IN THE LATE 1980s the Chinese economy was a system in transition, moving cautiously away from central planning and gradually adopting some of the institutions and mechanisms of a market economy. The process of economic reform began in earnest in 1979, after Chinese leaders concluded that the Soviet-style system that had been in place since the 1950s was making little progress in improving the standard of living of the Chinese people and also was failing to close the economic gap between China and the industrialized nations.
The first major success of the economic reform program was the introduction of the responsibility system of production in agriculture, a policy that allowed farm families to work a piece of land under contract and to keep whatever profits they earned. By 1984 the responsibility system had dramatically increased food production, and the government had eliminated the people's communes--the hallmark of Chinese socialism for over twenty years. In most other sectors of the economy the role of government was reduced, managers were given more decision-making power, enterprises were encouraged to produce for profit, the role of the private sector increased, and experimentation with new forms of ownership began in the state sector. Constraints on foreign trade were relaxed, and joint ventures with foreign firms were officially encouraged as sources of modern technology and scarce foreign exchange. With rising incomes, greater incentives, and rapid growth in the service and light industrial sectors, the People's Republic of China began to exhibit some of the traits of a consumer society.
Movement toward a market system, however, was complex and difficult, and in 1987 the transition was far from complete. Relaxing restrictions on economic activity quickly alleviated some of China's most pressing economic difficulties, but it also gave rise to a new set of problems. Inflation--the greatest fear of Chinese consumers--became a problem for the first time since the early 1950s, and along with new opportunities to seek profit came growing inequality in income distribution and new temptations for crime, corruption, and Western cultural styles, regarded by many older Chinese people as decadent and "spiritually polluting." The state still owned and controlled the largest nonagricultural enterprises, and the major industries were still primarily guided by the central plan.
Thus, the Chinese economy in the late 1980s was very much a mixed system. It could not be accurately described as either a centrally planned economy or a market economy. The leadership was committed to further expansion of the reform program as a requisite for satisfactory economic growth, but at the same time it was compelled to keep a tight grip on key aspects of the economy- -particularly inflation and grain production--to prevent the emergence of overwhelming political discontent. Under these circumstances, forces in the economic system worked against each other, producing what the Chinese leadership called internal "contradictions." On the one hand, the economy was no longer tightly controlled by the state plan because of the large and growing market sector. On the other hand, the market could not operate efficiently because many commodities were still under government control and most prices were still set or restricted by government agencies. Under the leadership of Deng Xiaoping, the entire nation was "riding the tiger"--making great progress but not entirely in control--and therefore unable to stop the process without risk.
Despite the burst of progress in the 1980s, the Chinese economy still shared many basic characteristics with the economies of other developing countries. The gross national product per capita in 1986 was -Y849, or about US$228 (at the 1986 exchange rate), reflecting the low average level of labor productivity. As in many countries that did not begin sustained industrialization efforts until the middle of the twentieth century, the majority of the Chinese labor force--over 60 percent--was still employed in agriculture, which produced around 30 percent of the value of national output. Agricultural work still was performed primarily by hand. Modern equipment was in general use in industry but was largely typified by outdated designs and low levels of efficiency.
In other respects China's economy was quite different from those of most developing nations. The most important difference was that the Chinese economy--although in the midst of far-reaching changes--was organized as a socialist system, directed by a central planning structure. The predominance of state and collective ownership, firm central control over the financial system, redistribution of resources among regions, rationing of grain, and subsidized provision of housing resulted in a pattern of income distribution that was much narrower than those in almost all other developing countries. There was relatively little true capitalism in the form of private ownership of productive assets. Agricultural land was farmed under lease by farm households but was formally owned by villages, towns, and townships--the collective units that had replaced the rural commune system.
In the mid-1980s most Chinese were still very poor by American standards, but several important measures indicated that the quality of their lives was considerably better than implied by the level of gross national product (GNP) per capita. According to World Bank data, in 1984 energy consumption per person was 485 kilograms of oil equivalent, higher than that for any other country ranked as a low-income country and greater than the average for lower middle-income countries. In 1983 the daily calorie supply per capita was 2,620--11 percent above the basic requirement and nearly as high as the average for countries classified as upper middle-income countries. Significantly, infant mortality in 1985 was 39 per 1,000, well below the average for upper middle-income countries, and life expectancy at birth was 69 years, higher than the average for upper middle-income countries.
Despite the major economic gains made by China since 1949 and the dramatic advances of the 1980s, serious imbalances and deficiencies have persisted. Contributing to these deficiencies were the political turmoil that disrupted the economy during the Cultural Revolution decade (1966-76), insufficient flexibility in the planning process, and serious inaccuracies in price structures. Power shortages, inadequate transportation and communication networks, shortages of technicians and other highly trained personnel, insufficient foreign exchange for procurement of advanced technology from other countries, and inadequate legal and administrative provisions for both foreign and domestic trade further hindered modernization.
An important by-product of the reform program since the late 1970s has been an enormous increase in the amount of information available on the economy. The government collected and published basic national economic data in the 1950s, but the centralized statistics-keeping system broke down at the end of the 1950s, and very little statistical information was available during the 1960s and early 1970s. It was not until 1979 that the State Statistical Bureau ended the statistical "blackout" with the publication of an economic statistical communique. In subsequent years the State Statistical Bureau published larger and more frequent compendia, including annual almanacs of the economy and annual statistical yearbooks, which became progressively more sophisticated and informative. In addition, most provincial-level units and cities, as well as the major industries and economic sectors, such as coal mining and agriculture, began to produce their own specialized statistical yearbooks. In the early 1980s, numerous new periodicals, many of which specialized in economic data and analysis, started publication. Although Chinese statistical definitions and practices still differed from those in the West in many respects and the accuracy of some figures was called into doubt even by Chinese economists, foreign analysts in 1987 had access to a rich and growing body of data that would support extensive analysis of the Chinese economy.
Throughout most of the nineteenth and twentieth centuries, as during much of earlier Chinese history, the economy was barely able to meet the basic needs of the country's huge population--the largest in the world. In normal years the economy produced just about the amount of food required to meet the minimum nutritional requirements of the populace. In times of drought, flood, warfare, or civil disorder, there was not enough food, and before 1949 such conditions often led to starvation on a vast scale. Under the government of the People's Republic, food shortages were countered by redistributing supplies within China and by importing grain from abroad, which successfully averted famine except in the catastrophic years of 1959, 1960, and 1961.
Despite formidable constraints and disruptions, the Chinese economy was never stagnant. Production grew substantially between 1800 and 1949 and increased fairly rapidly after 1949. Before the 1980s, however, production gains were largely matched by population growth, so that productive capacity was unable to outdistance essential consumption needs significantly, particularly in agriculture. Grain output in 1979 was about twice as large as in 1952, but so was the population. As a result, little surplus was produced even in good years. Further, few resources could be spared for investment in capital goods, such as machinery, factories, mines, railroads, and other productive assets. The relatively small size of the capital stock caused productivity per worker to remain low, which in turn perpetuated the economy's inability to generate a substantial surplus).
China's socialist system, with state ownership of most industry and central control over planning and the financial system, has enabled the government to mobilize whatever surplus was available and greatly increase the proportion of the national economic output devoted to investment. Western analysts estimated that investment accounted for about 25 percent of GNP in the 30 years after 1949, a rate surpassed by few other countries. Because of the comparatively low level of GNP, however, even this high rate of investment secured only a small amount of resources relative to the size of the country and the population. In 1978, for instance, only 16 percent of the GNP of the United States went into gross investment, but this amounted to US$345.6 billion, whereas the approximately 25 percent of China's GNP that was invested came to about the equivalent of US$111 billion and had to serve a population 4.5 times the size of that in the United States. The limited resources available for investment prevented China from rapidly producing or importing advanced equipment. Technological development proceeded gradually, and outdated equipment continued to be used as long as possible. Consequently, many different levels of technology were in use simultaneously. Most industries included some plants that were comparable to modern Western facilities, often based on imported equipment and designs. Equipment produced by Chinese factories was generally some years behind standard Western designs. Agriculture received a smaller share of state investment than industry and remained at a much lower average level of technology and productivity. Despite a significant increase in the availability of tractors, trucks, electric pumps, and mechanical threshers, most agricultural activities were still performed by people or animals.
Although the central administration coordinated the economy and redistributed resources among regions when necessary, in practice most economic activity was very decentralized, and there was relatively little flow of goods and services between areas. About 75 percent of the grain grown in China, for instance, was consumed by the families that produced it. One of the most important sources of growth in the economy was the improved ability to exploit the comparative advantages of each locality by expanding transportation capacity. The communications and transportation sectors were growing and improving but still could not carry the volume of traffic required by a modern economy because of the scarcity of investment funds and advanced technology.
Because of limited interaction among regions, the great variety of geographic zones in China, and the broad spectrum of technologies in use, areas differed widely in economic activities, organizational forms, and prosperity. Within any given city, enterprises ranged from tiny, collectively owned handicraft units, barely earning subsistencelevel incomes for their members, to modern state-owned factories, whose workers received steady wages plus free medical care, bonuses, and an assortment of other benefits. The agricultural sector was diverse, accommodating well-equipped, "specialized households" that supplied scarce products and services to local markets; wealthy suburban villages specializing in the production of vegetables, pork, poultry, and eggs to sell in free markets in the nearby cities; fishing villages on the seacoast; herding groups on the grasslands of Nei Monggol Autonomous Region (Inner Mongolia); and poor, struggling grain-producing villages in the arid mountains of Shaanxi and Gansu provinces. The economy had progressed in major ways since 1949, but after four decades experts in China and abroad agreed that it had a great distance yet to go.
When the Chinese Communist Party came to power in 1949, its leaders' fundamental long-range goals were to transform China into a modern, powerful, socialist nation. In economic terms these objectives meant industrialization, improvement of living standards, narrowing of income differences, and production of modern military equipment. As the years passed, the leadership continued to subscribe to these goals. But the economic policies formulated to achieve them were dramatically altered on several occasions in response to major changes in the economy, internal politics, and international political and economic developments.
An important distinction emerged between leaders who felt that the socialist goals of income equalization and heightened political consciousness should take priority over material progress and those who believed that industrialization and general economic modernization were prerequisites for the attainment of a successful socialist order. Among the prominent leaders who considered politics the prime consideration were Mao Zedong, Lin Biao, and the members of the Gang of Four. Leaders who more often stressed practical economic considerations included Liu Shaoqi, Zhou Enlai, and Deng Xiaoping. For the most part, important policy shifts reflected the alternating emphasis on political and economic goals and were accompanied by major changes in the positions of individuals in the political power structure. An important characteristic in the development of economic policies and the underlying economic model was that each new policy period, while differing significantly from its predecessor, nonetheless retained most of the existing economic organization. Thus the form of the economic model and the policies that expressed it at any given point in Chinese history reflected both the current policy emphasis and a structural foundation built up during the earlier periods.
In 1949 China's economy was suffering from the debilitating effects of decades of warfare. Many mines and factories had been damaged or destroyed. At the end of the war with Japan in 1945, Soviet troops had dismantled about half the machinery in the major industrial areas of the northeast and shipped it to the Soviet Union. Transportation, communication, and power systems had been destroyed or had deteriorated because of lack of maintenance. Agriculture was disrupted, and food production was some 30 percent below its pre-war peak level. Further, economic ills were compounded by one of the most virulent inflations in world history.
The chief goal of the government for the 1949-52 period was simply to restore the economy to normal working order. The administration moved quickly to repair transportation and communication links and revive the flow of economic activity. The banking system was nationalized and centralized under the People's Bank of China. To bring inflation under control by 1951, the government unified the monetary system, tightened credit, restricted government budgets at all levels and put them under central control, and guaranteed the value of the currency. Commerce was stimulated and partially regulated by the establishment of state trading companies (commercial departments), which competed with private traders in purchasing goods from producers and selling them to consumers or enterprises. Transformation of ownership in industry proceeded slowly. About a third of the country's enterprises had been under state control while the Guomindang government was in power (1927-49), as was much of the modernized transportation sector. The Chinese Communist Party immediately made these units state-owned enterprises upon taking power in 1949. The remaining privately owned enterprises were gradually brought under government control, but 17 percent of industrial units were still completely outside the state system in 1952.
In agriculture a major change in landownership was carried out. Under a nationwide land reform program, titles to about 45 percent of the arable land were redistributed from landlords and more prosperous farmers to the 60 to 70 percent of farm families that previously owned little or no land. Once land reform was completed in an area, farmers were encouraged to cooperate in some phases of production through the formation of small "mutual aid teams" of six or seven households each. Thirty-nine percent of all farm households belonged to mutual aid teams in 1952. By 1952 price stability had been established, commerce had been restored, and industry and agriculture had regained their previous peak levels of production. The period of recovery had achieved its goals.
Having restored a viable economic base, the leadership under Mao Zedong, Zhou Enlai, and other revolutionary veterans was prepared to embark on an intensive program of industrial growth and socialization. For this purpose the administration adopted the Soviet economic model, based on state ownership in the modern sector, large collective units in agriculture, and centralized economic planning. The Soviet approach to economic development was manifested in the First Five-Year Plan (1953-57). As in the Soviet economy, the main objective was a high rate of economic growth, with primary emphasis on industrial development at the expense of agriculture and particular concentration on heavy industry and capital-intensive technology. Soviet planners helped their Chinese counterparts formulate the plan. Large numbers of Soviet engineers, technicians, and scientists assisted in developing and installing new heavy industrial facilities, including many entire plants and pieces of equipment purchased from the Soviet Union. Government control over industry was increased during this period by applying financial pressures and inducements to convince owners of private, modern firms to sell them to the state or convert them into joint public-private enterprises under state control. By 1956 approximately 67.5 percent of all modern industrial enterprises were state owned, and 32.5 percent were under joint public-private ownership. No privately owned firms remained. During the same period, the handicraft industries were organized into cooperatives, which accounted for 91.7 percent of all handicraft workers by 1956.
Agriculture also underwent extensive organizational changes. To facilitate the mobilization of agricultural resources, improve the efficiency of farming, and increase government access to agricultural products, the authorities encouraged farmers to organize increasingly large and socialized collective units. From the loosely structured, tiny mutual aid teams, villages were to advance first to lower-stage, agricultural producers' cooperatives, in which families still received some income on the basis of the amount of land they contributed, and eventually to advanced cooperatives, or collectives. In the advanced producers' cooperatives, income shares were based only on the amount of labor contributed. In addition, each family was allowed to retain a small private plot on which to grow vegetables, fruit, and livestock for its own use. The collectivization process began slowly but accelerated in 1955 and 1956. In 1957 about 93.5 percent of all farm households had joined advanced producers' cooperatives.
In terms of economic growth the First Five-Year Plan was quite successful, especially in those areas emphasized by the Soviet-style development strategy. A solid foundation was created in heavy industry. Key industries, including iron and steel manufacturing, coal mining, cement production, electricity generation, and machine building were greatly expanded and were put on a firm, modern technological footing. Thousands of industrial and mining enterprises were constructed, including 156 major facilities. Industrial production increased at an average annual rate of 19 percent between 1952 and 1957, and national income grew at a rate of 9 percent a year.
Despite the lack of state investment in agriculture, agricultural output increased substantially, averaging increases of about 4 percent a year. This growth resulted primarily from gains in efficiency brought about by the reorganization and cooperation achieved through collectivization. As the First Five-Year Plan wore on, however, Chinese leaders became increasingly concerned over the relatively sluggish performance of agriculture and the inability of state trading companies to increase significantly the amount of grain procured from rural units for urban consumption.
Before the end of the First Five-Year Plan, the growing imbalance between industrial and agricultural growth, dissatisfaction with inefficiency, and lack of flexibility in the decision-making process convinced the nation's leaders-- particularly Mao Zedong--that the highly centralized, industry-biased Soviet model was not appropriate for China. In 1957 the government adopted measures to shift a great deal of the authority for economic decision making to the provincial-level, county, and local administrations. In 1958 the Second Five-Year Plan (1958-62), which was intended to continue the policies of the first plan, was abandoned. In its place the leadership adopted an approach that relied on spontaneous heroic efforts by the entire population to produce a dramatic "great leap" in production for all sectors of the economy at once. Further reorganization of agriculture was regarded as the key to the endeavor to leap suddenly to a higher stage of productivity. A fundamental problem was the lack of sufficient capital to invest heavily in both industry and agriculture at the same time. To overcome this problem, the leadership decided to attempt to create capital in the agricultural sector by building vast irrigation and water control works employing huge teams of farmers whose labor was not being fully utilized. Surplus rural labor also was to be employed to support the industrial sector by setting up thousands of small-scale, low-technology, "backyard" industrial projects in farm units, which would produce machinery required for agricultural development and components for urban industries. Mobilization of surplus rural labor and further improvements in agricultural efficiency were to be accomplished by a "leap" to the final stage of agricultural collectivization--the formation of people's communes.
People's communes were created by combining some 20 or 30 advanced producers' cooperatives of 20,000 to 30,000 members on average, although membership varied from as few as 6,000 to over 40,000 in some cases. When first instituted, the communes were envisaged as combining in one body the functions of the lowest level of local government and the highest level of organization in agricultural production. Communes consisted of three organizational levels: the central commune administration; the production brigade (roughly equivalent to the advanced producers' cooperatives, or a traditional rural village), and the production team, which generally consisted of around thirty families. At the inception of the Great Leap Forward, the communes were intended to acquire all ownership rights over the productive assets of their subordinate units and to take over most of the planning and decision making for farm activities. Ideally, communes were to improve efficiency by moving farm families into dormitories, feeding them in communal mess halls, and moving whole teams of laborers from task to task. In practice, this ideal, extremely centralized form of commune was not instituted in most areas.
Ninety-eight percent of the farm population was organized into communes between April and September of 1958. Very soon it became evident that in most cases the communes were too unwieldy to carry out successfully all the managerial and administrative functions that were assigned to them. In 1959 and 1960, most production decisions reverted to the brigade and team levels, and eventually most governmental responsibilities were returned to county and township administrations. Nonetheless, the commune system was retained and continued to be the basic form of organization in the agricultural sector until the early 1980s.
During the Great Leap Forward, the industrial sector also was expected to discover and use slack labor and productive capacity to increase output beyond the levels previously considered feasible. Political zeal was to be the motive force, and to "put politics in command" enterprising party branches took over the direction of many factories. In addition, central planning was relegated to a minor role in favor of spontaneous, politically inspired production decisions from individual units.
The result of the Great Leap Forward was a severe economic crisis. In 1958 industrial output did in fact "leap" by 55 percent, and the agricultural sector gathered in a good harvest. In 1959, 1960, and 1961, however, adverse weather conditions, improperly constructed water control projects, and other misallocations of resources that had occurred during the overly centralized communization movement resulted in disastrous declines in agricultural output. In 1959 and 1960, the gross value of agricultural output fell by 14 percent and 13 percent, respectively, and in 1961 it dropped a further 2 percent to reach the lowest point since 1952. Widespread famine occurred, especially in rural areas, according to 1982 census figures, and the death rate climbed from 1.2 percent in 1958 to 1.5 percent in 1959, 2.5 percent in 1960, and then dropped back to 1.4 percent in 1961. From 1958 to 1961, over 14 million people apparently died of starvation, and the number of reported births was about 23 million fewer than under normal conditions. The government prevented an even worse disaster by canceling nearly all orders for foreign technical imports and using the country's foreign exchange reserves to import over 5 million tons of grain a year beginning in 1960. Mines and factories continued to expand output through 1960, partly by overworking personnel and machines but largely because many new plants constructed during the First Five-Year Plan went into full production in these years. Thereafter, however, the excessive strain on equipment and workers, the effects of the agricultural crisis, the lack of economic coordination, and, in the 1960s, the withdrawal of Soviet assistance caused industrial output to plummet by 38 percent in 1961 and by a further 16 percent in 1962
Faced with economic collapse in the early 1960s, the government sharply revised the immediate goals of the economy and devised a new set of economic policies to replace those of the Great Leap Forward. Top priority was given to restoring agricultural output and expanding it at a rate that would meet the needs of the growing population. Planning and economic coordination were to be revived- -although in a less centralized form than before the Great Leap Forward--so as to restore order and efficient allocation of resources to the economy. The rate of investment was to be reduced and investment priorities reversed, with agriculture receiving first consideration, light industry second, and heavy industry third.
In a further departure from the emphasis on heavy industrial development that persisted during the Great Leap Forward, the government undertook to mobilize the nation's resources to bring about technological advancement in agriculture. Organizational changes in agriculture mainly involved decentralization of production decision making and income distribution within the commune structure. The role of the central commune administration was greatly reduced, although it remained the link between local government and agricultural producers and was important in carrying out activities that were too large in scale for the production brigades. Production teams were designated the basic accounting units and were responsible for making nearly all decisions concerning production and the distribution of income to their members. Private plots, which had disappeared on some communes during the Great Leap Forward, were officially restored to farm families.
Economic support for agriculture took several forms. Agricultural taxes were reduced, and the prices paid for agricultural products were raised relative to the prices of industrial supplies for agriculture. There were substantial increases in supplies of chemical fertilizer and various kinds of agricultural machinery, notably small electric pumps for irrigation. Most of the modern supplies were concentrated in areas that were known to produce "high and stable yields" in order to ensure the best possible results.
In industry, a few key enterprises were returned to central state control, but control over most enterprises remained in the hands of provincial-level and local governments. This decentralization had taken place in 1957 and 1958 and was reaffirmed and strengthened in the 1961-65 period. Planning rather than politics once again guided production decisions, and material rewards rather than revolutionary enthusiasm became the leading incentive for production. Major imports of advanced foreign machinery, which had come to an abrupt halt with the withdrawal of Soviet assistance starting in 1960, were initiated with Japan and West European countries.
During the 1961-65 readjustment and recovery period, economic stability was restored, and by 1966 production in both agriculture and industry surpassed the peak levels of the Great Leap Forward period. Between 1961 and 1966, agricultural output grew at an average rate of 9.6 percent a year. Industrial output was increased in the same years at an average annual rate of 10.6 percent, largely by reviving plants that had operated below capacity after the economic collapse in 1961. Another important source of growth in this period was the spread of rural, small-scale industries, particularly coal mines, hydroelectric plants, chemical fertilizer plants, and agricultural machinery plants. The economic model that emerged in this period combined elements of the highly centralized, industrially oriented, Soviet-style system of the First Five-Year Plan with aspects of the decentralization of ownership and decision making that characterized the Great Leap Forward and with the strong emphasis on agricultural development and balanced growth of the "agriculture first" policy. Important changes in economic policy occurred in later years, but the basic system of ownership, decision-making structure, and development strategy that was forged in the early 1960s was not significantly altered until the reform period of the 1980s.
The Cultural Revolution was set in motion by Mao Zedong in 1966 and called to a halt in 1968, but the atmosphere of radical leftism persisted until Mao's death and the fall of the Gang of Four in 1976. During this period, there were several distinct phases of economic policy. High Tide of the Cultural Revolution, 1966-68
The Cultural Revolution, unlike the Great Leap Forward, was primarily a political upheaval and did not produce major changes in official economic policies or the basic economic model. Nonetheless, its influence was felt throughout urban society, and it profoundly affected the modern sector of the economy. Agricultural production stagnated, but in general the rural areas experienced less turmoil than the cities. Production was reduced in the modern nonagricultural sectors in several ways. The most direct cause of production halts was the political activity of students and workers in the mines and factories. A second cause was the extensive disruption of transportation resulting from the requisitioning of trains and trucks to carry Red Guards around the country. Output at many factories suffered from shortages of raw materials and other supplies. A third disruptive influence was that the direction of factories was placed in the hands of revolutionary committees, consisting of representatives from the party, the workers, and the People's Liberation Army, whose members often had little knowledge of either management or the enterprise they were supposed to run. In addition, virtually all engineers, managers, scientists, technicians, and other professional personnel were "criticized," demoted, "sent down" to the countryside to "participate in labor," or even jailed, all of which resulted in their skills and knowledge being lost to the enterprise. The effect was a 14-percent decline in industrial production in 1967. A degree of order was restored by the army in late 1967 and 1968, and the industrial sector returned to a fairly high rate of growth in 1969.
Other aspects of the Cultural Revolution had more far-reaching effects on the economy. Imports of foreign equipment, required for technological advancement, were curtailed by rampant xenophobia. Probably the most serious and long-lasting effect on the economy was the dire shortage of highly educated personnel caused by the closing of the universities. China's ability to develop new technology and absorb imported technology would be limited for years by the hiatus in higher education.
Resumption of Systematic Growth, 1970-74As political stability was gradually restored, a renewed drive for coordinated, balanced development was set in motion under the leadership of Premier Zhou Enlai. To revive efficiency in industry, Chinese Communist Party committees were returned to positions of leadership over the revolutionary committees, and a campaign was carried out to return skilled and highly educated personnel to the jobs from which they had been displaced during the Cultural Revolution. Universities began to reopen, and foreign contacts were expanded. Once again the economy suffered from imbalances in the capacities of different industrial sectors and an urgent need for increased supplies of modern inputs for agriculture. In response to these problems, there was a significant increase in investment, including the signing of contracts with foreign firms for the construction of major facilities for chemical fertilizer production, steel finishing, and oil extraction and refining. The most notable of these contracts was for thirteen of the world's largest and most modern chemical fertilizer plants. During this period, industrial output grew at an average rate of 8 percent a year.
Agricultural production declined somewhat in 1972 because of poor weather but increased at an average annual rate of 3.8 percent for the period as a whole. The party and state leadership undertook a general reevaluation of development needs, and Zhou Enlai presented the conclusions in a report to the Fourth National People's Congress in January 1975. In it he called for the Four Modernizations. Zhou emphasized the mechanization of agriculture and a comprehensive two-stage program for the modernization of the entire economy by the end of the century.
The Gang of Four, 1974-76During the early and mid-1970s, the radical group later known as the Gang of Four attempted to dominate the power center through their network of supporters and, most important, through their control of the media. More moderate leaders, however, were developing and promulgating a pragmatic program for rapid modernization of the economy that contradicted the set of policies expressed in the media. Initiatives by Zhou Enlai and Deng Xiaoping were vehemently attacked in the press and in political campaigns as "poisonous weeds." Using official news organs, the Gang of Four advocated the primacy of nonmaterial, political incentives, radical reduction of income differences, elimination of private farm plots, and a shift of the basic accounting unit up to the brigade level in agriculture. They opposed the strengthening of central planning and denounced the use of foreign technology.
In the face of such contradictory policy pronouncements and uncertain political currents, administrators and economic decision makers at all levels were virtually paralyzed. Economic activity slowed, and the incipient modernization program almost ground to a halt. Uncertainty and instability were exacerbated by the death of Zhou Enlai in January 1976 and the subsequent second purge of Deng Xiaoping in April. The effects of the power struggle and policy disputes were compounded by the destruction resulting from the Tangshan earthquake in July 1976. Output for the year in both industry and agriculture showed no growth over 1975. The interlude of uncertainty finally ended when the Gang of Four was arrested in October--one month after Mao's death.
After the fall of the Gang of Four, the leadership under Hua Guofeng--and by July 1977 the rehabilitated Deng Xiaoping-- reaffirmed the modernization program espoused by Zhou Enlai in 1975. They also set forth a battery of new policies for the purpose of accomplishing the Four Modernizations. The new policies strengthened the authority of managers and economic decision makers at the expense of party officials, stressed material incentives for workers, and called for expansion of the research and education systems. Foreign trade was to be increased, and exchanges of students and "foreign experts" with developed countries were to be encouraged. This new policy initiative was capped at the Fifth National People's Congress in February and March 1978, when Hua Guofeng presented the draft of an ambitious ten-year plan for the 1976-85 period. The plan called for high rates of growth in both industry and agriculture and included 120 construction projects that would require massive and expensive imports of foreign technology.
Between 1976 and 1978, the economy quickly recovered from the stagnation of the Cultural Revolution. Agricultural production was sluggish in 1977 because of a third consecutive year of adverse weather conditions but rebounded with a record harvest in 1978. Industrial output jumped 14 percent in 1977 and increased by 13 percent in 1978.
At the milestone Third Plenum of the National Party Congress's Eleventh Central Committee in December 1978, the party leaders decided to undertake a program of gradual but fundamental reform of the economic system. They concluded that the Maoist version of the centrally planned economy had failed to produce efficient economic growth and had caused China to fall far behind not only the industrialized nations of the West but also the new industrial powers of Asia: Japan, the Republic of Korea, Singapore, Taiwan, and Hong Kong. In the late 1970s, while Japan and Hong Kong rivaled European countries in modern technology, China's citizens had to make do with barely sufficient food supplies, rationed clothing, inadequate housing, and a service sector that was inadequate and inefficient. All of these shortcomings embarrassed China internationally.
The purpose of the reform program was not to abandon communism but to make it work better by substantially increasing the role of market mechanisms in the system and by reducing--not eliminating-- government planning and direct control. The process of reform was incremental. New measures were first introduced experimentally in a few localities and then were popularized and disseminated nationally if they proved successful. By 1987 the program had achieved remarkable results in increasing supplies of food and other consumer goods and had created a new climate of dynamism and opportunity in the economy. At the same time, however, the reforms also had created new problems and tensions, leading to intense questioning and political struggles over the program's future.
The Period of Readjustment, 1979-81The first few years of the reform program were designated the "period of readjustment," during which key imbalances in the economy were to be corrected and a foundation was to be laid for a well-planned modernization drive. The schedule of Hua Guofeng's ten-year plan was discarded, although many of its elements were retained. The major goals of the readjustment process were to expand exports rapidly; overcome key deficiencies in transportation, communications, coal, iron, steel, building materials, and electric power; and redress the imbalance between light and heavy industry by increasing the growth rate of light industry and reducing investment in heavy industry. Agricultural production was stimulated in 1979 by an increase of over 22 percent in the procurement prices paid for farm products.
The central policies of the reform program were introduced experimentally during the readjustment period. The most successful reform policy, the contract responsibility system of production in agriculture, was suggested by the government in 1979 as a way for poor rural units in mountainous or arid areas to increase their incomes. The responsibility system allowed individual farm families to work a piece of land for profit in return for delivering a set amount of produce to the collective at a given price. This arrangement created strong incentives for farmers to reduce production costs and increase productivity. Soon after its introduction the responsibility system was adopted by numerous farm units in all sorts of areas.
Agricultural production was also stimulated by official encouragement to establish free farmers' markets in urban areas, as well as in the countryside, and by allowing some families to operate as "specialized households," devoting their efforts to producing a scarce commodity or service on a profit-making basis.
In industry, the main policy innovations increased the autonomy of enterprise managers, reduced emphasis on planned quotas, allowed enterprises to produce goods outside the plan for sale on the market, and permitted enterprises to experiment with the use of bonuses to reward higher productivity. The government also tested a fundamental change in financial procedures with a limited number of state-owned units: rather than remitting all of their profits to the state, as was normally done, these enterprises were allowed to pay a tax on their profits and retain the balance for reinvestment and distribution to workers as bonuses.
The government also actively encouraged the establishment of collectively owned and operated industrial and service enterprises as a means of soaking up some of the unemployment among young people and at the same time helping to increase supplies of light industrial products. Individual enterprise--true capitalism--also was allowed, after having virtually disappeared during the Cultural Revolution, and independent cobblers, tailors, tinkers, and vendors once again became common sights in the cities. Foreign-trade procedures were greatly eased, allowing individual enterprises and administrative departments outside the Ministry of Foreign Trade (which became the Ministry of Foreign Economic Relations and Trade in 1984) to engage in direct negotiations with foreign firms. A wide range of cooperation, trading, and credit arrangements with foreign firms were legalized so that China could enter the mainstream of international trade.
Reform and Opening, Beginning in 1982The period of readjustment produced promising results, increasing incomes substantially; raising the availability of food, housing, and other consumer goods; and generating strong rates of growth in all sectors except heavy industry, which was intentionally restrained. On the strength of these initial successes, the reform program was broadened, and the leadership under Deng Xiaoping frequently remarked that China's basic policy was "reform and opening," that is, reform of the economic system and opening to foreign trade.
In agriculture the contract responsibility system was adopted as the organizational norm for the entire country, and the commune structure was largely dismantled. By the end of 1984, approximately 98 percent of all farm households were under the responsibility system, and all but a handful of communes had been dissolved. The communes' administrative responsibilities were turned over to township and town governments, and their economic roles were assigned to townships and villages. The role of free markets for farm produce was further expanded and, with increased marketing possibilities and rising productivity, farm incomes rose rapidly.
In industry the complexity and interrelation of production activities prevented a single, simple policy from bringing about the kind of dramatic improvement that the responsibility system achieved in agriculture. Nonetheless, a cluster of policies based on greater flexibility, autonomy, and market involvement significantly improved the opportunities available to most enterprises, generated high rates of growth, and increased efficiency. Enterprise managers gradually gained greater control over their units, including the right to hire and fire, although the process required endless struggles with bureaucrats and party cadres. The practice of remitting taxes on profits and retaining the balance became universal by 1985, increasing the incentive for enterprises to maximize profits and substantially adding to their autonomy. A change of potentially equal importance was a shift in the source of investment funds from government budget allocations, which carried no interest and did not have to be repaid, to interest-bearing bank loans. As of 1987 the interest rate charged on such loans was still too low to serve as a check on unproductive investments, but the mechanism was in place.
The role of foreign trade under the economic reforms increased far beyond its importance in any previous period. Before the reform period, the combined value of imports and exports had seldom exceeded 10 percent of national income. In 1980 it was 15 percent, in 1984 it was 21 percent, and in 1986 it reached 35 percent. Unlike earlier periods, when China was committed to trying to achieve self-sufficiency, under Deng Xiaoping foreign trade was regarded as an important source of investment funds and modern technology. As a result, restrictions on trade were loosened further in the mid-1980s, and foreign investment was legalized. The most common foreign investments were joint ventures between foreign firms and Chinese units. Sole ownership by foreign investors also became legal, but the feasibility of such undertakings remained questionable.
The most conspicuous symbols of the new status of foreign trade were the four coastal special economic zones, which were created in 1979 as enclaves where foreign investment could receive special treatment. Three of the four zones--the cities of Shenzhen, Zhuhai, and Shantou--were located in Guangdong Province, close to Hong Kong. The fourth, Xiamen, in Fujian Province, was directly across the strait from Taiwan. More significant for China's economic development was the designation in April 1984 of economic development zones in the fourteen largest coastal cities- -including Dalian, Tianjin, Shanghai, and Guangzhou--all of which were major commercial and industrial centers. These zones were to create productive exchanges between foreign firms with advanced technology and major Chinese economic networks.
Domestic commerce also was stimulated by the reform policies, which explicitly endeavored to enliven the economy by shifting the primary burden of the allocation of goods and services from the government plan to the market. Private entrepreneurship and freemarket activities were legalized and encouraged in the 1980s, although the central authorities continuously had to fight the efforts of local government agencies to impose excessive taxes on independent merchants. By 1987 the state-owned system of commercial agencies and retail outlets coexisted with a rapidly growing private and collectively owned system that competed with it vigorously, providing a wider range of consumption choices for Chinese citizens than at any previous time.
Although the reform program achieved impressive successes, it also gave rise to several serious problems. One problem was the challenge to party authority presented by the principles of freemarket activity and professional managerial autonomy. Another difficulty was a wave of crime, corruption, and--in the minds of many older people--moral deterioration caused by the looser economic and political climate. The most fundamental tensions were those created by the widening income disparities between the people who were "getting rich" and those who were not and by the pervasive threat of inflation. These concerns played a role in the political struggle that culminated in party general secretary Hu Yaobang's forced resignation in 1987. Following Hu's resignation, the leadership engaged in an intense debate over the future course of the reforms and how to balance the need for efficiency and market incentives with the need for government guidance and control. The commitment to further reform was affirmed, but its pace, and the emphasis to be placed on macroeconomic and microeconomic levers, remained objects of caution.
Under China's socialist political and economic system, the government was explicitly responsible for planning and managing the national economy. The State Constitution of 1982 specifies that the state is to guide the country's economic development and that the State Council is to direct its subordinate bodies in drawing up and carrying out the national economic plan and the state budget. A major portion of the governmental apparatus was devoted to managing the economy; all but a few of the more than 100 ministries, commissions, administrations, bureaus, academies, and corporations under the State Council were concerned with economic matters.
Each significant economic sector was supervised and controlled by one or more of these organizations, which included the People's Bank of China, State Planning Commission, State Economic Commission, State Machine-Building Industry Commission, and the ministries of agriculture, animal husbandry, and fishery; coal industry; commerce; communications; finance; light industry; metallurgical industry; petroleum industry; railways; textile industry; and water resources and electric power. Several aspects of the economy were administered by specialized departments under the State Council, including the State Statistical Bureau, General Administration of Civil Aviation of China, and China Travel and Tourism Bureau. Each of the economic organizations under the State Council directed the units under its jurisdiction through subordinate offices at the provincial and local levels.
Economic policies and decisions adopted by the National People's Congress and the State Council were passed on to the economic organizations under the State Council, which incorporated them into the plans for the various sectors of the economy. Economic plans and policies were implemented by a variety of direct and indirect control mechanisms. Direct control was exercised by designating specific physical output quotas and supply allocations for some goods and services. Indirect instruments--also called "economic levers"--operated by affecting market incentives. These included levying taxes, setting prices for products and supplies, allocating investment funds, monitoring and controlling financial transactions by the banking system, and controlling the allocation of scarce key resources, such as skilled labor, electric power, transportation, steel, and chemical fertilizer. A major objective of the reform program was to reduce the use of direct controls and to increase the role of indirect economic levers. Major state-owned enterprises still received detailed plans specifying physical quantities of key inputs and products from their ministries. Even these units, however, were increasingly affected by prices and allocations that were determined through market interaction and only indirectly influenced by the central plan.
By 1987 the majority of state-owned industrial enterprises, which were managed at the provincial level or below, were partially regulated by a combination of specific allocations and indirect controls, but they also produced goods outside the plan for sale in the market. Important, scarce resources--for example, engineers or finished steel--might be assigned to this kind of unit in exact numbers. Less critical assignments of personnel and materials would be authorized in a general way by the plan, but with procurement arrangements left up to the enterprise management. Enterprises had increasing discretion over the quantities of inputs purchased, the sources of inputs, the variety of products manufactured, and the production process.
Collectively owned units and the agricultural sector were regulated primarily by indirect instruments. Each collective unit was "responsible for its own profit and loss," and the prices of its inputs and products provided the major production incentives.
Consumer spending was subject to a limited degree of direct government influence but was primarily determined by the basic market forces of income levels and commodity prices. Before the reform period, key goods were rationed when they were in short supply, but by the mid-1980s availability had increased to the point that rationing was discontinued for everything except grain, which could also be purchased in the free markets.
Foreign trade was supervised by the Ministry of Foreign Economic Relations and Trade, General Administration of Customs, and Bank of China, the foreign exchange arm of the Chinese banking system, which controlled access to the scarce foreign currency required for imports. Because of the reduced restrictions on foreign trade, however, there were broad opportunities for individual work units to engage in exchanges with foreign firms without much interference from official agencies.
The role of the government in the economy was buttressed by the pervasive influence of the Chinese Communist Party. The structure of the party organization paralleled that of the government but also extended below the lowest level of government into individual work units. Important economic decision makers at all levels, from the members of the State Council down to the managers of factories, either were party members themselves or worked closely with colleagues who were party members. The party served as a powerful supplementary network for transmitting and implementing the economic goals and policies of the government.
Although the government dominated the economy, the extent of its control was limited by the sheer volume of economic activity. Furthermore, the concept of government supervision of the economy had changed--at least in the minds of the advocates of reform--from one of direct but stifling state control to one of indirect guidance of a more dynamic economy.
In the late 1980s, China remained a predominantly agricultural country. As of 1985 about 63 percent of the population lived in rural areas, and nearly 63 percent of the national labor force was engaged in agriculture. Modern technology had spread slowly in the vast farm areas, and the availability of modern supplies was less than adequate, causing growth in agricultural output to lag behind production increases in the rest of the economy. The proportion of GNP produced by agriculture declined from over 43 percent in the early 1950s to about 29 percent in 1985. The low agricultural growth rate as compared with other sectors of the economy reflected the fact that the average farmer had far less machinery and electric power and fewer other modern production aids to work with than the average worker in industry. Under the responsibility system, farm households and collective organizations purchased large amounts of new machinery, particularly small tractors and trucks. The horsepower of agricultural machinery per farmer increased by almost 30 percent between 1979 and 1985 but still came to less than 1 horsepower per person.
Before the early 1980s, most of the agricultural sector was organized according to the three-tier commune system. There were over 50,000 people's communes, most containing around 30,000 members. Each commune was made up of about sixteen production brigades, and each production brigade was composed of around seven production teams. The production teams were the basic agricultural collective units. They corresponded to small villages and typically included about 30 households and 100 to 250 members. The communes, brigades, and teams owned all major rural productive assets and provided nearly all administrative, social, and commercial services in the countryside. The largest part of farm family incomes consisted of shares of net team income, distributed to members according to the amount of work each had contributed to the collective effort. Farm families also worked small private plots and were free to sell or consume their products.
By the end of 1984, approximately 98 percent of the old production teams had adopted the contract responsibility system, and all but 249 communes had been dissolved, their governmental functions passed on to 91,000 township and town governments. Production team organizations were replaced by 940,000 village committees. Under the responsibility system, farm families no longer devoted most of their efforts to collective production but instead generally signed contracts with the village or town to cultivate a given crop on a particular piece of land. After harvest a certain amount of the crop had to be sold to the unit at a predetermined price, and any output beyond that amount was the property of the family, either to be sold in the market or to be consumed. Beyond the amount contracted for delivery to the collective, farmers were allowed to determine for themselves what and how to produce.
Market activity played a central role in the rural economy of the 1980s. Farmers sold a growing share of their produce in rural or urban free markets and purchased many of the inputs that had formerly been supplied by the team or brigade. A prominent new institution that thrived in the market environment was the "specialized household." Specialized households operated in the classic pattern of the entrepreneur, buying or renting equipment to produce a good or service that was in short supply locally. Some of the most common specialties were trucking, chicken raising, pig raising, and technical agricultural services, such as irrigation and pest control. Many of the specialized households became quite wealthy relative to the average farmer.
The new economic climate and the relaxation of restrictions on the movements of rural residents gave rise to numerous opportunities for profit-making ventures in the countryside. Towns, villages, and groups of households referred to as "rural economic unions" established small factories, processing operations, construction teams, catering services, and other kinds of nonagricultural concerns. Many of these organizations had links with urban enterprises that found the services of these rural units to be less expensive and more efficient than those of their formal urban counterparts.
The growth of these nonagricultural enterprises in the countryside created a large number of new jobs, making it possible for many workers who were no longer needed in agriculture to "leave the land but stay in the country," significantly changing the structure of the rural economy and increasing rural incomes. In 1986 nonagricultural enterprises in the countryside employed 21 percent of the rural labor force and for the first time produced over half the value of rural output.
Although the chief characteristic of the new rural system was household farming for profit, collective organizations still played a major role. Agricultural land still was owned by township or town governments, which determined the crops farmers contracted to grow and the financial terms of the contracts. Many township, town, and village governments also engaged in major entrepreneurial undertakings, establishing factories, processing mills, brick works, and other large-scale enterprises. Finally, the maintenance and operation of public works, such as irrigation systems, power plants, schools, and clinics, generally still was regarded as the responsibility of the collective administrations.
Four percent of the nation's farmland was cultivated by state farms, which employed 4.9 million people in 1985. State farms were owned and operated by the government much in the same way as an industrial enterprise. Management was the responsibility of a director, and workers were paid set wages, although some elements of the responsibility system were introduced in the mid-1980s. State farms were scattered throughout China, but the largest numbers were located in frontier or remote areas, including Xinjiang-Uygur Autonomous Region in the northwest, Nei Monggol Autonomous Region, the three northeastern provinces of Heilongjiang, Jilin, and Liaoning and the southeastern provinces of Guangdong, Fujian, and Jiangxi.
The industrial sector employed only about 17 percent of the labor force in 1985 but, as a result of much higher labor productivity than the agricultural sector, accounted for over 46 percent of national income. Industrial units were very diverse in size and technological sophistication, ranging from tiny handicraft manufacturing enterprises to giant modern complexes producing such goods as steel, chemical fertilizer, and synthetic fibers. The majority of the country's large industrial units were clustered in the major industrial centers in the northeast, the Beijing-Tianjin-Tangshan area, the Chang Jiang (Yangtze River) Valley, and Shanghai. Small and medium-size units were found throughout the country, and a number of first-rank plants were located far from the leading cities. Ownership of industrial enterprises fell into three general categories: state ownership, urban collective ownership, and rural collective ownership. Industry was dominated by the state-owned sector, which included the largest, most technically advanced, and most important enterprises.
In 1985 state-owned enterprises produced 70 percent of national industrial output by value, held 75 percent of fixed industrial assets, and employed 46 percent of the industrial labor force (including rural industrial enterprises). Although all of these units were owned by "the state" in the abstract sense, operational control and effective ownership of specific enterprises were divided among the different levels of government. A few of the largest enterprises were under the direct authority of their respective ministries in the central government. Most major enterprises were owned by the province, autonomous region, or special municipality where they were located or were subject to shared control by the central ministry and the provincial-level government. Small and medium-size units usually were owned by city, prefecture, county, or town governments. Control of some enterprises was shared with higher administrative levels.
Workers in state-owned enterprises were paid regular wages according to an established pay scale, as well as bonuses that were supposed to be related to personal or enterprise performance or both. In addition, they received a number of important benefits, including free health care, subsidized housing, and subsidies for such work-related expenses as special clothing and commuting costs. The average income of industrial workers was considerably higher than that of most farmers and was much more stable.
Urban, collectively owned enterprises (owned by the workers) for the most part were small units equipped with relatively little machinery. Many of these units were engaged in handicraft production or other labor-intensive activities, such as manufacturing furniture or assembling simple electrical items. In the late 1970s and early 1980s, the government promoted them as a means of using surplus labor to increase supplies of consumer and export goods. By 1985 urban collective industrial enterprises employed over 17 million people, 20 percent of the total industrial labor force. These enterprises held only 13 percent of all industrial fixed assets but produced 19 percent of total industrial output value.
Rural, collectively owned industrial enterprises--commonly referred to as "township enterprises"--were the most rapidly growing portion of the industrial sector in the mid-1980s. The government regarded them as a means of expanding industrialization (without further taxing the overcrowded major urban centers), alleviating rural unemployment, and increasing supplies of industrial products in rural areas. Most of the township enterprises were operated by township and town governments, but a large number of very small units were operated by private cooperative organizations called "rural economic unions." In 1985 township enterprises employed 30 million workers, over a third of the total industrial labor force. The value of their fixed assets, however, was only 12 percent of the national total, and their output value came to less than 10 percent of the national total. Nonetheless, in 1985 their income grew by 44 percent over the 1984 levels. The most common products of township industries were building materials, agricultural machinery, textiles, and processed foods.
The history of the Chinese banking system has been somewhat checkered. Nationalization and consolidation of the country's banks received the highest priority in the earliest years of the People's Republic, and banking was the first sector to be completely socialized. In the period of recovery after the Chinese civil war (1949-52), the People's Bank of China moved very effectively to halt raging inflation and bring the nation's finances under central control. Over the course of time, the banking organization was modified repeatedly to suit changing conditions and new policies.
The banking system was centralized early on under the Ministry of Finance, which exercised firm control over all financial services, credit, and the money supply. During the 1980s the banking system was expanded and diversified to meet the needs of the reform program, and the scale of banking activity rose sharply. New budgetary procedures required state enterprises to remit to the state only a tax on income and to seek investment funds in the form of bank loans. Between 1979 and 1985, the volume of deposits nearly tripled and the value of bank loans rose by 260 percent. By 1987 the banking system included the People's Bank of China, Agricultural Bank, Bank of China (which handled foreign exchange matters), China Investment Bank, China Industrial and Commercial Bank, People's Construction Bank, Communications Bank, People's Insurance Company of China, rural credit cooperatives, and urban credit cooperatives.
The People's Bank of China was the central bank and the foundation of the banking system. Although the bank overlapped in function with the Ministry of Finance and lost many of its responsibilities during the Cultural Revolution, in the 1970s it was restored to its leading position. As the central bank, the People's Bank of China had sole responsibility for issuing currency and controlling the money supply. It also served as the government treasury, the main source of credit for economic units, the clearing center for financial transactions, the holder of enterprise deposits, the national savings bank, and a ubiquitous monitor of economic activities.
Another financial institution, the Bank of China, handled all dealings in foreign exchange. It was responsible for allocating the country's foreign exchange reserves, arranging foreign loans, setting exchange rates for China's currency, issuing letters of credit, and generally carrying out all financial transactions with foreign firms and individuals. The Bank of China had offices in Beijing and other cities engaged in foreign trade and maintained overseas offices in major international financial centers, including Hong Kong, London, New York, Singapore, and Luxembourg.
The Agricultural Bank was created in the 1950s to facilitate financial operations in the rural areas. The Agricultural Bank provided financial support to agricultural units. It issued loans, handled state appropriations for agriculture, directed the operations of the rural credit cooperatives, and carried out overall supervision of rural financial affairs. The Agricultural Bank was headquartered in Beijing and had a network of branches throughout the country. It flourished in the late 1950s and mid-1960s but languished thereafter until the late 1970s, when the functions and autonomy of the Agricultural Bank were increased substantially to help promote higher agricultural production. In the 1980s it was restructured again and given greater authority in order to support the growth and diversification of agriculture under the responsibility system.
The People's Construction Bank managed state appropriations and loans for capital construction. It checked the activities of loan recipients to ensure that the funds were used for their designated construction purpose. Money was disbursed in stages as a project progressed. The reform policy shifted the main source of investment funding from the government budget to bank loans and increased the responsibility and activities of the People's Construction Bank.
Rural credit cooperatives were small, collectively owned savings and lending organizations that were the main source of small-scale financial services at the local level in the countryside. They handled deposits and short-term loans for individual farm families, villages, and cooperative organizations. Subject to the direction of the Agricultural Bank, they followed uniform state banking policies but acted as independent units for accounting purposes. In 1985 rural credit cooperatives held total deposits of -Y72.5 billion.
Urban credit cooperatives were a relatively new addition to the banking system in the mid-1980s, when they first began widespread operations. As commercial opportunities grew in the reform period, the thousands of individual and collective enterprises that sprang up in urban areas created a need for small-scale financial services that the formal banks were not prepared to meet. Bank officials therefore encouraged the expansion of urban credit cooperatives as a valuable addition to the banking system. In 1986 there were more than 1,100 urban credit cooperatives, which held a total of -Y3.7 billion in deposits and made loans worth -Y1.9 billion.
In the mid-1980s the banking system still lacked some of the services and characteristics that were considered basic in most countries. Interbank relations were very limited, and interbank borrowing and lending was virtually unknown. Checking accounts were used by very few individuals, and bank credit cards did not exist. In 1986 initial steps were taken in some of these areas. Interbank borrowing and lending networks were created among twenty-seven cities along the Chang Jiang and among fourteen cities in north China. Interregional financial networks were created to link banks in eleven leading cities all over China, including Shenyang, Guangzhou, Wuhan, Chongqing, and Xi'an and also to link the branches of the Agricultural Bank. The first Chinese credit card, the Great Wall Card, was introduced in June 1986 to be used for foreign exchange transactions. Another financial innovation in 1986 was the opening of China's first stock exchanges since 1949. Small stock exchanges began operations somewhat tentatively in Shenyang, Liaoning Province, in August 1986 and in Shanghai in September 1986.
Throughout the history of the People's Republic, the banking system has exerted close control over financial transactions and the money supply. All government departments, publicly and collectively owned economic units, and social, political, military, and educational organizations were required to hold their financial balances as bank deposits. They were also instructed to keep on hand only enough cash to meet daily expenses; all major financial transactions were to be conducted through banks. Payment for goods and services exchanged by economic units was accomplished by debiting the account of the purchasing unit and crediting that of the selling unit by the appropriate amount. This practice effectively helped to minimize the need for currency.
Since 1949 China's leaders have urged the Chinese people to build up personal savings accounts to reduce the demand for consumer goods and increase the amount of capital available for investment. Small branch offices of savings banks were conveniently located throughout the urban areas. In the countryside savings were deposited with the rural credit cooperatives, which could be found in most towns and villages. In 1986 savings deposits for the entire country totaled over -Y223.7 billion.
Before 1949 the Chinese economy was characterized by widespread poverty, extreme income inequalities, and endemic insecurity of livelihood. By means of centralized economic planning, the People's Republic was able to redistribute national income so as to provide the entire population with at least the minimal necessities of life (except during the "three bad years" of 1959, 1960, and 1961) and to consistently allocate a relatively high proportion of national income to productive investment. Equally important to the quality of life were the results of mass public-health and sanitation campaigns, which rid the country of most of the conditions that had bred epidemics and lingering disease in the past. The most concrete evidence of improved living standards was that average national life expectancy more than doubled, rising from around thirty-two years in 1949 to sixty-nine years in 1985.
In 1987 the standard of living in China was much lower than in the industrialized countries, but nearly all Chinese people had adequate food, clothing, and housing. In addition, there was a positive trend toward rapid improvements in living conditions in the 1980s as a result of the economic reforms, though improvements in the standard of living beyond the basic level came slowly. Until the end of the 1970s, the fruits of economic growth were largely negated by population increases, which prevented significant advances in the per capita availability of food, clothing, and housing beyond levels achieved in the 1950s. The second major change in the standard of living came about as a result of the rapid expansion of productivity and commerce generated by the reform measures of the 1980s. After thirty years of austerity and marginal sufficiency, Chinese consumers suddenly were able to buy more than enough to eat from a growing variety of food items. Stylish clothing, modern furniture, and a wide array of electrical appliances also became part of the normal expectations of ordinary Chinese families.
Income differences in China since the 1950s have been much smaller than in most other countries. There was never any attempt, however, at complete equalization, and a wide range of income levels remained. Income differences grew even wider in the 1980s as the economic reform policies opened up new income opportunities. More than two-thirds of all urban workers were employed in state-owned units, which used an eight-grade wage system. The pay for each grade differed from one industry to another, but generally workers in the most senior grades earned about three times as much as beginning workers, senior managers could earn half again as much as senior workers, and engineers could earn twice as much as senior workers. In 1985 the average annual income of people employed in state-owned units was -Y1,213. An important component of workers' pay was made up of bonuses and subsidies. In 1985 bonuses contributed 13 percent of the incomes of workers in state-owned units; subsidies for transportation, food, and clothing added another 15 percent. One of the most important subsidies--one that did not appear in the income figures--was for housing, nearly all of which was owned and allocated by the work unit and rented to unit members at prices well below real value. In 1985 urban consumers spent just over 1 percent of their incomes on housing.
The 27 percent of the urban labor force that was employed in collectively owned enterprises earned less on average than workers in state-owned units. The income of workers in collectively owned enterprises consisted of a share of the profit earned by the enterprise. Most such enterprises were small, had little capital, and did not earn large profits. Many were engaged in traditional services, handicrafts, or small-scale, part-time assembly work. In 1985 workers in urban collective units earned an average annual income of -Y968. In the more open commercial environment of the 1980s, a small but significant number of people earned incomes much larger than those in regular state-owned and collectively owned units. Employees of enterprises run by overseas Chinese, for instance, earned an average of -Y2,437 in 1985, over twice the average income of workers in state-owned units.
The small but dynamic domestic private sector also produced some lucrative opportunities. Private, part-time schools, which appeared in large numbers in the mid-1980s, offered moonlighting work to university professors, who could double or triple their modest incomes if they were from prestigious institutions and taught desirable subjects, such as English, Japanese, or electronics. Small-scale entrepreneurs could earn considerably more in the free markets than the average income. Business people who served as a liaison between foreign firms and the domestic economy could earn incomes many times higher than those of the best-paid employees of state-owned units. A handful of millionaire businessmen could be found in the biggest cities. These people had owned firms before 1949, cooperated with the government in the 1950s in return for stock in their firms, and then lost their incomes in the political turmoil of the Cultural Revolution. In the late 1970s and early 1980s, when these businessmen were politically rehabilitated, their incomes were returned with the accrued interest, and some suddenly found themselves quite wealthy. Although the number of people earning incomes far beyond the normal wage scale was tiny relative to the population, they were important symbols of the rewards of economic reform and received a great deal of media attention. In 1985 most of these people worked in enterprises classified as "units of other ownership" (private rather than state- or collectively owned enterprises). These enterprises employed only 440,000 people out of the total urban labor force of 128 million in 1985 and paid average annual salaries of -Y1,373, only slightly higher than the overall urban national average.
In China, as in other countries, an important determinant of the affluence of a household was the dependency ratio--the number of nonworkers supported by each worker. In 1985 the average cost of living for one person in urban areas was -Y732 a year, and the average state enterprise worker, even with food allowance and other benefits added to the basic wage, had difficulty supporting one other person. Two average wage earners, however, could easily support one dependent. Families with several workers and few or no dependents had substantial surplus earnings, which they saved or used to buy nonessential goods. An important positive influence on the per capita consumption levels of urban families was a decline in the number of dependents per urban worker, from 2.4 in 1964 to 0.7 in 1985. In farm families the dependency ratio fell from 1.5 in 1978 to 0.7 in 1985. Farm incomes rose rapidly in the 1980s under the stimulus of the responsibility system but on average remained considerably lower than urban incomes. Household surveys found that in 1985 average net per capita income for rural residents was - Y398, less than half the average per capita urban income, which was -Y821. The value of goods farmers produced and consumed themselves accounted for 31 percent of rural income in 1985. The largest component of income in kind was food, 58 percent of which was self-produced.
Farm family members on average consumed much less of most major kinds of goods than urban residents. For instance, a household survey found in 1985 that the average urban dweller consumed 148 kilograms of vegetables, 20 kilograms of meat, 2.6 kilograms of sugar, and 8 kilograms of liquor. At the same time, a survey of rural households found that the average rural resident consumed 131 kilograms of vegetables, 11 kilograms of meat, 1.5 kilograms of sugar, and 4 kilograms of liquor. Differences of a similar nature existed for consumer durables.
Another indication of the gap between urban and rural income levels was the difference in personal savings accounts, which in 1985 averaged -Y277 per capita for urban residents but only -Y85 per capita for the rural population. There was great variation in rural income levels among different provincial-level units, counties, towns, villages, and individual families. While the average net per capita income for rural residents in 1985 was - Y398, provincial-level averages ranged from a high of -Y805 for farm families living in Shanghai to a low of -Y255 for the rural population of Gansu Province.
The fundamental influence on rural prosperity was geography. Soil type and quality, rainfall, temperature range, drainage, and availability of water determined the kinds and quantities of crops that could be grown. Equally important geographic factors were access to transportation routes and proximity to urban areas.
The highest agricultural incomes were earned by suburban units that were able to sell produce and sideline products in the nearby cities. Under the responsibility system, household incomes depended on the number of workers in each household and the household's success in holding down production costs and in supplying goods and services to local markets. Most of the rural families with the highest incomes--the "10,000-yuan households"--were "specialized households" that concentrated family efforts on supplying a particular service or good. Many of these families owned their own equipment, such as trucks or specialized buildings, and operated essentially as private concerns. An increasingly important influence on rural incomes in the mid-1980s was the expansion of nonagricultural rural enterprises, often referred to as "township enterprises." These were factories, construction teams, and processing operations, most of which were owned by collectives, primarily villages, towns, and townships. Some were owned by voluntary groups of families. Township enterprises were considered by the government to be the main source of employment for rural workers who were leaving agriculture because of rising productivity under the responsibility system. By the end of 1986, township enterprises employed 21 percent of the rural labor force. The movement of rural labor into township enterprises helped to increase average rural incomes because of the higher productivity in nonagricultural jobs. In 1986 industrial workers in rural areas produced an average annual value of -Y4,300 per person, compared with about -Y1,000 per farmer in the same year.
The change in farm production from primarily collective to primarily household operations is reflected in household survey data on the sources of rural incomes. Before the 1980s farmers received income in the form of shares of the profits earned by their production teams plus supplementary income from household sideline activities. In 1978 two-thirds of the net income of farm families came from the collective, and only 27 percent was derived from household production. With the shift to the responsibility system these ratios were reversed. By 1982 the collective provided only 21 percent of farm income, while household production provided 69 percent. In 1985 the collective share of farm income had fallen to just over 8 percent, and the family production share had risen to 81 percent.
Perhaps the most serious gaps in living standards between rural and urban areas were in education and health care. Primary schools existed in most rural localities, and 80 percent of the country's primary-school teachers worked in rural schools. Secondary schools were less widely distributed; only 57 percent of the total number of secondary-school teachers served in rural schools. Most rural schools were less well equipped, and their staffs less adequately trained than their urban counterparts. Health care had been greatly improved in rural areas in the 1960s and 1970s through sanitation campaigns and the introduction of large numbers of barefoot doctors, midwives, and health workers. Most modern hospitals, fully trained doctors, and modern medical equipment, however, were located in urban areas and were not easily accessible to rural families. In 1985 two-thirds of all hospital beds and medical staff personnel were located in urban hospitals. The economic reforms affected rural education and health care positively in places where farm communities used their higher incomes to improve schools and hospitals and negatively in localities where the reduced role of the collective resulted in deterioration of collective services.