Monday, 2 September 1985. Chongqing.
The steamer Bashan leaves Chongqing on the Yangtze, bound for Wuhan, where it will tie up on 7 September. Aboard are more than sixty economists and officials, Chinese and foreign. The State Council has approved the voyage. The China Society for Economic System Reform, the Chinese Academy of Social Sciences and the World Bank have convened it as an international symposium on macroeconomic management.
The World Bank’s Lin Chonggeng invited the foreign guests. Among them are Alexander Cairncross from Britain, James Tobin of Yale, János Kornai of Hungary, Włodzimierz Brus of Oxford, Otmar Emminger of West Germany and Aleksander Bajt of Yugoslavia. The Chinese side includes Xue Muqiao, Ma Hong, Liu Guoguang, Wu Jinglian and Zhao Renwei. Two days earlier, on 31 August, Premier Zhao Ziyang received the whole party at Zhongnanhai. He told them that the goals of reform were unchanged and that a complete market system would be built gradually.
The economy they met to discuss was running hot. Official growth was 15.2 percent for 1984 and came to 13.4 percent for 1985, while farm-output growth fell from 12.9 percent to 1.8. The current account swung from a small surplus to a deficit of 3.7 percent of GDP.
Over six days on the water, with Xue Muqiao opening on the need to strengthen macro-control if firms were to be freed, they argued about what kind of economy China was building. Kornai set out a target: a market that coordinates, steered by the state through macroeconomic levers rather than orders, and most of the participants accepted it in principle. They named the levers: fiscal policy, monetary policy, income policy and the balance of payments. And they named the conditions: firms that could not count on rescue from the state, working markets, decisive price reform, mixed ownership and better economic information. The seminar produced seven special reports and a summary for the State Council, and its results were written into the draft of the Seventh Five-Year Plan, adopted by a Party conference on 23 September.
One of the things they judged was already in place. In September 1984 young economists meeting at Moganshan had worked out a way to reform prices without first reforming everything else. A factory kept its plan quota at the state’s price and sold anything above the quota at the market’s. In January 1985 the 20 percent ceiling on how far above the state price a firm could go was lifted. In March a State Council document freed prices for producer goods outside the plan, and the two-price system, called dual-track, became the working rule. On the Bashan, Brus praised it as a bridge from the old system to the new. The company agreed that two prices side by side cause friction and should not last long.
How long was the question that divided Chinese economists. Isabella Weber, whose account this chapter uses, sorts them into two camps. The dual-track reformers were younger, self-taught in Marxism and in Western social science, and wanted to leave the plan standing while the market grew around it. The “package” reformers were older and more orthodox. They wanted tight money first and then a big bang in which core prices were freed all at once, and they warned that two prices breed friction and corruption. On her account Zhao Ziyang leaned to the package side.
In 1986, she says, Zhao set up a programme office to carry out price liberalisation, and dual-track reformers intervened until the plan was halted. In December Deng Xiaoping put the stress elsewhere. The chief goal, he said, was to invigorate the large and medium state enterprises. Banks should act like banks, with foreign advisers. And China should not borrow too much abroad, build what did not produce, or let consumer demand run ahead. On Weber’s account the programme office was halted; the dual-track rule stayed.
The yuan helped in the meantime. It averaged 2.94 to the dollar in 1985, 3.45 in 1986 and 3.72 in 1987. The current-account deficit narrowed from 3.7 percent of GDP to 2.3 in 1986 and was roughly balanced in 1987, while exports rose from 8.3 percent of GDP in 1985 to 12.5 in 1987. Foreign investment into China was $1.66 billion in 1985 and $2.31 billion in 1987; India’s, in 1985, was $106 million.
1986IndiaIndia was changing too, and quietly. In 1985 and 1986 the government delicensed 25 categories of industry, raised the asset limit under the monopolies law from Rs 200 million to Rs 1,000 million, which freed 90 of 180 large houses from its growth restrictions, and made half of export profits deductible from taxable income. In January 1986 “broad-banding” let firms in 28 industry groups shift between related products. A firm using 80 percent of its capacity was assured it could expand to 133 percent of its earlier maximum output. From October duty-free capital goods went to selected “thrust” exporters. By 1990 the excise reform called MODVAT covered all manufacturing except petroleum, textiles and tobacco.
Imports of machinery loosened. The list of capital goods that could come in under open general licence had 79 items in 1976, 1,007 by April 1987 and 1,170 by April 1988. Non-oil exports in current dollars grew by about 1.2 percent a year over 1980 to 1985 and 14.4 percent a year over 1985 to 1990, on Panagariya’s reckoning.
Who gained is where the scholars divide. Rodrik and Subramanian list four internal liberalisations of 1985–86. Apart from the first, the delicensing of 25 categories, they mainly let incumbents operate more freely, not new firms enter. They call the change “pro-business”, not “pro-market”. None of it touched the reserved list or the permission line of chapter 7.
The money to pay for it came partly from abroad. India’s external debt rose from $38.9 billion in 1985 to $59.3 billion in 1988. Short-term external debt went from $4.4 billion to $6.4 billion, and reserves fell from 5.6 months of imports to 4.0. Current spending by the Centre and states went from 18.6 percent of GDP in the first half of the 1980s to 23 percent in the second, and the combined deficit from 8 percent to 10.1. Rodrik and Subramanian quote Ahluwalia’s judgment that growth of 5.7 percent in the decade was arguably unsustainable, fuelled by a build-up of external debt. Who lent the money, and on what terms, is told in A Crate of Gold, where the bill arrives.
198716:30ShenzhenTuesday, 1 December 1987. Half past four in the afternoon. The Shenzhen Auditorium.
A government is about to sell a piece of land. The plot is coded H409-4, residential, 8,588 square metres beside the Shenzhen Reservoir, and what is on offer is the right to use it for fifty years. Forty-four companies have registered to bid, nine of them foreign-invested. In the room are central government leaders, mayors from 17 cities and a Hong Kong delegation of 21.
The opening price is 2 million yuan. Each call raises it by 50,000. The auctioneer, named in one account as Liu Jiasheng, brings down the gavel at 5.25 million. The buyer is the Shenzhen Special Economic Zone Real Estate Company. That account puts the whole sale at seventeen minutes. The arithmetic, which is this book’s and not the sources’, is that a price of 5.25 million for 8,588 square metres comes to about 611 yuan a square metre, and that if every call raised the bid by exactly 50,000 there were 65 calls in seventeen minutes, a bid about every sixteen seconds. The price rose to 2.6 times its opening figure.
It was the first land auction in the history of the People’s Republic. Under the 1982 constitution land was owned by the state, handed out free, and could not be transferred. Shenzhen needed money to build. It copied the Hong Kong idea of selling the right to use land while the state kept the land, and the businessman Fok Ying-tung is said to have suggested separating the two. On 21 May 1987 the city’s Party committee had approved a land-management reform plan allowing auction, tender and negotiated transfer, and allowing land to be sold on and mortgaged. In November the State Council approved pilots in Shenzhen, Guangzhou and other places.
On 12 April 1988 the Seventh National People’s Congress put the experiment into the constitution. The clause banning the transfer of land by unlawful means now added that the right to use land “may be transferred according to law”, and the word “lease” dropped out of the list of banned acts. The same amendment added a clause saying the State permitted a private sector, within limits set by law, as a complement to the socialist public economy.
Beijing’s politics shifted in 1987. In January an enlarged Politburo meeting removed Hu Yaobang as General Secretary and Zhao took the post, promising that reform and opening would go on. On 6 February Deng said in a private talk that planning was not inherently socialist and the market not inherently capitalist, since Japan and the United States plan too, and that China should stop calling planning primary. The Thirteenth Party Congress, from 25 October to 1 November, set out the “primary stage of socialism”. Deng gave up all his posts except chairman of the Military Commission, and Li Peng became acting premier about three weeks later. By 1988 Li favoured a slower pace of price reform, according to the Monitor.
India had its own news in 1987. On 16 April, Swedish Radio reported that kickbacks had been paid on the 1986 contract for Bofors howitzers, a purchase of about $1.3 billion. V. P. Singh, the defence minister, investigated and was forced to leave the government. Rajiv Gandhi denied any part in it; the Delhi High Court quashed the bribery charges against him in 2004. Rodrik and Subramanian write that Gandhi, somewhat more prone to liberalise, had to step back when he went too far and when Bofors undermined his effectiveness. The monsoon failed as well. Growth in 1987 was 4.0 percent, with farm output down 1.6 percent.
1988On the other side of the Himalaya the lull was ending. On 5 May 1988, Premier Li Peng told the Politburo that Deng wanted the pace of price reform stepped up. By this account Zhao Ziyang had at first favoured a gradual approach, which does not sit easily with Weber’s placing of him on the package side. Deng explained himself in a talk with a North Korean military delegation led by O Jin U, printed under the date 19 May. Prices set by the state had distorted the economy, he said. The state paid low prices to farmers for grain and other food and capped what city people paid, then covered the difference, with subsidies of tens of billions of yuan a year.
The first step had been to lift controls on four foods: meat, eggs, vegetables and sugar. Deng said there had been a rush of panic buying and many complaints, but that people understood the decision. He said China had no choice but to reform prices despite the risks, that leaders must be daring but act prudently, and that he could not yet say for certain it would succeed. He thought growth in 1988 might still top 10 percent. It did: the World Bank’s figure is 11.2.
The reform had begun in the spring and, by one foreign reporter’s account, was not formally announced until it was well under way over the summer. On 15–17 August the Politburo met at Beidaihe and adopted a preliminary plan for price and wage reform. By then prices were running away. Consumer prices rose 7.2 percent in 1987 and 18.8 percent in 1988, and Holz puts inflation above 20 percent by mid-1988. Wages did not keep pace, and television that year showed crowds in Shanghai department stores.
Depositors ran on the banks, afraid that their money would lose value while deposits paid less interest than inflation took. After the outcry the government announced a price freeze, which the reporter doubted anyone would enforce. The Monitor blamed extra currency printed to cover deficits and bank loans made too freely. About 80 percent of Chinese still lived in the countryside, and that was a “saving grace” for the country as a whole because they were less involved in the cash economy.
The retreat came fast. On 12 September Deng told leaders that a rational price system was essential and should be built within a few years, but that rising prices needed adjustment, and that the adjustment must not endanger reform or cause contraction. At the Third Plenum, on 26–30 September, the Central Committee told the State Council to keep inflation under tight control, and the programme was shelved. Zhao later said that the postponement had been his own decision. Holz counts 1988–89 the most severe of four overheating episodes in the reform era, after 1980 and 1985–86 and before 1993–95. A State Council instruction that September said fixed-asset investment had run beyond the finance and materials available. Holz finds that the order leaked: exemptions were granted and projects moved into collectively owned units, so investment fell only slightly by 1990. Growth fell from 11.2 percent in 1988 to 4.2 in 1989. What came in 1989 is told in An Inquisitor.
1988IndiaIndia’s 1988 looked like the opposite. Official growth was 9.6 percent, nearly as high as India’s best year in the World Bank’s series, 9.7 percent in 2021. It was in large part a rebound. Farm output, down 1.6 percent in 1987, rose 15.6 percent in 1988, and Panagariya calls 1986–87 and 1987–88 a disaster for agriculture because of bad weather, and the next three years, 1988–89 above all, unusually good. Export incentives deepened too: the 1988 budget raised the tax deduction on export profits from half to all of them, the export-credit rate had been cut from 12 to 9 percent, exporters got wider access to imported capital goods from April, and they were promised that incentives would not be cut for three years. Industrial growth, which had been 4.5 percent in 1985–86, peaked at 10.5 percent in 1989–90, by the figures Panagariya cites.
Measured in constant dollars, a Chinese person’s income rose about 29 percent between 1985 and 1988, from $676 to $873 in 2015 prices, and an Indian’s about 12 percent, from $451 to $503. In current dollars the picture reversed. China’s income per head was $295 in 1985 and $284 in 1988 while India’s rose from $301 to $358. The difference is the yuan, which went from 2.94 to 3.72 to the dollar over those years.
The afternoon’s sale had a long tail. In 1995 local governments in China took in about 40 billion yuan from selling land-use rights. In 2018 they took in 6.51 trillion, a record at the time. Across 2010 to 2019 land sales ran at between 40 and 70 percent of local governments’ general budget revenue, the low being 39.2 percent in 2015 and the high 71.7 percent in 2010.
2022Then the market for flats turned. In 2022 land-sale revenue fell 23 percent, to 6.7 trillion yuan. By the figure behind that estimate it covered 24 percent of local governments’ income, against 30 percent a year earlier. The two shares use different denominators, so they are not directly comparable. How far the sale of 1987 caused any of this is disputed, as the panel below says, and A Small Car shows what it cost the people who lived on the land.
Chain C081987 → 2022Planted: the auction returns in A Small Car19472026Put the two countries side by side and the lesson looks tidy, and the tidiness should be resisted. China did not simply move one stone at a time. It held a seminar on a riverboat, tried in 1988 to free its prices in a single national push, and by September was telling the State Council to bring inflation under tight control. India did not simply stand still. It loosened the rules for firms already inside the gate and sold more abroad, and its combined deficit reached 10.1 percent of GDP in the second half of the decade. Each left 1988 with a different unfinished item: China with the price question and the land sale, India with its debt.
Neither item was settled when the next spring came. In Beijing it came with a hunger strike.