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Contractionary Investment Policies in China 1988/89: Accounting for the Implementation Difficulties and Successes*

Published online by Cambridge University Press:  12 February 2009

Carsten A. Holz
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Extract

In the past twenty years the People's Republic of China has undergone four marked periods of overheating as measured by output and price rises. While the 1980 bout of inflation was primarily a result of planned price increases, inflation in 1985/86, 1988/89, and 1993–95 increasingly reflected underlying market imbalances as prices had been liberalized and production decisions decentralized. Inflation was experienced as most severe in the 1988/89 period when the inflation rate climbed rapidly to levels – since the early years of the PRC unprecedented – above 20 per cent in mid-1988. Panic purchases in summer 1988 because of expected further price rises spread to several cities and inflation became tantamount to “social instability.” The Chinese Communist Party Central Committee strongly voiced its concern about the “stable and healthy economic development” in a communiqué on 30 September 1988: “At present, our overall economic situation is good, but the difficulties and problems are numerous, the most prominent being the excessively large commodity price rises.” Party and central government in 1988 felt compelled to stop economic overheating in order to prevent further panic purchases and rises in the inflation rate which would endanger social stability.

Type
Research Article
Information
The China Quarterly , Volume 160 , December 1999 , pp. 881 - 918
Copyright
Copyright © The China Quarterly 1999

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References

1. For a general exposition of the relationship between investment in fixed assets and inflation see Yining, Li, Zhongguo jingji wang hechu qu (Where is the Chinese Economy Heading?) (Hong Kong: Shangwu yinshuguan, 1989), ch. 5Google Scholar. For a broader view of China's macroeconomy, including the relationship between investment in fixed assets and inflation, see Shouyi, Zhang and Xinquan, Ge, Zhongguo hongguan jingji: lilun, moxing, yuce (China's Macroeconomy: Theory, Models and Predictions) (Beijing: Shehui kexue wenxian chubanshe, 1995), Part 1Google Scholar. Yingqiu, Liu, Zongxuqiu biandong guilü yu hongguan zhengce xuanze (Pattern of Change in Demand and the Choice of Macroeconomic Policies) (Xi'an: Shaanxi renmin chubanshe, 1993)Google Scholar offers a more detailed view of demand and supply relationships.

2. For example, the State Council in an instruction of 24 September 1988 on cleaning up fixed assets investment projects under construction and on reducing the investment volume and adjusting the investment structure, states: “In the past few years overall investment in fixed assets has risen rapidly, exceeding the total financial and material supply possibilities. This is one of the most important reasons for inflation.” Similar statements can be found in the government's work report of, for example, 1989 (see Shaanxi ribao (Shaanxi Daily), 21 03 1989)Google Scholar. A lead article in Renmin ribao (People's Daily) on 2 09 1988Google Scholar explicitly states the two links and claims that approximately half of China's annual steel output is used for the production of producer goods – with the producer goods sector therefore influencing the quantity and price of steel supplied to the consumer goods sector. Regarding the second link, almost 40% of capital construction funds end up being expended on consumer goods. Statistical significance tests on leading and lagged correlation coefficients using quarterly data from Zhongguo tongji yuebao (China Statistics Monthly Report), China Statistics Monthly and China Monthly Statistics covering the third quarter of 1984 to the third quarter of 1996 in fact allow for (i) investment in fixed assets and real Gross Output Value of Industry (COVI) to cause inflation, and for (ii) investment in fixed assets and real COVI to move closely together (all at the 1% significance level).

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4. Chung, Jae Ho, “Studies of central-provincial relations in the People's Republic of China: a mid-term appraisal,” The China Quarterly, No. 142 (06 1995), pp. 487–508Google Scholar, presents an extensive overview of the literature on central-local relations in China. More recent work includes Breslin, Shaun Gerard, China in the 1980s: Centre–Province Relations in a Reforming Socialist State (London: MacMillan Press, 1996)CrossRefGoogle Scholar; Yinxing, Hong and Yong, Cao, “Jingji tizhi zhuangui shiqi de difang zhengfu gongneng” (“Functions of the local government during economic transition”), Jingji yanjiu, No. 5 (05 1996), pp. 22–28Google Scholar; Angang, Hu, Zhongguo xia yi bu (China's Next Step) (Chengdu: Sichuan renmin chubanshe, 1995)Google Scholar; Xiangyang, Xin, Daguo zhuhou: Zhongguo zhongyang yu difang guanxi zhijie (Emperor and Princes: Central–Local Relations in China) (Beijing: Zhongguo shehui chubanshe, 1995)Google Scholar; and Guoguang, Wu and Yongnian, Zheng, Lun zhongyang-difang guanxi: Zhongguo zhidu zhuanxing zhong de yi ge zhouxin wenti (Central-Local Relations: The Crucial Question in China's Systemic Transformation) (Hong Kong: Oxford University Press, 1995).Google Scholar

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7. See Breslin, Shaun Gerard, China in the 1980s: Centre-Province Relations in a Reforming Socialist State (London: MacMillan Press, 1996), p. 7.CrossRefGoogle Scholar

8. See Naughton, Barry, “The decline of central control over investment in post-Mao China,” in Lampton, David M. (ed.), Policy Implementation in Post-Mao China (Berkeley: University of California Press, 1987), p. 76.Google Scholar

9. “State hierarchy” is defined as the central government (the Standing Committee and/or the Plenum of the State Council); local governments on all tiers (the Standing Committee and/or the Plenum of a local government); and ministries and other subgovernmental organs on all tiers (the “bureaucracy”). The distinction between these three types of institutions is somewhat inexact in that some ministers are part of the standing committee of the government of that tier (and all ministers are part of the government plenum of that tier). The distinction occurs below primarily in the context of the institution issuing instructions. Government instructions are clearly distinguishable from ministerial instructions. “Instructions” denote all formal documents issued by the state hierarchy, ranging from “regulations” (tiaoli) to “circulars” (tongzhi). “Lower-level tiers” denotes subcentral tier governments and the bureaucracy (including central ministries).

10. Chung, Jae Ho, “Central-provincial relations”Google Scholar finds very little literature on central— local relations that would not be limited to central—provincial relations, and restricts his discussion to the literature on centrals—provincial relations. An exception is Solinger, Dorothy J., “Despite decentralization: disadvantages, dependence and ongoing central power in the inland—the case of Wuhan,” The China Quarterly, No. 145 (03 1996), pp. 1–34Google Scholar, who examines the relationship between centre, province, and the extra-plan (jihua danlie) city Wuhan. Lyons, Thomas P., Poverty and Growth in a South China County: Anxi, Fujian, 1949–1992 (Ithaca, NY: Cornell University East Asia Program, Cornell East Asia Series No. 72, 1994)Google Scholar covers the top four tiers of the state hierarchy in his analysis of poverty and growth in one county. The central—local literature is limited not only by its focus on the relationship between centre and province but also by its almost systematic exclusion of investment control (often in favour of fiscal issues). None of the comprehensive treatments of several aspects of central—local relations, such as Breslin, , Centre—Province Relations, Hao, Jia and Zhimin, Lin (eds.), Changing Central—Local Relations in China: Reform and State Capacity (Boulder: Westview Press, 1994)Google Scholar, Xiangyang, Xin, Emperor and PrincesGoogle Scholar, or Guili, Bo, Zhongyang yu difang guanxiyanjiu (A Study of Central—Local Relations) (Jilin: Jilin daxue chubanshe, 1991)Google Scholar offer any chapter on investment control.

11. Disputes within the central leadership may in fact have accounted for the timid start of the contractionary investment policies in 1988. Throughout early and mid-1988 the centre was torn by discussions on price reform with Party General Secretary Zhao Ziyang setting the economic reform agenda pressing for rapid price reform, while SPC head Yao Yilin and Premier Li Peng opted for a slower pace of reform. Only at the Tenth Politburo session on 15–17 September 1988 was the conflict resolved in favour of the latter two who were assigned primary responsibility for handling the economy. On the differing opinions within the central leadership regarding the pace of reform and the need for contractionary measures see, for example, Zhonggong nianbao (Chinese Communist Party Annual Report) (Taipei: CCP Research Magazine Publishing House, 1989), pp. II–1 to II–5Google Scholar, Dittmer, Lowell, “China in 1988: the continuing dilemma of socialist reform,” Asian Survey, Vol. 29, No. 1 (01 1989), pp. 12–28CrossRefGoogle Scholar, or Fewsmith, Joseph, Dilemmas of Reform in China: Political Conflict and Economic Debate (Armonk, NY: M.E. Sharpe, 1994).Google Scholar

12. Shaanxi province in 1989 ranked 15th among all 30 provinces in the share of total investment in fixed assets accounted for by state-owned enterprises, seventh in the relative local budget surplus, 21st in GDP per capita, and 11th in the ratio of foreign funds to investment in fixed assets. See 1990 Zhongguo tongji nianjian (China Statistical Yearbook 1990) (Beijing: Zhongguo tongji chubanshe, 1991), pp. 38, 91, 155 and 655Google Scholar; and Quanguo ge sheng, zizhiqu, zhixiashi lishi tongji ziliao huibian (1949–1989) (Provincial Historical Statistical Material 1949–1989) (Beijing: Zhongguo tongji chubanshe, 1990), various pages.Google Scholar

13. See also Lane, Kevin P., “One step behind: Shaanxi in reform, 1978–1995,” in Cheung, Peter T.Y., Chung, Jae Ho and Lin, Zhimin (eds.), Provincial Strategies of Economic Reform in Post-Mao China: Leadership, Politics, and Implementation (Armonk, NY: M.E. Sharpe, 1998), pp. 212–250.Google Scholar

14. On subprovincial tier interviews were conducted in various counties in two municipalitites (shi) and one prefecture (diqu). Interviews, newspaper reports and numerical data all attest that there is no need to distinguish between municipalities and prefectures. In the following, “municipality” captures both entities.

15. For a more extensive list of instructions and events, including short descriptions, as well as for a list of instruction titles and concise sources please contact the author. All instructions are from State Planning Commission, Zhonghua renmin gongheguo jihua fagui huibian 1988–1990 (PRC Compendium of Planning Laws and Regulations) (Beijing: Zhongguo fazhi chubanshe, 1991)Google Scholar; Zhonghua renmin gongheguo falü quanshu (PRC Laws) (Changchun: Jilin renmin chubanshe, 1989)Google Scholar; Renmin ribao; Shaanxi Province Planning Commission, Shaanxi sheng guding zichan tonzi guanti wenjian xuanbian (Shaanxi Province Selected Documents on Investment in Fixed Assets) (Shaanxi, 1993)Google Scholar; Shaanxi ribao; Shanxi zhengbao (Shaanxi Province Bulletin); Yulin bao (Yulin News)', and Yan'an bao (Yan'an News). In the following, instructions are referred to by an abbreviation for the institution issuing the instruction and the date of issuing (year/month/day).

16. For investment by collective-owned units and individual-owned units (including private-owned units) monthly data are not available.

17. See Chuchu, Van, “Guanyu zaijian touzi guimo de jianyi” (“Proposals on the volume of investment under construction”), Jingji yanjiu cankao, No. 28 (03 1993), pp. 39–43Google Scholar, who also offers data on newly started capital construction projects for the years 1985 to 1987 (56, 361; 44, 112; 43, 291) but not for the years after 1989.

18. See Zhongguo tongji nianjian 1992 (China Statistical Yearbook 1992) (Beijing: Zhongguo tongji chubanshe), p. 153Google Scholar. The shares for the years 1987–91 are 21.3, 19.9, 14.6, 16.5 and 23.2%.

19. For the provincial and municipal data see Shaanxi nianjian 1990 (Shaanxi Province Yearbook) (Xi'an: Shaanxi renmin chubanshe), pp. 101, 203, 352, 445 and 456Google Scholar. Data on the investment volume of newly started projects on provincial and municipal tier are not available.

20. Lower-level tier instructions frequently copied major passages of the higher-level tier instruction if they did not pass on the higher-level tier instruction in full. Lower-level tier additions never thwarted the intention of higher-level tier instruction.

21. Information on the audit in Shaanxi province is from ShGov 89/8/19.

22. Although SC 88/9/24 required cuts in projects independent of ownership, the municipal tier appears to have focused solely on capital construction projects (i.e., one category of state-owned projects), and within this category mainly on commercial building projects. (See, for example, Yan 'an bao, 29 10 1988Google Scholar, or Yulin bao, 5 11 1988)Google Scholar. It was not until 1989 that technological updating and transformation projects received some attention, and not until 1990 that investment by townships, collective- and individual-owned units became regulated in Shaanxi province (ShPC 90/2/19, ShPC 90/2/10); these categories thus constituted temporary havens for endangered capital construction projects. (According to SC 88/10/12 the central ministries were responsible for investigating the spurious use of the name “collective-owned” by commercial building projects in which central ministries were involved.)

23. For example, the head of Yulin municipality at the Enlarged Yulin Municipality Party Committee meeting on 2 November 1988 claimed: “The provincial Party Committee and government are very concerned about us old revolutionary bases in Northern Shaanxi Province. At the past provincial meeting [Enlarged Second Plenum of the Seventh Party Committee] the leaders of the provincial Party Committee and government said that some liberation projects in our poor region are basically guaranteed. The subsidized projects determined by the provincial finance bureau will also not change. The old revolutionary base construction funds and the poverty funds will also not change … Therefore, despite the present situation of controlling credit and investment, the economy in our region will still be able to develop normally” (Yulin bao, 5 11 1988)Google Scholar. In contrast, the broad coverage of the Enlarged Second Plenum of the Seventh Party Committee in the press did not include any passage on special exemptions for Yulin municipality (or any other locality).

24. A deflator for investment in fixed assets is not available for the years covered here.

25. This instruction also somewhat rescinded the extension to “all” investment projects independent of size and ownership first included in SC 89/9/24 and more realistically specified as target all projects of state-owned and collective-owned units.

26. Exemptions from both the requirement to cut projects and the blanket prohibition to start new projects were possible but narrow in scope and required approval within a much centralized structure. For details see SC 88/12/26 and SC/SPC 89/1/21.

27. The full text of SC 88/6/16 is not available; central ministries were not mentioned in the newspaper article summarizing the instruction.

28. It is impossible to find evidence on individual instances of direct Party pressure on lower-level tier government personnel in response to CC 13–3. Yasheng, Huang, Inflation and Investment Controls, ch. 8Google Scholar, resorts to correlation and regression coefficients to establish that provincial tier personnel changes are an instrument used by the centre to achieve compliance with contractionary investment policies. The central Organization Department of the Chinese Communist Party appoints provincial governors and deputy governors; appointment decisions on the heads of provincial bureaus and their deputies while being made by the local Party Committee must be reported to the central Organization Department. The Party centre thus has direct influence if not control over personnel decisions regarding the staff in charge of implementing the contractionary investment policies on the provincial tier, including all members of the provincial leading group who are personally responsible for the cleaning up of investment in fixed assets projects under construction. For more details on the distribution of appointment authority see Burns, John P., “Strengthening central CCP control of leadership selection: the 1990 nomenklatura,” The China Quarterly, No. 138 (06 1994), pp. 458–491CrossRefGoogle Scholar, and Yasheng, Huang, Inflation and Investment Controls, ch. 4.Google Scholar

29. Shaanxi ribao on 12 10 1988Google Scholar listed the members of the provincial leading group by name, position within the leading group and position within the regular state hierarchy. Among the various institutions represented in the leading group, the People's Bank of China, People's Construction Bank of China, supervision bureau, statistical bureau, auditing bureau and Industrial and Commercial Bank of China all have a strong vertical relationship with the corresponding units on the central (and the municipal) tier. The central government thus brings together not only institutions which are likely to be concerned about the macroeconomic balance but those which furthermore may be attentive to central government instructions due to their degree of vertical leadership.

30. Both central and provincial tiers during this period issued detailed instructions on the regular auditing of investment projects before construction. (See AM 88/10/14 and ShAM 88/12/23, AM/SPC 89/12/18 and ShAM/ShPC 90/2/7.)

31. While the objects of the auditing ministries' attention were supposedly state-owned capital construction projects and collective- or individual-owned investment projects in which a state-owned unit participated (ShAM 89/2/22), the provincial auditing report on cut projects (ShGov 89/8/19) included short references to collective- and individual-owned projects without stating explicitly that state-owned units had participated in these projects. ShAM 89/2/22 gave each municipality the right to decide whether to include technological updating and transformation projects in the auditing work.

32. Shaanxi nianjian 1989, pp. 50 and 73Google Scholar, reports on the work of the provincial supervision bureau; a few individual cases are named but none refers to misbehaviour with respect to cleaning up investment in fixed assets projects.

33. Additional regulations were issued in 1989. SC 89/4/2 maintained the public reporting duties by asking the statistical bureaus on all tiers to report to the public on the reduction of investment in fixed assets in quarterly intervals. SSB/SPC 89/6/13 and ShSB/PC/ShEC 89/6/26 further clarified the reporting duties and extended and specified the coverage. For example, starting in the third quarter of 1989, provinces had to report on investment by collective-owned units and individuals.

34. See SPC investment research institute and SSB investment statistics office (eds.), Zhongguo touzi baogao 1991 (China Investment Repon 1991) (Beijing: Zhongguo jihua chubanshe, 1991).Google Scholar

35. Contrary to the instructions, the name of the approving unit was never made publicly known on any tier. SC 88/6/16 asked for the results of the cleaning up of commercial building projects to be reported in the provincial press as well as in Renmin ribao. The report was to include project name, approving unit, and construction area. ShGov 88/6/24 required publication of projects by its bureaus and by the municipal tier. SC 88/9/24 asked for the results of the cleaning up of all investment in fixed assets projects to be published but did not give any further details.

36. See Xi'an wanbao (Xi'an Evening News), 21 10 1988.Google Scholar

37. The findings here, while derived mainly for the case of Shaanxi province, equally apply to other localities. Data on cuts in other localities as well as data on actual investment and on projects newly started suggest that state-owned units in Shaanxi province may have complied better with central government instructions than the nation-wide average state-owned unit. On the other hand, the central auditing report at one point singled out Shaanxi province (as it did other provinces at other times) for reporting cuts in investment projects which had never been started. Neither the central auditing report, nor central documents, nor newspaper reports indicate that Shaanxi province complied in significantly different fashion with central government instructions from other provinces.

38. Using annual data, for the average province the subcentral share in capital construction did not decrease from 1988 to 1989; the subcentral share in technological updating and transformation, however, did decrease. (Monthly tier-specific data on technological updating and transformation is not available.) Shaanxi province thus for the case of capital construction projects complied comparatively well with central government instructions.

39. See Naughton, , Decline of Central Control, pp. 64ffGoogle Scholar, and China's Macroeconomy, pp. 131f.Google Scholar

40. See the provincial economic and social development plan in Shaanxi ribao of 9 05 1989.Google Scholar

41. See Shaanxi tongji nianjian 1990, pp. 92, 97 and 116Google Scholar; comparable data for earlier years are not available.

42. The Shaanxi Province Planning Commission only on 10 February 1990 issued a circular establishing a regulatory framework for investment in fixed assets by collective- and individual-owned units; on 19 February 1990 it issued an additional regulation on investment by township enterprises (ShPC 90/2/10 and 90/2/19). The central government had not explicitly requested such regulations.

43. The slight reduction in investment nation-wide in 1990 could be due to political reasons in the aftermath of 4 June 1989.

44. A similar argument applies held for the budget appropriations to capital construction projects and technological updating and transformation (see Table 5).