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How China's economic reform changed domestic circumstances for exports during the 1980s

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How China's economic reform changed domestic circumstances for exports during the 1980s

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HOW CHINA' S ECONOMIC REFORM CHANGED DOMESTIC CIRCUMSTANCES
FOR EXPORTS DURING THE 1980S
by
Kaori Shitayashiki
A Thesis Presented to the
FACULTY OF THE GRADUATE SCHOOL
UNIVERSITY OF SOUTHERN CALIFORNIA
In Partial Fulfillment of the
Requirements for the Degree
MASTER OF ARTS
(East Asian Area Studies)
May 1998
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UNIVERSITY OF SOUTHERN CALIFORNIA
T H E G R A D U A T E SCHOOL.
U N IV E R S IT Y PA R K
C O S A N G E L E S . C A L IF O R N IA 9 0 C 0 7
This thesis, w ritte n by
Kaori Shitayashiki
under the direction o f k £ I.— Thesis Com m ittee,
and approved by a ll its members, has been p re
sented to and accepted by the Dean of T h e
G raduate School, in p a rtia l fu lfillm en t o f the
requirements fo r the degree of
Master of Arts
THESIS COMM!
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Kaori Shitayashiki
ABSTRACT
China's exports increased tenfold in ten years during
the 1980s owing to the reform policy. Victorious over Hua
Guofeng and his policy initiative, the reformists led by
Deng Xiaoping and Chen Yun introduced a shift from the
excessive emphasis on heavy industry to a greater focus on
light industry, the household responsibility system in the
rural areas and decentralization, all of which resulted in
favorable circumstances for the collective sector to become
the most efficient sector in manufacturing products for
export.
The collective sector was superior to the state sector
in its growth. Although the state sector did grow, it
produced heavy industrial products which were not
competitive in foreign markets, whereas the collective
sector mainly engaged in light industry, especially the
textile industry, with the latter occupying one-third of
total exports by the end of the 1980s.
Given more autonomy, the collective enterprises became
more flexible and quickly responded to the demands of the
market, thus becoming crucial in the growth of exports in
the 1980s.
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T A B LE OF CONTENTS
Page
I. INTRODUCTION ..............................................I
II. OVERVIEW OF THE CHANGE IN EXPORTS AND THEIR
COMPOSITION ............................................... 3
III. THE POLITICAL CONFLICTS .................................8
IV. CHANGE IN CHINA'S INDUSTRIAL STRUCTURE:
FROM HEAVY TO LIGHT INDUSTRY .......................... 18
V. AGRICULTURAL REFORM ....................................22
VI. ENTERPRISE REFORM IN THE STATE SECTOR............... 26
VII. ENTERPRISE REFORM IN THE NON-STATE SECTOR ............36
VIII. ENTERPRISES IN EXPORT PERFORMANCE ...................4 9
IX. CONCLUSION ...............................................57
BIBLIOGRAPHY ....................................................59
ii
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Chapter I
Introduction
The 1980s was the transitional period for China after
the decades of Mao's reign. Experiencing conflicts
within the government too severe to take definitive
political initiatives, new leaders groped for development
in order to improve the stagnant economy and to attain
higher living standards.
One of the most remarkable changes brought by the
reforms was the increase in exports. At the end of the
1970s, China had a more inward-oriented strategy with a
centrally-planned economy; however, in the 198 0s,
reformers aimed at an external-orientation.
Consequently, exports rose ten times in the ten years.
By the open-door policy, China decreased central
control over export performance, loosened restrictions on
foreign trade, devalued its currency and established
Special Economic Zones and fourteen open coastal cities t
introduce foreign capital and to promote exports.
However, these outward oriented policies alone cannot
explain the export rise in the 1980s.
The overall environment came to be more favorable for
exports through the domestic policies as well, such as
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introducing the market mechanism and providing autonomy to
the regions. Under such circumstances, perhaps the
collective sector, which emerged in the process of reform,
was the key since these enterprises efficiently worked in
manufacturing export products while state enterprises did
not. The question, then, is how did the collective
sector perform to contribute to exports, and what were the
government policies which supported the collective sector
and created circumstances for the collective sector.
Chapter two presents an overview of China's export
trend. Exports not only grew rapidly but also
diversified dramatically in the 1980s. Chapter three
explains the political power shift through the conflicts
which influenced decision making during the reform era.
In chapter four, one sees the change from the emphasis on
heavy industry to a more balanced development between
heavy industry and light industry. Chapter five covers
agricultural reform under the introduction of the
responsibility system. Chapter six examines the
enterprise reform in the state sector from plan to market
orientation. Chapter seven discusses the non-state
sector, which developed to respond to market signals more
promptly. Chapter eight focuses on those enterprises that
contributed to the rise in exports.
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Chapter II
Overview of the Change in Exports and their Composition
Table 1 Trading Value and GNP
(unit: billion RMB yuan, %)
Year GN? Exports
^Imcorts
Exports Imports (E+I}/GNP
197 9 399.8 45.5 21.2 24 .3 11.37
1980 447.0 57 . C 27.1 29.9 12.75
1981 377.3 73. 5 36.3 36. 8 15.41
1982 519.3 77 . 1 41.4 35.8 14.35
1983 580. 9 36.0 43.8 42.2 14. 31
1984 696.2 120. 1 58 .1 62.1 17.25
1985 855.8 206. 7 80.9 125. 8 24 .15
1986 969.6 258. 0 108 .2 149. 8 26.61
1987 1,130.1 308.4 147 .0 262. 4 27 .29
1988 1,406.3 382. 2 176.7 205.5 27.17
1989 1,599.3 415.6 195.6 219.9 25. 99
1990 1,769.5 566.0 298 .6 257.4 31.42
1991 1,985.5 722. 9 38 3.1 399. 9 36.41
Source: Nomura, 1991, p.302.
Examining GNP, the total amount of trading and the
trading ratio to GNP from 1979 to 1991, Table 1 shows that
transactions with the outside world increased throughout
the 1980s. The ratio of trading to GNP was as low as
11.37 per cent in 197 9 at the beginning of reform, but
steadily rose up to 36.41 per cent in 1991. This is
because the open-door policy provided the incentives in
trading and China has been applying an externally-oriented
development pattern.
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Although exports increased tenfold in ten years it was
not fast enough to catch up with import expansion. With
the minor expansions in 1982 and 1983, China's trade
balance remained in deficit throughout the 19SCs.
Yet the benefits brought by export expansion should not
be underestimated. Through processing trade and
compensation trade, the inflow of foreign capital and
technology activated China's economy, which was the
foundation to realize a trade surplus in the 1990s.
Processing trade is based on importing raw materials or
intermediate products for conversion into final production
using Chinese labor, infrastructure and land. The final
products are all exported. Foreign investors supply
imported inputs under a cooperative agreement and pay
Chinese partners a processing fee. In compensation
trade, foreign investors provide equipment, technology and
management support in return for output which is then
exported. The most important location for both types of
trade were the special economic zones (SEZs) in southern
China. The link with foreign direct investment (FDI) in
the SEZs will be examined in a later chapter.
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Table 2. China's total exports by group of commodities
(unit: %)
1978 1980 1985 1990 1993
Agriculture 36.1 26.3 21.7 21.5 9.2
Capital-intensive 15.2 15.6 12.8 26.7 28.8
Labor-intensive 31.1 30.2 35.4 50.9 56.8
Textile and Clothing 19.8 20.8 27.0 37.8 40.0
Mineral-intensive 17.0 17.3 28.8 9.4 4.7
Source: OECD, 1996, p.55.
("Textile and Clothing" are a subcategcry of
"Labor-intensive products" in the table.)
One of the reasons for the rapid growth and the
dramatic compositional change of China's exports during
the 198 0s can be attributed to the decentralization of
decision-making in foreign trade. At the beginning of
the reform, trade was heavily influenced by central
planning, which covered 100 per cent of exports; by 1992,
however, that figure was only 15 per cent. Planners'
preferences corresponded only weakly; the exports that
responded to the world market consequently were the
competitive products of labor-intensive manufacturing.
Observing expert contents in Table 2, one notices the
change in commodities as the reform proceeded. Even
though the total amount of exports increased as in table
1, some commodities decreased.
Exports of both agriculture-intensive and mineral
intensive commodities have substantially declined in
proportion to China's total exports. As seen in Table 2
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agricultural commodities declined from 36.1 per cent to
9.2 per cent during the period of 1987-93, and minerals
from 17.0 per cent to 4.7 per cent. Despite China's
size, arable land per person is only 0.C8 hectares, much
lower than the world average of 0.25 hectares.
Mineral exports declined according to an adjustment
based on domestic needs. Most of the mineral-intensive
commodities are related to crude oil or petroleum. In
the late 1970s and early 1980s petroleum was a major
expert source in spite cf the growing shortage of domesti
energy, but after 1985 the pattern started to change unde
the tight control of central state planning.
After the mid-1980s, while the share of primary
commodities in exports fell continuously, the share of
both capital intensive and labor-intensive manufactured
goods rapidly increased. The high ratio of labor-
intensive goods reflects China's underlying comparative
advantage in light industry. 3esides the large amount o
textiles and clothing, China exported footwear, canned
food, sewing machines, bicycles, machine tools, ceramics
and glassware products.
Thus, it is apparent that light industrial production
was the key to the rise in exports during the 1980s.
Then, why did light industry grow in this period? Was
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there a structural change to support industry? In order
to answer these questions one should consider the
political climate at that time, because the conflicts
among factions in Beijing, which accompanied China's
economic reform, greatly influenced policy-making.
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7
Chapter III
The Political Conflicts
The political lines in contemporary China are less
clear and more overlapping with potential competing lines
than they were in Mao's China. In the personalized
rather than institutionalized politics, the core
leadership will always attempt to maximize its power,
while rival leaders try to undermine the ability of the
core to set the political and economic agendas for the
country. Second, because policy and power are linked,
criticisms of policy preferences and initiatives
associated with the core leaders are inevitably political
assaults and are intended as such. (Fewsmith, p.9)
Pclitical struggle against Mac's legacy
After the death of Mao Zedong in 1976 and the arrest of
the "gang of four", conflicts occurred between the
successor, Hua Guofeng, and the group which intended to
bring about a new economic strategy, including Chen Yun
and Deng Xiaoping. Hua raised the slogan of the “two
whatevers" ("whatever decisions Chairman Mao made, we
resolutely support; whatever instructions Chairman Mao
left, we will steadily abide by") to prevent Deng and
other veteran leaders from returning to their posts.
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However, his failure in economic planning undermined
his power. Miscalculating the seriousness in the rural
areas, Hua Guofeng set a goal of rural mechanization
within ten years. His rural policy was practiced in
Dazhai, a poor and barren area of Shanxi Province. Rural
communes were, however, toe impoverished to purchase
agricultural machinery on a large scale.
Zhao Ziyang, who had been closely associated with Deng,
also supported rural reform. It was widely known that
then Premier Zhao Ziyang in Sichuan Province, and then
Vice-Premier Wan Li in Anhui, were in charge of rural
work. Both provinces had experienced a decline in rural
productivity and welfare under the radical-collectivist
agrarian policies of the Cultural Revolution.
Consequently, farmers in both provinces were more likely
to respond to the party's policy.
The approach of both Zhao Ziyang and Wan Li was to
relax agricultural policies and search for a compromise
solution. In addition, they introduced the household
responsibility system in which production decisions were
devolved to the family. Their regulations respected the
autonomy of production teams, encouraging sideline
production, and restoring private plots. This clearly
challenged the Dazhai model. (Ash and Kueh, p.63)
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In addition to Hua, the faction which had maintained
power going back to the Mao's years was a group of
bureaucrats known as the "Petroleum Group." Revenue from
agriculture was net important in the state budget; by
contrast, industrial enterprises, mostly heavy industry at
that time, were mutually inter-dependent and their profit
directly sustained the national government. The
Petroleum Group, under the patronage of Hua Guofeng,
persistently opposed the shift from heavy industry. They
advocated investment in heavy industry, relying in part on
foreign credits.
Hua and the Petroleum Group were the old power from
Mao's reign, yet their foreign policy reversed Mao's self-
reliance development policy by calling for opening the
country to large scale technological imports from the West
and Japan. However, their view was different from
reformers' one in terms of the export contents. The
Petroleum Group planned to keep the control over exports
and to finance high-technology industrial imports from the
West mainly by petroleum exports. (Baum, p.54)
The Third Plenary Session of the Eleventh Central
Committee in December 1978 was a major turning point which
led to the emergence of a new political alignment in the
post-Mao period. At this meeting, Deng rose to
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leadership within the party. With his confirmed
predominance, the Dengist coalition opposed the Petroleum
Group's approach. This opposition was not led by Deng
himself, but by Chen. (Fewsmith, p.61}
At the Wuxi Conference in 1979, reformers attacked the
planning system of Hua's group, which had ignored cost and
efficiency, as well as the need for the consumer goods,
and rather concentrated resources on heavy industry.
This reflected the economic difficulties at this time.
The conference called for the integration of planned
adjustment with market regulation, with the planned
adjustment primary, but also giving full importance to
regulation by the market. Two years later, however, this
policy was revised to reemphasize the plan, reflecting
Chen Yun's opposition to Deng's strategy.
Although the conference called for readjustment in
1979, the Petroleum Group still maintained strong power
continuing to let one of their leaders Yu Qiuli head the
powerful State Planning Commission, and resisted the
pressure for further cuts in heavy industry. Against
this group, after the Deng-Chen coalition was reinforced
by the Deng's endorsement on readjustment in early 1980, a
campaign was launched to criticize the leaders of the
Petroleum Group. Petroleum minister Song Zhenming was
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forced to issue a self-criticism on his management of an
offshore oil-drilling rig in the Bohai Gulf and
relinquished his position; Yu Qiuli was subsequently
forced to yield his position as head of the State Planning
Commission to Yao Yulin, Chen Yun's long-term associate.
The Petroleum Group lost the centripetal force, and seen
its power deteriorated.
Conflicts between reform and readjustment
Since the beginning of the reform in 1977-1978, the
central political leadership had been shared between Deng
Xiaoping and Chen Yun. Chen's strong support to Deng's
leadership at the Third Plenary Session of the Eleventh
Central Committee in December 1978 was critical in Deng's
rise. They were closely allied at the inception, sharing
common perspectives regarding the importance of political
and social stability, the need to avoid large scale
political campaigns that mobilized the masses, and the
ruling position of the Chinese Communist Party (CCP).
Chen's view is called "conservative" in the sense he
sought to "conserve" what he saw as the essential elements
of the Marxist-Leninist party-state that had been created
in China during the preceding three decades. In terms of
economic policy, Chen's conservative approach needs to be
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clearly distinguished from "Stalinism." He objected to
the overemphasis on heavy industry to the neglect of
agriculture, light industry, and the people's standard of
living. (Fewsmith, p.88}
Chen Yun had always been concerned with and responsible
for the details of economic affairs. As an economic
specialist rather than a political specialist, he was more
conscious of the economic imbalances that occurred when
economic growth was pursued too quickly. As he compared
the economy and economic planning to a bird and a cage in
his famous "birdcage" theory, he intended to work through
a policy of "readjustment" within the framework of the
planned economy, maintaining the leading position of the
state sector.
On the other hand, Deng challenged fundamental tenets
of the Maoists. He emphasized higher economic growth
rates, bolder experimentation with various reforms, and
the rapid integration of the Chinese economy into the
world market economy. Therefore, his relationship with
Chen steadily deteriorated over the following decade as
their differences in political ideology affected the
reform process.
Supporters of readjustment, centering on Chen Yun,
increased their influence in late 1979 at the expense of
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the Petroleum Group, and in early 1980 they attacked not
only the Petroleum Group but also the other reformers.
In Chen's opinion, economic reform should come only after
carrying out a thorough readjustment; at least for the
time being, centralization had to be emphasized over
decentralization. By late 1962, the atmosphere for
reform was much less open than it had been three years
before, slowing the pace of economic reform.
By the end of 1982 the economy improved more than was
expected. In late 1983 and early 1984 Dengist influence
waxed with positive economic news that undercut the
credibility of conservatives. Following the 1984 Third
Plenum and the Decision on Economic Structural reform,
reformers worked to create a more open atmosphere to
support rapid economic development, and rejected the
economic programs planned under Chen's guidance.
The differences between Deng Xiaoping and Chen Yun
became apparent by the end of 1984. Deng was convinced
that Chen's economic views were too conservative and his
steady approach to the economy would neither generate a
growth rate Deng desired to transform China into a modern
country, nor the popular support to maintain legitimacy
for the government.
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Therefore, this political and ideological atmosphere
was nor susrained for long. Conservatives argued that
the relaxation of ideological restraints went too far.
They criticized reformers in terms of the macro economy,
the policy of opening to the outside world, and
agricultural policy.
Conservatives took advantage of the problems that
followed the rapid opening of China's coastal areas in
1984. Imports of technology were not well planned, and
many enterprises became overly dependent on imported
materials. The import of consumer durables sold on the
domestic market also decreased China's foreign exchange
reserves. The exposure of corruption of Hainan island
fueled the conservatives' assault as well. Deng began to
back away. (Fewsmith, p.153)
In 1965, Chen Yun criticized the problems which emerged
in the agricultural sector, particularly the decline in
grain production. Peasants invested more in cash crops
for which the economic returns far exceeded those from
grain production. As rural enterprises grew, peasants
received a greater proportion of their income from non-
agricultural pursuits; they became less enthusiastic about
agriculture. (Fewsmith, p.157)
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In the Conference of Party Delegates convened in
September 1985 they discussed the proper rate of growth as
well as the relationship between plan and market. Chen
Yun openly criticized the performance of the reform
program. He sharply distinguished the guidance planning
that had been authorized by the Third Plenum's 1984
Decision on economic structural reform from market
regulation, and reconfirmed that planning is the essence
of macroeconomic control.
Conservative criticism of reform, in 1985 clearly slowed
economic reform and put its supporters on the defensive;
however, when the new year began reformers counterattacked
and once again pushed reform. In the recession of 1986
economic conservatives urged the strengthening cf central
controls to reduce inflationary pressures and maintain
"balance," while the young economists associated with Zhao
Ziyang proposed a loosening of monetary policy in order to
enhance the influence of market forces in the economy.
In contrast to the situation in 1985, the advocates of
loosening the money supply and stimulating the growth rate
won the 1986 debate. They argued that the retrenchment
policy of 1985 created the 1986 recession, reducing the
efficiency of market forces. (Feng Chen, p.177)
16
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At the Sixth Plenary Session of the Twelfth Central
Committee in 1986, the resolution was surprisingly liberal
in many ways. Although the younger reformist Zhao Ziyang
took the initiative from 1936 onward, the pressure from
inflation, corruption and mounting enterprise losses put
him in a difficult position. He began to issue more
radical plans in order to maintain his initiative in
economic policy; nevertheless, Zhao's authority was on the
wane. By the Tiananmen crackdown in 1989 China had swung
back to the conservative side.
By the end of fall 1990 Deng fought back vigorously,
albeit with only limited success. With his dramatic trip
to the Shenzhen SEZ in January 1992, Deng was able to
regain the political initiative and pushed reform forward
again.
In the years from 1978 to 1990 it seems as if Deng's
strength compensated for Chen's weakness and vice versa.
When reform was proceeding rapidly Deng's power waxed,
whereas during the period of economic retrenchment Chen's
influence grew at Deng's expense. These power shifts
between the two leaders affected the environment for
exports.
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Chapter IV
Change in China's Industrial Structure:
from Heavy to Light Industry
China's industry has maintained a high growth rate even
though the structure has changed over the decades.
During the 1960s and 1970s, industrial output grew at 10
per cent a year. In the 1980s it accelerated to 13.5 per
cent.
From 1957 to 1978, heavy industry grew more rapidly
than light industry. A heavy industry-centered strategy
was not suitable to China, which was rich in labor power,
but short of land and capital. But partly because cf the
prestige of the Soviet Union in the socialist world, and
partly because cf their own great power aspirations, the
Chinese leadership adopted a Soviet-style development
strategy. As a result, the one-sided emphasis on heavy
industry had distorted China's economic growth, placing a
heavy burden on finance, as well as preventing the
people's living standard from increasing.
After the policy of readjustment by Chen Yun was
officially adopted at the Central Work Conference in 1979
China moved to light industry to create balance. In
fact, the growth rate of net output in heavy industry was
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only 1.9 per cent in 1980 whereas the counterpart in light
industry was 19.0 per cent. (UNIDO, p.39)
Light industrial output was emphasized as the
government sought to compensate for the neglect of
consumer demand of past years. Planners provided light
industry with priority access to raw materials, fuels and
power. During this phase of the reform period, light
industry was the major force behind the rapid industrial
output growth, largely due to the accelerated growth of
small-scale enterprises in the non-state sector in the
rural areas.
The banking system which began to play a more important
role provided credits. In the early years, 1979-1980,
virtually all new bank credits went to create new capacity
in light, consumer goods industries, generally in small or
medium-sized projects. The expanded role of bank lending
allowed planners to increase resources for light industry
without going through the politically contentious process
of redirecting budgetary investment away from existing
projects. (Naughton, p.132)
However, the trend was again reversed in 1983; heavy
industry took the lead, but in a better-balanced way.
The share of heavy industrial output rose from 54.1 per
cent in 1981 to 61.2 per cent in 1985. It slightly
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declined to 57.6 per cent in 1988, and stood around 58 per
cent in 1968, 1989 and 1990. The share of light industry
stayed around 42 per cent in 1988, 1989 and 1990 (UNIDO,
p . 4 1 )
Overall, textile and food manufacturing continued to
dominate the structure of net industrial output value in
light industry, maintaining over 10 per cent in the 1980s.
At the same time, among heavy industries, the contribution
of the machine building industry to net industrial output
value was also high at around 10 per cent, followed by
chemicals in the 1980s.
Thus, even after the readjustment of the imbalance
between heavy industry and light industry, heavy industry
still had kept more than half of the total industrial
output. This portion certainly does not accord with the
situation in exports.
In exports, as explained in chapter 1, labor-intensive
light industry continuously grew during the 198 0s,
reaching over 50 per cent in 1990, whereas capital
intensive industry steadily declined. The development of
light industry was facilitated by the removal of planning
constraints and the creation of a domestic mass market for
consumer goods. These goods mostly originated in the
labor-intensive production system of the township and
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village enterprises, and similar enterprise types, which
gained power through enterprise reform.
21
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Chapter V
Agricultural Reform
The growth of rural industry had been closely related
to conditions in agriculture. In fact, the development
of township and village enterprises (TVEs) in the early
stage heavily depended on financial support from
agriculture.
Agricultural reform was carried out in the initial
stage of the reforms, largely because China's agriculture
had drastically deteriorated in the late 1970s. In 1978
one tenth of ail farmers were below the poverty line.
Twenty years of collective agriculture failed to overcome
intractable problems of poverty, unemployment and apathy.
The government had tried to squeeze too much out of
agriculture in the Maoist period. Rural collectives were
being forced to maintain high levels of output that
actually reduced their incomes. The agricultural sector
had to be reconstituted.
Chinese policy toward agriculture was radically
transformed following the Third Plenum of the Eleventh
Central Committee at the end of 1978.
Agricultural output increased after the household
responsibility system was introduced because it motivated
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people powerfully, owning to the change of ownership
structure.
However, at the beginning the government encouraged
collectives, not family farming. The ideological
conflicts between the reformists and the conservatives
raised a central question of how far the
decollectivization should go.
After the Third Plenum, the regime relaxed rural policy
and provided institutional flexibility. The new policy
included: raising agricultural prices, reducing taxes,
increasing state investment in agriculture, providing
greater autonomy to agricultural collectives and expanding
the scope of permissible payment schemes for peasants
within the collectives.
In spite of the limitations of the initial stage, a
complex series of interactions between peasants and
government leaders gradually led to the "rural
responsibility system" and the widespread adoption of
family farming. (Naughton, p.139)
In September i960, the government classified rural
areas into three regions: poor and mountainous regions
which could carry out family farming, intermediate regions
which should preserve the collective but organize more
flexible work groups, and advanced regions which should
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preserve the collectives but in addition should develop
specialized agricultural and non-agricultural households.
This policy was acceptable to the conservatives because it
seemed to maintain the concept of collective forms.
Under Wan Li some peasants had begun dividing land up
for individual household cultivation in Anhui Province.
At the end of 1980, still only 40 per cent of farmers had
adopted household farming, but the new permissiveness
provided incentives for change. The adoption of
household farming accelerated in 1981 and 1932, and the
government then retrospectively acknowledged the positive
results.
There were several steps in the transition to the
household responsibility system. First, the government
changed the production responsibility system to the output
responsibility system at the level of the production team.
Second, it changed the production unit to the householder
level, but with some restrictions. Finally, it gave full
responsibility to the householder to manage their own
businesses as taxpayers. (Dercng Chen, p.59)
Once the household responsibility system was adopted,
agricultural output growth soared. The average growth
rate of grains rose from 2.1 per cent during 1957-78 to
4.9 per cent during 1978-84. Cotton production grew much
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more, from 1.3 per cent to 18.7 per cent. (Feng Chen,
p. 85}
In addition to the increased output, the agricultural
reform brought a rapid increase in household savings,
which not only provided the key element to the
macroeconomic stability but also contributed to the rapid
growth of rural enterprises. The growth of rural
deposits enabled local banks to expand their supply of
funds and was a positive force in the early development of
the TVEs. (Byrd, p.5 5)
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25
Chapter VI
Enterprise Reform in the State Sector
Enterprise reform followed agricultural reform. State
enterprises and non-state enterprises had different
consequences as a result of the reforms.
China's enterprise system consists of two components.
One is the state sector and the other is the collective
sector. Prior to the reform, total industrial output
value increased greatly; however, it did not yield
sufficient economic results in raising living standards,
promoting technological modernization, and productive
efficiency. The state sector needed to be reformed
because state enterprises were requiring more investment
to obtain smaller increases in output as compared with the
Maoist era.
In 1978, nearly 80 per cent of the value of industrial
output came from the state sector, and the rest from the
collective sector. However, during the 1980s the
collective sector had grown much faster as well as more
efficiently than the state sector; the value of industrial
output increased to more than 40 per cent while the state
sector declined to less than 50 per cent. (Ash and Kueh,
p.100) In spite of government efforts to improve state
26
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enterprises, why did the ratio of industrial output from
the state sector decline continuously?
China's policy of developing rural industry and other
non-farming sectors was first introduced in 1958, along
with the introduction of the People's Communes. At that
time development focused on the simple processing of local
farm produce, handicrafts, the manufacture and repair of
farm tools, and the processing of local industrial
resources. These industries were operated on a small
scale, using outdated techniques. They utilized local
raw materials; very few non-farming activities took place
in People's Communes other than the above mentioned
industries which were owned by the communes. Private
operations were not permitted.
The large number of farm laborers were reassigned to
industry in order to meet the excessively high national
industrial targets, which helped to absorb surplus labor
after the agricultural sector required less labor.
In the 1970s, the non-farming enterprises started to
increase in number; however, they were often banned as
embodying "capitalist practice" during the Cultural
Revolution. The advances of the non-farming sector did
not occur until 1978.(Dong, P.54)
27
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Since 197 9 the Chinese authorities have implemented a
wide range of reforms in the state-owned enterprises, with
the objective of improving economic efficiency. The
reform proceeded through three stages. The initial state
(1979-83) was experimental, emphasizing the enlargement of
enterprise autonomy, and the expansion of the role of
financial incentives, within the context of the
traditional planning system. During the second stage
(1984-86) the reforms introduced the substitution of
profit remittance by profit tax, rationalization of
indirect taxes and the establishment of the double-track
system. Market transactions were formally implemented
alongside the traditional planning system to influence the
output decisions of the enterprises. In the third stage
(1987 to the present) the Contract Responsibility System
was widely implemented. This system attempted to clarify
the authority and responsibilities of enterprises and
their supervisory bureaus. (Fan, p.138)
The main goal of these procedures was to reduce
government intervention in the running of state
enterprises and to make them financially independent, and
to introduce profit rather than plan fulfillment as the
key indicator of enterprise performance.
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During 1979 and 1980, the government started a reform
of the state sector. Endorsed by Beijing, Zhao Ziyang
experimented with selected large- and medium-sized state
enterorises in Sichuan Province. Following on this, the
State Economic Commission approved the Economic
Resoonsibiiity System in 1981, allowing industrial
enterprises to have the right to retain and sell shares
higher than the profit quotas based on the profit level of
the preceding year, and to enjoy accelerated depreciation
after 1979. But the reform, plan receded until early 1984
owing to the conservative policy that emerged in 1981.
The purpose was to provide a link between the welfare
of employees and bonus payments, urging enterprises to
invest in their financial performance, and to promote
profit-oriented behavior. In their first phase, the
economic system had been closer to a market orientation,
but the result was not satisfactory. Because the setting
of retention rates which differed from one industrial
sector to another led to extensive bargaining between
enterprises and their supervisory bureaus, it therefore
weakened the incentive structure provided by profit
retention and limited enterprise autonomy.
Most of the enterprises remained very effectively
subordinate to the bureaucratic apparatus; in addition,
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most large enterprises continued to be obliged to provide
output to the state material supply and planning organ;
therefore, many high technology industrial goods generally
did not enter market.
When Zhao Ziyang again took the initiative in economic
reform, the strategy was to expand market forces by
limiting the scope of planning, fostering entrepreneurial
responses to market-determined price signals, and
improving incentives and autonomy for state-run
enterprises to operate in the market. The expansionary
macroeconomic policy accelerated economic growth; the
environment was inflationary. (Naughton, p.218)
By late 1984 Beijing officials recognized that they
could not control outside plan prices and were preparing
to accept a transition to full market pricing. The
government formally introduced a further substantial
increase in the direct sales of their products by
enterprises and a decline in the share of output allocated
according to plan. This regulation granted enterprises
the right to sell and purchase products in excess of
quotas. Thus, the so-called dual-track price system was
given legitimacy for the first time.
The dual-track system became one of the prominent
characteristics of China's state sector after the concept
30
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of the market mechanism was introduced. This system
refers to the coexistence of centrally determined
administrative prices and market-determined prices. It
allowed state enterprises to transact and cooperate with
non-state, marketized firms flexibly. In this respect,
collective enterprises should be distinguished from the
dual-track system since most of them were predominantly
market-oriented from the beginning.
Accordingly, enterprises were permitted to sell their
products at higher market prices after they had fulfilled
the plan quota. This system brought a substantial
reduction in the scope of central planning and an
expansion in the role of market mechanisms in the Chinese
economy.
It was argued that this would raise efficiency;
nevertheless, this was not the case for the following
reasons. First, both input and output quotas were set on
an ad hoc basis and subject to bargaining. Depending on
their bargaining power, some enterprises could obtain most
of their inputs at market price and sell their output at
plan price, whereas some might have lower input and higher
output quotas.
Second, since enterprises were uncertain how much input
they would actually get at plan prices, they made
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decisions on output and investment with regard not only to
market prices, but also based on expectations of input
quotas.
Third, output quotas, set annually based on the
previous year's output level, discouraged enterprises from
utilizing fully their productive capacity.
Fourth, the market prices under the double-track system
were not the same as those in a full-functioning market
economy. Even if producers face market prices at the
margin, prices at the margin would differ among producers
as a commodity has not one but several market prices.
Thus, the production and investment decisions made by
referring to these market prices may not necessarily lead
to efficiency.
Fifth, market prices were usually much higher than plan
prices. The difference between the two prices provided
enterprises with incentives not to fulfill their plan
quotas but to sell their products at market prices and to
use their access to plan allocation to obtain inputs at
low prices. The government had two options to reduce the
gap between the two prices. Either they could increase
plan prices or set ceilings on market prices;
administrative intervention was required in either case, a
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fact which contradicted the basic aim of the double-track
system. (Fan, p.145)
In the third stage, the Contract Responsibility System
was the most formalized and widely implemented in late
1987 among the various types of profit contract system
which had been tried in the 1980s. The essential feature
was that contracts were negotiated between enterprise
management and their supervisory agencies, and involved
the specification of items such as the amount of profit
remittance, investment and innovation targets.
Permitting the negotiation of the amount of profit taxes
and in some cases the amount of indirect taxes, this
system not only undermined the tax system and offered
substantial tax concessions but also led to extensive
bargaining both before and after the contract. This ran
counter to the intention of replacing discretion with
rules in the relationship between the center and the state
enterprises. (Fan, p.152)
The objective of enterprise reform was to improve the
economic efficiency of state enterprises by subjecting
them to market influences. The critical change was that
all state enterprises also began to operate in accordance
with the market.
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However, the reform of state enterprises by the
reformers was sometimes interrupted when the political
balance went back to the conservatives. Conservatives
were successful in slowing the reform of the industrial
economy, but they were less successful in the agricultural
sector. First, given the complexity of the industrial
economy in which so many relations among suppliers,
buyers, creditors and tax authorities were involved, a
factory could not simply be given authority over its own
production as a rural household could. Second,
ideological issues were more central in the industrial
sector. Reforming enterprises in a way that undermined
the plan raised ideological questions that were crucial to
the Chinese understanding of socialism. Moreover, since
the industrial economy was more bureaucratized and
centralized than the rural agricultural economy, central
leaders had the capacity to strengthen controls over the
industrial economy. {Fewsmith, p.116;
The profit retention and decentralization of
enterprises were not fully realized, and in practice, the
interference of local government did not cease. Even
though state enterprises were improved through the reform
process, the growth was far behind the collective
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enterprises, which were the least regulated, and thus the
freest to plan and market their own output.
State enterprise reform proceeded on a trial-and-error
basis without a coherent or predetermined blueprint. The
piecemeal approach not only precluded a clear
understanding but seriously affected the policy
implementation and success of enterprises' reform,
resulting in less satisfactory achievements. (Fan, p.138)
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35
Chapter VII
Enterprise Reform in the Non-state Sector
Collective Sector
Township public ownership dates back to 1958, and it
developed on a large scale in the 1970s. These
enterprises were first set up by different levels of the
People's Commune authorities using public funds. Later,
the enterprises expanded their operations or started new
ventures using their own accumulated funds.
The reforms had an immediate and dramatic impact in the
rural areas, where the People's Communes were disbanded
and collective property divided and sub-contracted to
private individuals. Enterprises formerly owned by
communes, brigades or production teams were changed into
publicly-owned firms run by the township or the village.
Peasants were free to leave agriculture to become
entrepreneurs or workers in commerce, the services or in
industry.
Yet this transformation did not lead to the end of the
collective and the re-distribution of income. Some
villages decreased collective welfare funds for village
schools, clinics, insurance and irrigation, but many
villages remained strong corporate entities. They
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continued to redistribute a substantial amount of income
to their members and provide an incentive to stay in part
of the collective. This fact suggests that it was not
the contracting of property or the rise of the household
economy that determined the demise of the village as a
corporate entity. Rather, it was the sources of income
in a village, and more specifically, the degree of
industrialization in a village.
Villages that relied exclusively on agriculture,
especially in the remote areas with little or no industry
or other income generating activity, were left with few
income sources. When peasants had autonomy over the
management of their work and direct control over the
profits from their harvests, these villages experienced a
decline of the collective both in fiscal and
organizational terms.
In contrast, villages that had non-agricultural
enterprises still maintained control of the peasants, and
redistributed their income. The income from industry,
which in some villages was many times greater than that
from agriculture, provided collective cohesion.
Industry, not agriculture, became the primary source of
income in large areas of China's countryside. Already in
some suburban villages, income from agriculture was less
37
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than a third, while in others such income was even less
than ten percent of the total. Actually, as many as
three-fourths of collective sector employees were
constantly engaged in industry throughout the 1930s. By
1986, the gross value of output of rural enterprises
exceeded the gross value of agricultural output for the
first time, with the number of rural enterprises growing
rapidly. (Dong, p.54)
Under the Maoist rural economy policy, resources flowed
primarily through a vertical and bureaucratically
dominated system which controlled the goods produced in
the countryside and transferred them according to the
planned command economy. State and collective rural
cadres from the county level down managed the labor,
capital and land of the collectivized peasants.
After the nationwide introduction of the household
responsibility system China made further rural reforms.
The market mechanism and increased privatization of the
non-agricultural sector has increased the amount of goods
flowing horizontally among individuals and units beyond
the bureaucracy's vertical controls. (Reynolds, p.14)
Local governments were encouraged to develop rural
enterprises after the party promulgated Document No.4 in
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early 1984, which strongly supported the development.
Township and village governments were mainly responsible
for launching and organizing the rural collective
enterprises. The publicly-owned enterprises were
planned, funded and established by the government, which
also collected all or part of the profits and pooled funds
from other sources to build more firms or expand the
existing ones. The township governments were responsible
for production plans, income distribution or any losses
incurred by the enterprises.
Non-state enterprises were already a component of the
market sector, but they were not completely free from
administrative influence.
Compared to agriculture, decentralization did not occur
to a similar degree in the management of rural industry.
Some enterprises are relatively free to transact with
fewer restrictions, yet some remain part of the
bureaucratic system and work under its guidance. The
responsibility system had been instituted, but state
officials still controlled their enterprises through rules
and regulations over the division of enterprise profits,
access to allocation of investment opportunities and
credits, guiding their development in a way that helps
them fulfill their political obligations. Also, these
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officials may also limit access to the market to protect
those firms whose taxes are important revenue sources to
local government.
Looking at the negative side, collective enterprises
lack decision making power, and are not overly concerned
about profit and loss. In some areas, the exactions of
local government are a heavy burden for the enterprises.
Sometimes officials use, or abuse, or treat enterprises as
their personal property. (Dong, p.59)
Collective enterprises also had to deal with financial
intervention by the local government as well. All
investment and purchases in collectively owned enterprises
need to be agreed upon by the village or township
governments. It is impossible to make loans without
approval from the basic level officials. The village
acts in some instances as the guarantor of a loan. In
ether cases, an enterprise may find another enterprise to
act as its guarantor, but ultimately the village officials
still must approve, at least informally. Administrative
intervention does not always interfere with the
enterprises' performance. Through the intervention of
the village or township government, an enterprise receives
a subsidy to pay the interest on a loan, or an exemption
from penalty interest payments, or an extension of the
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payback period. Village governments further help by
investing in factories that produce raw materials needed
by its industries. The prices the village charges are
close to the market price, but in China for many items,
access and convenience is the issue, not price. The
profit that the village makes from these sales is then
used for collective welfare. (Reynolds, p.76) Officials
decide questions on spending, investments, loans and
hiring.
The reforms have hardly decentralized the management of
rural industry to those who have contracted to operate
these enterprises. Consequently, village governments
maintained control, sometimes in such a way as to help the
enterprises' development.
Free markets were established as township and village
industry blossomed. Growth of the non-state sector began
to be represented as one of the main accomplishments of
reform.
The expansion of township and village enterprises
(TVEs) was the result of two reform initiatives. One was
the decollectivization of agriculture and the other was
the fiscal reform of the early 1980s. In agricultural
reform, the government provided the incentive of reduced
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income from agricultural sales. Through its fiscal
policy, local officials became eager to expand local
industry.
The Maoist fiscal system provided localities with
little inducement to generate additional revenues.
Localities were required to turn over all or most of the
revenues generated within the localities to upper levels.
(Walder, p.175)
In the post-Mao reform the institutional change removed
constraints on local government and expanded fiscal
autonomy. By this change, the revenue share fixed for
five years made it easier for provinces to increase
revenue and plan ahead; provinces were responsible for
balancing their own budgets; and provinces had budgetary
authority to arrange the structure and amount of local
spending and thus ceased to receive mandatory fiscal
targets the central ministries. (Shirk, p.166)
After the share of total taxes from SOEs decreased, the
rural collective industry continue to grow in importance
for local treasuries. Because of the political taint
still associated with private enterprises, this route to
gain revenue was taken cautiously. The most profitable
and least problematic strategy was the development of
rural collective enterprises. Given the fiscal
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importance of rural industry, collective enterprises
mushroomed throughout the rural areas with the localities'
support. (Oi, p.116)
Although the rapid expansion of TVEs caused an
imbalance within the agricultural sector, these
enterprises rapidly grew and began to play an important:
role by the mid-1980s. In 1978 there had been only 1.5
million rural enterprises employing about 28 million
people. In early 1984 the CCP promulgated its Document
No. 4, which strongly supported the development of rural
enterprises. That year the number of rural enterprises
exploded from 1.3 million to 6.1 million, and the number
of employees jumped from 32 million to 52 million.
(Fewsmith, p.157)
In the late 1980s labor employed per unit of output by
the TVEs averaged around two and a half times that of
state firms, and private firms had five times the labor
intensity of state firms. Their share of gross
industrial output rose from 10 per cent in 1980 to 45 per
cent in 1993.
The gross revenue of collective enterprises in the
rural areas increased nearly ten times over the 1978
figures, with an average annual increase of 26. 4 per
cent. The increased proportion of products which
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constituted the national total between 1981 and 1985 were
as follows: coal, 28 per cent; machine-made paper and
cardboard, 30 per cent: textiles, 20 per cent; clothing,
33.3 per cent; building materials, 53.4 per cent and
leather goods, 75 per cent. Already by 1988, the ratio
had changed as follows: coal, 34 per cent; machine-made
paper and cardboard, 39.2 per cent; cement, 27.9 per cent;
silk, 44 per cent; cloth, 24.2 per cent; wool fabric, 52.3
per cent; clothing, 70 per cent and electric fans 45.5 per
cent. (Dong, p.54)
Thus, it is obvious that the collective sector
demonstrated a critical expansion in only ten years,
mainly producing light industry products. Especially,
the increased ratio of textile-related goods is notable.
Private Sector
The private sector did not come into existence until
after 1979. Prior to that, even if a few private
enterprises operated they were not considered legitimate
and were often banned. After 1979, not only did farmers
begin to have more savings owing to the institution of the
responsibility system, but they were also being permitted
to work their land as they wished, as well as to run non
farming activities.
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In some areas, especially in the rural area of Wenzhou
city in Zhejiang Province, enterprises started to develop
quickly. In Wenzhou, the total of 146,500 private
industrial enterprises run by farmers hired 12.7 per cent
of the city labor by 1984. 1.707 billion yuan of goods
were produced, 113 per cent more than two years before.
(Dong, p.58)
The reform policy to increase the free flow of
commodities and services in the rural areas weakened the
state and collective sector's monopoly over rural
marketing and services. In response, the private sector
cut into their markets and challenged them for business.
local governments were mainly responsible for
implementing policies which created favorable conditions
for private enterprises and took charge of the necessary
administration.
There were two types of farmer-owned private firms.
One was the household enterprises which were funded and
set up by rural families. The other was the joint-
capital enterprises, which were set up with joint
investment from farmers. The emergence of joint-capital
enterprises came later and the number was quite limited.
As the township government could only exercise indirect
influence over these firms, they enjoyed a wider degree of
45
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decision-making power and autonomy. When facing market
competition, they acted more flexibly in operations and
could adapt better to market changes than state
enterprises or collective enterprises. As they had to
take full responsibility for their losses, they had to
constantly improve management, raise efficiency and lower
costs in order to survive and expand. Indeed, they
boasted a higher degree of efficiency generally, and their
products had lower costs and were more competitive.
However, these enterorises tended to pursue short-term
interests and their development could be haphazard.
iWalder, p.64;
Private enterprises had difficulty competing with
collective enterprises. Most of them were located far
from large cities; without developed transportation
systems they could not have ready access to markets.
Also, since most were family industries, the literacy
level was low and technical personnel were scarce. The
quality of their products was often poor due to outdated
production methods. Moreover, they were more likely to
cheat customers and engage in widespread tax evasion.
Although the collective sector was less restricted than
the state sector, both remained under the control of local
government. The private sector was the freest to seek a
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quick profit. The ongoing rural reform begun in 1983 and
expanded in 1985 had increased the number of private
businesses as well as their freedom to compete with
collective and state enterprises. They had great
potential, but in the 1980s their number was still small
and they were still not producing internationally
competitive products.
The newly emerged non-state enterprises in the rural
areas played an important role in promoting rural
modernization. They absorbed a large amount of surplus
rural labor, and accelerated the growth of farmers'
incomes.
These non-state enterprises were able to transform
themselves into efficient and rapid-grcwing ones owning to
a number of reasons. First, there were hard budget
constraints because local governments could net engage in
deficit financing. Moreover, any surpluses accrued to
local communities, sc that they had a stake, in terms of
both income and prestige, in the success of enterprises.
Second, there was also intensive competition in the
Chinese market. A local government, unlike a national
government, was not able to protect collective and private
enterprises from competition, and rivalry between
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different areas for resources and foreign partners was a
powerful stimulus. {OECD, 1996, p.38} Because of
competitive pressures, there was a corresponding
motivation to depoliticise enterprises and bring in
professional management. Third, since there was no job
security, and none cf the political constraints of
enterprise management associated with the "iron rice bowl"
in state enterprises, non-state enterprises could expand
or contract their labor force as required, in a flexible
labor market.
The government lifted restrictions on the non-state
sector while still keeping state enterorises under
control. During the period 1978-90 industrial output and
employment of the collective and private sectors grew much
faster than those of the state-owned sector. By 1990 the
non-state sectors accounted for 40 per cent of total
industrial output and more than 63 per cent of industrial
employment.
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48
Chapter VIII
Enterprises in Expert Performance
By the late 1980s the most successful and rapidly
growing exporters were the two decentralized sectors:
rural township and village enterprises and joint venture
enterprises, not state-owned enterprises. The amount of
exports of the rural enterprises rose from 3.9 billion US
dollars in 1985 to 12.5 billion US dollars in 1990. (Ash
and Kueh, p.237)
The export goods supplied by rural township factories
in Suzhou, Wuxi, Changzhou and Shanghai accounted for 20
per cent of all exports of these four municipalities in
1987. TVEs in these four municipalities on the Yangtze
Delta were switching to refined processing and medium- and
high-grade products. Light industrial products made in
the Pearl River Delta also were sold abroad.
As seen in Table 3, the growth in exports from the
collective sector is remarkable, from 4.6 per cent to 24.4
per cent of total exports in only six years during the
late 1980s. State enterprises were unable to match the
high growth rates of the collective enterprises, primarily
because they were engaged in heavy industry, while
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collective enterprises explicitly focused on manufacturing
light industrial products for export.
Table 3 Exports from the Collective Sector
[unit: million KM3 yuan, %)
Total
Exports
Exports from the
Collective
Sector
Exports from
Collective Sector as
a Percentage of
Total Exports
1984 58056 2700 4.6%
1985 80932 3900 4.8%
1987 146995 16196 11%
1988 176672 28588 16.1%
1989 195606 37144 19%
1990 298584 74646 24 . 4%
Source: Chinese Township and Village Enterprises Yearbook,
1978-1991; China Yearbook, 1985, 1988, 1990, 1991;
International Trade Statistics Yearbook, 1995.
Even some state enterprises which engaged in light
industry needed the TVEs' cooperation. To reduce cost,
subcontracting operations to TVEs became attractive, and
by entering into relations with TVEs state firms could
escape from some of the tight constraints of the state-run
industrial system and gain access to the resources they
needed. (Naughton, p.155)
The collective sector was strong in areas close to
large cities, where the township enterprises often had the
backing of large industries situated in the cities.
Collective enterprises did not blossom in the Special
50
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Economic Zones where foreign capital and technology were
invested intensely. They made use cf transport networks,
communications, markets and technology, and generally
worked in a supplementary position near cities, often with
the large urban industries, such as joint ventures with
foreign firms. Rural industries did not develop where
there were no urban industries.
They manufactured parts and accessories for the latter,
or turned out products that the urban industries no longer
produced, or were unable to produce in quantities which
could satisfy market demand. Some urban enterprises have
become partners with the rural firms through investment or
the supply of technical assistance. In such cases, rural
factories often recruit retirees from city plants to serve
as technical experts. Consequently these collective
enterprises were often larger in scale and enjoyed higher
technical levels than the private enterprises. Also,
their products contained more sophisticated technology,
and the quality of their products was usually better.
Basically, the production composition of Chinese
exports has evolved very much along the lines of
comparative advantage, namely, small, rural enterprise-
based, labor intensive manufactured products. (OECD,
1996, p.58) Textile products are a good example.
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Supportive factors include not only the collective
enterprises but also the improved agricultural sector and
commerce, and the political support brought about by the
reform.
Among the light industrial export products, textile
performance was the most remarkable and took the lead.
By the mid-1980s, China had became the world's largest
producer of cotton yarn and textiles. China's textile
exports have three features: first, it grew at the same
average annual rate, 17 per cent, as overall exports
between 1979 and 1988. This means textiles played a
leading role in export expansion. Second, Chinese
economic strategy stresses the importance of textile
export, in which a comparative advantage exists. Third,
among the textile sales, manufactured products (yarn,
fabrics and clothing) increased more rapidly than raw
materials. This resulted from the development of the
modern domestic textile industry.
In the world trend of the 1980s, textile exports became
more active in developing countries than in developed
countries. How did China expand its textile exports in
the post-1978 period and seize the greater share ever
other developing countries?
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China's competitiveness in the world textile market is
perhaps the most crucial factor in the textile export
growth in the 1980s. This is best explained by (l)the
advantage in the cost of textile production relative to
that of its competitors; (2)the promotion policy of the
government; and (3;the improved domestic supply of textile
exports. (Wang, p.172)
The cost of production includes the cost of raw
materials, labor employment and equipment. The labor
cost was lower than these of ether exporters such as the
NIEs.
First, as observed in chapter five, the efficiency of
the agricultural sector improved by the reform provided
the labor force and materials necessary to produce export
goods. Reform from 1978 onward remarkably affected the
lives of those in the rural areas. Grain production
increased sharply and surplus labor became more involved
in the rapid development of nonagricultural sideline
production, which greatly raised rural incomes.
In 1982, the grain harvest reached 354 million tons,
growing 9 per cent from the previous year. At the same
time, cotton production increased 21.3 per cent and oil
crops 15.8 per cent over those of 1981. In the following
year, it was even better. Since China was not only self-
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sufficient in cotton, but one of the largest cotton
exporters during this period, the textile industry
basically relied on domestic production.
Second, there was an improvement in agricultural
commerce. Before 197 8 state commerce dominated the
exchange of major farm products such as ccitcn, grain and
vegetable oils. Under a monopoly or near-monopoly,
farmers could sell only to state procurement stations run
by the Cotton Hemp Bureau; the government prohibited other
organizations and individuals from engaging in cotton
trade.
After 1977 commercial policies changed as the
government began to promote "multiple channels" for
commerce. Beginning in 1981 individuals were permitted
to establish small-scale businesses to conduct trade in
animal products, vegetables, minor crops, and light
manufactures such as textile and clothing.
Government planning of procurement and sales continued,
but the scope of planning was gradually reduced.
Although the government retreated from the reforms for
several years after grain and cotton production fell in
1985, the reforms fundamentally altered the commercial
environment in rural areas. Commercial activity has
continued to grow and market circulation has improved.
54
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The reforms have allowed pre-existing actors to
participate in the commercial transformation. Rather
than abolish the state commercial bureaucracy, China
encouraged the component agencies to become market
players. Agencies and enterprises within the state
bureaucracy already had capital, labor, access to credit,
and political and business networks, therefore they were
well positioned to fill the vacuum created by market
liberalization.
Third, China's government was in need of foreign
exchange to update equipment and technology in its
domestic industry, so that it issued a series of
preferential treatments, for example, tax reduction and
priority access to materials and energy.
Fourth, the domestic supply condition improved. The
decentralization in party policy provided farmers
decision-making power for cultivation and raised the
output of cotton. Compared with 1978, China's output of
cotton rose by 189 per cent in 19S4 to 6.26 million metric
tons. Also, a large amount of advanced textile machinery
was imported in the early 1980s reflecting structural
adjustment in favor of light industry.
More importantly, rural enterprises developed
extensively in this period. Engaging in labor intensive
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textile production was a popular choice. In 1988 rural
enterprises produced textiles valued at 46 billion yuan,
rising from almost nothing in the 1970s to 27 per cent in
China's total.
Thus, one can see the superiority and importance of the
textile industry in China's experts.
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56
Chapter IX
Conclusion
It is difficult to attribute the dramatic growth in
China's exports in the 1980s to one factor, since it is a
result of many factors interacting with one other.
In the post-Mao period, new leaders made
transformations in many crucial fields. Industry was
marked by the shift from heavy to light industry; the
agricultural sector became more productive through reform.
Enterprise reform was also involved. The reforms did
not necessarily lead public enterprises to the end of
redistributive socialism; on the contrary, a form of
collective corporativism successfully developed in rural
industry. With the positive consequences of reform,
rural collective enterprises made a significant
contribution to the transformation to labor-intensive
manufacturing. TVEs did not directly carry out foreign
trade business but they were flexible, and responded
rapidly through subcontracting, to the changes in world
market conditions, by working with the foreign trade
companies.
57
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Although the trade deficit was not solved by the end of
the 1980s, the mechanism established in this period would
develop and make further contributions in the next decade.
58
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Creator Shitayashiki, Kaori (author)

Core Title How China's economic reform changed domestic circumstances for exports during the 1980s

School Graduate School

Degree Master of Arts

Degree Program East Asian Area Studies

Publisher University of Southern California (original), University of Southern California. Libraries (digital)

Tag economics, history,history, Asia, Australia and Oceania,OAI-PMH Harvest,political science, general

Language English

Contributor Digitized by ProQuest (provenance)

Advisor Rosen, Stanley (committee chair), [illegible] (committee member)

Permanent Link (DOI) https://doi.org/10.25549/usctheses-c16-24394

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