China’s 30 years of reform: macro-economic policy shifts

China will adopt an "active" fiscal policy and a "moderately easy" monetary policy to boost its economy, according to an executive meeting of the State Council, or cabinet, on 9 November.

These stances mark a shift from "prudent" fiscal and "tight" monetary policies the government adopted at the start of 2008. And they are one of only a few major policy shifts in the past three decades. Previously, China had made six major macro-economic policy shifts over the 30 years since the era of reform and opening up began in 1978.
 
A timeline of China's macro-economic policy shifts

- From 1979 to 1981, China moved to cool an overheated economy and inflation resulting from investment booms since 1978. The government lowered economic targets, curtailed spending, tightened credit controls and froze corporate savings through administrative means.

- From 1985 to 1986, China adopted tight fiscal and monetary policies after economic growth surged 15.2 percent in 1984 on strong investment. It was the first time the government tried to use fiscal and monetary policies in macro-controls, which included curbing bank lending and money supply.

- From 1989 to 1990, runaway price rises and heady investment growth led to a series of strong actions by the government, which imposed price caps on major industrial inputs, reduced expenditure, strictly controlled credit and at one point even halted lending to township enterprises. As a result, economic growth plummeted to 3.8 percent in 1990 from 11.3 percent in 1988.

- From 1991 to 1997, China pursued "appropriately tight" fiscal and monetary policies. It reduced interest rates and expanded money supply at first to revive the economy, but saw a record high inflation rate of 21.7 percent in 1994. The government managed to curb price hikes by keeping the growth of money supply and fiscal outlays within a moderate range.

- From 1998 to 2003, China turned to an "active" fiscal and "prudent" monetary policy after the Asian financial crisis dragged down the economy and added deflation risks. Government spending was hiked and more debt was issued to fund infrastructure projects. Measures were taken to increase revenues of low-income groups and improve social welfare to stimulate domestic demand.

While reducing interest rates, the government started to tax interest on deposits and adjusted money supply through central bank open-market operations.

From 2004 to 2008, with excessive credit and fixed-asset investment growth and strained supplies of energy and grain, China embarked on a new phase of macro-controls to prevent overheating and inflation. During that period, it modified its stances several times without a fundamental overall change.

The government changed its fiscal policy from "active" to "prudent" in 2005. It continued to pursue a prudent monetary policy till June 2007, when the cabinet proposed a "prudent" but "appropriately tight" monetary policy to counter rising inflationary pressure.

In December 2007, the government decided to adopt a "tight" monetary policy and continue the "prudent" fiscal policy in 2008.

The country on the reform road to rural areas

The central leadership has promised longer-term land use rights and very tight land acquisition regulation to farmers as part of its rural reform. The proposals, still to be written into law, carry forward China's comprehensive land reform that began in the late 1970s with the dismantling of the commune system.

The intervening years have seen many rural youths join the workforce, driving the country's economic growth and making it the fourth largest economy in the world. But rural China is still home to 55.1 percent of the population, for whom land remains the greatest source of economic security.

Desperate move to the first stage of rural reform was implemented between 1978 and 1979. The process that continued for three decades saw the transformation of many a poor village into success stories.

Farmers responded with spontaneous initiatives to overcome the commune system's consequences, such as poverty and hunger. They leased out farmlands under their collective management to individual households, creating the concept of household contract responsibility system.

An agricultural boom followed, prompting the central government to introduce farm contract system across the country in 1982. As a system, it accorded due rights and rewards to farmers who produced more.

The Western media tended to call it "decollectivization" without realizing that the community ownership of land was never abolished. What was transferred for private control was the management right.

Agricultural production in the first half of the 1980s reached a rate several times higher than the average of many previous decades. Grain output touched 407 million tons in 1984 after a net increase of more than 100 million tons in just six years. Thus, feeding China, the world's most populous nation, no longer posed a problem.

Rural income, too, rose during the period. With a 150 percent increase in the average price of farm products, farmers began seeing up to a 250 percent rise in their per capita cash income.

But then oversupply caused a major setback in 1985. That caused a 6 percent drop in grain output and slowed down farmers' income, making farming a less profitable job.

To further develop rural China, the government shifted its rural reform focus to creation of off-farm jobs in industrial units, run by village communities. Such units were called township and village enterprises (TVEs). Since TVEs were mostly small and flexible in organizational structure, they could compete quite easily against the then highly bureaucratized State-owned enterprises, especially when it came to meeting consumers' demand.

Quite a few Chinese consumer brands were set up by the TVEs in the 1980s, with most of them being based in the Pearl River or Yangtze River delta regions. Such brands include Konka TV sets, Midea electric cookers and Kelong refrigerators. But the dream run of TVEs ended in the mid-1990s with the tightening of macro-economic control to curb the runaway economic growth. Most of the TVEs had to close shop. According to some estimates, about 30 percent of them went bankrupt, and many others, originally funded by community money, were restructured into private or joint-stock companies to build a more competitive ownership structure. Those that survived the credit crunch were the most competitive ones.

City rush though TVEs are largely a thing of the past now, they opened the road for rural people to get urban jobs. Youths from rural areas began flooding into cities in the mid-1990s, even though they faced a lot of restrictions and difficulties. Some estimates say about 200 million such people are now employed on long-term or short-term bases in cities.