Deng Xiaoping and the Transformation of China (88 page)

At the 1984 Third Plenum, Chen Yun did not publicly criticize the “Decision on the Reform of the Economic Structure,” but as Deng began pushing
for faster growth and market reforms the tensions between the two became more intense. In meetings during 1984, Chen Yun objected to the excessive 33 percent increase in capital construction, the 15 percent rise in GNP, and the 9 percent rise in the retail price index, the highest since the start of the reforms.
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Indeed the inflation produced deep anxiety among the public.
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The expansion of markets also required some adjustment to the government's system for collecting revenue. In October 1984 the Chinese government, after trying some experiments, introduced a new nationwide system of taxes to replace the prior reliance on profit remittances for taxation
(ligaishui).
Under the old system, the government assigned factories overall production targets and taxes; there was no economic incentive to increase efficiency. Under the new system, by contrast, each enterprise was completely responsible for its own profits and losses; after remitting its taxes, managers could retain the after-tax profit, thus providing local enterprises with incentives to become more efficient. Both private and state firms, as well as joint ventures with foreign firms, were eligible. Initially, however, the managers lacked sufficient experience to make the system work smoothly. During the first several years, there was no increase in central government revenues.
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The data announced at the end of 1984 were deeply disturbing to Chen Yun. At an enlarged Politburo meeting on February 18, 1985, held while Deng was away in Guangdong, Chen Yun denounced the large budget deficits, the excessive use of foreign currency reserves, and the failure to keep tight controls over spending. He concluded that the policy of giving primacy to the plan over the market was not outdated.
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He used the data at the end of the year to pull back Deng's latest bold charge ahead. Provincial leaders were called to a series of urgent meetings that resulted in the curtailing of large-scale construction, the tightening of bank credits, and tighter controls on wage increases and the use of foreign exchange.
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With the high inflation by Chinese standards, even Zhao Ziyang moved to tighten controls and constrain investments. Finally Deng too, responding to the atmosphere, joined in the effort to reduce the overheating of the economy.
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As he had done in the early 1980s, Chen Yun again used his position as head of the party's Central Commission for Discipline Inspection to restrain the experiments in Guangdong and Fujian. He and his allies publicized cases of smuggling, laundering of foreign exchange, gambling, and pornography. Chen Yun was also aware that various ministries in Beijing were illegally investing
funds in the SEZs, making it more difficult to enforce party discipline.
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As part of this effort to curtail excesses, Hu Qiaomu traveled to Fujian, where he criticized provincial officials for recreating foreign enclaves like the nineteenth-century treaty ports. Yao Yilin went to Shenzhen, where he complained that there had already been too many “blood transfusions” of state funds into Shenzhen; he said that it was time to “pull the needle.”
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In addition, during the summer of 1985 the Central Commission for Discipline Inspection published a report on an automobile scandal in Hainan where local officials had abused their special privileges to import vehicles for development in order to sell the vehicles on the mainland at great profit.
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And Gu Mu announced that China would give priority to only four of the fourteen new coastal development zones—those around Shanghai, Tianjin, Dalian, and Guangzhou.
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Even Deng was constrained by the more critical mood toward the SEZs; he qualified the statements on SEZ policy that he had issued in early 1984, saying that if the SEZs proved unsuccessful, they should be regarded simply as experiments.
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In a speech at a national conference convened September 18–25, 1985, in order to set the basic policies for the Seventh Five-Year Plan (for the years 1986 to 1990), Chen Yun declared that the growth-rate target for the economy should be no more than 6 or 7 percent (roughly half the growth rate of 1984 and 1985), even if the actual growth might be somewhat higher. He added that the township and village enterprises (TVEs) should be restrained from taking away resources needed by state enterprises and he warned that if they were not constrained, China could suffer serious energy shortages and transportation bottlenecks.
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On the defensive because of the new atmosphere, Deng protected his ideological flank by opposing bourgeois liberalization and advocating the strengthening of “education” so that officials would better resist corruption and injustice. Deng said he fully supported the Seventh Five-Year Plan growth target of 7 percent, which was agreed to unanimously by the Standing Committee of the Politburo. In fact, Deng was not upset at this figure for he knew that given the rapid growth during the last two years, if the country continued to grow by 7 percent per year until 2000, it would easily meet his target of quadrupling GNP between 1980 and 2000.
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Some of Deng's critics still complained, however, that it would have been better had Deng not been so exuberant in 1984; that way they could have avoided the inflation and corruption that accompanied the overheated Chinese economy.

Panic and Backlash over Inflation, 1988

Just as Chen Yun's readjustment policy of 1980–1981 brought the economy under control and paved the way for Deng to speed up growth and reform, so too did Chen Yun's retrenchment policies of 1985–1986 again bring the economy under control and pave the way for Deng to barge ahead. In February 1987, when setting guidelines for the 13th Party Congress to be held that fall, Deng, in direct contradiction to what Chen Yun had been urging, directed that “[In the past] we said that in a socialist economy planning was primary. We should not say that any longer.”
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In talks with various foreign leaders in 1987 Deng made it clear that he wanted to leave a legacy of further market opening before he retired.

In his major address at the 13th Party Congress in October 1987, Zhao Ziyang, with Deng's approval, used the expression “primary stage of socialism.” It was again a marvelous concept that allowed Zhao and Deng to say to conservatives that they were upholding socialism and had not given up the goal of achieving a higher stage of socialism. They did add, however, that the higher stage could be postponed for as long as a century. The new concepts, “planning should no longer be primary” and the “primary stage of socialism,” provided a framework for continued movement to a market economy. Zhao declared that “commodity exchange” should be conducted according to the “law of value,” with prices increasingly determined by value; if goods were in short supply, prices would be higher. Private enterprises were explicitly allowed to employ more than seven people. Zhao added that in the future, shareholders would receive cash dividends. While Zhao was still speaking, Chen Yun walked out of the hall, which reformers took to be his way of avoiding a public fight while making it clear what he thought of Zhao's speech.
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In early 1988, Deng decided to move boldly to remove price controls on more goods. As he explained in mid-May to O Jin U, defense minister of North Korea, Chinese standards of living had risen and the public could absorb some price increases.
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At its meeting later that month (May 30 to June 1), the Politburo, under strong pressure from Deng, endorsed a comprehensive plan for price and wage reforms. Deng, who had been briefed for years on the importance of price reform, realized that market prices were critical for achieving a market-led economy. He explained to his colleagues that “it is better to endure short-term pain than to endure long-term pain.” Deng had been told over the years that if prices were to rise, they would do so only temporarily:
market forces would cause other suppliers to enter the market and the prices would come down.

Deng was also concerned with growing corruption, and one of the main structural causes of the corruption was the dual-price system that enabled some officials to acquire goods at low state prices and sell them at much higher market prices. Ending state prices would eliminate that cause of corruption.
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Thus the bold warrior Deng charged ahead to decontrol prices, declaring that price reforms should be completed within three to five years. In July, price controls were removed from alcohol and tobacco, causing prices to rise more than 200 percent.
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But this did not stop Deng from barging ahead.

Deng's economic advisers warned that the timing was not right for price reform because many goods, already under inflationary pressures, were in short supply.
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Before lifting the price controls, supplies had to be ready so that prices would not skyrocket. Deng was undeterred. At a Politburo meeting at Beidaihe (August 15–17, 1988), there were heated discussions about removing price controls. In the end, Deng prevailed and the Politburo endorsed his plan of comprehensive removal of price controls. Immediately after the meeting, on August 19, the decision was announced in the
People's Daily.
As soon as the editorial appeared, the urban public, already straining to cope with inflation, panicked. People rushed to withdraw bank deposits and buy supplies wildly to guard against future price increases. Stores sold out of goods, and the public took to the streets in demonstrations.

Deng was keenly aware that changing party decisions weakens party authority, and since becoming preeminent leader, he had stoutly resisted announcing publicly any changes in decisions. But at this point, Deng had no choice. The public mood was overwhelming. Deng accepted the August 30 decision of the State Council to withdraw the plan for removing price controls. This reversal of party policy represented the most dramatic retreat of a reform measure since Deng had mounted the stage in December 1978.

Deng's decision to announce plans for large-scale price reforms proved to be perhaps the most costly error of his career. His assessment of the long-term needs was correct. To move to a market economy, prices at some point needed to be released. In the 1990s, Zhu Rongji would lift price controls, but he did so when inflationary pressures were lower and the public, by then more accustomed to moderate price increases, was more accepting. Zhu managed to avoid a hard landing and his policies were judged a great success.

Deng had erred in his short-term assessment of the public mood. He was mistaken in his estimate that the rise in the standard of living would enable the public to accept the freeing of prices. At age eighty-three, he no longer mingled with the public and was out of touch with the mood of the Chinese people. Deng's family had played a role in sensitizing Deng to public sentiments, but their contacts were largely with families of other high officials who were more insulated from inflationary pressures than were ordinary salaried workers.

Deng's mistake led not only to a loss of popularity with the public, but also to a loss of power within high-level party circles. His ability to move boldly and expect compliance was greatly reduced. But Deng the soldier had long learned to regroup after his troops had suffered losses. On September 12, 1988, Deng called Zhao Ziyang, Li Peng, Hu Qili, Yao Yilin, Wan Li, Bo Yibo, and Qiao Shi—a mixture of reformers and cautious planners—to his home to discuss price reforms. He acknowledged, “Right now things don't seem in good order. There are all kinds of problems such as inflation. Prices are rising so some adjustments have to be made. Nevertheless, in our effort to stem inflation and keep prices down, we must on no account jeopardize the policies of reform and opening. . . . We have to maintain a proper rate of growth.”
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Deng had little choice but to yield on lifting price controls, but he made clear that he remained fully committed to the overall reform agenda.

The public reaction to the freeing of prices also weakened Zhao Ziyang. Although he had not agreed with the decision to remove price controls at that time, he had earlier made the case for freeing prices and he had allowed inflationary pressures to rise more rapidly than Chen Yun had believed wise. From studying the experiences of other countries, he believed that economies could grow rapidly with some inflationary pressures. But inflation had risen far more rapidly than at any time since 1949. The official retail price index was 18.5 percent higher in 1988 than it was in 1987. And the official retail price index in the second half of 1988 had risen 26 percent over the previous year; many economists believed that other measures would have shown inflation to be much higher.
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The cautious planners had disagreed completely with Zhao's decisions in 1987 and early 1988 that had permitted inflation to rise so rapidly. At the Third Plenum of the 13th Party Congress (held September 26–30, 1988), Zhao Ziyang was criticized for policies that had allowed inflation to grow out
of control earlier in the year. Zhao accepted responsibility for his errors: he acknowledged that some assumptions guiding policy earlier in the year were wrong and that the problem of inflation had not been resolved due to the overheated economy and excess aggregate demand.
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Some thought he should have been removed from his post as party general secretary. He managed to remain as general secretary, but he was given some instructions from Chen Yun about economic policy. On October 10, 1988, Chen pointedly told Zhao Ziyang that there should never be fiscal deficits; too much currency was in circulation. In addition, there should always be balanced development of the economy, otherwise chaos would ensue.
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The warning seemed stern, but, unlike Chen's criticism of Hu Yaobang in 1983, it was not delivered at a large public meeting. Power over economic decisions was then handed to Li Peng, who in November 1987 had been made acting premier and in March 1988 became premier. Needless to say, the relationship between Zhao, a committed reformer who believed in moving to markets, and Li Peng, who was carrying out Chen Yun's retrenchment policies, was not an easy one.