Prisoner of the State: The Secret Journal of Premier Zhao Ziyang

by Adi Ignatius

  After Yaobang resigned, the Five-Person Group replaced the Politburo Standing Committee, thus making it parallel to the Seven-Person Group. The Five-Person Group managed daily affairs. The Seven-Person Group made preparations for leadership appointments for the 13th Party Congress. It also expanded its powers to take over the Central Committee’s role in making general personnel changes.

  The Minister of Forestry was removed from office because of a forest fire in Daxing’anling [in Heilongjiang Province] in 1987, so a new Minister of Forestry was proposed. However, because of the intervention of the Seven-Person Group, it failed to go through. At the time, I was on a state visit abroad, leaving Wan Li in charge at home. Wan Li objected to what had happened and reported to Deng Xiaoping.

  Deng announced that the Seven-Person Group should be led by the Five-Person Group. Day-to-day personnel changes would still be managed by the Secretariat and the State Council. Bo Yibo had no choice but to agree. However, he continued to overreach. He often asked the Director of Organization [Song Ping] to report to him; he would then relay his opinions to Song Ping and ask him to carry things out accordingly. Bo Yibo said that because the leadership appointments for the 13th Party Congress included the evaluation of all provincial, municipal, and ministerial leaders, the Department of Organization must consult the Seven-Person Group before deliberating the reshuffling of cadres.

  Before the 13th Party Congress, he also conveyed a suggestion to me through Song Ping: that it would be preferable for the existing Seven-Person Group to continue in some form after the 13th Party Congress in order to assist the Central Committee in managing personnel work. The original purpose of the Seven-Person Group was to make arrangements for the leadership of the 13th Party Congress, but now he was proposing that it continue even beyond the Congress. It was obvious that they hoped to control the management of personnel indefinitely.

  I could not agree with that. I told Song Ping to relay my message that we would stick to the original decision—that after the 13th Party Congress, the mission of the Seven-Person Group will have been accomplished. As for how to utilize the effectiveness of the elder comrades with regards to personnel management, this was something we could discuss at a later date. Bo, a person who had always been keen to grab power, must have been deeply displeased when I rejected his idea.

  PART 5

  A TUMULTUOUS YEAR

  1

  After the Congress

  By his own account, 1988 is the most difficult year in Zhao’s entire political career, a time when things take a dramatic downward turn. The 13th Party Congress has been a success, and Zhao even manages to win approval for a political reform plan. But a series of conflicts and crises lies in store.

  The 13th Party Congress met with good reactions both at home and abroad, and was highly praised. Above all, it made people across the country feel hopeful. It is fair to say that it renewed people’s enthusiasm.

  The economic situation in 1987 was also better than it had been in past years. Not only was the nation’s economy continuing to grow at a fast pace, but the signs also seemed to point to a smooth and stable development. The balance among the various parts of the nation’s economy was also good, except in agriculture. We had an abundant harvest, but problems arose due to stagnation in the sector in the prior few years. But money supply had remained within the plan, foreign reserves had greatly increased, and foreign trade was healthy.

  Efforts to control macroeconomics while freeing microeconomics had also improved. The macroeconomics had not gotten out of control, and the microeconomics had not been stifled. The problems of economic overheating and excessive money supply had all been eased.

  In the few years prior, problems had occurred when we tried to bring the macroeconomic situation under control while making improvements to the mechanism. From our experiences of 1987, stabilizing the economy and growing at a certain pace can happen concurrently. Bringing the macroeconomic situation under control can be done at the same time as freeing activities at the microeconomic level.

  After the 13th Party Congress, the general political and economic situation was good. If we had continued to adapt the measures and policies learned from the successful experiences of the past few years, the situation in 1988 could have continued to improve.

  However, that is not what happened. Instead good became worse and in the end was quite bad. There are a lot of lessons that can be drawn from what happened.

  2

  Panic Buying and Bank Runs

  Freeing up prices represents one of the thorniest challenges for China’s economic reformers—and one of the most critical. After all, freely set prices instantly transmit vital information on the real demand for commodities, a fundamental part of the efficiency of a market system. In the early reform era, China has a dual-price system: both government-set prices and market-determined prices exist for the same goods. Exploiting the difference between the two creates widespread opportunities for corruption. Reformers feel an urgency to fix this volatile situation, but in their haste make some fatal mistakes. The result is panic buying and bank runs as the public anticipates what will come next.

  Rising prices was a hot issue in 1988; it was inevitable during the reform process. The 7 percent rise in 1987 was not very high, but higher than in the few years prior.

  In the first quarter of 1988, prices continued to rise, especially for food. The cause was the mediocre agricultural output over the previous few years. At the same time, our approach had been problematic, as we had not followed market rules. Grain prices had been raised, but meat and egg prices had not, resulting in shortages. During the Spring Festival of 1988, some cities were considering a return to the ration system. If we had immediately adjusted prices of agricultural produce to lift that sector, and at the same time provided compensation to urban residents, the problem could have been resolved.

  However, there were concerns. Prices were rising every year, and the cumulative rise was significant. People were complaining, and we were reacting by making further adjustments—yet the overall pricing system had still not been straightened out. We considered quickly raising prices to their correct levels within a few years, enduring the pain for the sake of breaking through the difficulties of reforming the system. At the same time, we would raise workers’ wages.

  With the benefit of hindsight, however, this idea was not practical. In those years, the coexistence of two markets, with a two-track pricing system, created so much friction and corruption that it was impossible to institutionalize the market. We wanted to come up with a coordinated plan to eliminate the coexistence of two systems as soon as possible.

  We also believed that the reforms to date had been relatively easy, and while the results had been good, the things left to accomplish were more difficult. The task at hand was to tackle the thornier issues and achieve a breakthrough; if we shied away from confronting them, things would not improve, and might get worse.

  In moving from a planned to a market economy, we had always taken a gradual approach, especially when adapting new elements. The nation’s economy was divided into two sectors. We were increasing the market sector and gradually weakening the planned sector. These two efforts were coordinated.

  The government did not directly intervene in the market sector, especially not through administrative means. Production was self-initiated and prices were freely set according to market forces. In the market sector, family enterprises, privately operated firms, and joint ventures were all self-initiated and responsible for their own profits and losses.

  The planned sector was basically under the control of the state, and here the state set prices. Some products in this sector also were put on the market, but they mainly did not respond to market mechanisms. The state-owned enterprises had no real autonomy.

  In the market sector, enterprises were free to set their own prices. In the planned sector enterprises’ prices were set by the state, or at least the state retained authority over the process. The same w
as true for wages. In the market sector, enterprises were free to set wages themselves. In the planned sector, wages were set by the state or, even if the state ceded some of this power to the enterprises, it still retained ultimate control. The market sector in those years grew out of nothing, from infancy to maturity, while the planned sector gradually shrank. Still, in 1988, the planned sector accounted for more than 60 percent [of the economy].

  Though the two-track system caused friction and created opportunities for corruption, overall it brought vitality to the economy, especially the market sector.

  It was not possible to transform large and midsize state-owned enterprises into market entities through a one-time reform of the system, prices, and wages. They could only be transformed bit by bit through gradual reforms to the planning, pricing, and ownership systems. The gradual approach was more stable, less risky, and easier for society to accept. We had been proceeding this way all along, though not consciously.

  We knew that pricing reform was critical. And we always thought that at some point conditions would be right to take measures, all at once or in several steps, to transform the state-owned enterprises. This implied that the development of the market sector was a prelude to a final breakthrough.

  In May 1988, I gave a report to a Politburo meeting titled “Establishing the New Order: The Socialist Market Economy,” in which I said the task was to reform the pricing system in the next few years while raising workers’ wages appropriately. We believed this was the decisive battle in the transformation to a market economy: ending the coexistence of the two systems and the two-track pricing system.

  The existence of these concerns indicated that price reform was not a simple problem. After August, I concluded that the success of price reform and wage reform depended on deepening the entire reform. If price and wage reform ultimately required us to transition all medium and large state-owned enterprises toward a market model, then there was a feasibility question. It was difficult for the plan to work.

  There also were tactical problems, specifically involving price reform. The original plan was problematic—but it was highly publicized before implementation, without consideration for people’s psychology. Economic conditions were good in 1987, but in 1988 there were tensions in the market.

  Abroad, this is known as the psychological anticipation of inflation. If people know that the state will raise prices, even if they know there will be government compensations and that their living standards will not drop, they will be concerned about preserving the value of their savings.

  Because we did not raise the banks’ interest rates in time to address the issue of preserving the value of savings, people started panic buying and hoarding to preserve the value of their money. This was primarily psychological. Even though we announced repeatedly that the price hikes would not lower people’s living standards, we had overlooked the issue of people’s savings. It was common sense, but we lacked experience at the time.

  In August, we discussed the issue of pricing reform at Beidaihe. Immediately the newspapers began publicizing the breakthrough, reporting that there had been a decision to raise prices. People started to panic. They rushed to banks to make withdrawals and frantically bought up commodities. Suddenly there were shortages, and it seemed as if the economic situation had worsened.

  In fact, the economic situation in 1988 was not bad; there wasn’t an excessive supply of money. The main issue was the psychological factor: people were in a panic. Of course, there still was some hangover from the overheated economy and excess currency of earlier years. People’s buying power had not yet materialized in the form of large amounts of savings. There was perhaps 1 trillion yuan deposited in banks; once people panicked they withdrew their funds and started buying.

  The issue was the improper publicizing of price reform. If we had announced a cessation of price reform and then raised interest rates and promised value-guaranteed savings, people would have felt more secure. If we had then scaled back the tens of billions of yuan being spent on infrastructure, saving several million tons of steel, the economy would not have suffered any problems.

  Back then, the Central Economic and Financial Leading Group repeatedly proposed to the State Council that interest rates be raised as quickly as possible and that value-guaranteed savings be put into practice. However, at the State Council, Li Peng and Yao Yilin worried that if savings’ interest rates were increased while interest rates on loans to the state-owned enterprises could not be raised accordingly, that would put too much burden on the banks. They were indecisive for a time, before eventually putting value-guaranteed savings into place.

  In fact, as soon as value-guaranteed savings were in place, savings deposits rose again. That started in the fourth quarter of 1988 and accelerated in the first quarter of 1989. The situation quickly stabilized. This proved that the economy did not have any serious problems. Inflation was not higher. But when people were in a panic, they withdrew cash that amounted to years of savings to purchase commodities, making it appear that inflation was getting worse. In fact, inflation had gone down after 1987, though it had not fully subsided.

  3

  A Series of Missteps

  Zhao further analyzes the events that led in 1988 to panic buying and bank runs. The political fallout is far worse than the actual effect on the economy. Many people now believe the reform program is a failure, and control over the economy reverts to leaders who want to reassert administrative controls. It will be years before things recover.

  The bank runs and hoarding of commodities led to an overall panic, which arrived with the force of a tidal wave. Every major city was in a tense situation. Criticisms within and outside the Party grew, and people at all levels of authority were under pressure.

  This caused us to overestimate the seriousness of the economic problems and believe that inflation had soared. We did not use the term “runaway inflation” but called it “high inflation.” In fact, we had not actually analyzed the inflation.

  We decided to reassert order over economic affairs in 1988. We started to shift emphasis away from reform and toward “adjustment and reorganization.” The intention was to assuage people’s panic, but the effect was extremely negative and in retrospect things should not have been handled this way.

  We should have stabilized the economy by getting control over infrastructure spending and money supply. If we had done this, the economy could have been stabilized. There was no need for a major reorganization and contraction. If we had deepened reforms, which would have meant further reducing the planned sector while developing the market sector, the situation would have developed smoothly. One goal of the proposed “adjustment and reorganization” was to quickly create conditions for another attempt to reform the pricing and wage systems, to end the two-track pricing system. But I now realize that this idea was not realistic.

  People like Li Peng and Yao Yilin had always had misgivings about reform, so as soon as the slogan “adjustment and reorganization” was proposed—and with direct management of economic affairs under their control—they tightened on all fronts. They restored the old methods, making major cutbacks through administrative means. Powers that had been handed down to lower levels were reclaimed. Measures that had relied significantly on market mechanisms were abolished.

  After a few months of this, the economy slowed down; the contraction would continue for two to three years. This shows that there had not been a problem with the Chinese economy; otherwise, why would these weaknesses occur only after administrative controls were put in place?

  The end result of “adjustment and reorganization” was not good. My intention had been to use the slogan to quickly stabilize the situation and create the right conditions for reinitiating price and wage reforms, and continue with the original plan. In retrospect, however, this was a mistake.

  The economy wouldn’t show signs of vitality again until Deng Xiaoping took his southern tour in 1992. At that time, he criticized “adjustment and re
organization” and suggested that we take advantage of opportunities to speed up development and reform. This won the people’s approval and further proved that the single-minded cutbacks and contractions had not been in line with China’s reality. If the Chinese economy had really been in a critical condition and inflation so serious, it would have been impossible for the economy to recover so quickly in reaction to Deng’s remarks in the south.

  There are two important issues from this period that need to be revisited. One concerns reform: under the existence of the two-track system, the only way to reform matters was to make gradual transitions, incrementally expanding market-adjustment mechanisms while progressively reducing the planned economic sector. We had to proceed step-by-step in expanding the market sector. It would have been impossible to transform the planned economy into a market economy in one blow. In retrospect, the “all at once” method had not been appropriate; the basic approach was wrong.

  Another issue was that when bank runs and panic buying occurred, the seriousness of the situation had been overestimated. Necessary measures could have been applied, but it was inappropriate to move in a new direction. Rather, actions to deepen reform should have been taken to stabilize the situation. If we had done that, the panic buying of 1988 and the stagnation and setbacks of the next few years could have been avoided.