China's Way of Economic Transition

Abstract

China started economic transition in 1978 to implement a Chinese type of socialist market economy system, i.e., a market-oriented economy consisting of collectively community-owned enterprises (CCOE) and state-owned enterprises (SOE) in a totalitarian political system with the Communist Party of China as the ruling power. The main contents of the economic transition can be briefly described as follows: (1) gradual decentralization of economic decision from central economic planning to market-oriented decision by delegating competence to managers of SOE and CCOE without privatization of public ownership, (2) liberalization of cross border economic activities (open-door policy), (3) allowance for Chinese to erect private enterprises (PE) on the one side and foreigners to set up foreign invested enterprises (FIE) on the other side, as well as (4) reorganization of SOE and CCOE. In comparison to the former Soviet Union and the Central and Eastern European countries, the following points of China's way of economic transition are of special interest. First, China's way of transition is a ``gradual trial and error'' approach without a transition program set for long term but flexible and gradual way which is called a ``touch stones to cross river'' approach. Field experiments have been carried out at first. A reform will be implemented after successful experiments. Second, the rural community becomes reorganized by breaking down communes, implementing a ``household responsibility system'' in the agricultural sector and setting CCOE in the rural areas to carry out industrialization without movement out of rural labor (the slogan for this kind of transition is lee tuh puh lee shian [``move out from agriculture but not out of rural area'']. Third, China's economic development is characterized by a huge expansion of CCOE in the eighties and newly founded PE consisting of FIE since the nineties, while only a very limited share of SOE has been privatized via the reorganization of the sector. China's way of economic transition has been a process of decentralization of the economic system from a central planning economy to one of decentralized market-oriented decision by delegating competence to management of SOE and CCOE without privatization of the ownership to increase efficiency. Fourth, China has been heavily loaded by a fragile banking system with a huge amount of nonperformance loan which implies a high risk of banking system crisis. Fifth, China's economic transition has been seen as a tool to keep the power of the Communist Party China with a periodically instable totalitarian political system and has permanently been confronted with risk of a political collapse. Human rights have not been protected in China. The FIE have crucially contributed to the growth of industrial production, export, and also the economic growth in China since 1979, especially since 1992. Economic special zones have significantly induced the rapid growth inflow of FDI which has financed the establishment of new enterprises instead of financing privatization of the SOE in China. Thus, it is not exaggerated to say that the FDI inflow has mainly contributed to the performance of the Chinese economic transition and the FIE have been the engine of the Chinese economic development.