Reform and political coalition: 1990–2003

The leadership resolved the political crisis and reinitiated the economic reform, though it was subject to a narrower political restriction. State-owned enterprise (SOE) reform and tax reform were the major elements of the reform in this period. The reform in the 1990s was driven partly by the top-down design and partly by the enthusiasm to develop the market economy from the bottom of the society. The most important institutional changes were (i) the reform of SOEs, a silent privatisation in which the small SOEs were sold to the public, while the large SOEs were kept by the government; (ii) the setting up of the tax-sharing system between the central and local governments, which readjusted the financial sources and responsibilities of the central and local governments; and (iii) China’s World Trade Organization (WTO) entry, which further opened the door of the Chinese economy to the world. A large private sector and a financial market were formed by the end of this period. As a result of the downward shifting of power from the central government, the local government played a significant role in economic development through political competition among local governments. The leadership formed a coalition with the elites of the society, which provided a foundation for its stability.