The Chinese Path to Economic Dual Transformation

Li Yining

• Publisher: Routledge
• Year: 2017
• ISBN:
  9781351581653
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Economic transformation in traditional development economics refers to the transition from an agricultural society to an industrial one. Based on the practical conditions and the experience since reform and opening up in the late 1970s, the author observes that the path China's economy takes is a dual transformation, namely, developmental transformation from an agricultural society to an industrial economy, and institutional transformation from planned economy to market economy.

Centering on property ownership reform which is the supreme reform of the dual transformation, this book discusses land ownership approval, stock-holding system reform and the maintaining ownership of private enterprises, etc. Besides, the book expounds on the urbanization in China, believing that it is not only the outcome of the dual transformation but also the booster that will help China's economy continue to develop at a high speed. Independent innovation and industrial upgrading which is the key to the enhancement of enterprises' competitiveness is also covered.

The combination or overlapping of the two types of transformations in China has had no precedent in history, and it has not been discussed in traditional development economics. Scholars and students in China's economic studies and development economics studies will be attracted by this book. In addition, this book will be a valuable reference for other developing countries which are undergoing economic transformation.

1 Significance of defining land ownership

Section 1 Economic disequilibrium and the establishment of market entities

1 The proposal of two types of economic disequilibrium

I have always considered Chinese Economy in Disequilibrium as my representative work on socialist economics theories. Its manuscript was written between 1987 and 1989. The full script was handed over to Economics Daily Press in December 1989, and the first edition came out in August 1990.

In the book, I categorised economic disequilibrium in Section 4 (Market Self-regulation in Resource Allocation) and in Chapter 2 (Market Regulation and Resource Allocation). My basic views are as follows:

Under equilibrium conditions, the market is fully developed with flexible pricing, and resource investment of microeconomic units is governed by self-benefits. Resource allocation is constrained by market prices, and resources flow out of inefficient sectors, regions and enterprises and are invested into efficient ones. Nonetheless, economic equilibrium is merely a hypothesis, as real world practice is in disequilibrium. Otherwise, why have so many Western economists been discussing disequilibrium for ages? According to the analysis of Western economists, reasons for disequilibrium roughly reside in the imperfectness of the market due to the existence of monopolies, inflexibility in making pricing adjustments due to unexpected factors or asymmetric information. Additionally, bidding for a price or outcry auctions only exist in a few commodities in economic life when it is only by out-crying like auctioneers that supply and demand can be balanced. Therefore, fundamental measures against economic disequilibrium are simply increasing the extent of government intervention (use government regulations to make up market deficiencies), or fully developing market mechanism, so that prices will be in a more flexible state, and commodity pricing may play a greater role in commodity trades. With regards to China’s train of thoughts on reforms in the 1980s, the school that advocated liberalisation of prices might be influenced by Western economists who favoured the price liberalisation policy and promotion of a fully developed market mechanism.

I proposed, at the beginning of the 1980s, the necessity of categorising a disequilibrium economic state into Type I and Type II economic disequilibrium. Type I economic disequilibrium refers to the state where the market is underdeveloped with inflexible pricing, coexistence of excess demand and supply, and the co-occurrence of constraints on demand and supply. Under this type of disequilibrium, microeconomic units in market activities are commodity producers who operate independently and assume full responsibilities in case of profits or losses. Thus, they are market entities in a standard market sense, having investment opportunities and rights to select self-operation methods, and automatically bearing investment and operational risks.

Type II economic disequilibrium refers to the state where the market is underdeveloped with inflexible pricing, coexistence of excess demand and supply, and the co-occurrence of demand and supply constraints. Under such disequilibrium, microeconomic units involved in market activities are not commodity producers which operate independently and assume full responsibilities in case of profits or losses. Hence, they are not market entities in a standard sense, for they don’t have investment opportunities or rights to automatically select operation modes; neither do they automatically take investment or operational risks or fully take those risks.

Economic disequilibrium in developed Western countries’ market economy belongs to Type I disequilibrium, while the disequilibrium in China in the 1980s belonged to Type II disequilibrium. Consequently, I draw two important conclusions as follows.

First, it is right because China’s economy belonged to Type II disequilibrium, i.e. being in a state where the market is imperfect and also lacks true market entity status, Chinese economic reforms should not take releasing prices but take reforming property ownership (clarifying and defining property ownership and fostering independent market entities) as the masterstroke. The best solution to the reform of property ownership is transforming enterprises’ stock-holding system.

Second, China must take two steps in economic reforms. The first step is to enable China’s economy to change from Type II economic disequilibrium to Type I disequilibrium through property ownership reforms. The second step is to gradually enable China’s economy to move from Type I economic disequilibrium closer to economic equilibrium through market-perfecting measures.

The above are my basic thoughts about China’s economic reforms.

2 Up-to-date achievements from property ownership reform

For the last 30 plus years (the 1980s-2012), China has made significant achievements in its property ownership reform. The achievements can be roughly summarised into five aspects:

1. (1) Most state-owned enterprises have been reorganised into joint-stock companies, among which some have become listed companies.

The aforementioned is a remarkable achievement. Note that in the reform of state-owned enterprises, China used to take such measures as “granting power and allowing a bigger share of profits”, “the substitution of tax payment for profit delivery” and “enterprise contract system” etc. Nevertheless, none of the measures brought about prominent outcomes, particularly the contract-based learning exemplar of Capital Iron and Steel Company (CISC), which was openly advocated by the government. Practice has proved the disadvantages of the advocacy outweighed advantages and that CISC was a typical exemplar, which was “unlikely to be followed”. It came late to other enterprises that “Capital Iron and Steel Company was a product of a special policy”. Without special government policies, no other companies could emulate it. So why should disadvantages outweigh advantages? That is because the enterprise contract system urged enterprise contractors to care for short-term interests and lacked long-term considerations, which brought about competition in using large equipment and ended up exhausting it. Future development strategies and visions of the contract-implementing enterprises were not taken into account. In addition, the enterprise contract system always lay the property ownership issue aside, neither clarifying nor defining it. As a result, enterprises’ property ownership remained fuzzy.

After Comrade Deng Xiaoping’s Southern Talk, the business world began to consider programmes in relation to the stock-holding system reform. Particularly after the 15th National Congress of the Communist Party of China, large state enterprises and big banks started to rank stock-holding system reforms as key projects and even did some research on listing state enterprises in the market. Thus, the reform of state-owned enterprises went into the fast lane.

1. (2) Since the1990s, private enterprises started to develop on a large scale and great changes took place in the economic life with private enterprises gradually recognised as important components of the Chinese national economy.

Private Chinese enterprises, which gradually matured during the period, have become new economic factors after the Reform and Opening-up. They were distinctive not only from private sectors run by the national bourgeoisie before the founding of New China but also from those on the early days of New China (until the transformation of private industry and commerce in 1956). After the Reform and Opening-up, one group of private entrepreneurs after another growing up in various areas devoted themselves to the socialist cause in response to the call of the Central Committee of Communist Party of China and became builders of socialism. Of them, the vast majority were born after the founding of the People’s Republic of China and received education in New China. Some even pursued higher education after the entrance examination to colleges was resumed in 1977, among whom many once went to the countryside or mountainous areas and received labour training in rural areas. They committed themselves to the Reform and Opening-up cause in accordance with the Party’s call and directly participated in private enterprises’ entrepreneurial process. Some of them even switched from being “inside the system”¹ to staying “outside the system”.

Thus, it is reasonable to say that a great majority of private entrepreneurs knew in practice the supreme significance of clarifying and defining land ownership to the development of private enterprises. Without clarified property ownership, what can we say about maintaining and securing private enterprises’ property ownership? Hence, private entrepreneurs were both beneficiaries of the property ownership reform, and its promoters and facilitators.

1. (3) Almost all collectively owned enterprises were reorganised after the 1990s and became enterprises under the clarified stock-holding system, enterprises under the cooperative stock system or enterprises operated with private capital.

When socialist transformation was conducted in industry, commerce and handicraft in 1956, there emerged a group of collectively owned enterprises in cities. Their ownership was still vague. Who were their investors? It was always a mystery, because without identifying a specific investor, “collective ownership” was an empty concept. The situation lasted until the Reform and Opening-up started. In rural areas, there also emerged the collectively owned enterprises which were generally called “commune and brigade enterprises”, but it was always unclear who was the investor of “commune and brigade-owned enterprises”.

However, after the household contract system was implemented in agriculture, labour productivity was greatly improved and there appeared rural surplus labour. So small township enterprises were actively run in rural areas. These newly established township enterprises were usually formed by farmers with funds pooled in the form of stock-holding or stock cooperative systems. Although property ownership of previous “commune and brigade enterprises” was unclear, they were renamed township enterprises. Thus, newly-formed township enterprises and previous “commune and brigade enterprises” were generally called township enterprises, and both were incorporated in the collectively owned enterprise system. In addition, in the 1980s, there was another type of collectively owned enterprises in both urban and rural areas. They were actually privately-invested and privately owned, but under the then-circumstances and by convention, they were “affiliated” to collective organisations and regularly paid a certain amount of administration fees to the organisers so as to be known as “township enterprises” or “collective enterprises”.

Mainly after the 1990s, all types of collectively owned enterprises underwent a property ownership-defining process. Although some were still called collective enterprises, their investors were specified, that is, which shareholders were exactly involved. Business forms were also converted into a stock-holding system or a stock cooperative system. “Collective enterprises”, previously affiliated to a certain collective organisation successively broke away from the “affiliated” relationship, and resumed their nature, i.e. whether they are privately owned, privately-cooperated or enterprises under the private stock-holding system. Ownership was crystal clear. That was the achievement of property ownership reforms.

1. (4) After the 1990s, especially after entering the 21st century, there have appeared more and more enterprises with mixed ownership.

Among the mixed-ownership enterprises, some are coalitions of state-owned and private capital, some coalitions of state-owned and foreign capital and others coalitions of state, private and foreign capital.

As a matter of fact, after an enterprise, whether it was state-owned or privately owned became a listed company, an investor in the stock market became one of its shareholders. Thus, the listed company became a mixed-ownership enterprise. If its employees held shares, even though the company was not listed, the enterprise became mixed-owned. Absolute or relative shareholding varied on the basis of the specific circumstances of the enterprise.

The establishment and development of mixed-ownership enterprises were preconditioned on defining property ownership. That is to say, if property ownership remained empty and property ownership failed to be implemented to a specific investor, such an enterprise would be unable to be sustained for long, not to mention further expansion.

1. (5) Likewise, cooperatives worthy of their names were an achievement after the Reform and Opening-up. Every cooperative must have been established, operated and administered by law.

A typical example in this respect is farmers’ specialised cooperatives, which have developed greatly in recent years on mainland China.

As will be mentioned in the next section, property ownership reforms in rural areas have been carried out relatively slowly. From 1979 onwards, implementing the household contract system was undoubtedly a significant reform measure with profound meaning in developing agricultural production, but that was not a property ownership reform in its real sense; rather, it was only an agricultural operation reform. The real launch of rural property ownership reform was the collective forest tree ownership reform promoted nationwide in 2008. The forest farmers contracted collective forest land. They did not only have defined property ownership, which was eligible for mortgage, but also were issued forest deeds, which were implemented to households.

In spite of that, it has to be pointed out that under the agricultural contracting operation mode, farmers’ specialised cooperatives have been set up one after another, which has been a new phenomenon in the last 10 years. To date, though much of farmers’ contracted land has not been defined, it has already become a consensus among farmers that land can be shares. It is more common to have cash rather than land as shares, though. In fact, that was exactly the pilot reform of rural property ownership, as farmers’ specialised cooperatives have already become market entities. Thus, defining and clarifying property ownership must be an essential prerequisite.

Compared to processes of defining rural land ownership and farmers’ gaining three rights, namely contracted land and homestead use rights and property ownership, property ownership reform of farmers’ specialised cooperatives have moved undoubtedly a step ahead.

3 Issues to be pushed forward in property ownership reforms

It should be acknowledged that in the past 30 years of the Reform and Opening-up, progress in China’s property ownership reform has been quite remarkable. Results from state enterprises’ stock-holding system reform are that many large state-owned enterprises and commercial banks have become listed companies and independent market entities in the construction of a modern enterprise system. Undeniably, even with those achievements, we should be clear-minded that large state-owned enterprises, especially those listed companies still have some distance before they eventually complete property ownership reforms. For instance, it still needs to make large-scale state-owned enterprises and commercial banks real market entities, corporate governance structure complete, the Shareholders’ Meeting, the Board of Directors and the Board of Supervisors play their due role, the behaviour of the listed enterprise open and transparent and shareholders assured.

Stocking-holding system or stock cooperative system of private enterprises, including micro, small, medium, large enterprises or stock cooperatives has also made remarkable achievements. Normally, private enterprises’ selection of a stock-holding system or a stock cooperative system accords with their development trends. It is also private investors’ option among the two forms, i.e. stock-holding system or stock cooperative system on a voluntary basis. But many private investors still have concerns over property ownership. They are generally worried about the security of property ownership, often withdrawing their businesses or transferring their businesses abroad after making some profits. Why is it so? The primary cause is that they still have doubts over domestic investment environments in China and lack confidence. As long as a private enterprise has a big business, the private investor’s sense of distrust intensifies. They expect the government and society to be more concerned about the security of private capital, anticipating that they are not discriminated against but treated equally in legislation and judiciary. That actually indicates that there is still much work to be done to protect property ownership of private enterprises. If private investments are not treated equally, private investors will never feel at ease.

Compared with state-owned and private enterprises’ progress in property ownership reform and entity status of the market, there are still a considerable number of limitations in farmers’ status as a market entity. That is because, since the Reform and Opening-up, the focus of property ownership reforms has been laid on the reform of enterprises without realising that the property ownership reform in rural areas should receive equal attention. That is primarily an issue of theoretical understanding.

For a long time, experts engaged in research on reform theories believed that the most important property in rural areas was land, and that it had been clearly defined in China’s Constitution that land was collectively owned, and that the rural contracting system, applicable to China at the current phase was just established collectively owned land. Thus, property ownership reforms in rural areas were considered to have been rudimentarily completed with the implementation and popularisation of the household contract responsibility system since the early 1980s, and pending reform tasks were simply to continuously develop and boost the collective economy.

The inadequate knowledge of rural property ownership reform seriously hindered deepening of rural property ownership reform. For many years since the mid-1980s, why were the majority of contracted households still so poor? Many people attribute it to three reasons. First, farmers only know how to grow crops. Yet, how much could they earn by growing crops? How could they avoid poverty? Second, farmers did not know how to run township enterprises and in some villages, no-one volunteered to organise enterprises. In that case, it was impossible for them not to continuously live in poverty. Third, the rural household contractors had no relatives, friends or hometown fellows in the town and had no idea where to find a job or set up small businesses. They depended completely on luck when they left their hometown. Some found work in the outside world and others lost valuable time, failed to earn money and had no other choice but to pack for their hometown. Some researchers did not understand that the reason for contracted farmers’ continued poverty was strongly related to the prolonged decision on reforming rural property ownership. Farmers did not have property ownership, thus gaining no property income. Apart from planting some crops, raising livestock and poultry, what other ways could they have to improve their wealth? Far from that, as cont...

Table of contents

• Cover
• Title
• Copyright
• Contents
• Introduction: dual transformation of the Chinese economy
• 1 Significance of defining land ownership
• 2 Coordinated development of state and private enterprises
• 3 Changes in the mode of economic development
• 4 Macroeconomic regulation and control
• 5 Reform of the income distribution system
• 6 Urbanisation
• 7 Independent innovation and industrial upgrading
• 8 Social capital and corporate social responsibility
• Provisional summary: the Chinese path and new progress in development economy
• Postscript to the Chinese edition
• Index