Economic System Reform in China

Ever since 1978, China has been making more and more progress in her economic system reform and gaining popularity around the world. This paper gives a general picture of China's economic system reform: its background, problems, policies, achievements and prospects.The Stalinist model was almost entirely copied by China as a means of organising the economic life and industrialising her economy in the early 1950s. By doing so, China had made some achievements before 1978, but as time passed, China's national economy lost impetus and was soon left far behind by developed countries. Not long after the downfall of the 'Gang of Four' in 1976, Mr. Deng Xiaoping and his close associates came to power. They were aware of the fact that there were not a few problems in China's economic system: over-centralisation in economic planning, equalitarianism in distribution, etc. All these problems gave rise to widespread unrest and hindered faster economic development.Being an agricultural country, it is not surprising at all that China started her economic system reform in the countryside, aimed at solving the problem of feeding her huge population and gaining the farmers' support for this reform. China introduced the Responsibility System (RS) in her rural reform in 1978. In this system, a farming household can sign a contract with the production brigade and become the user of land. Accordingly, the individual household will be obliged to hand over or sell an agreed quota of grain or cotton to the production brigade after harvest. At the same time, farmers can sell the above-quota output on the free market. Farmers may thus have incentives to make full use of the resources which would finally improve the efficiency of production.Another important aspect of China's rural reform, is the rapid development of "township enterprise" which was highly encouraged by the central government. Township) enterprise is a kind of collective enterprise, located mainly in the countryside and run by the production brigade or township government. This may be the special way through which China would continue her industrialisation.RS has been also widely applied to urban reform, which followed China's rural reform. Managers with relative autonomy like farmers can sign a 'contract' with local authorities or ministries concerned. In such contracts, both sides decide how to share the profit and make arrangements about production quotas. Products covered by those quotas will be distributed at officially fixed prices among state-owned enterprises. Products above quotas can be marketed at so-called floating prices (with their bases and ceilings under state regulation).China's open-door policy is an integral part of her economic system reform. By implementing this policy, China intends to play an active role in the international division of labour and also to take advantage of new forms of management used by joint ventures and of new technology.Rural reform also had some negative aspects. E.g, farmers refused to invest in land, and on the contrary, they have been very much interested in pursuing short-term profits. As a result, the growth rate of grain production declined in 1986. The explanation for this could be that RS's potential has nearly been used up.The realisation of urban reform has not been completely smooth, either. Under RS, the manager has to pay a fine if he or she fails to fulfil the contract. This sanction is, however, not big enough for compensating the loss caused by bad management. On the other hand, the state is likely to be reluctant to see any enterprise going bankrupt. That is why RS does not seem to be able to eliminate soft budget constraints for managers. Irrational pricing system is another reason for concern. This has been damaging the national economy by misleading resource allocation. Moreover, any changes in the pricing system may give the impression of simple price hikes. Population pressure is still a special problem which the Chinese leaders have to take into account.China's central government has promised not to change current RS in the rural areas, in at least the next 15 years. The leadership has implemented some flexible policies to encourage co-operation between farmers on a voluntary basis. As an important step in the urban reform, China is introducing a share-holding system. As to the irrational pricing system China's reform architects are trying to work out far-reaching corrections. In addition, a bolder experiment is being undertaken in the newly-formed Hainan province, where market mechanism will play a dominant role. The opening of coastal areas is intended to promote a better integration with the world economy.It can be expected that many other substantial changes will take place in China in the years to come as economic system reform progresses.