With Nobody Looking, China Drops Economic Reform for Economic Drift

China’s economic reform program collapsed last month. Remarkably, no one seems to have noticed.

This collapse, coming in the wake of virulent debates within China’s senior leadership, has stripped the country of any coherent overall policy for guiding its economy. Now, instead of proceeding forcefully toward reordering a heavily controlled and irrationally structured economy, Chinese leaders are floundering, plugging multiplying leaks in the economic dike with metaphorical thumbs of condemnation and exhortation.

Since 1979, at the direction of the country’s senior leader, Deng Xiaoping, China has made dramatic progress in climbing from the self-inflicted wreckage of the Cultural Revolution. Farmers till their own land and, for the most part, sell their produce at reasonable prices, whether to the state or private marketeers. Entrepreneurial spirit has blossomed in many cities and towns, resulting in a welter of private businesses, from factories to banks. And the sluggish state industrial sector has been prodded into reforming its management style.

All this has resulted in the rapid growth in rural personal incomes, an almost astronomic industrial growth rate and the creation of a vigorous market for consumer goods in urban areas--the greatest improvement in the living standards of China’s people in the country’s history.

But by 1987, there was, among key economic advisers, concern that reforms instigated since 1979, while producing phenomenal progress, had begun to reach their limits. Further economic growth, these advisers realized, required movement to a radically new stage.

Even as the need to move decisively loomed, China’s leadership remained embroiled in serious internal struggles, the dimensions of which are still not clear. What is certain, though, is that the debate revolved around the country’s future economic direction.

Two proposals, far-reaching in scope, were put forward by the most senior economic theorists as twin pillars of the country’s new economic policies. For a time, both were adopted by the leadership. Both went a considerable distance in sweeping away the last vestiges of anything that could be called socialism.

The first called for an admission that China’s policy of setting prices was fundamentally irrational--a central planning apparatus could not determine how much a ton of coal or a kilogram of silkworms should cost. Without a market system--an economy that rationed goods, services and labor according to laws of supply and demand--China would never lay the foundation for real growth. Only a market-based economy, these economists contended, would ensure the country’s climb from underdevelopment to reasonable prosperity.

Wu Jinglian, an executive director of the Economic, Technological and Social Development Research Center of the State Council, the country’s Cabinet, is the foremost exponent of this approach. “The most backward aspect of the reform is the building of the market system,” he told me late last year. “We have to speed up price reform. To improve the economic system, you have to make the market system work. If you don’t have a competitive market, you will have nothing.”

The second proposal mandated total revision of the conventional system of state ownership. No longer, advocates of this view maintained, could China persist with an economy dominated by state proprietorship of industry. Rejuvenation of unwieldy enterprises could only occur through a form of privatizing, when owners’ economic interests compelled efficient operation. Proponents of this ownership reform argued that only by turning these industries into stock-owned public companies could they achieve needed autonomy from state control. This, they said, is a prerequisite for real reform.

The leading figure in promoting this view has been an economist at Beijing University, Li Yining. Li sees ownership reform, he told one recent interviewer, as “the key to it all.”

While supporters of these proposals succeeded in swaying the leadership early last year, a combination of economic and political developments shocked China’s leaders--even those pushing reform most aggressively. As 1988 unfolded, the gradual freeing of prices on an array of consumer goods brought a sharp rise in inflation--the first serious jump since the Communist Party came to power in 1949.

In urban areas, where the vast majority of people subsist on government-controlled fixed salaries, prices leapt officially by as much as 20% and unofficially by more than 50%. City dwellers were stunned by the sudden erosion of their already paltry incomes. The country’s leaders were also stunned by the ballooning prices and last August, as grumbling among city people increased noticeably, they ordered a halt to future price reforms, a freezing of prices on an array of basic goods and wider rationing of scarce staples, such as pork and cooking oil.

That decision, taken during the leadership’s annual summer retreat, reportedly came amid heated disagreements over what the direction of economic policy should be. There were some who insisted inflation was not inherently bad and that in some measure it contributed to economic growth. Inflation, they argued--and Wu of the State Council was the most outspoken--is a monetary phenomenon that can only be controlled by a strong-minded central bank imposing a tight rein on the growth of the money supply.

But that view was submerged in the panic over the potential for serious urban discontent. A hint of this emerged in the winter of 1986, when university students marched in more than two dozen cities, calling for greater democracy. What troubled the leadership was that in some cities--including Shanghai, the country’s largest--workers joined the protests. The one thing the leadership would not tolerate was street protests by hundreds of thousands of angry workers. Price reform and the market system were shelved.

Last month it became apparent that even this effort to stabilize prices had failed. Official inflation rates were running well over 25% and the incomes of more than one third of all urban families were lagging further and further behind inflation. Then, at a little-noted press conference, Zhang Yanning, vice minister of the State Commission for Economic Restructuring, announced that the plan to embark on the road of ownership reform, of transforming state industries into stock-owned companies, had been abandoned for at least the next two years.

With that simple announcement, China found itself without a guiding economic policy. At the heart of the problem, it appears, are the staggering political risks involved in pursuing these policies. As Zhao Ziyang, the head of the country’s 48-million member Communist Party, told President George Bush during his brief stop in Beijing, “There are quite a few people who aren’t fully prepared mentally to face up to the difficulties of reform.” Indeed, the Communist Party chief admitted, some in the leadership believe the reforms “should be reversed.”

The reasons for the persistence of this anti-reform sentiment are evident: both programs--adoption of a market-driven economy and gradual privatizing of the state sector--undermine the basic principles of Chinese socialism. State dominance of production and distribution have been at the core of socialist economic theory. To jettison both would raise inevitable questions about what the real nature of the Chinese polity is. And these are questions so challenging that the leadership cannot address them except in the conventional vocabulary of the past.

What this abrupt disintegration of policy portends for China in the long run is unclear. The country’s leadership insists that it has only postponed restructuring for two years. But the country is left with a patchwork system of prices, some free, some controlled, which has spawned pervasive corruption by local officials.

Meanwhile, China begins a slow, rudderless drift.