by Adi Ignatius
The problem was with how we were thinking about pricing reform. We did not follow the path that we had taken in the few years before that, but instead had attempted to use brute force to make the breakthrough, believing that the market transformation would complete itself afterward. It was in fact a treatment of shock therapy.
Next, the timing and the publicity of the price reform policy were mistaken. In spring of 1988, the nationwide problem of price hikes was not due to the economic overheating of 1987, nor was it triggered by currency oversupply. The main cause was that when we set prices for agricultural products we did not handle things appropriately. The prices of meat, vegetables, and eggs were all raised; rising prices were already a focus of attention. So when we then made plans for pricing reform, the timing was ill chosen and naturally caused panic. Publicizing the plan was especially inappropriate; we suffered a great deal as a result. This was the main reason for the panic buying: people were not buying products for consumption, but rather for preserving the value of their savings.
Throughout the process of designing, discussing, and finalizing the price reform plan, newspapers continuously published articles. Some reported on what Deng Xiaoping had said; others included remarks made by me. It put a spotlight on the issue. They said that the easiest part of reform had already been done, and that now we would tackle the problem with prices.
These factors together made people panic. The situation, therefore, was caused by the inappropriate measures we had taken. When the bank runs and panic buying started, we didn’t make a coolheaded analysis. We rushed too quickly to propose “adjustment and reorganization,” and the result was that those who had opposed reform were given a chance to cause several years of economic decline.
4
The Problem with Prices
Zhao expounds on the political circumstances surrounding the attempts to dramatically reform the pricing system. The plan has the solid political backing of Deng Xiaoping, who wants to eliminate the billions in subsidies that support the dual pricing system. In the end, however, Zhao chokes under the pressure and pulls the plug on price reform. He takes full responsibility for the failure.
The attempt to achieve a breakthrough in pricing reform went as follows.
In May 1988, I issued a report at an enlarged Politburo meeting, “Establishing a New Economic Order: The Socialist Market Economy.” I proposed that within five years we should adjust prices and the inappropriate wage levels, at the cost of having to suffer price hikes each year. It was resolved at the meeting that the State Council would draw up plans. [Vice Premier] Yao Yilin and his associates drafted the detailed plan. It was discussed once at Beidaihe, after which they made revisions and it came back to the Politburo for consideration.
While we were discussing the issue, the incidents of panic buying had become widespread. People expressed concerns in the discussion that pricing reform would cause problems. I said at the Politburo meeting that when implementing this reform, each step must not be too big; at the same time, we should cut tens of billions in infrastructure spending to reduce market demand for steel and other resources.
The timing was perceived to be relatively favorable: the economy was growing, and people’s incomes were increasing. Plus, we had some backup measures on reserve. For example, we had large amounts of public housing that could be sold in order to take some currency out of circulation. We could also sell some small and midsize enterprises.
Our main objective with price reform was to correct price levels and make enterprises meet market conditions through fair competition, so as to improve their efficiency.
In August, regional authorities, especially in Tianjin and Shanghai, were concerned, but none expressed their opinions clearly. And so at Beidaihe, the plan was approved. In the process of carrying it out, there were no obvious disagreements, even from Yao Yilin and his associates at the State Council, as they had drawn up the detailed plans.
Comrade Deng Xiaoping had always believed in price reform. In 1988, he commented several times that price reform had proceeded too late, and that things would have been better if it had been done a few years earlier.
At the enlarged Politburo meeting in May, I proposed that we make significant progress in price reform over the next few years. I had discussed this with Deng Xiaoping beforehand, and he had been very supportive. Later, he said publicly that price reform needed a breakthrough and that we should overcome the difficulties. He also said that our problem was not that we might take too bold of a step, but rather that we might vacillate, and when faced with problems, hesitate or back down.
I believe that Deng Xiaoping’s understanding of price reform was based mainly on concerns about the losses at state-owned enterprises and his hopes for reducing state subsidies. He often said that, because of incorrect pricing, we were spending tens of billions of yuan on subsidies. He asked Yao Yilin several times, “If we proceed with this reform, how many billions can we save in subsidies? If we don’t proceed, how much will they increase?”
He was very firm in supporting price reform. He liked taking bold steps, and he encouraged anything to do with reform.
Of course, if we believed something was too difficult to carry out, he would not insist. Therefore, for the attempt at price reform in 1988, the responsibility was not his, but primarily mine. I had proposed all of it. The entire process from design to discussion in the State Council was chaired and approved by me. At the last moment, when we faced difficulties, I proposed delaying implementation, with his [Deng’s] agreement.
In the end, I decided to stop price reform and turn to “adjustment and reorganization.” Just before making the decision in September, I spoke with Yao Yilin. I said that we should all unite to delay price reform. He said it could be postponed for several months, until the latter half of 1989, when we could reevaluate. Later, because of the repercussions of price reform and the tense situation in so many places, I concluded that we had to delay the implementation and concentrate on improving the economic environment and easing people’s fears. We could fight this battle later. After I made my decision, I spoke again with Li Peng and Yao Yilin, and they agreed with me.
I felt it necessary to report to Comrade Deng Xiaoping. Just before I had made my decision, Deng Xiaoping had spoken with Li Peng and encouraged us by saying, “Don’t be afraid.” He said there were risks involved with price reform, but these were risks that had to be taken. If anything happened, he would take responsibility.
Given this, if I were to halt price reform, I felt compelled to report that to Deng. The issue was very difficult to explain; it involved a change in direction that was not easy to express in a few sentences. Plus, Deng Xiaoping’s hearing was poor. So I asked [Deng’s secretary] Wang Ruilin to come to my office and outlined the situation in detail for him. I explained why I had decided to delay the plan, and why it would be bad if we did not delay. I asked him to relay this to Deng Xiaoping, because he worked closely with Deng and could clearly explain the issue. After it was reported to Deng, the decision was finalized in the Politburo meeting.
5
Reforms Take a Hit
The failed attempt at pricing reform allows Party conservatives to seize the opportunity to reverse many successful attempts at liberalizing China’s economic system. Ambitious plans like the coastal development strategy are scrapped altogether. Zhao is powerless, as Li Peng and his team roll back the clock.
We had planned for great advances in 1988 in reform and openness. At the end of 1987, it was proposed that Hainan be established as a separate province and be designated a Special Economic Zone (SEZ) with provincial level administration, making it the largest SEZ. The drafting of the Enterprise Law began. In March 1988, the National People’s Congress passed the proposal to establish Hainan Province as a SEZ as well as the Enterprise Law and regulations on private enterprises. The Congress also made amendments to the constitution regarding the rights of land use and the development of private enterprises.
In
the Enterprise Law, ownership and managerial authorities were separated. The point was to emphasize the authority to use and manage a property, as distinct from the rights of ownership. It was recognizing the enterprise as a legal entity. The state was giving its property to the enterprise to use and manage. According to the new law, the state was no longer permitted to interfere unduly in the affairs of enterprises, thereby reducing the importance of the state’s right of ownership. We also established the “factory director responsibility system,” which emphasized the central role of the director as the legal representative of the enterprise.
The document also adopted the policy that formally permitted family businesses and private enterprises to exist and grow. They were given lawful status. Amendments to the constitution also included the rights of land use, which allowed land to be leased out. All of these were part of furthering reform.
Many important ideas on enterprise reform were formulated at this time. In 1987, we promoted the contract-out scheme, which was also intended to separate the two authorities. In 1988, we introduced competition mechanisms into the contract-out scheme. Later we proposed introducing the approach of rural enterprises [that is, with a great deal of freedom from state control] into state-owned medium and large enterprises. We implemented the shareholding system for medium and large enterprises. We proposed the “grafting method” for adopting foreign systems of finance, technology, management, and marketing. In fact, we used the mechanism of joint ventures for state-owned medium and large enterprises. That is, we borrowed an approach and “grafted” it onto the enterprises to transform them.
I later saw news about five state-owned enterprises that had adopted a free style of management in Lanxi, in Zhejiang Province, and it was quite evocative. Thereafter, I proposed letting medium and large enterprises adopt the free style of management and take responsibility for their own profits and losses.
The so-called “free style of management” meant government agencies would no longer intervene in the management of enterprises. The enterprises would decide everything: prices, what to produce, profit distribution, and all other matters of running a business. As long as they did not violate the law, they could independently manage their affairs.
In August and September, I viewed the concepts of “free style of management” and “responsible for one’s own profits and losses” as important aspects of enterprise reform. I emphasized that they were two inseparable parts of a whole; only if we allowed free management could the enterprises take responsibilities for their own profits and losses; only when they took responsibility for that could they truly be free to manage well. Otherwise, we could experience a situation of “profits enjoyed by the enterprises and losses being suffered by the state.”
Some people said these businesses were “enterprises with no higher authority.” That saying was not right. They really were enterprises not under government administration. All of these approaches were aimed at improving efficiency and enabling enterprises to apply proper management and strengthen their ability to adapt during price reforms.
After price reforms were proposed, I felt that they ultimately depended on the efficiency and flexibility of enterprises. Only then could we avoid a return to the old pricing system. We needed to deepen reform, especially enterprise reform.
During this period, I was also very interested in the shareholding system. In September 1988, I met the famous American economist Milton Friedman. I said, “Our biggest problem is that everything is owned by the state, yet management authority is unclear. Is it mine? Or is it his? It could mean that no one assumes responsibility.” Enterprise reform at that time touched upon the problem of ownership rights. The shareholding system was proposed to tackle this problem, to deepen reform.
In the winter of 1987, the coastal development strategy was also proposed. It was an extremely important issue. I also proposed making the entire province of Guangdong a testing ground for reform policies, where everything could be launched first.
If all of these efforts had been allowed to proceed smoothly, reform and openness would have advanced. All the right conditions were in place. Following the successful 13th Party Congress, reform could have taken a giant step forward.
Regrettably, because of the missteps on price reform, the entire reform effort not only could not be advanced, but actually suffered a setback that ended with “adjustment and reorganization.” When I think about it now, I still feel profound regret.
Some of the situations that emerged after the proposal of “adjustment and reorganization” were beyond what I had anticipated. In the State Council, Li Peng and Yao Yilin used “adjustment and reorganization” to fully restore the old methods and completely roll back reform.
They issued many rules, laws, and regulations and placed controls on infrastructure spending. They abolished most measures that had been adopted in recent years to revitalize enterprises. They took back the powers that had been handed down to local authorities and enterprises.
The rise in the consumer price index in 1989 was not larger than it had been in 1988, and hit the target I originally had planned for. But they [Li and Yao] turned the target into an order and made all of the administrative levels responsible for it. That meant some of the commodity pricing that had been freed up was again firmly under administrative control.
For a time, rural regions had been free to make their own choices about crops after fulfilling the state procurement quotas: whether or not to plant, how much to plant. These rights were also abolished. All of this reverted into the state planning sphere. The coastal development strategy that had just been proposed and was about to be launched was entirely scrapped.
It marked the complete comeback of the old system and a great setback for reform. Power was concentrated in a few hands at the State Council and a few agencies of the Central Committee. For example, in order to control loans and credit, withdrawals on ordinary people’s savings were frozen; only deposits were allowed.
As they proceeded with this form of “adjustment and reorganization,” the economy quickly went into a dive: markets slumped and production stagnated. If not for the non-state-owned sector of family businesses and joint ventures, the entire national economy could have fallen into extreme adversity.
6
Zhao in Retreat
With the brakes applied to reforms, Zhao’s authority fades. He tries to keep his hand in the running of the economy but is ignored. There are widespread rumors that he is about to lose his job, and that his family is engaged in corruption. Zhao concludes that he is the target of an organized campaign: frozen out of power and pilloried by his foes. Even Deng Xiaoping can’t help. The economic innovations the two introduced are at risk.
During the process of “adjustment and reorganization” greater power shifted into the hands of the State Council, and away from me and the Central Economic and Financial Leading Group. I continued to search for economic solutions within the group; however, they would not discuss, let alone execute my proposals.
Deng Xiaoping originally suggested the formation of the Central Economic and Financial Leading Group. The purpose was to let me continue to lead economic development and reform even after I had left the position of Premier. When Li Peng had taken over as Premier, many people were concerned, because I was more familiar with the issues involved. Moreover, Li Peng had always been vague about his attitude toward economic reform, so people had doubts. Therefore, Deng Xiaoping designated that I should continue to manage economic affairs, and the group was established.
When “adjustment and reorganization” began, they believed that my position in economic affairs had weakened. They took controlling power, which meant the Politburo Standing Committee, the Central Economic and Financial Leading Group, and I could no longer run economic affairs. Thus they were able to restore many of the old methods, in the name of “adjustment and reorganization,” something the Politburo Standing Committee and the Leading Group would never have agreed to do.
As I mentioned previously, people made a run on banks and commodities to preserve the value of their savings. If interest rates had been raised immediately, the problem could have been resolved. At Leading Group meetings, I repeatedly proposed that we raise interest rates on bank savings. Other comrades in the group, such as Zhang Jinfu and Du Runsheng, agreed.
But the State Council kept fiddling, neither raising interest rates nor launching value-guaranteed savings. Although they eventually raised interest rates, the increase was too small to make a difference. The State Council’s method was to use administrative means to slash credit quotas. As a result, there was insufficient liquidity, and no funds for procuring agricultural products or upgrading technology for factories. Production stagnated.
Another issue was that while people’s savings had decreased, the currency supply had actually grown. Therefore, in the latter half of 1988 and the beginning of 1989, the biggest problem was a severe tightening of credit and loans, which disrupted production and distribution, even as the money supply and currency in circulation had both increased. This proved that the measures taken were a mistake.
I suggested keeping credit under control—tightening it but not so stringently—so that production needs could still be taken care of, while at the same time making efforts to resolve the savings issue to ease people’s fears. My proposal was not adopted.
