Unifying To Market Prices

TUTOR 6
WHAT ARE THE KEY UNDERTAKING OF SECOND-PHASE REFORM (SINCE MID-1990s)? WHAT ARE THE
ACHIEVEMENTS AND CONSEQUENCES OF EACH OF THE UNDERTAKINGS?
During the first-phase, the markets was expanded and affect the rapid growth on the resources. In
the early reforms, it can describe as “Pareto process” which reforms without obvious losers. In that
time, the unemployment pressure and government pressure were resolved and even the farmers or
workers can supply the foods with no any problems. In the first reforms, it was concluded that the
benefit was in the social dimension sides.
In the financial situation, decentralisation and dual-track systems led to deteriorating central
financial and need to give up their power to local governments. During the issue, it might lead the
local governments become more independent when the central government gives more power to
them. The reform faced the problems during the early reforms. The problems were SOE ownerships
become untouched, corruption, inequality and many others. There was also an East-West gap which
means the different advantages between the other areas and the growth became left behind.
To solve the issues, Government implemented the second phases along with the key underlings
1. Unifying to Market Prices

To avoid the corruptions and inequality of ownerships, government let the market to
unifying towards market prices instead of central planning. In this underling, the market
shares the prices and affect 95% of total retail goods, 90% of agriculture products and 85%
of production materials converted to market price.
Since then, China economy largely depends on market price as the resource-allocation
mechanism. Most of goods and materials are in market prices. This implementation has led
the plan system power becomes fewer.
On the other side, different ownerships like SOE, TVE, collective. Private sector, FDI operate
and compete with each other on the playfield level. They compete by paying the same prices
to gain the same things on the markets and the resource-allocation becomes much more
towards on the market prices instead of plan systems. The dual-track systems still
maintaining during the implementation. The banks still more easily lend the money to state-
owned company and more reluctant to private sectors and cause the inequality.
2. Fiscal – Taxation Reform

Because of many differences in enterprises ownerships, the government needs to give
different taxes to the enterprises. To solve the issues, the reform was to standardize the
taxes to the firms of all ownership types. During the implementation, government formalise
the taxes into central, local and shared categories by sharing the taxes equally and
strengthen the central taxation agencies during the operation. At first, the centre financial
collected the bulk of revenue before they share it to the local governments.
As the results, the taxes become more transparent and standardized. To make it fair during
the shares, they restructured fiscal revenue between the central and local government for
example, the shares of 25% of VAT offer to local government while 75% goes to central
government. Therefore because of it the attraction ability of centre financial becomes larger.
The side effect of the reform caused an inadequate local revenue and led to decline of local
services. This happen because of the lack of resources, so the government also needs to
reduce the local services, arbitrary local taxes, fees and sub-charges and strengthen the san-
nong problems.
The problems caused from the government more focus on the investment during Big Push
development Strategy but without enough capitals. The issue shifted focus toward more on
cities/ industry sectors and left behind the agriculture sector. The fiscal reform left the rural
government in bad financial situation and used the unauthorised taxes to fill the gap but
only caused the problems become worse. During the issue, the centre government need the
support from local government by let them selling the land to supply more services.
3. Enterprises Restructuring
During the decentralisation in first phase, it caused the enterprises to become more
incentive, but only impact the ownerships become untouched. In the second phase, they
started to restructure the enterprises by reform the ownerships. The reform was
restructured the company laws during the operation to make them become more
independent. The government also launched ‘Modern Enterprise System’ / ‘Corporations’ to
improve the enterprises into the independent companies like SOEs. To implement it, the
governments throw out the small one or let them merges with the other companies to fill in
the big companies become bigger. They also led the SOEs to laid off some employees to
reduces more costs and the decline of local services. The reason they throw the small
companies was to avoid the backward and loss of resources.
As the outcomes, the big companies during the systems compete with each other since their
number became higher. Many small companies also started to diversified or mixed with the
other enterprises. Even the TVEs that changed to private sectors become more incentive
during the reforms. During this reform, the winner and losers become emerged, for example
managers implemented the management payoff by buying the SOE and gain the shares.
The SOE during restructured was empowered and have the control on the economy. They
also need to fulfil their objectives especially on the workers who are laid off. To keep the
employment, the SOE need to handle those issues.
4. Entering WTO
The other alternatives, the government also tried to enter the WTO by harmonising the
laws/ regulations/ practices toward the WTO requirements. The action was to gain the
support from the outside. To make the WTO acknowledgement, the government took the
previous reform achievements to as the significant steps in entering the WTO. They also
unified the exchange rates to invest for WTO and cause the devaluation of RMB by 57%.
During the operation, it took around 15 years to join the WTO.
As the result, Through the investment to the outside, the country market shares started to
become bigger by overseas to other countries and facilitated with technology/ knowledge/
labour from the investment. The FDI also started to accelerate when entering the WTO.
After it, the country gained the economic power and make them to not only inviting in the
investment but also going out and let them become more benefits and powerful.
Because of their advanced economic sector, it affected the urge of mutually beneficial
conducts or uneasy issue in some areas like trade war between US-China.

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TUTOR 6

1. Unifying to Market Prices

2. Fiscal – Taxation Reform

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