China Economic and Financial Policy After 1978 Part I

In the 1980s, the Chinese economy underwent profound transformations. The new course, which began at the end of 1978, was characterized by an increased autonomy of businesses and families, a lower weight of direct planning, a rationalization of the production system and the opening of the economy to foreign countries.

The reforms brought about important institutional changes: the number of ministries and commissions was halved and, at the same time, the number of bureaucrats decreased; the financing of state-owned enterprises was secured through bank loans; collective enterprises, especially agricultural ones, benefited from greater decision-making autonomy and a system of material incentives; finally, the management of fiscal policy (both for expenditure and, above all, for income) and that of foreign trade were decentralized. China remains, however, characterized by a structure in which numerous pricing systems and different institutional arrangements apply to transactions on similar goods and services. The territorial dimension of the country and the limited communications, as well as differentiated regional developments,

The economic reform process has had very significant effects. Since 1978, the average annual growth of GNP has been 9%, a value higher than that of many other rapidly industrializing East Asian countries; per capita income has doubled both in the cities and in the countryside. The development of the urban economy has created 70 million new jobs, while, in the countryside, industry has absorbed around 80 million workers previously employed in the agricultural sector. On the external front, the policy of openness followed by China has promoted a rapid development of trade and attracted investments from abroad (over 20 billion dollars in total between 1979 and 1986).

After the slowdown in 1981, due to the restrictive policies adopted to deal with a situation of rising inflation, high public deficits and large imbalances in external accounts, the Chinese economy grew at a rate of over 10% per year. The pressures on the demand side have gradually intensified. In 1985 the inflation rate reached 12%, while the current account balance of payments, mainly due to the sharp increase in imports, presented a deficit of over 11 billion dollars after four uninterrupted years of surplus. The same year, the amount of external debt exceeded that of official reserves.

According to, the authorities’ response consisted of a depreciation of the currency (of the order of 20% in 1986-87) and a tightening of monetary and fiscal conditions. Subsequently, to counter the slowdown in the rate of income development, economic policy was more accommodative and the public deficit in relation to GNP rose from 0.5 to 2.7% between 1985 and 1987.

Despite an expansive economic policy, in 1987 there was an improvement in the external accounts thanks to the growth in exports of non-petroleum products, export promotion measures, restrictions on imports and tighter control over foreign debt.

In 1988, the reform process encountered major difficulties: high inflation and a situation of financial panic led to a halt to liberalization. In 1989, when GNP grew at the lowest rate of the decade, there were also growing difficulties on the side of foreign loans following international sanctions.

Over the next few years, the reform process will have to ensure that the increased autonomy of state-owned enterprises is accompanied by more efficient financial management; that the price system allows an optimal level of investment and use of resources; greater mobility of labor and capital; a financial system that ensures the intermediation services necessary for the new economic reality. But the basic lines of the eighth five-year plan (1991-95) and of a ten-year development plan, approved by the Communist Party in December 1990, seem to be inspired by principles of greater orthodoxy than in previous years.

Political events in China show a continuous evolution but, at the same time, a continuous clash of tendencies, now innovative now conservative. Chinese foreign policy between 1977 and 1978 had been dominated by the so-called ‘three worlds’ theory, first announced by Deng Xiaoping in a speech at the UN Assembly in 1974: United States and Soviet Union they would have constituted the first world; Europe, Japan and Canada the intermediate section; China, Africa and Latin America the ” Third World ”. But Chinese efforts to economically help the countries of Asia and Africa were not successful.

In the course of 1979 the Chinese government proposed to that of Taiwan to put an end to the military confrontation and to be able to develop some contacts between the two Chinas. Starting from January 1979, China officially adopted the pinyin alphabetical transcription system (see below: Language).

Relations with Vietnam deteriorated and, in January and March 1979, China condemned the Vietnamese military intervention in Cambodia.

Between June 1978 and August 1980 the politics that had been introduced during the so-called ” great proletarian cultural revolution ” underwent a radical change: the posthumous rehabilitation of the old president Liu Shaoqi took place; began a severe criticism of Mao Zedong’s theories, of which the cult of personality definitively ceased. In February 1980 Hu Yaobang, a figure very close to Deng Xiaoping, was elected secretary of the Chinese Communist Party. The political conflict took place between the still strictly Maoist factions and the more liberal elements. The campaign against the “ gang of four ” (Mao’s widow, Jian Qing, Zhang Chunqiao, Wang Hongwen and Yao Wenyuan) and their followers continued as they were rehabilitated ” revisionists ” and ” right wing deviators ”, imprisoned at the time of the cultural revolution. The polemics between the factions did not develop only within the party and in the press, but were also conducted by means of “ large-print placards ” (dazibao) which were the most used form of political criticism.

China Economic and Financial Policy After 1978 1