August 1, 2000｜China
Institute of Developing Economies
The economic reform of China could be seen as a process of an endless choice of systems. Sometimes, a system has been chosen spontaneously at the actual scene, and at other times, a system has been introduced based on a central government decision. The efficiency of a system is the final condition for selection. In other words, the sole criterion is whether the system can promote economic development alone. “Development is the first priority,” – the influential slogan of Deng Xiaoping, has been a principle that has helped to accomplish China’s economic reform.
The drastic change of systems all over society has been more or less successfully achieved during the last two decades because of the above mentioned reason. Among these changes, the remaining system, like a sanctuary, is the very basic one related to the “socialist market economy,” i.e. the state ownership of major assets. However, recent reforms have proven that this system is not a sanctuary after all. It is tossed about by the waves of system choice based on efficiency.
The 15th Party Congress held in 1997 was the first turning point towards the acceleration of the reform of state owned enterprises. At that time, a policy of strategic readjustment of the state economy, i.e. withdrawal from non-strategic areas and concentration on strategic areas, was confirmed. Although the privatization of small and medium sized state owned enterprises was in progress in individual provinces it began to be developed on an national scale. The number of state owned enterprises has rapidly decreased since 1997.
The decision made at the Fourth Plenum of the 15th Central Committee in September 1999 made this movement more active. This decision reconfirmed the “strategic adjustment” in 1997, and emphasized its promotion. Following this result, major cities such as Beijing, Shanghai and Tianjin, announced a new policy, which was to withdraw state capital from small and medium sized enterprises in most industries, i.e. promoting the privatization and concentrating on the small number of strategic industries. All small and medium sized state owned enterprises would be privatized soon. Furthermore, even in the case of large enterprises, a policy to promote diversification of capital through the sale of state assets has been formulated. During 1999, 10 listed enterprises were chosen as test cases for disposing of state shares. Two cases among them have already been implemented. Recently, the Minister of Finance announced that an idea has been discussed that the shortage of funding for social security would be supplemented by the disposal of state assets. It is not rare that listed state owned enterprises with bad management are purchased by private enterprises. The privatization of large state owned enterprises would be gradually advanced.
The background of this serious reform of the system of state ownership is a recognition that the momentum which has supported the high economic growth is being lost. The growth rate of investment was 5.2% at actual base in 1999, which is the lowest level ever, except for the period just after the Tiananmen Square uprising in 1990. Although the economic growth rate still remains at a high level of 7-8%, around 2% of this depends on government spending. Since China has a rather weak tax revenue foundation, it is unrealistic that China will continue its policy of domestic demand expansion at present levels for the medium and long-term future. In order to maintain a certain level of growth and to avoid aggravation of the employment situation within these circumstances, there is only one choice. That is to begin reform of state owned assets, which is the last “homework” for achieving system reform.
The concept of the “socialist market economy” was a great innovation for China’s economic reform, because it enabled the transition of the past system to a market economy, without reforming the present political framework. However, an important turning point is just around the corner, due to the pressure of the market economy, which pursues unlimited efficiency.
[Translated by ERINA]