange theory has begun a new stage of systematization. Before the reform and opening up, our country’s foreign exchange had always been under centralized management by the state, and the Bank of China handled foreign exchange business. In March 1979, the State Administration of Foreign Exchange was established, which is under the direct leadership of the State Council, and various provinces and cities set up administrative offices. The tasks of the State Administration of Foreign Exchange are to formulate foreign exchange policies and decrees, manage foreign exchange in a unified manner, supervise foreign currency payments, ensure the balance of foreign exchange receipts and payments, and announce foreign exchange rates. In 1979, based on the cost of foreign exchange export exchange, a target exchange rate of 1 US dollar equal to 2.53 yuan was set. In 1980, the State Council promulgated the “Interim Regulations on Foreign Exchange Administration.” Taking into account the reasonable profits of foreign trade exports, in order to solve the problem of export difficulties and export losses, since January 1981, all imports and exports have implemented an internal trade settlement price of 1 US dollar equal to 2.80 yuan. Since then, a larger-scale discussion of exchange rate issues has begun in the theoretical community. After joining the World Trade Organization, especially after 2003, due to the doubts about the value of the renminbi in the United States, Europe and other countries, discussions on the level of China’s exchange rate and the rationality of the exchange rate system have been very heated. Looking at the discussion of foreign exchange theory over the past 40 years, there are three notable characteristics. One is that the problems are relatively concentrated; the other is that it is very tightly connected with reality; and the third is that the discussion is more in-depth. The main issues discussed are as follows:

Should the RMB Exchange Rate System be a Single Exchange Rate System or a Dual Exchange Rate System? This issue was caused by the implementation of internal trade settlement prices in 1981. At the first academic seminar of the China Institute of International Finance (June 1983), most scholars believed that the implementation of the internal trade settlement price of 1 U.S. dollar to 2.8 yuan after 1981 did not achieve the expected results and should be reformed. The dual exchange rate system should be reformed

602

18 The Development and Review of the Opening Up Theory

into a single exchange rate system. Scholars believe that a single exchange rate system has the feature of conciseness and is easier to manage; while dual exchange rates cannot be used to subsidize individual commodity prices; China, as a member of the International Monetary Fund, implements dual exchange rates, which is also disadvantageous in terms of external influence; compared with the dual exchange rate system, single exchange rate system is conducive to maintaining the reputation of the RMB and the stability of the RMB exchange rate.81 Wu Nianlu believes that although some countries in the world engage in double exchange rates, we should be aware that Western countries are different from Eastern European countries. China actually is implementing a double exchange rate system now, which is similar to Eastern European countries. This is because the RMB is not freely convertible and is not determined by market supply and demand; the internal settlement price of RMB trade is positioned low, but the non-trade exchange rate is set high, which is contrary to Western countries; the internal settlement price of RMB trade is mainly a means of subsidizing foreign trade exports. He believes that a single exchange rate system should be implemented, the internal settlement price should be abolished, and import and export commodities should be supplemented, added, and taxed on the basis of a single list price to reflect the real situation of profits and losses in import and export trade, and eliminate the contradictions and confusions caused by dual exchange rates, which is more applicable to all kinds of payment and settlement in our country.82 Obviously, the theoretical circles hold different views on the policy operations in actual sectors, which prompted sectors to think, and later abolished the dual exchange rate.

Determination of RMB Exchange Rate Level Since the 1980s, the theoretical circles have discussed the theoretical basis for determining our country’s RMB exchange rate level with great enthusiasm. Some people believe that the exchange rate should be determined based on the relative rate of change of the price level. It should be based on Marx’s price theory. After the purchasing power parity theory is transformed and its reasonable part is absorbed, it is used as the basis for us to set the RMB exchange rate in the medium and long term. Some people further believe that the exchange rate level should be based on the narrow purchasing power parity theory, that is, the exchange rate of the renminbi is not determined by the comparison of comprehensive price level between the two countries, and only the domestic and foreign prices of tradable commodities are used as the basis, that is, only the average exchange cost of import and export prices is used as the basis. Some experts also believe that Marx’s international price theory should be used as the theoretical basis for setting the RMB exchange rate. The exchange rate is essentially the ratio of the external value of a country’s currency to 81 82

Secretariat of China Institute of International Finance (1984). Wu (1984).

18.3 Foreign Exchange Theory

603

the external value of another country’s currency. The domestic value actually reflects the average necessary labor time in society, while the international value reflects the world average labor unit. Therefore, in the determination of the RMB theoretical exchange rate, it is not to compare the domestic consumer price levels of the two countries, nor to compare the respective domestic selling prices of import and export commodities, but to compare the conversion ratio between the domestic selling price of import and export commodities in local currency and the international market price in convertible currency. Or, according to the principle that prices fluctuate around value and are consistent with the level of values in the long-term, the cost of export exchange and the sales ratio of imported goods can be used to replace the international value that cannot be directly measured, and the proportion of import and export commodities in the total foreign trade should be considered to determine the RMB exchange rate level in a weighted manner. To specifically measure the level of RMB exchange rate, scholars have proposed five methods: one is based on the average exchange cost of exports; the second is based on the ratio of domestic and foreign prices of imported and exported goods; the third is based on the ratio of domestic and foreign prices of imported and exported goods, which also refers to the net income of non-trade items; the fourth is based on the international price ratio of import and export commodities, and comprehensively considers the impact of non-trade items, free transfer items and international capital flow items; and the fifth is based on the principle of equal average comparative profit in import and export trade.83 It should be said that the subsequent discussion on the determination of the exchange rate will fundamentally be conducted on this basis. After 2003, with regard to the pressure being put on the appreciation of the RMB by European and American countries, most domestic experts believed that the demand for the appreciation of the RMB exchange rate was the result of the imbalance in domestic payments and the deepening adjustment of the world economic structure in major countries such as the United States. China’s increasing influence on the world economy has also triggered various requests from different countries to protect vested interests by using exchange rates. A more consistent view is that a country’s exchange rate level is a concentrated expression of its economic strength. With the increase of the overall national strength and labor productivity, the national currency will inevitably appreciate. There exist different advocates as regard to the appropriate level of appreciation of the renminbi. Among many discussions on this aspect, Professor Yi Gang’s views are very representative. He believes that the change in the RMB exchange rate is due to the strengthening of China’s economy, the improvement of labor productivity is the foundation, and the advancement of economic system reform provides an institutional foundation.84

83 84

See China Finance Society (1989). Yi (2007).

604

18 The Development and Review of the Opening Up Theory

How to Reform Our Country’s Exchange Rate System? Discussions on this issue began in the 1980s. Chen Biaoru believes that a country’s foreign exchange system consists of three parts: the exchange rate system, foreign exchange receipts and payments, and foreign exchange management. The direction of China’s exchange rate reform should head towards a limited flexible exchange rate; the determination of the exchange rate should be aimed at the long-term balance of foreign exchange receipts and payments, and the foreign exchange receipts and payments should gradually change from an administrative order-style mandatory balance to a market-adjusted balance of supply and demand; in terms of management, the foreign exchange market was gradually opened up cautiously, deregulation was carried out in a planned and step-by-step manner, and finally a relatively flexible and loose foreign exchange system was established.85 This idea is very influential and proved to be correct in practice. Ji Chongwei believes that the reform of our country’s foreign exchange system mainly includes five aspects. The first is to reform the planned management of foreign exchange. It is necessary to comprehensively balance short-term and long-term, trade and non-trade, foreign exchange and finance, credit, and materials. The second is to reform the foreign exchange retention system, mobilize the enthusiasm of the central, local, and corporate parties, and consider setting up an internal foreign exchange swap market under state management and control in several large ports and central cities. The third is to establish an exchange rate system suitable for our country’s national conditions, which not only reflects the trend of international and domestic price changes, but also reflects our country’s foreign economic policy. The fourth is to gradually implement foreign exchange approving and reforming loans, that is, to gradually change the state’s free foreign exchange appropriation system to a loan system. At the same time, it is necessary to implement a combination of foreign exchange use and foreign exchange earnings to improve the efficiency of foreign exchange use. The fifth is to eliminate bureaucracy in foreign exchange management and the style of bureaucratic trading.86 Obviously, this reform idea is more specific. Some scholars believe that the current exchange rate arrangements of developing countries mainly link their national currencies with a certain “currency basket” composed of several countries’ currencies with a certain weight. China should choose a currency “basket” with the best import weights and peg the RMB’s foreign exchange rate with it. He believes that this aspect is stable and can be adjusted at the same time; on the other hand, the import weight can be offset by changes in different directions of various currencies, so it has a certain self-adjustment function.87 Some scholars disagree with this view and believe that “China’s implementation of a basket of currency-linked exchange rates is not in line with the principle of economic independence and the country’s economic interests. We are fully equipped to implement an independent floating exchange rate system and establish a stable exchange rate system. Only on the basis of the domestic currency 85

Chen (1986). Ji (1986). 87 Zhang (1984b). 86

18.3 Foreign Exchange Theory

605

value can we correctly assess import costs and export costs and measure changes in terms of trade. For example, if the value of the Hong Kong dollar depreciates, the Hong Kong dollar cannot reflect the actual income of China’s re-exported goods, and if the RMB will also depreciate if it is pegged to a basket, and it cannot reflect the actual income of export goods in China.88 In the early 1990s, academic circles further discussed the issue of exchange rate liberalization. Li Yining believes that the liberalization of exchange rates requires four conditions: first, commodity producers should become independent stakeholders, operate independently, be responsible for their own profits and losses, and have a mechanism of interest constraints and self-growth. Only in this way can they adapt to market changes and price changes after the liberalization of exchange rates. Second, the relationship between total supply and demand is basically balanced, and the supply and demand of foreign exchange for foreign-related economic activities is basically stable. At this time, the liberalization will prevent large fluctuations in exchange rates. The third is that residents’ asset choices have formed a diversified pattern, and there will be no rush to buy foreign exchange due to the liberalization of exchange rates. Fourth, the country’s financial strength is sufficient, capable of maintaining economic and social stability, and able to cope with all kinds of turbulence after the liberalization of the exchange rate.89 During this period, the theoretical community basically reached a consensus on the reform of the foreign exchange system, but the specific plans were different. The consensus is that the short-term goal is to implement an appropriately managed single-market flexible exchange rate system for the RMB, and the long-term goal is to internationalize the RMB and achieve free convertibility. Scholars believe that it takes a long time for the renminbi to become freely convertible, and the control needs to be gradually relaxed. We should start with the special zones, coastal and inland cities, take the lead in relaxing foreign exchange controls, and further improve the legal and investment environment for enterprises and foreign investment. We should expand the autonomy of enterprises in the use of foreign exchange; establish a solid foreign exchange reserve, set up the central bank’s foreign exchange stabilization fund; price reform should also be further promoted.90 To sum up, it can be seen that the discussion on foreign exchange theory in our country’s theoretical circles is relatively in-depth and quite effective. In July 2005, the People’s Bank of China issued an announcement91 stating that our country has begun to implement a managed floating exchange rate system based on market supply and demand, with reference to a basket of currencies for adjustment. The RMB exchange rate is no longer pegged to a single U.S. dollar, forming a more flexible RMB exchange rate mechanism. The People’s Bank of China will adjust the fluctuation range of exchange rate in a timely manner based on market development and economic and financial conditions. At the same time, based on market supply and demand, the People’s Bank of China is responsible for the management 88

Yu (1984). Li and Qin (1991). 90 See Yin (1993). 91 See the website of the People’s Bank of China, http://www.pbc.gov.cn, 2005-07-21. 89

606

18 The Development and Review of the Opening Up Theory

and adjustment of the RMB exchange rate in accordance with the domestic and foreign economic and financial situations, with reference to changes in the exchange rate of a basket of currencies, thus maintaining the normal fluctuation of the RMB exchange rate, maintaining the basic stability of RMB exchange rate at a reasonable and balanced level, promoting the basic balance of international payments, and maintaining the stability of the macroeconomic and financial markets. In 2008, the State Council promulgated the “Foreign Exchange Management Regulations”, which clarified that the RMB exchange rate system implements a “managed floating exchange rate system based on market supply and demand.” On August 11, 2015, the People’s Bank of China announced the implementation of the reform of the formation mechanism of the RMB exchange rate. The main contents include: (1) the determination of the next-day middle price with reference to the closing price; (2) Daily fluctuation range of ± 2%. This is an important step forward in the RMB exchange rate formation mechanism towards a floating exchange rate system. However, the possibility of a sharp depreciation of the RMB exchange rate in the short term is underestimated. The new exchange rate formation mechanism was abolished in only three days. The People’s Bank of China adjusted the RMB central parity formation mechanism, with the aim of increasing the two-way floating flexibility of the RMB exchange rate and realizing exchange rate marketization. In February 2016, the People’s Bank of China disclosed the specific content of the pricing rule of “closing exchange rate + basket of currency exchange rate changes”:middle price of the day = middle price of the day before yesterday + [(closing price of the day before yesterday − middle price of the day before yesterday) + (theoretical middle price of 24-h basket stability − middle price of the day before yesterday)]/2. In October 2016, the RMB was officially included in the SDR basket currency, reflecting the representativeness and stability of the RMB in the world currency. The reform of the RMB exchange rate system has entered a new stage with the goal of establishing and improving a managed floating exchange rate system based on market supply and demand and maintaining the basic stability of the RMB exchange rate at a reasonable and balanced level. This is a major result achieved by the joint efforts of theoretical workers and practical department workers. Yu Yongding pointed out that although the exchange rate formation mechanism of “closing price + basket of currencies” has realized, in a relatively effective manner, the policy of guiding the gradual depreciation of the RMB, it has prevented the market from clearing for a long time and cannot achieve true twoway exchange rate fluctuations. The price to pay is a large loss of foreign exchange reserves, the independence of monetary policy was affected, and the strengthening of capital controls has caused market distortions. Is it possible to consider temporarily putting aside the free float of remittances and introducing a new exchange rate formation mechanism with wide fluctuations in the RMB exchange rate? And under this mechanism, especially when the fluctuation range being not wide enough, the independence of monetary policy will still be subject to certain restrictions, and foreign

18.3 Foreign Exchange Theory

607

exchange reserves may still be deployed.92 Some scholars have suggested that after the RMB joins the SDR, as the only currency in the SDR basket that has not yet been freely convertible, our country’s foreign exchange still needs to be reformed to adapt to the review of the SDR basket of currencies in 2021. In the process of RMB reform, China is facing such problems as conflicts between legal and regulatory documents in the reform of foreign exchange marketization, the vacuum state of legal regulations, and complicated legal regulatory systems for financial derivatives. There are also some problems in the reform of foreign exchange management, such as imperfect foreign exchange risk reserve system, imperfect deposit reserve system and incomplete supervision system of cross-border capital flow. Therefore, our country should pay attention to the coordination between foreign exchange management reform and international rules, and improve the foreign exchange management legislative system and the foreign exchange management supervision system to prevent financial risks in the foreign exchange management reform.93

Foreign Exchange Reserves At the end of 1993, our country’s foreign exchange reserves were only 21.19 billion U.S. dollars. After our country’s accession to the WTO in 2001, the current account and the capital account experienced a sustained high-level of double surplus, and the scale of foreign exchange reserves grew rapidly, reaching a peak of US$3.99 trillion in June 2014. Subsequently, the capital account suffered a deficit for 11 consecutive quarters, and the scale of foreign exchange reserves began to shrink. After the exchange rate reform on August 11 in 2015, the renminbi continued to depreciate and capital outflows intensified. By the end of January 2017, foreign exchange reserves fell below US$3 trillion. There are mainly three theoretical issues surrounding foreign exchange reserves. The first is the role of foreign exchange reserves. In November 2010, Zhou Xiaochuan put forward the “pool” theory at the Caixin Summit, “If short-term speculative funds want to come in, I hope to put it in a pool and not let it flood the entire Chinese real economy. So, when it needs to retreat, we can release it from the pool and let it go. In this way, to a large extent, it can reduce the impact of abnormal capital flow on China’s economy at the macro level”.94 Later, he further pointed out that foreign exchange reserves are a typical “pool”. The second issue is related to the relationship between foreign exchange reserves and exchange rates. At the end of 2016, when China’s foreign exchange reserves were only one step away from breaking 3 trillion yuan, 92

Yu Yongding. Overcoming the Devaluation Fear and Accelerating the Reform of China’s Exchange Rate System. Working Paper of Research Center for International Finance, Institute of World Politics and Economics, Chinese Academy of Social Sciences, No.2016.072. 93 Liu and Zeng (2017). 94 (2010, December 16). Zhou Xiaochuan Defines “Pool” and Denies “Overgrowth”. Shanghai Securities News. Retrieved from HTTP: //business.sohu.com/20101216 /n278324971.SHTML.

608

18 The Development and Review of the Opening Up Theory

there was a dispute over whether to preserve the exchange rate or preserve the reserves in the market. One group believes that the fluctuation of the RMB exchange rate is normal and has little impact on Chinese economy. Even if it fluctuates, it will not be depreciated too much; so it is not worthy the effort to intervene. In addition, foreign exchange reserves are national wealth accumulated through hard work and should be cherished. The other group advocates that 3 trillion foreign exchange reserves are still too much, and the reduction of foreign exchange reserves is a good thing. It is actually “hiding foreign exchange reserves among the people”, which will help improve the efficiency of foreign exchange resources, help stabilize the RMB exchange rate and reduce foreign exchange controls.95 Guan Tao pointed out that China’s abundant foreign exchange reserves are indeed helpful in resisting the risk of cross-border capital flow shocks, and bought time for exchange rate reform and adjustment; maintaining reserves is not about maintaining scale but maintaining confidence. It is not considered as one of the alternatives besides maintaining exchange rate; instead, they together consists the two sides of a coin.96 Zhang Huilian pointed out that on the issue of “safeguarding exchange rate” or “safeguarding foreign reserves,” an “intermediate solution” should be chosen and the decision should be made based on specific market conditions. Choosing an “intermediate solution” means that both “safeguarding exchange rate” and “safeguarding foreign reserves” should be considered. Because unilateral exchange rate depreciation (or appreciation) will strengthen market depreciation (appreciation) expectations, leading to a greater outflow (inflow) of capital; and a unidirectional continuous decrease (or increase) of foreign exchange reserves will also strengthen market depreciation (appreciation) expectations. In the short run, it must be tilted in response to the main contradictions at different stages of economic development. Secondly, with the increasing scale of capital flows, the increasing difficulty in predicting directions, and the existence of global financial cycle, pure exchange rate fluctuations can no longer guarantee the stability of foreign exchange reserves.97

18.4 The Regional Opening Theory China’s regional opening started only after the Third Plenary Session of the Eleventh Central Committee of the Communist Party of China. In July 1979, the Party Central Committee and the State Council approved Guangdong and Fujian provinces to implement special policies and flexible measures in foreign economic activities, marking the official start of our country’s opening up. Soon, the central government took another major step towards the establishment of special economic zones and opened four special economic zones in Shenzhen, Zhuhai, Shantou and Xiamen. 95

Yu Yongding, Zhang Bin, and Zhang Ming. Introducing a Wide Volatility Band Against a Basket of Currents as Soon as Possible. International Economic Review, 1. 96 Guan (2018). 97 Zhang (2017).

18.4 The Regional Opening Theory

609

Since then, 14 coastal port cities including Tianjin, Shanghai, and Guangzhou have been opened up. Economic open zones have been established in the Yangtze River Delta, the Pearl River Delta, Southeastern Fujian, and the Bohai Rim. Hainan has been approved to be established as a province and become the largest special economic zone. In the 1990s, Shanghai’s Pudong New Area was successively opened, and some cities along the river and borders expanded the opening of inland capital cities to the outside world. Bonded zones were also established in suitable areas of some open cities. In the twenty-first century, China has joined the World Trade Organization and gradually improved the overall regional development strategy, including “four development sectors”, namely, the development of the west, the revitalization of the northeast, the rise of the central region, and the initiative rise of the east. China has opened 1194 counties (cities) to the outside world, and there are more than 240 firstclass ports of sea, land and air. A comprehensive and multi-level regional opening pattern has been formed.98 Since the 18th National Congress of the Communist Party of China, the three major strategies of Belt and Road Initiative, the coordinated development of Beijing-Tianjin-Hebei and the Yangtze River Economic Belt have been connecting and supporting each other, which have raised our country’s regional opening to a new level. The Belt and Road Initiative is the top-level design and general plan for China’s opening to the outside world for a long time and in the future. Coordinating land and sea can not only improve the quality and level of coastal opening up, but also provide unprecedented opportunities for the opening-up of inland and border areas; The coordinated development of Beijing and Tianjin and Hebei will significantly enhance the level of regional development and openness with the capital as the core; the Yangtze River Economic Belt will inject vitality into the formation of an all-round open pattern of provinces and cities along the Yangtze River in the east, middle and west of the Yangtze River.99 Opening to the outside world is gradually expanding and advancing from south to north, from the coast to the inland. As regard to the field of regional opening, the theoretical debate has never stopped. The main issues discussed and different views were as follows.

The Economic Nature of Special Economic Zones From the beginning of the 1980s, during the same period when the special economic zone was established, the debate started over the economic nature of the special zone. The view of most scholars is that special economic zones are a complex of multiple economic elements coexisting under the management of a socialist country

98

Speech by Liu Shan, then Vice Minister of Foreign Trade and Economic Cooperation, at the Meeting to Commemorate the 20th Anniversary of the Third Plenary Session of the 11th CPC Central Committee. 99 Long (2017, p. 273).

610

18 The Development and Review of the Opening Up Theory

with state capitalism as the main component.100 For example, Xu Dixin believes that China’s special economic zones basically have the nature of national capitalism; he advocates that the special economic zone must have a state-owned economy as a pillar and have a certain collective economy serving the role of contacting foreign capital and foreign business; however, only by attracting a large number of foreign-funded enterprises can the success of special economic zone be realized. Joint venture and cooperative economy belong to the state capitalism, and foreign-invested enterprises are a special kind of capitalism restricted and managed by the state, with a certain nature of state capitalism.101 Nevertheless, Yu Guangyuan has a different view on this. He believes that economic forms such as cooperation, joint ventures, and processing and compensation trades (including processing with materials or given samples, and assembling supplied components) and so on cannot be completely regarded as state capitalism, because in these economic forms, there are also socialist economic activities, labor provided by socialist laborers of our country, as well as China’s socialist funds and socialist organizational strength, etc. And all these constitutes the main aspects of the economic forms; therefore, we should not consider its nature as state capitalist, but socialist.102 Fu Dabang believes that the sole proprietorship in the special zone is economically independent and does not have an internal connection with our country. Its nature should be a private capitalist economy, and its proportion will continue to increase.103 Dai Yuanchen believes that it is necessary to distinguish economic nature from social nature. The ideas that cast doubts about the development of multiple ownership structures in the special economic zone is unnecessary.104 Obviously, the raising of this question did not leave the scope of the identification of socialism or capitalism; it is a reflection of the ideological difficulties encountered in the early development of the special zone.

Who Earns Whose Money? The development of the special zone is inseparable from the support of inland cities. The special zone has carried out a large number of trading activities with inland cities and has benefited from the price difference. Some scholars have pointed out that the rapid expansion of Shenzhen in the past few years is basically an unhealthy economic growth. It has mainly utilized the special preferential policies of the central government to the special zone. Under the blind traction of market regulation forces, the development of Shenzhen has relied on making money from the inland cities. Its development has eroded the development and interests of other regions of the country 100

Collected Papers on the Economic Theory of the Special Administrative Region. (p. 158). People’s Publishing House, 1984. 101 Xu (1982). 102 Yu (1993). 103 Fu (1981). 104 Dai (1993, p. 55).

18.4 The Regional Opening Theory

611

to a certain extent. In short, the specialty of the special zone is its privilege granted. In this regard, Hu Angang’s views are representative. But most scholars disagree with this view. Some scholars believe that the development of the special zone is an important part of reform and opening up, and it is of great significance as a window and testing ground for opening up. Dai Yuanchen pointed out that we must take a correct perspective at the issue that the special zones are making money by relying on the inland and depending on national supports. Taking Shenzhen as an example, from the perspective of the source of its construction funds in the initial stage of its development for the first three years, nearly one-third of the funds is from foreign capital; nearly one-third is bank loans; 8% is from state investment, and the funding from central ministries, provincial units and fiscal appropriations only accounts for 17%. It can be seen that the source of construction funds is mainly self-raised, not allocated by the state finance. The regional price difference of commodities is normal. Earning this benefit is operated according to the laws of the market. It will not only benefit the special zone, but also support the economic development of the inland areas, which is a reflection of the function of a “window”.105

The Regional Opening Strategy In the early 1980s, most scholars believed that our country’s opening to the outside world can only be a “gradient advancement” strategy, forming different levels consisting of special economic zone-economic and technological development zone in coastal open cities-coastal open cities-coastal open areas-inland areas. In practice, this is also the case. Some scholars in the mainland have also proposed106 that in order to implement an anti-gradient strategy, we must first open up the inland areas, introduce foreign capital to the inland cities, and narrow the economic gap between the coastal and inland areas. Three methods are specifically proposed. The first method is to cancel or reduce preferential policies for economically developed regions and change regional preferential policies into industrial preferential policies. However, this requirement does not take China’s national conditions into consideration and is only wishful thinking. It is difficult to achieve the goal, and it has not been implemented in practice. The second method is to increase the state’s investment in the western region and reduce its investment in the eastern region. However, due to the low rate of return on investment in the western region, the western regions can not be guaranteed to develop even if the eastern regions are sacrificed. Therefore, it is not feasible. The third method is to reform the unreasonable conditions of resource prices in the west and the prices of industrial processed products in the east, so as to create a favorable environment for the economic development of the west.107 105

Dai (1993, p. 22). Speech by Inner Mongolia representative at the first national meeting of young and middle-aged economic workers in Moganshan, Zhejiang province, 1994. 107 Dai (1993, p. 27). 106

612

18 The Development and Review of the Opening Up Theory

This opinion is correct. Price reform has also played a certain role in achieving this goal. This is also proposed in the central government’s policy on the development of the central and western regions, but this is, after all, part of the western development strategy and not the western opening strategy. Therefore, it has not formed a big influence in the opening strategy. In the 1990s, our country’s opening up to the outside world has led to a pattern of all-round opening up. At this time, many growth poles and even growth belts emerged throughout the country. Therefore, supporting these growth poles or growth belts has become a topic of concern to the theoretical community. Some scholars have proposed to move from gradient opening to all-round opening by concentrating on a combination of both individual regional development as “points” and overall development of the country as a whole. Scholars such as Ma Hong proposed to open the three-side opening along the border, along the river, and along the coast. They reached consensus in the academic community and strongly promoted our country’s all-round opening.

The Western Development, the Revitalization of the Northeast Old Industrial Base and the Rise of Central China With the acceleration of our country’s accession to the World Trade Organization, opening to the outside world has entered a new stage, and the central, western and northeastern regions will also become more open as the eastern coastal regions. In 1999, the state proposed a strategy for the development of the western region. On December 8, 2006, the executive meeting of the State Council deliberated and approved in principle the “Eleventh Five-Year Plan for Western Development”. The “Plan” requires “active expansion of opening up to the outside world” and “make full use of the favorable location condition that the western region has with 14 neighboring countries and regions surrounding its border, and further give full play to the advantages of abundant labor resources, land resources, and characteristic mineral resources, better coordinate the development of the western region and the opening up to the outside world, and expand the opening up to promote the sound and rapid development of the western region. The development of the western regions can lead to the development and promotion of China’s implementation of a mutually beneficial and win–win opening strategy, and enhance the western region’s ability to participate in international and domestic market competition.” We need to “promote the coordination and interaction of eastern, central and western regions”, “correctly guide the direction of foreign investment”, “build a new platform for participating in international regional economic cooperation”, “make good use of loans from international financial organizations and foreign governments”, and “transform the growth pattern of foreign trade.” We also need to “expand the opening of the western region to the outside world, strengthen economic and technological exchanges and

18.4 The Regional Opening Theory

613

cooperation with neighboring countries, and vigorously develop trade and border trade with neighboring countries”.108 In 2004, Premier Wen Jiabao proposed that “the strategy of revitalizing the old industrial base in the Northeast and the development of the western region is the two wheels of interaction between the East and the West.” Regarding the revitalization of the old industrial base in Northeast China, some people think: “since the reform and opening up, the opening up of the Northeast region has increased significantly. The rapid development of foreign trade, the increasing use of foreign capital, and international economic cooperation have also made some progress. However, it is undeniable that the degree of openness in the Northeast is still at a low level compared to that of other regions across the country, it is especially far below the degree of openness of developed areas along the eastern coast. In this reality, the expansion of opening up in the process of northeast revitalization must be supported with new ideas and a policy system that conforms to the actual situation should also be formulated. That is to say, the basic guidelines should be to form a multi-level opening-up pattern, a competitive regional opening-up layout, to improve export capacity and promote continuous optimization of the export product structure, and formulate and implement policies and measures to strengthen regional coordination and cooperation, to accelerate the construction of infrastructure and ports that have a significant impact on the opening up of Northeast China, and promote the rapid and healthy development of border trade”.109 In March 2004, Premier Wen Jiabao clearly stated in the government work report to promote the rise of the central region for the first time; in December 2004, the Central Economic Work Conference again mentioned promoting the rise of the central region; in March 2005, Premier Wen Jiabao proposed again in the government work report that we need to speed up the study and formulation of plans and measures to promote the rise of the central region, give full play to the geographical advantages and comprehensive economic advantages of the central region, strengthen the construction of modern agriculture, especially the main grain producing areas; we also need to strengthen the comprehensive transportation system and the construction of energy and important raw material bases; and to accelerate the development of competitive manufacturing and high-tech industries; it is also necessary to open up a large market in the central region and develop grand circulation.110 With the acceleration of the strategy of promoting the rise of the central region and the development of the western region, our country has initially formed a new pattern of economic cooperation and development in the four major regions, specifically with the development of the eastern and western regions, the rise of the central region, and the revitalization of the northeastern region.

108

The State Council. (2006, December). The Eleventh Five-Year Plan for the Development of the Western Region. 109 Lian (2007). 110 Wen Jiabao. (2005). Report on the Work of the Government.

614

18 The Development and Review of the Opening Up Theory

The Belt and Road Initiative In September and October 2013, President Xi Jinping proposed the initiatives of the Silk Road Economic Belt “Going Global” from the inland and the 21st Century Maritime Silk Road Initiative “Going Global” from the sea. On March 28, 2015, the National Development and Reform Commission, the Ministry of Foreign Affairs and the Ministry of Commerce jointly issued the “Vision and Actions for Promoting the Joint Construction of the Silk Road Economic Belt and the 21st Century Maritime Silk Road”, which promoted the Belt and Road Initiative from the height of toplevel design. The transformation of the country’s economic development and the expansion of opening up will gradually promote the rebalance of China’s economic development and opening to the outside world, forming a cross-regional cooperation pattern. The “Decision of the Central Committee of the Communist Party of China on Several Major Issues of Comprehensively Deepening Reform” adopted by the Third Plenary Session of the 18th Central Committee of the Communist Party of China on “building a new open economic system” clearly defined the strategic goal of “building a new pattern of all-round opening up”. “All-round” is a highly condensed and generalization of the characteristics of China’s opening-up strategy in the new era. The comprehensive opening-up strategy design focuses on the construction of the Belt and Road Initiative. From a domestic perspective, the regional coordinated development strategy constitutes one of the six major tasks of China’s construction of a modern economic system, the advancement of the “Belt and Road” construction has laid a strategic foundation for the relatively underdeveloped central and western regions to become the forefront of the opening-up strategy. It is an upgraded version of China’s opening-up strategy in the new era, and also creates a new period of opportunity for the economic development of inland regions. The advancement of the “Belt and Road” construction has intensified the opening up to the west. With the help of the technological and capital advantages in the construction of our country’s rapid transportation system, it has once again created new development opportunities for inland provinces. According to the “Vision and Action to Promote the Joint Construction of the Silk Road Economic Belt” and the “21st Century Maritime Silk Road”, China will build a “Silk Road Economic Belt” on land, which is from China to Europe via central Asia and Russia, from China to the Persian Gulf and Mediterranean via central Asia and West Asia, and from China to Southeast Asia, South Asia and the Indian Ocean; China will build a maritime Silk Road at sea, which extends from China’s coastal areas across the South China Sea to the Indian Ocean to Europe, and from China’s coastal areas across the South China Sea to the South Pacific, so as to form a new pattern of opening up to the world with sea-land coordination, east–west mutual assistance.111

111

Gao (2014).

18.4 The Regional Opening Theory

615

Regional Opening and Industrial Agglomeration With the acceleration of economic globalization and the deepening of the international division of labor in industrial chains and product chains, the agglomeration of industries in the process of regional opening and approaches to promote economic development have increasingly become a hot topic in economics research. Zhao Wei creatively put forward the “dual opening theory” of regional economy. He believed that regional economic opening is a process of combining internationalization and interregional integration. Based on the research framework of regional openness which consists of the five dimensions of regional openness and economic growth performance, total factor productivity change, technological progress, factor accumulation and institutional transformation, he examined the relationship among the three processes of regional economic dual openness, regional institutional transformation and regional economic growth. To explore the impact of regional opening on regional institutional transformation and economic growth, a new analytical framework can be established with the chain links among regional economic opening—institutional transformation—regional economic growth performance and related endogenous variables. The three dynamic variables of regional economic opening, institutional transformation, and regional economic growth performance and their logical relationships constitute a relatively coherent series of proposition systems. This proposition system consists of at least five sub-propositions: the first is related to the relationship between regional economy opening and economic growth performance. The second is concerned with the relationship between the process of regional economic opening and changes in total factor productivity. The third is related to regional economic opening and regional technological progress. The fourth focuses on the relationship between regional economic opening and regional factor accumulation, and the fifth discusses the relationship among regional economic opening—institutional transformation—regional economic growth performance.112 Wang Chunhui and others pointed out that regional opening has led to the same industrial clustering and different industries (upstream and downstream industries). The reason why manufacturers choose agglomeration (cooperative agglomeration) layout under regional opening conditions is to obtain different types of agglomeration external benefits. The acquisition of external benefits has an important impact on the improvement of regional economic performance.113 Zhao Wei comprehensively examined the self-reinforcing mechanism of agglomeration under the conditions of regional openness from the two dimensions of the agglomeration of manufacturers in the same industry and the collaborative agglomeration of different industries and upstream and downstream industries. He pointed out that in the process of regional opening, with the decline of regional transaction costs, industrial agglomeration is gradually formed, and through the expansion of regional demand and agglomeration scale, it gradually attracts the layout of other industries 112 113

Zhao (2007). Wang and Zhao (2014).

616

18 The Development and Review of the Opening Up Theory

and upstream and downstream industries, which then lead to collaborative agglomeration. The coordinated agglomeration of a large number of different industries will, in turn, improve the regional market structure, further reduce transaction costs in the region, and thereby strengthen the initial agglomeration economy. Based on the fact that agglomeration is an economic layout structure, functional departments in the governments cannot simply create such economic layout structure through administrative instructions and policy plans. Instead, they must continue to cultivate a good regional institutional environment under open conditions by improving market rules and strengthening government services to attract new manufacturers to create economic layout by themselves so as to realize the agglomeration process.114

18.5 On the Construction of Foreign Economic and Legal System The practice of opening up to the outside world has proved that respecting international conventions and acting in accordance with prevailing international rules is an important aspect of opening up. In the foreign economy, laws and regulations are indispensable, and foreign-related laws are an important guarantee for smoothly advancing the cause of opening up. For 40 years, there have been a large number of foreign-related economic laws and regulations. Foreign-related laws and regulations are related to foreign-related economic activities. Therefore, the higher the degree of openness, the more foreign-related economic activities and the more substantial the laws will be in this area. Foreign-related laws have guaranteed the orderly progress of reform and opening up, safeguarded national security and legitimate rights and interests, and effectively promoted economic and social development. The “Decision of the Central Committee of the Communist Party of China on Several Major Issues concerning the Comprehensive Promotion of the Rule of Law” (hereinafter referred to as the “Decision”) adopted by the Fourth Plenary Session of the Eighteenth Central Committee of the Communist Party of China made important arrangements for strengthening foreign-related legal work under the new situation. The “Decision” proposed “to strengthen foreign-related legal services, safeguard the legitimate rights and interests of Chinese citizens and legal persons overseas and foreign citizens and legal persons in China, and safeguard the rights and interests of overseas Chinese in accordance with the law.” We need to actively participate in the formulation of international rules, promote the legal handling of foreign-related economic and social affairs, strengthen China’s right to speak and influence in international legal affairs, and utilize legal means to safeguard China’s sovereignty, security, and development interests”. This puts forward new requirements for doing a good job in foreign-related legal services under the new situation. In the past 40 years, our country’s foreign-related economic legislation has achieved unprecedented speed and fruitful results. Before the reform and opening 114

Zhao (2017).

18.5 On the Construction of Foreign Economic and Legal System

617

up, our country had only promulgated the “Interim Regulations on Foreign Trade Administration,” “Interim Customs Law,” “Implementation Measures for the Import and Export Trade License System,” and a few laws and regulations such as customs supervision and foreign shipping. There are few theoretical studies and debates on foreign-related laws. A legal system has been preliminarily formed by regulating the domestic and foreign economy and participating in international treaties. It can be said that these 40 years are the golden period for the construction of foreign economic laws and regulations. The legal system mainly involves investment, taxation, trade, intellectual property rights, and contract arbitration. These laws embody the principle of equality and mutual benefit and the orientation of respecting international conventions, aiming to adjust various economic relations between Chinese economic entities and foreign economic entities. For example, foreign investment legislation will adjust the establishment, modification, termination and economic relations arising from the operation and management process of foreign enterprises. Domestic laws in China cover a very wide range. In terms of foreign trade, there are “Foreign Trade Law,” “Customs Law,” “Commodity Inspection Law,” “Application Law of Foreign Civil Relations Law,” “Exit and Entry Administration Law,” “Import and Export Commodity Inspection Law,” and “Trademark Law.” “Patent Law,” “Imported Commodity Management Regulations,” “Export Commodity Management Regulations,” “Anti-dumping Regulations,” “Countervailing Regulations,” “Foreign Exchange Management Regulations,” “Technology Import and Export Management Regulations,” “Regulations on the Origin of Imported and Exported Goods”, etc., involving various fields of import and export Trade, foreign-related economic contracts, customs, taxation, trademark management, arbitration and so on. In terms of foreign direct investment, domestic laws and regulations mainly include “The Law of the People’s Republic of China on Chinese-Foreign Joint Ventures”, “The Law of the People’s Republic of China on Chinese-Foreign Cooperative Enterprises”, “The Law of the People’s Republic of China on Foreign-funded Enterprises”, and “The Law of the People’s Republic of China on the Protection of Investment by Compatriots in Taiwan” and other related foreign investment corporate laws and regulations. Foreign investment legislation safeguards national sovereignty and protects the legitimate rights and interests of investors. In recent years, four laws have been revised: the “Foreign Investment Enterprise Law”, the “Sino-foreign Joint Venture Enterprise Law”, the “Sino-foreign Cooperative Enterprise Law” and the “Taiwan Compatriots Investment Protection Law”. The management model for establishment and change of foreign-invested enterprises has been changed from the model of overall approval to the model of filing management and in this way, the pre-access national treatment negative list is rolled out to the whole country. In 2017, the “Guiding Opinions on Further Guiding and Regulating the Direction of Overseas Investment” and “Measures for the Administration of Overseas Investment by Enterprises” were successively issued, which simplified the procedures for project approval, improved the level of investment facilitation and transparency, and strengthened the whole-process supervision of investment behaviors. The relevant foreignrelated economic treaties concluded and participated in by the Chinese government mainly include “The Hague Convention”, “Paris Convention for the Protection of

618

18 The Development and Review of the Opening Up Theory

Intellectual Property Rights”, “United Nations Convention on Contracts for the International Sale of Goods” and “Convention Establishing the World Intellectual Property Organization”, etc.; China has recognized and adopted the “General Rules for the Interpretation of International Trade Terms”, the “Uniform Practices for Credit Certification” formulated by the International Chamber of Commerce, and the “Conditions of International Civil Engineering Contracts” prepared by the International Federation of Engineers. These regulations have played a great role in protecting the normal operation of the foreign-related economy, ensuring the necessary management of the state, protecting the interests of operators, resolving economic disputes, and promoting the establishment of a new economic order. There are many issues discussed in economic legislation. The most critical contradiction is how to integrate the requirements imposed on foreign-related laws to respect and refer to international laws and to be in line with the international community with the reality of domestic economic reform and transformation. First of all, to formulate foreign-related economic laws in full compliance with internationally mature laws will help to communicate and negotiate with foreign economies, help gain recognition from the international community, and help promote our country’s reform towards a legal system based on a market economy. However, the foundation of our country’s economy is quite different from that of foreign countries. It has been transferred from a traditional planned economy, and the reform of the economic system is still deepening. It is definitely not feasible to comply with strict western laws, and some modifications are needed accordingly. Secondly, many relationships in economic life are changing rapidly. If legislation is required at this time, it is difficult to stabilize the law if legislation is carried out based on the current requirement, and the law will be greatly out of touch with reality which will cause the difficulty in law enforcement, if legislation is not carried out based on the current requirement. If there is no legislation, there is no basis for change; however, legislation often lags behind change. Therefore, there is a big contradiction between the changes in economic life and the stability of the law. Regulations in the form of “interim regulations” at this stage are more common. Finally, the relationship between the Party, the government, and the law in legislation has not yet been fully legalized. Many laws and regulations are drafted by the competent authorities, so that the regulations have the characteristics of departmental interests. Although repeated requests for opinions and amendments will reduce the requirements of the department’s interests, it is impossible to truly eliminate the department’s interests, which will affect the authority and fairness of the law to a certain extent. As regard to these issues, we will find a more favorable and integrated solution based on the theoretical research and discussion of relevant laws, and select more feasible approach of operation in practice. In the next step, based on the “Foreign Trade Law” and other relevant laws, we should strengthen the study of relevant international economic and trade treaties, proceed from the requirements of establishing a socialist market economic system, formulate and improve foreign economic and trade laws and regulations, and strengthen the uniformity, standardization and transparency of our country’s foreign economic legal system. Looking forward to the future, China’s trend towards a society under the rule of law is unstoppable, and foreign economic laws and regulations will make further progress to meet

18.6 China’s Positive Progress in Opening Up to the Outside World Since …

619

the needs of the socialist market economy opening to the outside world, actively participate in the formulation of international rules, enhance the right to speak in international affairs, and be a defender and builder of international rules, so as to strengthen the ability to use legal means to safeguard national interests.

18.6 China’s Positive Progress in Opening Up to the Outside World Since Its Accession to the WTO In 2001, China joined the World Trade Organization and became the 143rd member country. This is the international community’s recognition of China’s own development achievements and an inevitable requirement for China’s market reform and opening up. Since its accession to the WTO, China has actively integrated into globalization, and has changed from a learner of free trade rules to an advocate of free trade rules reform, thus China has promoted the establishment of a fair and reasonable international economic and trade order. This is mainly manifested in two aspects: one is to fulfill its WTO commitments and abide by international rules; the other is to promote its own development and boost the world economy.

Fulfilling WTO Commitments and Complying with International Rules Since joining the WTO, China has always been a staunch supporter of the multilateral trading system, has always been a defender of free trade principles, and has always been an active promoter of the Doha Round of negotiations. As of 2010,115 China’s commitments after its accession into the WTO have been fulfilled, and an economic and trade system that meets the requirements of the rules has been established, making it one of the most open markets in the world. Take tariff-cutting as an example; China joined the WTO at the end of 2001 and started to cut tariffs across the board on January 1, 2002, and the tariff-cutting process is gradually implemented hem over 10 years. Among them, the tariff reduction commitments for most imported products have been implemented on January 1, 2005. As of January 1, 2010, the tariff reduction commitments for all products have been fulfilled. The average overall tariff level of our country has dropped from 15.3% before WTO accession to 9.8% in 2010.116 The 2015 report on China’s fulfillment of WTO commitments issued by the Office of the United States Trade Representative (USTR) shows that since China’s accession to the WTO, the volume of trade and investment between China and its main trading partner the United States has expanded dramatically. In 2014, the total amount of the US exported goods to China has reached 124 billion U.S. dollars, an increase 115 116

Hu and Wang (2010). Li (2017).

620

18 The Development and Review of the Opening Up Theory

of 545%; and the total amount of the US exported services to China has reached 43 billion U.S. dollars, an increase of 733% compared to that of 2001.

Promoting Self-development and Boosting the World Economy The positive interaction between domestic reforms and opening up to the outside world has promoted China’s own development and also made important contributions to the world economy. From the latest data officially provided by the World Trade Organization,117 a horizontal comparison of China’s development and its contribution to the world economy can be made. First, overall, China’s GDP was 18.87 trillion US dollars, and the per capita GDP was 7503 US dollars in 2015. The current account balance accounted for 2.1% of GDP, the per capita trade volume was US$1677, and the total trade accounted for 22.3% of GDP. China is the world’s largest exporter of commodities, the second largest importer of commodities, the second largest importer of service trade, and the third largest exporter of service trade. The second is related to commodity trade. In 2015, China’s total import and export volume was 3.95 trillion US dollars. Among them, the export value was 2.27 trillion U.S. dollars, and the average annual growth from 2010 to 2015 was 8%, accounting for 13. 8% of the world’s total exports. The import value was 1.68 trillion U.S. dollars, with an average annual growth rate of 4% from 2010 to 2015. It accounts for 10.06% of the world’s total imports. Behind the scale of trade and the speed of development is the optimization and upgrading of the industrial structure. The export of China’s primary products (agricultural products, fuels and mineral products) only accounted for 3.3% of total merchandise exports. The third is related to the aspect of service trade. In 2015, China’s total import and export volume was US$0.76 trillion. Among them, the export value was US$0.29 trillion, accounting for 6% of the world’s total exports. Transportation and tourism accounted for 13.5 and 40% of China’s total service exports. And the value of imports is 0.47 trillion U.S. dollars, with an average annual growth rate of 21% from 2010 to 2015, accounting for 10.11% of the world’s total imports. Vertically speaking, China’s foreign economy and trade have developed rapidly in the process of integrating into globalization. Since joining the WTO, China’s import and export trade of goods has continued to grow rapidly. In 2001, China’s total import and export of goods was only 0.5 trillion U.S. dollars. Although during the 2008–2009 international financial crisis, due to the sluggish external demand, the import and export trade of goods declined. Around 2010, the previous strong growth momentum continued. In 2015, the total value of imports and exports of goods was US$3.95 trillion, which was nearly 8 times the total value of imports and exports 15 years ago. 117

Retrieved from the official website of the World Trade Organization, http://stat.WTO.Org/cou ntryprofiles/CN_e.htm.

18.6 China’s Positive Progress in Opening Up to the Outside World Since …

621

In the field of international investment, China implements a combination of “bringing in” and “going out”, and both foreign investment and Chinese corporate outbound investment have increased substantially: in 2001, China’s actual use of foreign capital was 49.67 billion US dollars, and in 2015 it increased to 1262. 700 million US dollars, an increase of 76.6 billion US dollars or 154.2%.In 2007, China’s net investment in the world was US$26.5 billion. In 2015, it increased to US$145.67 billion. In just 8 years, it achieved an increase of US$119.17 billion, an increase of nearly 450%. It is worth noting that by the end of 2015, China’s total foreign investment has surpassed the total foreign investment, becoming a net foreign investment country. Facts have proved that after China’s accession to the WTO, our country has fully relied on and applied WTO international trade rules while fulfilling its promises in a timely manner. It only took 12 years to jump from the world’s sixth largest trading nation to the world’s first place. Since our country has become the world’s largest country of trade in goods in 2013, it has maintained its position as the world’s number one for three consecutive years. Facts have proved that it is correct to insist on openness. We respect and apply international rules to implement reform and opening up, which is the key to realizing brilliant achievements.

Further Deepening Reform and Expanding Opening-Up In the past 40 years, China’s market economy has achieved remarkable results. It is manifested in two aspects. First, China has increasingly emphasized the use of market mechanisms to allocate resources, emphasizes the decisive role of the market, and at the same time better exerts the role of the government to eliminate system and mechanism defects. Second, China is increasingly integrating into the global economy with an open and inclusive attitude. Since joining the World Trade Organization, especially since the 18th National Congress of the Communist Party of China, China has actively participated in many fields such as international trade, international investment, and global governance. While achieving its own development, China has also become an important force driving world economic growth. China has solved various obstacles step by step in expanding its opening up, and is striving to play a more beneficial role in the international market. As of December 12, 2016, China has joined the World Trade Organization for 15 years. Article 15 of the Protocol on the Accession of the People’s Republic of China to the World Trade Organization clearly states that 15 years after China’s accession to the World Trade Organization, the use of “surrogate countries” in anti-dumping investigations based on market economy status should be revoked. According to statistics from the Ministry of Commerce of China, as of the end of 2017, more than 80 economies around the world have recognized China’s market economy status, including Russia, Brazil, Switzerland, Australia, and New Zealand, as well as the Nordic countries, the United Kingdom and the Netherlands. The country also supports China to obtain

622

18 The Development and Review of the Opening Up Theory

market economy status. However, the United States, Japan and some European countries insist that the WTO provisions do not mean that China “automatically” obtains market economy status. They still use the “surrogate country” approach to increase the anti-dumping duty rate of Chinese exports to hinder the export of Chinese products.118 In this regard, we believe that China is already a developing country of market economy,119 and all countries should strictly implement WTO rules and abandon the “surrogate country” method as soon as possible. Certain countries have tried to use “market distortion” or other excuses to replace “surrogate countries” to continue antidumping against China. China has used relevant WTO regulations and international mechanisms to file complaints and argue for reasons. On March 21, 2017, China formally proposed to the WTO for the intervention of the dispute body regarding the EU’s “surrogate country” approach to imposing anti-dumping tariffs on China, which is a good example. In fact, the theoretical debate about whether China is a market economy country should be viewed dialectically. On the one hand, we need to see that certain countries want to use this to curb China’s development; on the other hand, we do need to deepen reforms to further improve the market economy system, but we should proceed from our national conditions and improve ourselves in the process of growth, while pursuing our growth in the process of improvement. General Secretary Xi Jinping pointed out that “openness brings progress, and closure leads to backwardness.” In the face of a more complex international environment with trade protectionism and anti-globalization trends, persisting in opening up requires not only attitude, but also wisdom. On the basis of the Bali’s Agreement on Trade Facilitation in 2013 and the Nairobi Declaration by the Minister of Trade of the World Trade Organization in 2015, we will maintain the status of the World Trade Organization’s multilateral system and the main channel for global trade and investment liberalization, and promote the Doha Round of negotiations to achieve further results, promote the sharing and promotion of balanced, win–win, and inclusive development of the multilateral trading system, and form a fair, reasonable and transparent system of international economic and trade rules. We must unswervingly expand opening up, and uphold and develop socialism with Chinese characteristics under the new historical conditions!

18.7 A Brief Conclusion What does the history of the development of opening-up theory in the past 40 years show? What enlightenment can we get from it? First, if a country or a region wants to achieve rapid economic development, it must be open to the world. It can develop without opening to the outside world, but 118

The Ministry of Commerce (2017) Beijing Normal University, Institute of Economic Resource Management. (2003, 2005, 2008, 2010). China Market Economy Report; Li and Lin (2017).

119

18.7 A Brief Conclusion

623

it can only develop at a low-level with a slow pace, which will continue to widen its economic gap with developed countries. Without the courage and wisdom to open to the outside world, it is impossible to make big strides forward. Opening to the outside world requires a country to enter the world market for trade, use the international capital market to borrow funds and debts, improve the investment environment, introduce foreign investment and start businesses, more freely integrate local and foreign currency; we should implement a managed floating exchange rate to communicate with the outside world, take international economic changes as an important factor for policy analysis in domestic macro-control, and strengthen economic exchanges with major developed countries, and so on. For 40 years, all theories that promote openness today seem to have shown vision and competence. All theories that oppose opening to the outside world, despite many arguments, seem pale and conservative today. Therefore, we economic theory workers must continue to work hard to support and promote opening up, and to improve the quality of opening up. Second, the progress of the theory of our country’s opening to the outside world is consistent with the process of transition from a planned economic system to a market economic system, and is synchronized with the progress of the theory of commodity economy and market economy. Commodity economy and market economy, by their very nature, require openness and require the domestic market to be linked with foreign markets. Opening up and reform complement and promote each other. Opening up promotes reform, and reform pushes forward opening up. The development and evolution of the traditional planned economy to the socialist market economy is a main line of the continuous deepening of the theory of opening to the outside world. Major debates among theorists on the commodity economy, the law of value, and even the later market economy are directly related to the development of opening-up theory. Conversely, the progress of the opening up theory has also greatly promoted the process of economic system reform. Some scholars say that in a sense, opening up has become a powerful driving force for reform. This view is indeed very reasonable and is in line with the path our country has traveled for 40 years. This shows that it is of great significance that Deng Xiaoping has put forward reform and opening-up side by side. Third, we need to emphasize that it is very important to integrate theories with practice. The theory of opening to the outside world, due to its complexity and practicality, makes it quite difficult to conduct advanced researches in the theoretical field away from reality. A large number of practical theories are the primary forming theories that come from the work of the actual department, and then are summarized and sublimated into a certain system by the theoretical circle. The characteristic of the theory in the past 40 years has been to consider China’s national conditions and start with the integration of international development trends and China’s reform process. Issues that the theoretical circle face are mostly new, and the theoretical circle is also learning by doing. This is the reality of opening to the outside world for the last 40 years. This requires theoretical workers to stay closer to reality and to investigate the status quo more deeply in order to provide more valuable theories to the society.

624

18 The Development and Review of the Opening Up Theory

Fourth, it is important to introduce advanced theories and knowledge. Our country’s opening-up theory has advanced under the guidance of Deng Xiaoping Theory, but to a large extent, it has also advanced with the help of continuously learning from the experience and theory of developed market economies. It can be said that the deepening of the theory of opening to the outside world coincides with the expansion of the influence of Western international economics. Western theories of international trade, international division of labor, and international investment have injected a lot of fresh theories for international economic interaction under the market economy into our traditional economic theories, which has greatly broadened people’s horizons and deepened the depth of theory. Since the theoretical circle first came into contact with the theory of Western market economy countries, it showed a certain level of advanced characteristics in applying the theory of domestic opening up. Without this kind of learning, it would be quite difficult for the theoretical community to do anything. This shows that we must continue to be courageous and proficient at learning in establishing a market economic system, learn all the theories and knowledge in the world that are useful to us, and learn more and in-depth knowledge in order to make greater progress in guiding China’s opening up. Only on this basis can we create a theory of opening-up with Chinese characteristics. Fifth, the theoretical circle is generally sober and cautious in all aspects of opening up. For example, in terms of the timing of opening, the theoretical community has both a push and a cautious attitude. Opening to the outside world is a step-by-step process of opening-up. We cannot ignore necessary conditions and integrate ourselves with the world with only one step. This is useless and harmful. From the perspective of 40 years of opening-up, our country opened-up in a gradual manner; from the 40 years of reform and opening-up process, opening to the outside world is also about gradual expanding with gradual increases in the degree of opening-up. For another example, in the theory of opening to the outside world, the four viewpoints put forward by the theoretical circles have played a major role. One is the “opportunity theory” in the 1980s, emphasizing that an international environment of peace and development is a rare opportunity for China’s development; the other is the “convergence theory” that began in the early 1990s, which emphasized the need to act in accordance with international practices and integrate with the international economy; the third is the “security theory” that began in the late 1990s, which emphasized the need to protect the country’s economic security during international financial and economic integration. The current academic circle focuses on the “responsibility and power theory” of great powers, which is especially needed for the integration of the rising China into the world. These important statements all reflect that theoretical circles can start from the national conditions and promptly put forward more objective response ideas to serve the practice of opening-up. Of course, openness is a way, and it is a means to achieve a certain goal. The theoretical circle needs to have a deeper understanding of the goal, in order to truly study the means. Sixth, ideological emancipation is of great significance to theoretical research. For 40 years of theoretical research, why have the main results come from the reform and opening-up? It is because of the 40 years of emancipating the mind, seeking truth from facts, allowing scholars to speak, breaking through various theoretical

18.7 A Brief Conclusion

625

forbidden areas, and distinguishing policy research from research propaganda, and there has been a great period of theoretical research. In the early days of opening-up, the theoretical community supported reform and opening-up as the mainstream. In terms of opening to the outside world, the debate in the theoretical community was not on whether to open up or not, but on how to open up. However, there are also some concerns, such as during opening-up to the outside world, whether fluctuations in the international market will impact our trade, whether Chinese economy will be controlled by the economies of developed countries during introduction of foreign capital, and whether the consumption patterns and lifestyles of developed countries will impact and affect the thinking of our people. However, with the deepening of theoretical discussions, these worries were gradually eliminated, and some cognitive problems were gradually resolved. Seventh, the theoretical research on opening to the outside world will reach a new level. China’s opening to the outside world has changed from a limited scope, field, and region to a full-scale, multi-level, and wide-ranging opening; from a policy opening characterized by pilot projects to an institutional opening under the legal framework; the unilateral self-opening market is transformed into a two-way open market between China and WTO members. We have transformed from passively accepting the opening of international economic and trade rules to actively participating in formulating and leading the opening of international economic and trade rules; from only relying on bilateral consultation mechanisms to coordinate the opening of economic and trade relations, to an opening that can be combined and promoted by multilateral and bilateral mechanisms; from expanding opening to the outside world to coordinating domestic and foreign opening, from raising the level of opening up to building a new open system. Since the 18th National Congress of the Communist Party of China, with the increase of economic strength, China’s right to speak in the world has also be enhanced. Under the conditions of the new era, our opening to the outside world has undergone and will undergo major changes, and our opening theory will also develop towards a new stage. (This chapter was completed by two periods of writing. The writing of the sections related to the first 30 years was completed by Li Xiaoxi, and supported by the 2008JYJW047 project of the Ministry of Education, to whom we extend our acknowledgement here. Zou Shinian and Xu Chaoyang, Ph.Ds from the Graduate School of the Chinese Academy of Social Sciences in 2007, provided a wealth of information and valuable opinions for writing this chapter. Two Ph.Ds, Li Wenfeng and Wang Lianhai from the Ministry of Commerce, have reviewed this chapter and put forward valuable comments, to whom we would like to express our gratitude. The writing of the sections related to the next ten years was completed by Dr. Su Xuxia from the Ministry of Commerce.)

626

18 The Development and Review of the Opening Up Theory

References Bian Zhenhu. (1989). Foreign Trade Development Strategy in the Primary Stage of Socialism in China. International Trade Forum. Cai Siqing. (2006). Implicit International Trade Friction and Countermeasures for Establishing Early Warning Mechanism. Inquiry Into Economic Issues, 6. Chen Biaoru. (1986). Discussion on China’s Foreign Exchange System. In China International Finance Society (Ed.). Collected Works on the Reform of Foreign Exchange System. China Financial Publishing House. Chen Wenling. (2011). Striving for Rightable Rights and Interests in International Economy and Trade as a National Strategy. China Business and Market, 12. Chen Xi, and Bian Jing. (2017). Strategic Priorities and Policy Choices of China’s Foreign Trade Structure Adjustment. Macroeconomic Management, 11. Chen Deming, et al. (2014). Economic Crisis and Rule Reconstruction. The Commercial Press. China Finance Society. (1989). Discussion on the Theory and Policy of RMB Exchange Rate. In State Administration of Exchange Control, People’s Bank of China (Ed.). Study on China’s Foreign Exchange and Foreign Debt. (pp. 20–22.). China Financial Publishing Houses. Dai Yuanchen. (1993). From Closed Economy to Open Economy. Lujiang Publishing House. Dai Xiang, and Xu Liu. (2017). The Industrial Differences of China’s Foreign Trade Growth Rate: Based on the Perspective of Global Value Chain Participation. International Business Research, 6. Fan Mingtai. (2000). The Influence and Significance of Foreign Trade on China’s Economic Development.Finance and Trade Economics, 8. Fu Dabang. (1981). A Discussion on the Understanding of the Nature of Special Zone Economy. Journal of Jinan University, 4. Gao Hucheng. (2014). Deepening Economic and Trade Cooperation and Creating New Splendor. People’s Daily, July 2, 2014. Ge Hui. (1987). Foreign Trade System Reform and Its Realization. Journal of International Trade, 2. Guan Tao. (2018). Reflecting on the Debate on China’s Foreign Exchange Reserves. International Economic Review, 1. Gui Shiyong and Wei Liqun. (1988). On the Strategy of Socialist Economic Development in China. (p. 128). China Planning Press. He Manqing. (2017). Advantages and Disadvantages of Foreign Investment Based on Data Analysis of Quality and Benefit. Social Science Journal, 1 Hong Yinxing. (1997). From Comparative Advantage to Competitive Advantage. Economic Research Journal, 6. Hu Zuliu. (2004). Three Issues on the Introduction of Foreign Investment in China. International Economic Review, 2. Hu Fengying, and Tang Haiyan. (1992). China’s Economic Development and Foreign Trade Strategy for Balanced Development. Intertrade, 3. Hu Xiaohong, and Wang Limei. (2010, July 21). China’s WTO Commitments Completed. Beijing Times. Huang Yasheng. (2006). 2006, Indian Year or Chinese Year? Washington Observer Weekly, 6. Ji Chongwei. (1986). Summarizing Experience, Strengthening Management in Reform; Livening Management and Striving for Balance of International Payments. In China International Finance Society (Ed.). Collected Works on the Reform of Foreign Exchange System. China Financial Publishing House. Jiang Xiaojuan. (1993). A Study of China’s Industrial Development and Foreign Trade Relations. Economic and Management Publishing House. Jiang Xiaojuan. (2004). The Influence of Attracting Foreign Investment on Promoting China’s Industrial Technological Progress. China Coal Industry, 5.

References

627

Jiang Yuechun. (2005). Some Reflections on the Economic and Trade Frictions between China and Foreign Countries. International Studies, 3. Jiang Xiaojuan. (2006). China’s Opening to the World: A More Balanced and Reasonable Integration into the Global Economy. Economic Research Journal, 3. Lenin. Speech at the Meeting of the Secretaries of the Moscow Organization of the Russian Communist Party. In The Complete Works of Lenin. (1986). Vol. 40. (p. 42). People’s Publishing House. Li Xiaoxi. (1997). Study on the Strategy of Introducing Foreign Investment. Productivity Economics, 4. Li Xiaoxi. New Thinking of Opening to the Outside World. Speech at the Opening to the Outside World Forum held by Western Returned Scholars Association and School of Economics, Beijing Normal University, May 23, 2004. Li Chunding. (2014, March 20). The Impact of Value-added Trade Statistics on China from a New Perspective, IGI (International Studies), Institute of World Economics and Politics, Chinese Academy of Social Sciences. Li Jian. (2017, March 10). Wins between China and the World in the 15th Anniversary of China’s WTO Entry. Retrieved from http://news.ifeng com/a/20161211/50398431_ 0.shtml. Li Yining, and Qin Wanshun (Eds.). (1991). Research on China’s Foreign Economy and International Balance of Payments. (p.163). International Culture Press. Li Xiaoxi, and Lin Yongsheng. (2017). From the Development of China’s Market Economy to Commemorate the Forty Years of Reform and Opening Up. Globalization, 7. Li Jiguang, Zhang Hanlin, and Sang Baichuan. (2008). Review and Prospect of China’s Foreign Trade Development Strategy in the Past 30 Years of Reform and Opening up. Word Economy Studies, 6. Lian Xiaomei. (2007). Opening to the Outside World in the Process of Northeast China’s Revitalization: General Ideas and Countermeasures. Northeast Asia Forum, 16(5). Lin Shuzhong (Ed.). (1989). Utilization of Foreign Capital and Development of Export-oriented Economy. CITIC Press. Lin Yifu. (2017). The Belt and Road and Free Trade Zone: China’s New Initiations and Measures for Opening Up. Journal of Beijing University (Philosophy and Social Sciences Edition), 1. Liu Changli. (1987). Import Substitution: China’s Long-Term Strategy to Overtake World Industrial Powers. Economic Research Journal, 8. Liu Jiali, and Zeng Wenge. (2017). Reform of China’s Foreign Exchange Management from the Perspective of the Legal Framework of SDR Basket Currency Evaluation. Journal of Yunnan Normal University (Philosophy and Social Sciences Edition), 5. Long Yongtu (Ed.). (1999). World Trade Organization Knowledge Book. China Commerce and Trade Press. Long Guoqiang. (2015). The New Situation and New Strategy of China’s Opening Up. China Development Observation, 8. Long Guoqiang, et al. (2017). Building a New System for Open Economy. Guangdong Economy Publishing House. Lu Jinyong, et al. (2017). Theoretical Innovation of China’s Utilization of Foreign Investment in the New Situation. Intertrade, 11. Lv Gang. (2006). The Spillover Effect of Foreign Investment in Technology. New Economy Weekly, 6. Marx and Engels. The Manifesto of the Communist Party. In Selected Works of Marx and Engels. (1992). Vol. 1. (p. 255). People’s Publishing House. Peng Lili. (2007). Looking at Two Tendencies of Foreign Merger and Acquisition Prevention. Foreign Investment in China, 6. Qiu Jie, and Chang Huili. (1996). Reflections on the “Package” Transition Mode of Foreign Trade System Reform. Journal of International Trade, 4. Ren Jijun. (1991). Analysis of China’s Trade Development Strategy. Finance and Trade Economics, 2.

628

18 The Development and Review of the Opening Up Theory

Sang Baichuan. (2007). Differences and Evaluation of Foreign Mergers and Acquisitions. Intertrade, 7. Sang Baichuan, and Zhang Caiyun. (2018). Restructuring the “double Drive” Pattern of Foreign Investment Utilization. China Economic Report, 1. Secretariat of China Institute of International Finance. (1984). Summary of Discussions on the RMB Exchange Rate. In China International Finance Society (Ed.). Collection of Discussion on RMB Exchange Rate. (p.3). China Financial Publishing House. Selected Works of Deng Xiaoping. (1993). Vol. 3. People’s Publishing House. Shi Shui. (1988). International Great Cycle and Coastal Development Strategy. Teaching Reference, 2. Teng Weizao. (1981). China’s Socialist Modernization and Foreign Trade Forms. Journal of Nankai University, 1. The Ministry of Commerce. (2017, March 17). Strongly Dissatisfied with Europe, the United States and Japan’s Failure to Recognize China’s Market Economy Status. Retrieved from http://news. china.com/945/20161209/30072168.html. Wang Jian. (1988, January 5). The Conception of “International Great Cycle” Economic Development Strategy. Economic Daily. Wang Zixian. (1994). Some Issues on China’s Implementation of the “Great Economic and Trade Strategy”. Journal of International Trade, 10. Wang Zixian. (2000). Taking Competitive Advantage as the Guidance-Reflections on China’s Comparative Advantage and the Long-term Development of Foreign Trade. Intertrade, 1. Wang Zixian. (2014). China’s Opening Up Facing New Choices in the Era of Global Value Chain in the World Economy. Globalization, 5. Wang Chunhui, and Zhao Wei. (2014). Agglomeration Externalities and Regional Industrial Upgradation: A Theoretical Model from the Perspective of Regional Openness. Journal of International Trade, 4. Wang Linsheng, and Pei Changhong, et al. (1996, June 27). Discussion on How to Protect National Industry Effectively in the Process of Expanding Opening Up. Guangming Daily. World Bank. (2007). China’s Utilization of Foreign Investment: Prospects and Strategies. CITIC Press. Wu Nianlu. (1984). The Nature and Reform Direction of the RMB Exchange Rate. In China International Finance Society (Ed.). Collection of Discussion on RMB Exchange Rate. (p.116). China Financial Publishing House. Wu Yi. (2000, July 20). Implementing the Important Thought of “Three Represents” and Promoting Foreign Economic and Trade Work in an All-round Way. International Business Daily. Wu Cailin, and Li Xin. (2007). Reflection on Foreign Mergers and Acquistions: The Negative Impact of Foreign Mergers and Acquistions on China’s Economy and the Bottomline Analysis. Group Economics Research, 24. Xing Houyuan. (2007). Foreign Mergers and Acquisitions and National Security. Foreign Investment in China, 9. Xu Dixin. (1982). Special Administrative Regions and State Capitalism. Hong Kong and Macao Economy, 1. Yang Xiaoping. (1997, January 21). Foreign Capital is Not a Tiger: an Interview with Dr. Li Xiaoxi. China Business Times. Yao Zengyin. (1983). Foreign trade and development strategy. Intertrade, 6. Ye Qi. (2017). On the Construction of a New Pattern of China’s Opening up under the Supply-side Structural Reform. Modern Economic Exploration, 3. Yi Gang. (2007). Reasons and Institutional Factors Behind the Changes of RMB Exchange Rate. In Wang Mengkui (Ed.). China after the Asian Financial Crisis. (pp. 53–69.). China Development Press. Yin Yanlin. (1993). Exchange Rate Multitrack Integration and Moderate Management. China Financial & Economical Publishing House.

References

629

You Hongbing. (2001). Revitalizing Trade through Science and Technology: the Only Way for China to Become a Trade Power from a Trade Country”. Intertrade, 10. Yu Guantao. (1984). Reform of China’s Exchange Rate System. In China International Finance Society (Ed.). Collected papers on the RMB exchange rate. (p. 124). China Financial Publishing House. Yu Guangyuan. (1993). On the Nature of Special Economic Zone Economy. Economic Research Journal. Yu Xintian. (1999). The Evolution and Prospect of China’s Opening up Theory. Research on Mao Zedong and Deng Xiaoping Theory, 6. Yu Yongding. (2004). The Impact of FDI on China’s Economy. International Economic Review, 2. Yuan Wenqi. (1990). China Foreign Trade Development Model Research. China Commerce and Trade Press. Zhang Peiji. (1984a). Discussion on the Development Strategy of China’s Foreign Trade. Intertrade, 1. Zhang Zhichao. (1984b). On the Decision of Exchange Rate. In China International Finance Society (Ed.). Collection of Discussion on RMB Exchange Rate. (p. 167). China Financial Publishing House. Zhang Peiji. (1991). The Development and Prospect of China’s Foreign Trade. In World Economy and China’s Foreign Economic and Trade. China Commerce and Trade Press. Zhang Xiang. (1999, June 1). Revitalizing Trade with Science and Technology. China High-tech Industry Herald. Zhang Huilian. (2017). The Relationship between RMB Exchange Rate and Asset Price and Foreign Exchange Reserves. Economic Review, 6. Zhang Haiyuan, and Liu Muqian. (2017). Accelerating the Coordinated Development of Foreign Trade and Industry. Intertrade, 12. Zhao Wei. (2007). Institutional Transformation and Economic Growth Effect of Regional Openness: A Research Outline. Quest, 3. Zhao Wei. (2017). Regional Openness and Industrial Agglomeration: A Model Based on Transaction Cost Perspective. Journal of International Trade, 3. Zhong Pengrong. (1988). Four Changes in Foreign Trade System. Finance and Trade Economics, 7. Zhong Changbiao. (2001). The Mechanism of Promoting Technological Progress by Using Foreign Trade Links in China and the Key of Sustainable Utilization. Inquiry into Economic Issues, 3. Zhou Tianyong. (2017). The Changes of the Domestic and Foreign Economic Situation and the Adjustment of China’s Foreign Strategy. Contemporary World and Socialism, 2. Zhou Xiaochuan. (1988). On the Direction, Stage and Problems of Foreign Trade Reform. Intertrade, 2.

Chapter 19

The Construction of Socialist Political Economics with Chinese Characteristics

Since the 18th National Congress of the Communist Party of China in 2012, General Secretary Xi Jinping has proposed the historical task of constructing a socialist political economy with Chinese characteristics, and delivered a series of important speeches on how to construct a socialist political economy with Chinese characteristics. Therefore, the construction of socialist political economy with Chinese characteristics has become a hot topic of research and discussion in Chinese economic circles in recent years. Many good opinions and ideas have been put forward, and some issues worthy of further study have also been raised. This chapter intends to introduce some viewpoints and propositions in the research process of economics circles on how to better construct socialist political economy with Chinese characteristics.

19.1 The Socialist Political Economics with Chinese Characteristics Is an Important Part of the Theoretical System of Socialism with Chinese Characteristics General Secretary Xi Jinping emphasized during the 28th collective study session of the Political Bureau of the CPC Central Committee on November 25, 2015, that we need to develop contemporary Chinese Marxist political economy based on our country’s national conditions and development practices. On July 8, 2016, General Secretary Xi Jinping presided over an expert symposium on economic situation and pointed out that to adhere to and develop socialist political economy with Chinese characteristics, we must use Marxist political economy as the guidance to summarize and refine the great practical experience from our reform and opening up and socialist modernization construction, while drawing on the useful elements of Western economics. The socialist political economy with Chinese characteristics can only be enriched and developed in practice, and must be tested by practice so it can be used to further guide practice. It is necessary to strengthen research and © China Social Sciences Press 2023 Z. Zhang, Handbook of Chinese Economics, https://doi.org/10.1007/978-981-99-0420-4_19

631

632

19 The Construction of Socialist Political Economics with Chinese …

exploration, strengthen the understanding of regularity, continuously improve the theoretical system of socialist political economy with Chinese characteristics, and promote the construction of economic disciplines that fully reflect Chinese characteristics, Chinese style, and Chinese manner. In May 2017, the Central Committee of the Communist Party of China issued the “Opinions on Accelerating the Construction of Philosophy and Social Sciences with Chinese Characteristics”, proposing to accelerate the construction of a discipline system of philosophy and social sciences with Chinese characteristics. We need to consolidate the basic status of the firstlevel discipline of Marxist theory, strengthen the construction of Marxism-related disciplines in various disciplines of philosophy and social sciences, implement the innovation plan for the construction of ideological and political theory courses in colleges and universities, develop socialist political economy with Chinese characteristics, and enrich the development of Marxist philosophy, politics economics and scientific socialism. All of these are the magnificent tasks of constructing the political economy of socialism with Chinese characteristics that the Party Central Committee has clearly proposed for the first time since the reform and opening up. Chinese economists generally believe that contemporary Chinese Marxist political economics is the socialist political economics with Chinese characteristics. Since Deng Xiaoping proposed building socialism with Chinese characteristics in the opening speech of the Twelfth National Congress of the Communist Party of China in 1982, under the leadership of the Party, the cause of socialism with Chinese characteristics has been flourishing and prospering, and it has achieved remarkable achievements. With the continuous deepening of reform and opening up and rapid economic and social development, our understanding of socialism with Chinese characteristics, including the understanding of socialist political economics with Chinese characteristics, is also constantly deepening and developing. In particular, China’s reform and opening up began with the reform of the economic system, and opening to the outside world also began with the establishment of special economic zones and the use of foreign capital. It has always focused on economic reforms, which has brought the most and richest practical experience. Therefore, among the theoretical system of socialism with Chinese characteristics, the economic theory is the most prominent and the most systematic one. The economic theory of socialism with Chinese characteristics is the “pearl” of the entire theoretical system of socialism with Chinese characteristics. In October 1984, the Third Plenary Session of the Twelfth Central Committee of the Communist Party of China made the “Decision of the Central Committee of the Communist Party of China on Economic System Reform”, which, for the first time, proposed that China’s socialist economy is a planned commodity economy based on public ownership. This is the first major theoretical breakthrough since reform and opening up. Soon, Deng Xiaoping said at the Third Plenary Meeting of the Central Advisory Committee that “taking’ The Decision on Economic System Reform’ for instance, when the Central Committee passed this decision the day before yesterday, I said a few words. I said that my impression is that it is a first draft of political economy that combines the basic principles of Marxism with the

19.1 The Socialist Political Economics with Chinese Characteristics Is …

633

practice of socialism in China. This is my basic evaluation towards this.”1 In 1997, in the report of the 15th National Congress of the Communist Party of China, Jiang Zemin proposed that Deng Xiaoping Theory formed a theoretical system of socialism with Chinese characteristics: generally speaking, Deng Xiaoping Theory formed a new scientific system for building socialism with Chinese characteristics. For the first time, it answered a series of basic questions of China’s socialism in a relatively systematic way with discussions about the development path, development stages, fundamental tasks, development momentum, external conditions, political guarantees, strategic steps, the Party’s leadership and unity, and so on, which has guided our Party to formulate the basic line of the initial stage of socialism. It is a relatively complete scientific system that runs through the fields of philosophy, political economics, and scientific socialism, covering economics, politics, science and technology, education, culture, ethnicity, military, diplomacy, united front, and Party building and so on. It is also a scientific system that needs to be further enriched and developed in all aspects. In 2007, Hu Jintao pointed out in the report of the 17th National Congress of the Communist Party of China that the fundamental reason for all the achievements and progress we have made since the reform and opening up is that: the road to socialism with Chinese characteristics has been opened up and the theoretical system of socialism with Chinese characteristics has been formed. To hold high the great banner of socialism with Chinese characteristics, the most fundamental thing is to stick to this path and this theoretical system. The report made an authoritative statement on the path of socialism with Chinese characteristics and the theoretical system of socialism with Chinese characteristics. In 2011, Hu Jintao added “a socialist system with Chinese characteristics” to his speech at the celebration of the 90th anniversary of the founding of the Communist Party of China, and proposed that after 90 years of struggle, creation, and accumulation, the achievements that the Party and the people must cherish, persist for a long time and develop continuously are: opening up the road of socialism with Chinese characteristics, forming a theoretical system of socialism with Chinese characteristics and establishing a socialist system with Chinese characteristics. Since then, a unified structure of four aspects including banner, road, theoretical system and system has been formed. After the 18th National Congress of the Communist Party of China, with the deepening and advancement of reform and development, socialism with Chinese characteristics has made major new progress both in theory and in practice. Examples include the proposition of a series of new concepts, new ideas, and new strategies such as “five in one”, “the four pronged comprehensive strategy”, the three major strategies, China’s economic entry into a new normal, the five major development concepts, and supply-side structural reforms, and so on; furthermore, in addition to the banner, road, system and theoretical system of socialism with Chinese characteristics, the concept of socialist culture with Chinese characteristics was added; China has actively participated in and improved global economic and financial governance,

1

Selected Works of Deng (1993, p. 83).

634

19 The Construction of Socialist Political Economics with Chinese …

advocated the construction of a community of shared future for mankind, and is playing an increasingly important role in the international community. On May 17, 2017, in his congratulatory letter to the 40th anniversary of the founding of the Chinese Academy of Social Sciences, General Secretary Xi Jinping once again hoped that the comrades of the Chinese Academy of Social Sciences and the majority of philosophy and social science workers should build the disciplinary system, academic system and discourse system of philosophy and social sciences with Chinese characteristics, and make new and greater contributions in enhancing the international influence of China’s philosophy and Social Sciences! This includes the task of constructing contemporary Chinese Marxist political economics, that is, socialist political economics with Chinese characteristics. This is an important deployment for enriching and developing the theoretical system of socialism with Chinese characteristics. It is also an important task entrusted to Chinese economists, which is giving a huge boost to the research on contemporary Chinese Marxist political economics. To study the political economics of socialism with Chinese characteristics, it is necessary to have a good understanding of the reality of China’s socialist modernization, the pace of China’s reform and opening up, the development of China’s socialist market economics, and explore their regularities and conduct theoretical generalization so to help the smooth and healthy development of China’s socialist modernization drive. Since 2015, Chinese economists have carried out a lot of research and discussion on how to construct the political economics of socialism with Chinese characteristics, and there is a certain consensus in many aspects. For example, the object of the political economics of socialism with Chinese characteristics is to study the socialist production relations with Chinese characteristics, and at the same time, to study the approaches to develop socialist productivity with Chinese characteristics. We need to study the profound implication of such propositions as “development is the absolute principle”, the scientific outlook on development and the “five development concepts”; we need to study various aspects such as economic growth and the transformation of development methods, the realization of highquality development, as well as the supply-side structural reform and the construction of modern economic system, and so on. Some scholars pointed out that the construction of a theoretical system of socialist political economics with Chinese characteristics should be guided by the methodology of construction system structures in Marx’s “Das Kapital”. A logical relationship can be found from the structure of Marx’s political economics and the structure of Marx’s “Das Kapital” that research purpose determines research object, research purpose and research object determine research content, and research content determines system structure. The main research purpose of the current socialist political economics with Chinese characteristics is to improve and develop the socialist economic system, promote the development of productive forces, meet the needs of the people, and realize the development of each person. The research object determined by this purpose is to study the production mode of socialism with Chinese characteristics and its corresponding production relations and exchange relations. The research content determined by the research object is to study the approaches to improve and develop socialism.

19.1 The Socialist Political Economics with Chinese Characteristics Is …

635

Based on this purpose and object and with the realization of the free and comprehensive development of everyone and the realization of people’s happiness as the main line, under the guidance of the “Das Kapital” methodology, we can absorb the civilization achievements of other human economics, so that the construction of the theoretical system and discourse system of socialist political economics with Chinese characteristics will surely achieve a new leap.2 At the same time, there are different opinions on the design of the theoretical system of the socialist political economics with Chinese characteristics. Some scholars have pointed out that the theoretical innovation of socialist political economics with Chinese characteristics includes two major aspects: one is in the aspect of production relations, starting from the theory of the primary stage of socialism, the theory of economic systems is innovated; the second is in terms of productivity, starting from the level of productivity of the middle-income stage, the economic development theory is innovated. Some scholars believe that the theoretical system of socialist political economics with Chinese characteristics mainly includes four aspects, namely, the economic system and development stages, economic operation, economic development, and issues related to world economy and openness. Other scholars believe that analysis and demonstration should be carried out from three perspectives, namely, basic theories and basic systems (including basic economic system, distribution system, socialist market economic system, etc.), socialist economic operation (including government and market relations, industrial structure and industrial policies, fiscal and fiscal system reforms, etc.), and new political economics (including the theory and practice of new development concepts, supply-side structural reforms and China’s current economic policy choices).3 Regarding the research methods, some scholars have proposed that the research methods of the socialist political economics of with Chinese characteristics include at least three levels: one is the methodological level or the philosophical level, that is, the basic methods of Marxist dialectical materialism and historical materialism; the second is the level of theoretical research, such as abstract methods, unified methods of history and logic, methods combining normative analysis and empirical analysis, etc.; the third is the level with description of phenomena or with specific research techniques, such as statistical methods, and mathematical methods, etc.4

2

Zhao and Wang (2017). Yang (2018). 4 Ibid. 3

636

19 The Construction of Socialist Political Economics with Chinese …

19.2 The Mature Socialist Political Economics with Chinese Characteristics Originates from Mature Socialist Economic System with Chinese Characteristics and Basic Realization of Modernization Up to now, we have not written a recognized book of socialist political economics or socialist market economics with Chinese characteristics. Some economists believe that this is not due to the lack of efforts of Chinese economists. The important reason is that the level of productivity development under the socialist economic system with Chinese characteristics is not high enough, modernization has not yet been achieved, and the economic system is not yet mature and finalized. We all know that Marx wrote “Das Kapital”, exposing the regularity of the development of capitalist production methods and the inevitability of being replaced by socialism. The important reason for his going to London to write this masterpiece is because Britain was a country with a high level of capitalist economic development and a relatively mature economic system at that time. China began to implement reform and opening up at the end of 1978, and it has been 40 years now. The socialist market economy has developed rapidly. It has not only solved the food and clothing problem of the people quickly, but also reached a moderately prosperous level at the end of the twentieth century. We are going to build a moderately prosperous society in all respects by 2020 and continue to march towards modernization. However, by 2018, China has not yet entered the ranks of high-income countries, and there is still a long way to go before modernization is basically achieved. At the same time, the socialist market economic system has been established and is in the process of improvement. The basic framework of the socialist market economic system supported by the five pillars proposed by the Third Plenary Session of the 14th Central Committee of the Communist Party of China in 1993 has been established, but it is not mature enough and has not yet been finalized. In 1992, Deng Xiaoping predicted in his “Southern Talks”: “I am afraid it will take another 30 years before we will form a more mature and more finalized system in all aspects. The guidelines and policies under this system will also be more formalized.” There are still about four years away from the “30 years” which Deng Xiaoping mentioned. In 2013, the Third Plenary Session of the Eighteenth Central Committee of the Communist Party of China also proposed that by 2020, decisive results will be achieved in reforms in important areas and key links, and the reform tasks proposed in this decision will be completed, and a complete and comprehensive, scientific and standardized, and effective institutional system will be formed, which will bring higher level of maturity and finalization in all aspects. According to the spirit of the Third Plenary Session of the Eighteenth Central Committee of the Communist Party of China, the major areas and key links of the economy that need to be reformed to achieve decisive results are: state-owned assets supervision and management institutions should realize the transformation of their major functions towards capital management; central enterprises, especially parent companies of group companies, should establish and improve a

19.2 The Mature Socialist Political Economics with Chinese Characteristics …

637

modern enterprise system; the board of directors of state-owned holding companies shall implement the decision-making powers on major issues granted by the “Companies Act”; we need to eliminate ownership discrimination and guide the healthy development of the non-public economy; we need to implement a negative list system in investment and market access, eliminate market barriers, and oppose monopoly, in order to form a fair competitive market environment, we shall implement the separation of farmer’s contracting rights and management rights over land, and develop circulation markets for land management rights; we should improve the macro-control system to prevent systemic risks, gradually establish a comprehensive and classified personal income tax system, speed up the legislative progress of real estate taxes and advance reforms in accordance with the law; we also need to increase the proportion of direct taxes, continue to develop private banks, improve the financial market system, realize marketization of exchange rates and convertibility of RMB capital accounts, expand the proportion of middle-income earners, reduce the Gini coefficient, improve the transfer and continuation policy of social insurance relationship, and perfect the personal account system of basic endowment insurances; we also should continue to open up to the outside world and build a new system of open economy, etc. The above-mentioned reform tasks in “deep-water zones” are all arduous and can only be achieved with great efforts. Since modernization has not yet been basically achieved, and the economic system and institution for socialism with Chinese characteristics are not yet mature and finalized, so far, it has been difficult for us to make comprehensive, in-depth, systematic and accurate generalizations and discussions on the laws of development and operation of socialist economy with Chinese characteristics. However, economists emphasize that we cannot just wait and do nothing. In the past 40 years of reform and opening up, with the rapid economic growth and the overall progress of the society, a series of theoretical results that combine the principles of Marxist economics with the practice of reform and opening have emerged and been summarized, such as the theory of socialist market economy and the theory of the primary stage of socialism, basic economic system theory in the primary stage of socialism, the distribution theory which takes distribution according to work as the main body with coexistence of multiple modes of distribution, the progressive reform theory starting from the rural reform and advancing to the comprehensive deepening of the reform, the theory of the separation of collective ownership of rural land, farmers’ land contract rights and management rights of farmland, the theory of promoting social fairness and justice, and the gradual realization of common prosperity for all people, the theory developed from the “development is the absolute principle” to the “scientific outlook on development” and further to the “innovative, coordinated, green, open and shared development concept”, the theory of economic transformation and transformation of economic growth and development mode, the theory of China’s economy entering the new normal, the theory of promoting supplyside structural reform, the theory of promoting the coordination of new industrialization, informationization, urbanization and agricultural modernization, the theory of further opening up which includes making good use of the two markets both home and abroad and the two kinds of resources, and the theory of building a modernized

638

19 The Construction of Socialist Political Economics with Chinese …

economic system, etc. We must carefully study these series of important theories and clarify its scientific connotation. It is necessary to continuously study the fresh experience of reforms and the practice of building a moderately prosperous society in all respects way and the experience of building a modernized economic system, and make new theoretical generalizations to form a mature economic theory system under a basically modernized and mature economic system and institution. Therefore, from now on, we should take active actions to conduct systematic and in-depth research on the political economy of socialism with Chinese characteristics, and continue to produce new results. During the discussion of the approaches to speed up the construction of socialist political economics with Chinese characteristics, some economists suggested that the discipline positioning of socialist political economics with Chinese characteristics is: in terms of production relations, it belongs to the political economics of the primary stage of socialism; and as regard to the development level of GDP per capita, China has bid farewell to the low-income stage and has entered the middle-income stage. Therefore, the political economics of socialism with Chinese characteristics belongs to the political economics of socialism entering the middle-income development stage.5 Some experts think that this formulation is worth discussing. It is believed that China’s embarking on the path of socialism with Chinese characteristics began with the reform and opening up in 1978. In 1978, China’s per capita gross national income was only US$190, which is at a low-income stage. As the reform and opening up greatly liberated social productivity, China’s economy took off rapidly. According to World Bank standards, China began to enter the ranks of middle (lower) income countries in 1999, with a per capita GDP of nearly US$800 (according to the world bank standard, the per capita GNP of middle and lower income countries in 1999 was more than 756 US dollars, and that of China was 780 US dollars). In 2009, China again entered the ranks of middle (upper) income countries. In 2017, China’s per capita GDP was close to 9000 U.S. dollars, but it is still a long way from the ranks of high-income countries. Since China started to take the road of socialism with Chinese characteristics in 1978 when it was still at a low income level, the stage positioning of the political economics of socialism with Chinese characteristics should also take it as the beginning when the reform and opening up were implemented in 1978; the discussion of this issue should not be limited to the period of 1999 when China entered the ranks of middle income countries. Started when the middle-income countries rank. Second, the stage of middle income level is only a transitional stage. In the future, we must first build a moderately prosperous society in all respects way by 2020. On this basis, it is generally estimated that after at most another five or six years of hard work, our country will be able to enter the ranks of high-income countries. This is not enough. The goal of our country’s socialist construction is to realize socialist modernization and build China into a prosperous, strong, democratic, civilized, harmonious and beautiful modernized socialist country. We have seen that from the 14th National Congress to the 19th National Congress of the Communist Party of China, two centenary goals have been proposed and perfected, 5

Hong (2017).

19.2 The Mature Socialist Political Economics with Chinese Characteristics …

639

namely, building a moderately prosperous society in all respects when the party is founded 100 years ago, and achieving socialist modernization by the 100th anniversary of the founding of the country. The report of the 19th National Congress of the Communist Party of China pointed out that from the 19th National Congress of the Communist Party of China to the 20th National Congress of the Communist Party of China, it is the historical convergence period of the two centenary goals. We must not only build a moderately prosperous society in all respects and realize the first centenary goal, but also take advantage of the situation to embark on a new journey of building a socialist modern country in an all-round way and march towards the second centenary goal. Based on the comprehensive analysis of the international and domestic situation and our country’s development conditions, the period from 2020 to the middle of this century can be divided into two stages. In the first stage, from 2020 to 2035, on the basis of building a moderately prosperous society in all respects, we will strive for another 15 years to basically realize socialist modernization. In the second stage, from 2035 to the middle of this century, on the basis of basically realizing modernization, we will strive for another 15 years to build our country into a prosperous, democratic, civilized, harmonious and beautiful socialist modernized power. The report of the 19th National Congress of the Communist Party of China also put forward the task of building a modernized economic system: China’s economy has shifted from a stage of rapid growth to a stage of high-quality development, and is now in a critical period of transforming development methods, optimizing economic structure, and transforming growth momentum; the building of a modernized economic system is an urgent requirement to cross the strategic gateway and a strategic goal for China’s development. Therefore, the aim of political economics of socialism with Chinese characteristics is to properly study and answer the question of how China has developed from a low-income country to the ranks of high-income countries with continuous skips over the low-income traps and the middle-income traps, through implementing reform and opening up and taking the path of socialism with Chinese characteristics; it also needs to study and answer how China has further gradually realized modernization, built a prosperous, strong, democratic, civilized, harmonious and beautiful socialist modern power, and realized the great rejuvenation of the Chinese nation. Through revealing the inherent regularity and inevitability, these answers can also be used for reference by the vast number of developing countries. Therefore, the stage positioning of the political economics of socialism with Chinese characteristics involves a very long period of time. It includes at least the period after the reform and opening up in 1978 until the establishment of a modernized socialist power, so its content is very rich.6 According to the above, the so-called mature economy is not only associated with the maturity and finalization of the socialist market economic system, it seems that as of the level of productivity development, we must, at least, be able to skip the middle-income trap, stably enter the ranks of high-income countries, and further gradually realize socialist modernization. That is to say, the overall economic transformation include both the successful transformation of economic system and the 6

Zhang et al. (2018, pp. 296–297).

640

19 The Construction of Socialist Political Economics with Chinese …

transformation of economic development mode. If there is no comprehensive and systematic successful experience of economic transformation, it is difficult to appropriately summarize the regularity of the construction of socialism with Chinese characteristics. By the time China has achieved economic transformation, skipped the middle-income trap, and realized socialist modernization, its economic strength will reach a new level, and China’s ability to participate in global governance will be greatly enhanced. Of course, this does not mean that we have not yet achieved anything in constructing the political economics of socialism with Chinese characteristics. In the 40 years since the reform and opening up, China’s total economic output has become the second largest in the world since 2009. The socialist economic construction with Chinese characteristics has accumulated a wealth of successful experience and summarized a series of important theories on this basis. As General Secretary Xi Jinping pointed out during the 28th collective study session of the Political Bureau of the CPC Central Committee, “Since the Third Plenary Session of the 11th Central Committee of the Party, our party has combined the basic principles of Marxist political economy with new practices in reform and opening up, constantly enriched and developed Marxist political economy, and has formed many important theoretical achievements of contemporary Chinese Marxist political economics. These theoretical achievements, for example, include the theory on the essence of socialism, the theory on the basic economic system in the primary stage of socialism, the theory on establishing and implementing the development concept of innovation, coordination, green, openness, and sharing, and the theory of developing socialist market economy, making the market play a decisive role in the allocation of resources and giving better play to the role of the government, the theory of China’s economic development entering the new normal, the theory of promoting the coordination of new industrialization, informationization, urbanization and agricultural modernization, the theory of making good use of the two markets both home and abroad and the two kinds of resources, and the theory of promoting social fairness and justice and gradually realizing the common prosperity of all the people, and so on. All these theoretical achievements are political economics adapted to the national conditions and characteristics of the times in contemporary China. They have not only guided the practice of economic development in our country, but also opened up a new realm of Marxist political economics.”7 It can be seen that we are currently in the stage of constructing the “four beams and eight pillars: of the political economics of socialism with Chinese characteristics. The mission is glorious and the responsibility is heavy. We must make great efforts to do this work well.

7

People’s Daily. (2015, November 25).

19.3 Seeking the Main Line of Socialist Political Economics with Chinese …

641

19.3 Seeking the Main Line of Socialist Political Economics with Chinese Characteristics The political economics of socialism with Chinese characteristics is a new subject and a new theoretical system. What is the main line or main pillar of this new system? It is the major issue that we must first solve and identify when we research and build this new system. The main line generally refers to the main line that runs through the theoretical system. It determines the important categories in the theoretical system and marks the unique and high-level regulations of the theoretical system. The main line of Marx’s “Das Kapital” is the exploitation of labor by capital and the distribution of surplus value. When China’s older generation of economists Sun Yefang organized the compilation of “On Socialist Economics” in the early 1960s, he proposed to follow the writing method by which Marx wrote “Das Kapital”, namely, to carry out the discussion from the direct angles of production process, circulation process and the total process of capitalist production, and to use the “minimum and maximum” approach, that is, to take “using the minimum labor consumption to achieve the greatest useful effect” as the main line of the book, advocating to give full play to the regulation of the law of value on production and circulation. Sun Yefang’s proposition at that time was undoubtedly a useful exploration in the traditional planned economy period. In order to build a socialist political economics with Chinese characteristics, the approaches to determine its main line is a major issue that requires the economics community to brainstorm and explore seriously. Some economists (such as the author of this chapter) believe that the main pillar of socialist political economics with Chinese characteristics is the theory of socialist market economy, and the main line is the combination of socialism and market economy, and the combination of public ownership and market economy. Since the reform and opening up, China has gradually introduced market mechanisms, established the theory of socialist commodity economy in 1984, and further established the socialist market economic system as the goal of economic system reform in 1992, making it clear that the development of a socialist economics with Chinese characteristics is the development of a socialist market economy. With the continuous advancement of market-oriented reforms, our country’s economy has taken off rapidly, with an average economic growth rate of 9.5% from 1979 to 2017, creating a new miracle of long-term rapid growth of human society and economy. Practice has proved that it is correct and effective to develop a socialist market economy based on our country’s national conditions. In this context, the theory of socialist market economy has become the main pillar of socialist political economics with Chinese characteristics. The core of the theory of socialist market economy is the combination of socialism and market economy. Therefore, the combination of socialism and market economy and the combination of public ownership and market economy have naturally become the main line of socialist political economics with Chinese characteristics.

642

19 The Construction of Socialist Political Economics with Chinese …

Scholars holding this view published a long article in Guangming Daily on December 7, 2008, titled “Theory of Socialist Market Economy: The Main Theoretical Pillar of China’s Reform and Opening-up.” The article stated that China is developing under socialist conditions. The market economy is an unprecedented great pioneering work and a brand new subject. The theory of socialist market economy summarized on the basis of successful practice is a major theoretical innovation of scientific socialism by Chinese Communists and Marxist economists, and an epochmaking contribution to economic science. The construction of a socialist economics with Chinese characteristics is the development of a socialist market economy. The theory of socialist market economy is naturally in the most important position in China’s characteristic socialist political economy. The connotation of the socialist market economy theory has been continuously developed with the deepening of reforms. In 1992, when the 14th National Congress of the Communist Party of China established the goal of reforming the socialist market economy system, it proposed that “we need to make the market play a fundamental role in the allocation of resources under the macro-control of socialist countries.” In 2002, the 16th National Congress of the Communist Party of China further proposed to “give the market’s fundamental role in resource allocation to a greater extent and improve a unified, open, competitive, and orderly modern market system.” In 2012, the Eighteenth National Congress of the Communist Party of China further proposed that “the market’s fundamental role in resource allocation needs to be given to play to a greater extent and with a wider scope”. In 2013, the Third Plenary Session of the Eighteenth Central Committee of the Communist Party of China decided to elevate the fundamental role of the market to a decisive role, proposing to “make the market play a decisive role in the allocation of resources and make the government play a better role”. “Market plays a decisive role in the allocation of resources” is the inheritance and development of the basic statement that has been handed down and used since the last 20 more years, and its main orientation includes the following three points. First, we need to solve the problem of excessive government intervention in the allocation of resources; second, we should solve the problem of an imperfect market system and truly form a market environment for fair competition; third, we also need to eliminate some discriminatory regulations on the non-public economy, including eliminating such problems as the setting of hidden barriers, and so on. The difficulty of the argument of the theory of socialist market economy lies in whether public ownership can be combined with market economy. Western economics denies that a market economy can be developed under socialist conditions. China’s practice after reform and opening up overturned this conclusion. After the reform and opening up, we have found effective forms of realization of public ownership such as shareholding system and mixed ownership system, so we have found the form and approach which takes public ownership as the combination of state ownership and market economy. Because state-owned enterprises’ reform into modern companies with state-owned holding or equity participation, and the implementation of independent management and self-financing can turn them into real market players, so they can actively participate in domestic and foreign market competition and strive to develop themselves in fair market competition. After the

19.3 Seeking the Main Line of Socialist Political Economics with Chinese …

643

reform and opening up, our country’s economy has risen rapidly, and both the stateowned economy and the non-public economy have experienced great development in practice, which has effectively solved the difficult problem of the socialist market economy theory. Under the conditions of the socialist market economy, the combination of public ownership and the market economy is conditional and compatible with each other. On the one hand, public ownership must find a form of realization such as jointstock system to integrate itself with the market economy, and since it is a joint-stock system, this market economy cannot be the one that is dominated by the public-owned economy, but should the one that includes multiple ownership systems with the coexistence and mutual development of individual, private and foreign-funded economies. On the other hand, the development of the market economy also needs to adapt to the goal of socialism to gradually achieve common prosperity, and cannot cause the gap between the rich and the poor and polarization like the capitalist market economy. The purpose of government’s various policies is to seek to fully utilize the advantages of socialism in maintaining fairness and justice and in promoting the efficiency of resource allocation by the market economy. Of course this is an extremely difficult task. For example, it is a very difficult subject to handle the relationship between the government and the market and let the market play a decisive role in the allocation of resources, and at the same time, to better play the role of the government. For another example, the Third Plenary Session of the 14th Central Committee of the Communist Party of China in 1993 determined that the direction of state-owned enterprise reform was to establish a modern enterprise system. After more than two decades of reforms, state-owned enterprises have basically realized the reform of the joint-stock company system. At the same time, the modern enterprise system still needs to be improved. Many central enterprises and group companies will have to advance the reform of the joint-stock company system until 2017 to establish a modern enterprise system; the board of directors of some state-owned holding companies have not been able to perform their duties as stipulated in the company law, and the environment for fair competition between state-owned enterprises and non-public enterprises still needs to be improved. Many people do not treat private enterprises and entrepreneurs as their own “family members” and various obstacles have been set up in terms of access and loans, and financing costs have been increased. In addition, it is even more difficult to guide the development of the socialist market economy to achieve the goal of common prosperity. In this regard, we should consolidate and improve the basic economic system with public ownership as the main body and with the common development of multiple ownership economies, improve the distribution system with “distribution according to work” as the main body and with coexistence of multiple distribution methods, and continuously improve the redistribution function of fiscal and taxation systems to promote the sharing of development achievements by all people, and perfect the supporting function of various social policies, including targeted poverty alleviation and comprehensive poverty alleviation, and so on. The combination of socialism and the market economy and the combination of public ownership and the market economy is the core of the development

644

19 The Construction of Socialist Political Economics with Chinese …

of the socialist market economy. It runs through all aspects of socialist market economic activities. The socialist market economic system is constantly improving and maturing in the process of promoting this organic combination; it is also through this process that the development of social economy is continuously promoted. Therefore, when we construct socialist political economics with Chinese characteristics, we must take the combination of socialism and market economy, and the combination of public ownership and market economy as the main line to implement and form a logically rigorous and structured theoretical system. Some economists have published articles and believe that the theme and direction of the research on the political economics of socialism with Chinese characteristics is the integration and unification of the basic socialist economic system and the market economy. We believe that adhering to the reform direction of the socialist market economy is not only a basic principle that needs to be adhered to in the practice of reform and development in our country, but also the theme of the political economics of socialism with Chinese characteristics. The core of this theme lies in how to unify the socialist basic economic system of our country, in which the public ownership is the main body and multiple ownership economies develop together, with the market economy. This involves at least two aspects: on the one hand, how the socialist basic economic system, especially the public ownership economy as the main body, can be organically integrated with the market economy; on the other hand, how to organically integrate government regulation and market regulation so that the market can play a decisive role in the allocation of resources and the government can better play its role in areas such as macro-control and market failure.8 At the same time, some different points of view were also raised during the discussion. Some scholars believe that the core content of the main line of the political economics of socialism with Chinese characteristics is to liberate, develop and protect productive forces. The construction of the theoretical system of socialist political economics with Chinese characteristics is to establish a systematic economic theory of liberation, development, and protection of productive forces.9 However, some economists believe that such an expression cannot effectively reflect the unique essential provisions of the political economics of socialism with Chinese characteristics, especially the difference between the political economics of socialism with Chinese characteristics and the traditional socialist political economics. The difference is that the traditional socialist economic system, based on public ownership, implements a planned economy and “distribution according to work”. For a long time at the beginning, due to its advantages such as that efforts made are more concentrated to do major tasks, it did effectively promote economic growth. Therefore, traditional socialist political economics has always advertised that socialism is capable of liberating and developing productive forces. In addition, even slave society, feudal society, and capitalist society can emancipate and develop productive forces when they are on the rise. Therefore, many mainstream Western economists still believe that the capitalist system is beneficial to the development of productive 8 9

Liu (2016). Hong (2017).

19.3 Seeking the Main Line of Socialist Political Economics with Chinese …

645

forces. The most prominent feature of socialist political economics with Chinese characteristics is to develop a market economy under a socialist system with public ownership as the mainstay, and to be able to combine and exert the advantages of both socialism and market economy, so as to achieve continuous liberation and development of productive forces, which also includes the protection of productive forces. The difference between the socialist economics with Chinese characteristics and the traditional socialist economics is that it implements reform and opening up, implements the socialist market economic system, and continuously liberates and develops productive forces. As pointed out in the report of the 15th National Congress of the Communist Party of China, building a socialist economy with Chinese characteristics means to develop a market economy under socialist conditions and to continuously liberate and develop productive forces. Therefore, for the socialist economics with Chinese characteristics, the most essential feature that distinguishes it from other systems and institutions is that it implements a socialist market economic system and develops a socialist market economy.10 Some scholars believe that the main line of socialist economics with Chinese characteristics is development. Scholars holding this opinion pointed out that the new system of socialist economic theory with Chinese characteristics mainly includes the following aspects. The first aspect is related to the research object; it is advocated that the research object determined according to the essence of socialist society and the tasks of the times is to study both production relations and productive forces. That is, to liberate the productive forces by continuously deepening the reform and continuously adapting production relations with productive forces, and develop productive forces by studying the operation law of the productive forces. The second aspect is about the main logical line. The main logical line determined by the basic contradictions in the primary stage of socialism is development. The third is related to the theoretical framework, that is, by focusing on the logical main line of development, we need to explain the concept, category, principle, and operating mechanism of the economic theory of socialism with Chinese characteristics from the aspects of development concept, development goal, development aim, development speed, development transformation, development motivation, development path, development resources, development environment and development system, and so on.11 In short, how to find convincing main lines, themes, and main categories of the political economics of socialism with Chinese characteristics seems to be an issue worthy of our further and attentive study and discussion.

10 11

Zhang et al. (2018, pp. 201–302). Huang (2017).

646

19 The Construction of Socialist Political Economics with Chinese …

19.4 Exploring the Basic Laws of Socialist Economy with Chinese Characteristics In the 1950s, the basic economic laws that prevailed in traditional socialist political economics was given by Stalin in the book Soviet Socialist Economic Issues; and the main features and requirements of the basic socialist economic laws can be roughly expressed as follows. The method of continuous growth and continuous improvement of socialist production on the basis of high technology is used to ensure that the material and cultural needs of the entire society that are constantly growing are met to the greatest extent. The biggest problem with this formula that has dominated the economic circles of socialist countries for decades is that it has not adjusted and reformed the content of production relations and economic systems. Under the influence of this formula, some socialist countries, including the Soviet Union, have become intoxicated with the superiority of the socialist system and did not think about making changes, and they fails to adjust and innovate the production relations and economic system in time to adapt to the development of social productive forces. Therefore, it is impossible to have continuous technological progress and innovation. The so-called use of high technology to enable continuous growth and continuous improvement of socialist production will inevitably fail. At the same time, it will not be able to meet the material and cultural needs of the entire society as a whole, and it will also be difficult for the superiority of the socialist system to play its part. Starting from the late 1950s, the economic growth of the Soviet Union and Eastern European countries gradually slowed down, economic efficiency increased very slowly, and technological progress was also very slow. This is exactly the important reason for the disintegration of the Soviet Union in 1989 and the subsequent drastic changes in Eastern Europe. So, what are the basic laws of the socialist market economy with Chinese characteristics? This is a completely new issue. Some people believe that, first of all, since the socialist market economy is also a market economy, the basic laws governing the market economy are naturally the basic laws of the socialist market economy. It is generally believed that the law of value is the basic law of market economy, because Engels said in the Anti-Duhring Theory that “the law of value is the basic law of commodity production.”12 Commodity production, commodity economy, and market economy are within the same domain. Under the conditions of socialized production, commodity economy is market economy. Therefore, the basic law governing commodity production is the law of value, which is the basic law governing market economy. It is also the basic law governing the socialist market economy. This means that under the conditions of a socialist market economy, the law of value is the regulator of social production and circulation, and the market plays a decisive role in the allocation of resources. Regarding the law of value, Marx made a comprehensive and in-depth exposition in Das Kapital, which is still the criterion for our understanding of the law of value. The so-called the law of value means 12

Selected Works of Deng (1993, p. 351).

19.4 Exploring the Basic Laws of Socialist Economy with Chinese …

647

that the value of a commodity is determined by the socially necessary labor time condensed in the commodity. The price of a commodity in the market is determined by its value and fluctuates around the value. For producers with high technical level and high quality of labor, their individual labor consumption of producing goods will be lower than the socially necessary labor consumption, and will be put in an advantageous position in market competition. On the contrary, they will be placed at a disadvantage or even will be eliminated through market competition. The mechanism of the law of value is that if the supply of a certain commodity in the market exceeds demand, the price of this commodity will rise, which will stimulate producers and operators to increase supply while suppressing demand. Therefore, over a period of time, there will be an oversupply of this commodity in the market, which will cause prices to fall, prompting producers and operators to reduce supply while stimulating consumption, and then commodity prices will rise again. This cycle continues in this way so to maintain the coordination between supply and demand, and between production and consumption. The role of the law of value is inseparable from the influence of market mechanism, price mechanism, supply and demand mechanism, and competition mechanism. The law of value gives all market entities the strongest pressure and the greatest encouragement, urging them to seek advantages and avoid disadvantages. Under the action of the law of value, scarce resources are automatically allocated to the most efficient links, thereby promoting the development of production and the growth of wealth. It needs to be pointed out that the law of value is the basic law of socialist economy. The famous Chinese scholar Sun Yefang has put forward very close implication as early as the 1950s and 1960s. He published an article in 1956 with the title “Placing Planning and Statistics on the Basis of the Law of Value” (Economic Research, Issue 6, 1956). In 1964, he made it clear at a theoretical symposium that although there are thousands of rules, or even ten thousand rules, and the law of value should be the first rule.13 After the reform and opening up, in 1979, Deng Liqun also said, “some comrades believe that the concept of working in accordance with economic laws should be specific, which mainly means that we should carry out our work in accordance with the laws of commodity economy and the law of value. Management system, economic policies, and the work of planning should all act in accordance with the laws of commodity economy… I agree with this opinion.”14 Either the saying that “the law of value is the first rule”, or the principle of doing our work according to the law of value, is very close to the implication that the law of value is a basic economic law. At the same time, we must also realize that the role of the law of value will bring some negative effects on economic and social development. Under the law of value, the mechanism of survival of the fittest will cause income disparity and polarization in which the rich get richer and the poor get poorer, which will trigger social contradictions and conflicts, and impair social stability. When Marx and Engels talked about the role of the law of value under the capitalist system, they borrowed the 13 14

Thousand Law, Ten Thousand Law, The First Law of Value. In Sun (1979). Deng (1979).

648

19 The Construction of Socialist Political Economics with Chinese …

words of the classical bourgeois economist Adam Smith: “This relationship is like the god of fate in ancient times, who uses the invisible hand to distribute happiness and disasters in the world.”15 Driven by the law of value, various manufacturers are trying their best to expand production and strive to increase market share, but the purchasing power in the market cannot keep up with the increase in supply, which triggers cyclical economic crises. The competition mechanism of the law of value will lead to monopoly, and monopoly will inhibit competition, hinder technological progress and weaken economic vitality. The law of value cannot effectively solve the externality problems in economic activities, especially the problems of protecting the ecology and the environment. Therefore, even developed capitalist countries are taking various measures to varying degrees, implementing certain fiscal, monetary, and social policies in an attempt to alleviate the negative impact of the invisible hand of the law of value on the economy and society. However, it has not been possible to fundamentally solve the above-mentioned problems, including the economic and financial crises that have caused headaches for all countries. The basic economic laws must also reflect the purpose of social production. The reason why capitalism is always unable to get rid of the economic crisis is because the production purpose of the capitalist market economy is to pursue the maximum profit. The pursuit of the maximum profit by capital makes its ever-expanding production capacity often surpass the needs with social purchasing power. The vast majority of workers are trapped in poverty due to the exploitation of capital. In contrast, under the conditions of a socialist market economy, the purpose of production and development is to benefit the people and to share the fruits of reform and development. In the report of the 17th National Congress of the Communist Party of China, Hu Jintao put forward the concept of sharing by pointing out that serving the people wholeheartedly is the fundamental purpose of the Party, and all the efforts made and work of the Party’s are aimed at the benefit of the people. We must always regard the realization, maintenance and development of the fundamental interests of the overwhelming majority of the people as the starting point and goal of all work of the Party and the country, respect the dominant status of the people, give play to the pioneering spirit of the people, protect the rights and interests of the people, and take the path of common prosperity, so to promote the all-round development of the people. In doing so, we can realize the goal that development is for the people, development depends on the people, and the fruits of development are shared by the people. General Secretary Xi Jinping further listed “sharing” as one of the five development concepts. In the report of the 19th National Congress of the Communist Party of China, he said: improving people’s livelihood and welfare is the fundamental goal of development. We must seek more benefits and resolve more worries for the people’s livelihood, make up for shortcomings in people’s livelihood, promote social fairness and justice in development, and make continuous and new progress in providing the young with nurturing care, providing the students with education, providing the labors with income, providing the sick with medical care, providing the elderly with nursing care, providing the residents with housing, and providing the 15

Selected Works of Marx and Engels (1972, p. 40).

19.4 Exploring the Basic Laws of Socialist Economy with Chinese …

649

weak with support; we should also make in-depth efforts to alleviate poverty, ensure that all people have more sense of gaining on the path of joint construction and sharing to achieve development, and continuously promote the all-round development of the people and the common prosperity of all the people. The above illustrates that the laws that play a dominant role under the conditions of a socialist market economy do not only include the law of value, but also include the sharing law of development achievements which reflects socialist fairness and justice. This is also the basic law of the socialist market economy. The sharing law of development achievements requires everyone to share the results of economic and social development and gradually achieve common prosperity. This fundamentally put an end to the overproduction crisis of capitalism. To share development achievements, first of all, in terms of primary distribution, the implementation of distribution according to labor and other factors focuses on both efficiency and equity. Second, we need to implement financial transfer payments and various progressive tax systems; redistribution should be carried out after the realization of poverty alleviation, the establishment and improvement of social security system and social assistance system, and so on. The redistribution process should focus on fairness, and we need to gradually narrow the gap between wealth and income, and strive to reduce the Gini coefficient to around 0.3. During redistribution, we should give better play to the role of the government, and use the visible hand to solve the problem caused by the failure of the invisible hand. Under the conditions of a socialist market economy, the visible hand, which reflects respect for the sharing law of development achievements, is not a subjective fabrication, and it is not something that people can take action on arbitrarily. It is an objective necessity endogenous to socialism and public ownership. Therefore, the policies of socialist countries, especially economic policies, must not only respect the requirements of the law of value, but also follow the requirements of the sharing law of development achievements. The proposition of taking the law of value and the sharing law of development achievements as the basic law of the socialist market economy is consistent and logical with previous scholars’ proposition that the main line of the political economics of socialism with Chinese characteristics is the combination of socialism and market economy. Socialism corresponds to the sharing law of development achievements, while market economy corresponds to the law of value. Together, they determine the direction and process of the development of the socialist market economy. Some economists have pointed out that under the conditions of a socialist market economy, the law of value and the sharing law of development achievements are not parallel and independent; instead, they take effect through mutual penetration and integration. There is no primary and secondary priority between the two; instead, both laws jointly dominate the operation and development of the socialist market economy. If the government’s various policies and the behaviors of various market entities can follow the basic economic rules effectively, the development of the socialist market economy can be smoothly promoted and their own advantages can also be given into full play. On the contrary, if people’s actions do not meet the requirements of objective laws, they will be punished, run into obstacles everywhere, and even encounter

650

19 The Construction of Socialist Political Economics with Chinese …

failure. Of course, people’s understanding and adapting to objective economic laws, including basic economic laws, is also a process of continuous exploration, and sometimes a trial and error process. The continuous accumulation of practical experience and the deepening of the understanding of objective economic laws, especially basic economic laws, will gradually lead people’s way towards the beautiful other side with high proficiency.16

References Deng Liqun. (1979). The Law and Plan of Commodity Economy. (p. 25). People’s Publishing House. Hong Yinxing. (2017, May 5). Promoting the Construction of Theoretical System of Political Economy of Socialism with Chinese Characteristics. Chinese Social Sciences Today. Huang Taiyan. (2017). Promoting Economic Theory Innovation in Development Practice. Economic Research Journal, 1. Liu Wei. (2016, August 1). Constructing Political Economy of Socialism with Chinese Characteristics in New Practice. People’s Daily. Selected Works of Marx and Engels. (1972). Vol.3. People’s Publishing House. Selected Works of Deng Xiaoping. (1993). Vol.3. People’s Publishing House. Sun Yefang (Ed.). Some Theoretical Problems of Socialist Economy. People’s Publishing House, 1979. Yang Xinming. (2018, November 19). New Progress in the Study of Political Economy of Socialism with Chinese Characteristics. People’s Daily. Zhang Zhuoyuan, Hu Jiayong, and Wan Jun. (2018). Forty Years of China’s Economic Theory Innovation. China Renmin University Press. Zhao Min, and Wang Jinqiu. (2017, April 12). Focusing on Constructing Political Economy of Socialism with Chinese Characteristics. Economic Information Daily.

16

Zhang et al. (2018, p. 306).

Postscript

This book Handbook of Chinese Economics was updated on the basis of 30 Years of Chinese Economics published by China Social Sciences Press in 2008. We are very pleased that it was published for the 40th anniversary of reform and opening up. This book is edited by Zhang Zhuoyuan. The authors of each chapter are: Zhang Ping: Chapter One. Zhang Zhuoyuan: Chapters Two, Four, Five, Six, Seven (with Lu Yao), Nine and Nineteen. Wan Jun: Chapter Three. Cheng Jinzhui: Chapters Eight and Seventeen. Gao Peiyong: Chapter Ten. Zhang Lei: Chapter Eleven. Hu Jiayong: Chapters Twelve and Thirteen. Zhang Lin: Chapter Fourteen. Li Guangan: Chapter Fifteen. Liu Xuemin, Zhu Jing: Chapter Sixteen. Li Xiaoxi, Su Xuxia: Chapter Eighteen. We would also like to express our sincere thanks to Dr. Cheng Jinzhui, who has done a lot of complicated work in organization and liaison. Zhang Zhuoyuan.

© China Social Sciences Press 2023 Z. Zhang, Handbook of Chinese Economics, https://doi.org/10.1007/978-981-99-0420-4

651

References

Bo Yibo. (1991). Review of Some Major Decisions and Events. Party School Press of the CPC Central Committee. Cao Hongjun. (2005). Foreign Investment Mergers and Acquisitions and the Adjustment of Foreign Investment Policy in China. People’s Publishing House. Cao Junwei. (2006). On the Stage of Utilizing Foreign Capital. Shanghai Academy of Social Sciences Press. Chen Dongqi (Editor-in-Chief). (2004). History of Chinese Economics: 1900–2000. China Youth Press. Chen Dongqi (Editor-in-Chief). (2004). Outline of China’s Economic History: 1900–2000. China Youth Press. Chen Qiwei. (1986). On international competition. Xuelin Press. Cheng Zhiping. (2006). Thirty Years of Price Reform (1977–2006), China Market Press. Chi Fulin (Editor-in-Chief). (2014). Market Decisions. China Economic Press. Chi Fulin (Editor-in-Chief). (2018). Dynamic Changes. China Workers Press. China Tax Yearbook Editorial Committee. (2007). China Tax Yearbook (2007). China Taxation Press. China’s Economic Growth Frontier Research Group. (2013). Structural Characteristics, Risks and Efficiency Improvement Paths of China’s Economic Transformation. Economic Research Journal, 10. Chinese Association of Regional Economics. (1991). The New Starting Point of Regional Economic Research. Economy and Management Publishing House. Decision of the Central Committee of the Communist Party of China on Several Major Issues Concerning Comprehensively Deepening Reform. Beijing: People’s Publishing House, 2017. Decisive Victory in Building a Moderately Prosperous Society in all respects and Winning the Great Victory of Socialism with Chinese Characteristics for a New Era. People’s Daily, 1, October 28, 2017. Department of Finance and Taxation System Reform, Ministry of Finance. (1889). Ten Years of Fiscal and Taxation Reform. China Financial and Economic Publishing Press. Department of Economics, Renmin University of China (Ed.). (1960). Political Economy (Socialism). Renmin University of China Press. Development Research Center of the State Council, Research Group, Upgrading Strategy of Emerging Powers’ Competitiveness, China Development Press, 2016. Ding Bing, et al. (2006). Study on China’s Utilization of Foreign Investment and Foreign Trade. Economic Press China. Dong Fuchu. (1979). On the Form of Socialist Ownership in China. Economic Research Journal, 1. © China Social Sciences Press 2023 Z. Zhang, Handbook of Chinese Economics, https://doi.org/10.1007/978-981-99-0420-4

653

654

References

Dong Minjie, and Liang Yongmei. (2013). Sources of China’s Economic Growth from 1978 to 2010: A Non-parametric Decomposition Framework, Economic Research Journal, 5. Editorial Committee of China Financial Yearbook. (2007). China Financial Yearbook (2007), China Finance Magazine Publishing Press. Editorial and Publication Committee of Chinese Society of International Trade (Ed.). (2003). Situation and Countermeasures: Development and Reform of China’s Foreign Trade and Economic Cooperation. China Commerce and Trade Press. Editorial department of Economic Research Journal. (1985). Debates on Theoretical Issues of Socialist Economy since the Founding of the People’s Republic of China: 1949–1984. China Finance and Economy Press. Editorial Board of the Economic Research Journal. (2002). Debates on China’s Economic Theories: 1990–1999. China Financial and Economic Publishing. Excerpts from Xi Jinping’s Discussion on Socialist Economic Construction. Beijing: Central Literature Publishing Press, 2017. Fan Yongming. (1992). China’s Industrialization and Foreign Direct Investment. Shanghai Academy of Social Sciences Press. Fang Sheng (Ed.). (1991). China’s Economy toward Openness. The Economic Daily Press. Feng Lei, et al. (2004). Economic Globalization and China’s Trade Policy. Economic and Management Publishing House. Feng Jinju (Editor-in-Chief). (2004). Hot and Tough Issues of Political Economy. Higher Education Press. Gao Shangquan. (2018). Forty Years of Reform and Opening up in China. People’s Publishing House. Ge Zhida. (1963). The Integrated Balance of Finance Credit and Materials. Economic research Journal, 10. General Planning Department of the National Economic System Reform Commission. (1988). China’s Reform Ideas, Shenyang Publishing Press. General Planning Department of National Economic Restructuring Commission. (1988). Great Ideasof China’s Reform. Shenyang Publishing Press. Gong Yuzhi, et al. (2003). Mao Zedong’s Reading Life. Central Literature Press. Gong Yuzhi. (1998). The Theory, Line and Program of the Primary Stage of Socialism in China. Journal of the Party School of the CPC Central Committee, 1. Guan Tao. (2016). The Nature of Exchange Rate. CITIC Press. Guide Book of the Report of the 19th National Congress of the Communist Party of China. People’s Publishing House, 2017. Guidance Book of the Report of the 19th National Congress of the Communist Party of China. People’s Publishing House, 2017. Han Kexin. (1990). Modern International Economic and Trade Issues. China Commerce and Trade Press. Hao Shouyi, and An Husen. (Eds.). (1999). Regional Economics. Economic Science Press. Hu Zucai (Editor-in-Chief). (2016). Study Guide of the Opinions of the CPC Central Committee and the State Council on Advancing the Price Mechanism Reform. People’s Publishing House. Hu Jintao. (December 19, 2008). Speech at the Conference Commemorating the 30th Anniversary of the Third Plenum of the Eleventh CPC Central Committee. People’s Daily. Hu Jintao. (2007, October 15). Holding High the Great Banner of Socialism with Chinese Characteristics and Striving for New Victory in Building a Moderately Prosperous Society in an All-Round Way-Report to the 17th National Congress of the Communist Party of China. Hu Jintao. (2011, July 1). Speech at the Conference Celebrating the 90th Anniversary of the Founding of the Communist Party of China. People’s Daily. Huang Xiaodong. (2008). Study on the Growth of China’s Foreign Exchange Reserves. Southwestern University of Finance and Economics Press. Huo Jianguo. (2004). China’s Foreign Trade and National Competitive Advantage. University of International Business and Economics Press.

References

655

Institute of Economics and Resource Management, Beijing Normal University. (2003). Report on China’s Market Economy in 2003. China Commerce and Trade Press. Institute of Economics and Resource Management, Beijing Normal University, Beijing Normal University. (2010). China Market Economy Development Report 2010. Beijing Normal University Press. Jiang Xiaojuan. (2002). The Contribution of Foreign Investment to Growth, Structural Upgradation and Competitiveness in China. China Renmin University Press. Jiang Zemin. (1997, September 12). Holding High the Great Banner of Deng Xiaoping Theory and Pushing the Cause of Building Socialism with Chinese Characteristics to the Twenty-first Century in an All-round Way. Jiang Xiaojuan and Liu Shijin. (1996). How Competitive Industries Realize Production Concentration: An Empirical Analysis of China’s Refrigerator Industry. Management World, 1. Jiang Xiaojuan, Yang Shengming, and Feng Lei (Ed.). (2003). China’s Foreign Economic and Trade Theory Frontier 3. Social Sciences Academic Press. Jiang Zemin. (1992). Speeding Up the Pace of Reform and Opening Up and Modernization to Win a Greater Victory in the Cause of Socialism with Chinese Characteristics–Report to the 14th CPC National Congress. People’s Publishing House. Jiang Zemin. (1997). Holding High the Great Banner of Deng Xiaoping Theory and Pushing the Cause of Building Socialism with Chinese Characteristics to the 21st Century in an All-round Way—Report to the 15th CPC National Congress. People’s Publishing House. Li Lanqing (Ed.). (1995). The Basic Knowledge of Foreign Capital Utilization in China.China Commerce and Trade Press. Li Jiangfan. (2001). Impacts of the WTO on China’s Tertiary Industry and Development Strategies. Contemporary Economic Studies, 2. Lin Yifu, Cai Fang and Li Zhou. (1994). The Chinese Miracle: Development Strategy and Economic Reform. Shanghai Sanlian Bookstore. Liu Shijin. (1998). Seven Ways to Promote Economic Recovery. Economics and Information, 12. Liu he. (Ed.). (1998). Creating conditions for rapid growth. (p. 53). China Planning Press. Liu Xinhua. (2005). The Choice of Exchange Rate Regimes. Economic and Management Publishing House. Liu Xiaoxuan. (2003). Corporate Behavior and Market Equilibrium in the Process of Transition in China. China Social Sciences, 2. Lu Jinyong, and Du Qihua (Eds.). (2004). The Theory and Practice of International Investment. China Modern Economic Publishing House. Lu Tong (Ed.). (2003). The Transnational Management Strategy of Chinese Enterprises. Economic and Management Publishing House. Luo Zhisong. (2007). Host Country Risk of Foreign Investment Mergers and Acquisitions. People’s Publishing House. Lv Jinzhong. (2006). The Change of China’s Foreign Exchange Regimes. China Financial Publishing House. Ma Kai. (1999). Progress and Basic Experience of China’s Price Reform over the Past Twenty Years. Price Theory and Practice, 1. Major Events since the 18th CPC National Congress. People’s Daily, 1, October 16, 2017. Mao Tianqi. (1999a). From Planned Economy to Market Economy: Great Changes in 50 Years. Journal of Lanzhou University (Social Science Edition), 3. Mao Tianqi. (1999b). Theory of the Primary Stage of Socialism. In Zhang Zhuoyuan (Ed.). Debate and Development: 50 years of New China’s Economic Theory. Yunnan People’s Publishing House. Marx. Critique of Gotha Program. In Selected Works of Marx and Engels. (1995). Vol. 3. People’s Publishing House. National Bureau of Statistics. (2005). China Statistical Yearbook (2015). China Statistics Press. Pei Changhong. (2006). The Frontier of China’s Foreign Economic and Trade Theory (4). Social Sciences Academic Press.

656

References

Pei Changhong, et al. (2007). Economic Globalization and Contemporary International Trade. Social Sciences Academic Press. Proposal on Formulating the 13th Five-Year Plan for the National Economic and Social Development. People’s Publishing House, 2015. Research Group on the Frontier of China’s Economic Growth, Institute of Economics, Chinese Academy of Social Sciences. (2015). High Investment, Macro Cost and Sustainability of Economic Growth Economic Research Journal, 10. Selected Readings of Mao Zedong’s Works. (1986). Vol. 1 and Vol. 2. People’s Publishing House. Selected Works of Zhang Zhuoyuan. China Times Economic Press, 2010. Selected Works of Lenin. (1995). Vol.4. People’s Publishing House. Selected Works of Lenin (Socialism). (2009). People’s Publishing House. Selected Works of Marx and Engels. (1995). Vol.1 and Vol.3.People’s Publishing House. Selected Works of Deng Xiaoping. (1993). Vol. 3. People’s Publishing House. Shen Baoxiang. (1996). Mao Zedong and Chinese Socialism, Jiangxi People’s Publishing House. Shen Lin. (1993). On the Rationalization of China’s Industrial Organization. China Industrial Economics, 10 Speech at the Opening Ceremony of the Belt and Road Forum for International Cooperation. People’s Daily, 3, May 15, 2017. Stalin, Joseph. (1961). Socialist Economic Problems of the Soviet Union. People’s Publishing House. Su Xing. (2007). The Economic History of New China (Revised Edition). Party School Press of the CPC Central Committee. Su Ning (Ed.). (1996). A study on the utilization of foreign investment in China. International Culture Press. Sun Yefang. (1979). Several Theoretical Issues of the Socialist Economy. People’s Publishing House. The Literature Research Office of the CPC Central Committee (Ed.). (2017). Excerpts from Xi Jinping’s Expositions on Socialist Economic Construction. Central Literature Publishing Press. The Budget Law of the People’s Republic of China. (2014 Revision). Ministry of Finance. The Decision of the Central Committee of the Communist Party of China on Several Issues Concerning the Establishment of a Socialist Market Economic System. People’s Publishing House, 1993. The Decision of the Central Committee of the Communist Party of China on Several Major Issues Concerning Comprehensively Deepening the Reform. People’s Publishing House, 2013. The Decision of the Central Committee of the Communist Party of China on Several Issues Concerning the Perfection of the Socialist Market Economic System. People’s Publishing House, 2003. The National Bureau of Statistics of China. (2017). The 2017 China Statistics Abstract. China Statistics Publishing Press. The General Department of the State Commission for Restructuring. (1988). China’s Reform Ideas. Shenyang Press. The Complete Works of Marx and Engels. (1960). Vol. 3. People’s Publishing House. The World Bank’s Poverty Reduction and Economic Management Bureau in East Asia and the Pacific. (2007). Prospects and Strategies of China’s Utilization of Foreign Investment. CITIC Press. Unswervingly Advance along the Road of Socialism with Chinese Characteristics and Strive to Build a Moderately Prosperous Society in all respects. Selected Works of Hu Jintao (Vol. 3). People’s Publishing House, 2016. Wang Xinkui. (1989). The Profit Distribution in International Trade and International Investment. Shanghai SDX Joint Publishing Company. Wang Jue (Ed.). (1991a). Forty years of socialist political economy in China, vol. 3. Economic Press China. Wang Jue (Ed.). (1991b). The forty years of socialist political economy in China, vol. 4. Economic Press China.

References

657

Wang Jian (Ed.). (1996). The Strategy of Utilizing Foreign Capital in the Development of the next Century. Economic Press China. Wang Luolin (Ed.). (1997). Report on Foreign Investment in China.Economic and Management Publishing House. Wang Yungui (Ed.). (2002). China’s Foreign Economic and Trade Development Strategy after Its Accession to WTO. China Planning Press. Wang Shichun. (2006a). On Fair Trade. China Commerce and Trade Press. Wang Xiaohong. (2006b). The Utilization of Foreign Capital and the New Leap of China’s Economy. Social Sciences Academic Press. Wang Xuguo. (2006c). Exchange Rate System Arrangement and National Financial Security. Economic Science Press. Wang Mengkui (Ed.). (2007). China after the Asian Financial Crisis. China Development Press. World Bank. (1985). The Long-term Development of China: Problems and Plans. China Financial and Economic Publishing House. Wu Chao (Ed.). (1991). A Report on Foreign Direct Investment in China. China Financial & Economical Publishing House. Wu Nianlu, and Chen Quangen. (1989). A study on the exchange rate of RMB. China Finance Publishing House. Wu Weixing and Wang Yongxiang. (2004). Limited Participation, Event Risk and Liquidity Based on Search. Economic Research Journal, 8. Wu Jinglian. (2004). China’s Contemporary Economic Reform. Shanghai Far East Press. Xi Jinping. (2017). Secure a Decisive Victory in Building a Moderately Prosperous Society in All Respects and Strive for the Great Success of Socialism with Chinese Characteristics for a New Era—Report to the 19th National Congress of the Communist Party of China. People’s Publishing House. Xi Jinping. (2018). Speech at the Symposium on Private Enterprises (November 1, 2018). People’s Daily, November 2, 2018. Xi Jinping. (2017). Secure a Decisive Victory in Building a Moderately Prosperous Society in All Respects and Strive for the Great Success of Socialism with Chinese Characteristics for a New Era—Report to the 19th National Congress of the Communist Party of China. China Press. Xi Jinping. (2017). Secure a Decisive Victory in Building a Moderately Prosperous Society in All Respects and Strive for the Great Success of Socialism with Chinese Characteristics for a New Era: Report of the 19th National Congress of the Communist Party of China. People’s Publishing House. Xi Jinping. (2015, November 25). Developing Marxist Political Economy in Contemporary China Based on China’s National Conditions and Development Practice. People’s Daily. Xi Jinping. (2017). A Decisive Victory in Building a Moderately Prosperous Society in All Respects and Achieving the Great Victory of Socialism with Chinese Characteristics for a New Era-Report Delivering to the 19th National Congress of the Communist Party of China. People’s Publishing House. Xi Jinping. (2017). Xi Jinping on Governing the Country (Volume II). Foreign Languages Press. Xiang Songzuo. (2007). Exchange Rate Crisis. Peking University Press. Xue Hanwei. (1987). Similar Expressions in the Primary Stage and History of Socialism. Theoretical Frontier, 4. Yang Mu. (1989). Studies on Industrial Policy. Shanghai Sanlian Publishing Press. Yang Wenming. (2015). Critique of Anti-Monopoly Regulations on Free Pricing by Internet Platform Enterprises. Journal of Guangdong University of Finance and Economics, 1. Ye Yuansheng. (1994). Different Schools of Chinese Economic Reform Theory. Henan People’s Publishing. Yin Xiangsuo. (2001). China’s Foreign Trade Strategy after its Accession to the WTO. Fudan University Press. Yu Zhi. (2016). Fundamental Theory and Research Frontiers of International Trade. Truth and Wisdom Press, and Shanghai People’s Publishing House.

658

References

Yu Guangyuan. (1996). History of China’s Theoretical Economics: 1949–1989. Henan People’s Publishing. Yu Yongding, and Zheng Bingwen (Eds.). (2000). Research Report on China’s Accession to WTO: China’s Industry in WTO. Social Sciences Academic Press. Zhang Zhuoyuan, Fang Hanting, and Cheng Jingui. (2017). The Historical Breakthrough of Market Decision: 40 Years of China’s Market Development and Modern Market System Construction. Guangdong Economic Publishing House. Zhang Zhuoyuan, et al. (2011). Outline of New China Economics: 1949–2011. China Social Sciences Press. Zhang Zhuoyuan, Fang Hanting, and Cheng Jingui. (2017). Historical Breakthroughs of Market Decisions. Guangdong Economic Publishing House. Zhang Shuguang. (1999). Macroeconomic Theory. In Zhang Zhuoyuan (Editor-in-Chief). Controversy and Development: Fifty Years of China’s Economic Theory. Yunnan People’s Publishing House. Zhang Zhuoyuan (Ed.). (1999). Debate and Development: 50 Years of Chinese Economic Theory. Yunnan People’s Publishing House. Zhang Zhuoyuan (Ed.). (2000). Economic Thinking on the Experience of Reform and Opening up. Economic and Management Publishing House. Zhang Ping. (2003). Growth and Sharing: Theory and Empirical Evidence of Income Distribution. Social Science Literature Publishing. Zhang Xiaoji (Ed.). (2003). Frontier Issues of China’s Opening to the World. China Development Press. Zhang Erzhen, Ma Qingye, and Fang Yong, et al. (2004). Trade and Investment Integration and China’s Strategy. People’s Publishing House. Zhang Zhuoyuan (Editor-in-Chief). (2008). Thirty Years of Chinese Economics: 1978–2008. China Social Sciences Press. Zhang Xinzhu, Jean Lafon, and Ann Easthash. (2000). Theory of Regulation and Competition in the Network Industry. The Social Science Literature Press. Zhang Wei, Zhu Qigui, and Gao Hui. (2016). Upgrading of Industrial Structure, Optimization of Energy Structure and Low-Carbon Development of Industrial System. Economic Research Journal, 12. Zhang Zhuoyuan. (2016, November 21). Realizing the Organic Combination of Socialism and Market Economy-The Main Line of Constructing Socialist Political Economy with Chinese Characteristics. People’s Daily. Zhang Zhuoyuan, et al. (2011). Historical Perspectives on Chinese Economics (1949–2011). China Social Sciences Press. Zhang Zhuoyuan, et al. (2012). Outline of Chinese Economic History: 1949–2011. China Social Sciences Press. Zhang Zhuoyuan (Editor-in-Chief). (1996a). The Relationship between the Establishment of New Price Model and Market Development. Economic Management Press. Zhang Zhuoyuan. (2008). Thirty Years of Chinese Economics. China Social Sciences Press. Zhang Zhuoyuan. (2014). A New Journey of Economic Reform. Social Sciences Literature Press. Zhang Zhuoyuan, et al. (2011). The History of New China Economics (1949–2011). China Social Sciences Press. Zhang Zhuoyuan, Hu Jiayong, and Wan Jun. (2018). Forty Years of Chinese Economic Theoretical Innovation. China Renmin University Press. Zhang Zhuoyuan. (Ed.). (1999). Debate and Development: 50 Years of Chinese Economic Theory. Yunnan People’s Publishing House. Zhou Ning. (2007). RMB Exchange Rate Mechanism. Shanghai Academy of Social Sciences Press. Zhu Weilie. (Ed.). (1988). Asian and African Countries’ Opening to the Outside World. Shanghai Foreign Language Education Press. (2017, October 1). Opinions on Innovating Institutions and Mechanisms to Promote Green Development of Agriculture.