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«Inaugural-Dissertation zur Erlangung des Doktorgrades des Fachbereichs Wirtschaftswissenschaften der Johann-Wolfgang Goethe-Universität Frankfurt am ...»

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the rural population was outside the state-sector near subsistence level. This led to a rapid growth of the non-state sector as soon as constraints were removed.741 Reforms were launched in several phases, starting with a reform of agrarian production, a household-responsibility system (HRS) and an ‗industrial revolution‘ of rural areas.742 The HRS made formerly collective land available to individual farmers who were allowed to keep the majority of the crop after paying a share to the state. From the end of the 1980s and during the 1990s, price controls were gradually lifted and replaced by a dual price system that allowed SOEs to sell products above the plan quota for market prices, the socalled dual-track system (shuangguizhi). It allowed for the coexistence of plan and market for allocation of goods. However, the concept does not refer to two separate ownership structures and therefore the dual-track system operated only within the state sector.743 Additionally, in coastal areas several special economic zones (SEZ) were established, which were open to FDI and were less regulated by the state. These zones became engines of growth for the entire Chinese economy.

As will also be described with the example of Wenzhou in chapter 7, the central government decentralized its control to give local officials the space for economic experiments with privatization. One way to do this was the establishment of Town and Village Enterprises (TVEs), which are firms that officially are owned by the collective but actually are often privately managed.744 At the end of the 1980s, corruption was widespread and inflation was increasing which led to rising discontentment in the population which cumulated in the 1989 Tiananmen Square protests and caused a setback in the reform process.745 This trend was only reversed by the legendary ‗Southern Tour‘ of Deng Xiaoping to the SEZs, where he held a famous speech, reaffirming the need for an increasing pace of economic reforms in a pragmatic, non-ideological manner. Ultimately, this renewed the commitment of the CCP to economic reform and led to the 14th Congress of the Communist Party and the approval of a ‗socialist market economy‘ and the extension of markets to all sectors of the economy.746 Shortly thereafter, Deng retired. His accomplishment ―was not to design ‗the system‘ from above…, but to allow mundane experimentation from below‖.747 Zhu, 2007, p. 1507, Unger, 2002, p. 95-118.

Lin, 1992, p. 37, Faure, 2006, p. 73-75, see also chapter 8.2.2.

Naughton, 2007, p. 92.

For a description of the development of the private sector and significance of TVEs for it, please refer to chapter 7.

McNally, 2007b, p. 25.

Naughton, 2007, p. 99f.

Zhu, 2007, p. 1514.

Deng started an evolutionary process of establishing a market economy, and in November 1993 the Third Plenum of the 14th Party Congress issued a document named Decision on issues concerning the establishment of a socialist market economic structure which has been conceived as ―turning point on China‘s road to markets‖. In September 1997, this was followed by the decision of the 15th Party Congress to declare state-ownership merely as a ―pillar of the economy‖ and private ownership as an ―important component of the economy‖. Finally, in March 1999 the 11th article of the constitution was amended to incorporate private ownership and in 2004, at the Second Session of the 10th NPC, article 11 of the constitution was again revised to protect private property and encourage the development of the private sector.748 Also, entrepreneurs were invited to join the CCP on its 80th anniversary on 1 July 2001, in a now famous speech of then General Secretary Jiang Zemin (see also chapter 8 on the motivation of this move).749 In general, 1994 was a milestone year for economic reforms for example with the adoption of the Company Law that provided a uniform legal framework and regulated legitimized ownership structures (see also below, chapter 7 and 8) and many fiscal and financial reforms.750 Before 1978, the government-run banking system was merely responsible for providing trade credit and payment services to facilitate the exchange of goods. No long-term lending for investment projects nor a bond or stock market existed. The financial system was passive in the sense that economic decisions were almost never based on financial considerations but were made by planners and then financed from government budgets that also wielded power over the profits of the SOEs. However, especially in rural areas, banks provided the opportunity to save in form of the rural credit co-operatives.751 Today, China owns a modern financial system, complete with commercial banks and capital market. Particularly the latter has been developed after 1992 but the reforms of the financial system have been continuous since the 1980s when SOEs increasingly relied on the banking system for finance. Loss-making SOEs were provided with credits as the ‗soft-budgetconstraint‘752 led to unlimited access to bank credit. To uphold the notion of ‗reform without losers‘ the state-owned banking system piled up a large amount of nonperforming Qian, 2000, p. 161, Tsai, 2006b, p. 137. Please see also chapter 8.2.2.

Tsai, 2006b, p. 133.

Naughton, 2007, p. 301, Oi, 1999, p 54-56.

Naughton, 2007, p. 451. A detailed analysis of China‘s financial system prior to 1978 and of its reforms thereafter can be found in Watanabe, 2006, Yang, 1971 and Stein, 1997.





The term ‗soft-budget-constraint‘ was coined by Janos Kornai in his work on the socialist economy primarily in Hungary. In short, it exists whenever a loss-making enterprise still receives financing on a continuous basis without the risk of going bankrupt. See Kornai, 1992 and Naughton, 2007, p. 309.

loans wide into the 1990s, which thereafter were merely ‗hidden‘ by a transfer to specialized management companies. Throughout the reforms, the government kept control over the financial system, which is still dominated by the banking system and only has underdeveloped capital markets. Although stock markets developed rapidly during the 1990s, they are still far from being transparent and good governed.753 The Chinese banking system in general is very centralized and consists of a core of four vast state-owned banks that already existed during the planned economy. These ‗big four‘ state-owned banks (originally only subdivisions of one big government (mono)bank) are the Industrial and Commercial Bank of China (ICBC) which is responsible within urban areas and the Agricultural Bank of China (ABC) for rural areas. Additionally, there is the Construction Bank (CCB) that is focused on project financing and the Bank of China (BOC) that handles foreign-trade and foreign-exchange transactions. Additionally, eleven joint-stock commercial banks were set up between 1986 and 2001 and thus were relatively unburdened by China‘s past economic system. However, they are owned by groups of SOEs and thus, local government influence their operations. There are also so-called ‗Policy Banks‘, which consist of the China Development Bank, the Export-Import Bank and the Agricultural Development Bank. Even today, the banking sector is still dominated by government-owned or –controlled institutions.754 However, as this dissertation is primarily concerned with the development of the private sector, it will not in detail discuss the reforms of the fiscal or financial system. Nevertheless, as the private sector is largely exempt from receiving bank loans from the official banking system, it increasingly turns to more unofficial ways to obtain funds. This socalled underground banking will be described below in chapter 7.2. Also the tax system and its reform will be analyzed in depths. Apart from the explanations already given, although there are (rather strict) central government regulations how to govern the fiscal system, it exhibits a large variety locally. The issue of predatory taxation on the local level will therefore be briefly touched in chapter 8.

In the course of transformation, reforms experienced a substantial change of nature. Although decadal differences in GDP growth are rather small, the nature of reforms differed enormously in the 1980s compared to the 1990s. Whereas in the first decade of reforms the transformation was led by rural entrepreneurial endeavors, it was more state-led in the Brandt and Zhu, 2007 and Naughton, 2007, p. 452-454.

Allen; Qian and Qian, 2008 and Naughton, 2007, p. 455-460.

second decade.755 This means that private sector policies became more illiberal and urban biased with an emphasis on investments in state-allied businesses during the 1990s. Increasing tax burdens and other policy measures that curtailed the expansion of rural entrepreneurial businesses were shouldered by the rural private sector.756 This tendency was revised only after 2002 with the Hu Jintao - Wen Jiabao government.757 The state-sector was downsized, privatization became increasingly accepted. Especially after 1992, decentralization shifted power from the central to local governments.758 However, after a firm macroeconomic foundation was given, the focus of reforms shifted to regulatory aspects, such as restructuring of the banking and financial system, of the tax system and of corporate governance. Also, the relations to the international community were intensified, peaking in the admission of China to the WTO. For many, this is regarded as a milestone in the global integration of China.759 As already indicated above, the transformation process in China is also characterized by what is called the urban-rural divide, which means that China is characterized by what Huang calls ―the entrepreneurial, market-driven rural China vis-à-vis the state-led urban China‖.760 The gap can also be explained by the Chinese system of citizenship (hukou) that is divided in a rural and an urban form, with fewer privileges for the rural type. The urban hukou was also related to membership in a work unit (danwei) that provided not only work but health care, pensions as well as low-cost housing and education. This system aggravates the notion of two separate worlds that follow different rules and function in different ways, resulting in differing living standards. In theory, mobility is strictly controlled and thus most migrant workers have no official urban hukou.761 It is claimed that China‘s transformation process is completed and that now the challenge became economic development.762 Indeed, GDP quadrupled in the first two decades of reforms, driven by rising agricultural productivity in the first decade and then with the help of light industry within the TVEs. This led to a substantial decrease in absolute poverty. However, although the Gini-coefficient763 is different for urban and rural households, it Huang, 2008, p. xvii.

Huang, 2008, p. 23, 42f., 123, 173.

Huang, 2008, p. 24.

Galbraith, 2004, p. 98.

Naughton, 2007, p. 100.

Huang, 2008, p. xvi.

Naughton, 2007, p. 113-118.

Huang, 2008, p. 8.

The Gini coefficient is used as a summary measure of income distribution; it ranges in value between 0 and 1. A Gini of zero means that income is being perfectly distributed. Low Gini coefficients are found in countries like Sweden or Germany. However, in the beginning of reforms, China had a coefficient of 0.28, is still very high (see also below).764 However, China today is the third largest economy and although the per capita GDP is estimated $ 3.744 in 2009 it still an emerging nation due to its regional disparities of economic development.765 A 2007 strategy paper of the EU commission addresses the duality of China‘s transformation process which puts it on the one hand in the position to be one of the most important countries in international relations, becoming a strategic partner, and being able to hand out development aid to other countries. On the other hand China still remains a developing country in some aspects, although it has the ―resources to cover its own longerterm development needs‖. The EU assists China in matters of trade and business exchange and also in matters of the environment, energy and actions against climate change.766 The World Bank elevated China from being a ―lower income‖ to a ―lower middle income‖ country.767 However, ―China‘s development guidelines are set out in its 11th Five Year Plan (adopted in 2006) which marks a perceptible shift from all-out economic growth to one which places increasing emphasis on the social consequences associated with rapid economic development‖.768 In sum, ―[t]he economy grew at a phenomenal eight percent a year for three decades, and monetary poverty measures fell more than 80 percent between 1981 and 2005. Yet this success was not matched by performance in other dimensions of human development. China ranks first in economic growth since 1970, but 79th of 135 countries in improving education and health. In fact, China is one of only ten countries in the 135 country sample to have a lower gross enrolment ratio now than in the 1970s. […] The costs of single-minded pursuit of economic growth also became apparent in other dimensions. Escalating environmental pollution threatened many land, water and air systems that people depended on for their livelihoods, sometimes with global implications. Income inequalities worsened.

By 2008 per capita household consumption in the coastal region of Guangdong was more than four times that in Tibet. […] Reducing social imbalances is now a priority in the fiveprobably mostly due to an overall very low income level. Since that, inequality in China rose steadily. By 2001, it increased to 0.447. Naughton, 2007, p. 217ff.

Galbraith, 2004, p. 97.

GDP per capita (current prices), $3744 according to the World Bank, 2010, $3,734.608 according to the International Monetary Fund, 2010, both accessed 20 November 2010. GDP on PPP per capita: $6,778.091 (IMF), $6838 (World Bank), same source and $6600 according the Central Intelligence Agency, 2010, accessed 20 November 2010, $7075 according to the Economist Intelligence Unit, 2010a. This diversity in numbers reveals the difficulties when dealing with Chinese data. Results also strongly depend on different methodologies and definitions. See also below.

EU Commission, 2007, p. 2, 4.

Huang, 2008, p. 240.

EU Commission, 2007, p. 2.



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