China's reform, oriented towards market forces and a vigorous economy, is nine years old. Its development, though not all smooth, is still encouraging. In the first eight years of reform, GNP, state revenue and per-capita income all doubled, and more progress was made in 1987. Total grain output is expected to reach 400 million tons, second only to the record year of 1984; total industrial output value is estimated to have grown by 14 percent; heavy and light industries were kept in balance. Foreign trade and finances turned out better than expected. (Beijing Review will publish the State Statistical Bureau's estimated 1987 figures in issue No. 2).
Inflation has become a problem. however. Price rises have continued at an annual rate of 6-8percent for the last three years, especially in the 29 large and medium-sized cities including Beijing and Shanghai. For a while last July price rises moved into double digits (10 percent). People worry that unless price rises are checked, the benefit from the reform will be cancelled out. The government has adopted some emergency measures to remedy this. Pork. eggs and sugar have been rationed in the state stores.
Price rises point to economic instability, resulting mainly from excessive demand. Inordinate investment in capital construction, consumption outstripping production and excessive money supply have remained uncorrected for a number of years. These problems arose from inadequate reform rather than from the reform itself. That is the economic regulatory mechanisms which are to be established through the reform are incomplete, still ineffective or as yet untried.
This year, the Chinese government will stabilize the economy and deepen the reform. It will focus on strengthening macroeconomic control, establishing enterprise management mechanisms and developing the socialist market system. While controlling demand, it will increase supply. It will ensure an appropriate and steady economic growth and strive to improve product quality and economic returns.
This year the government, will curtail credit and keep the money supply under strict control. In coordination with the reforms in planning, finance, material supply and foreign trade, China will establish mechanisms for regulating the macro-economy. It will first use funds and materials for the budgeted and key projects. It will firmly cut down the number of non-budgeted and unnecessary projects. The state will also control the retail price index keep financial deficits at levels below last year's, and ensure a better foreign exchange balance than last year.
Meanwhile, according to the 13th Party Congress' plan, China will press ahead with political restructuring, separate Party from government functions, and reform government organizations. The State Council will submit the central government's plan for reform to the Seventh National People's Congress session to be held in March for approval. This move will change the government's economic management functions: taking a step away from direct control of enterprises and towards indirect control mainly through economic and legislative means.
Invigorating enterprises, especially the large key enterprises, in line with the principle of separating ownership from management power, is the linchpin of economic structural reform Over the last nine years, enterprises, as independent commodity producers, have been given autonomy. In the past two years, many enterprises have implemented the contract responsibility system and an element of competition has been introduced. Enterprises have been allowed to keep more of any increased profits, and to reward hard work with more pay. Enterprises now have money and a greater ability to develop and renovate.
However, some problems have arisen. For example, many enterprises failed to comply with the state's rule that enterprises should spend 60 percent of their operational funds on production and the rest on welfare and bonuses, and have instead spent most of the money on welfare and bonuses, resulting in a further expansion of consumption funds.
Taking advantage of relaxed controls, some enterprises raised prices without authorization. Some enterprises, which monopolize the production of commodities in short supply, joined lawless retailers in speculation to disrupt the market and harm the consumers' interests.
All this points are to the urgency of establishing a mechanism for enterprises to regulate themselves and relevant legal apparatus. It is expected that such legislation will be laid down in the Enterprise Law to be discussed and approved by the National People's Congress in March this year. Laws and regulations on economic associations, private enterprise and restrictions on and punishment of jeopardizing monopoly are also being drafted.
Extending markets under the guidance of the state plan is essential for vitalizing the enterprises and developing the socialist commodity economy. In the past few years, the consumer goods and capital goods market have expanded and spread across the country. Meanwhile, the capital, labour, technology, information and real estate markets are quickened. When this happens, it will promote goods production and circulation, improve economic results, and help readjust the current irrational pricing system. However, for important and scarce commodities and labour, prices must still come under state control to guard against illegal activities such as speculation. Only in this way can an environment be created for enterprises to compete on an equal footing, thus working out a system where the superior is promoted and the inferior eliminated.
In view of the fact that changes in price are inevitable, the state will attempt to readjust income in line with changes in prices, so as to prevent any drop in the standard of living. Rather, living standards should gradually be improved with economic development. This is important for winning the people's support and reducing resistance to reform.