U.S.-China Economic Relations: Present and Future

By Richard H. Holton; Wang Xi et al. | Go to book overview

3. China's Economic Reform and Its Implications for Sino-U.S. Economic Cooperation

WANG LINSHENG

After its founding in 1949, China gradually developed into a highly centralized economy of mandatory planning. Under this system, sectors of state and cooperative ownership predominated over China's economy, eliminating the capitalist private sector. Meanwhile, the existence of individual ownership was also so harshly restricted that its function in the economy became marginal. Both state and cooperative enterprises were run according to the state mandatory planning targets. The state planning was compulsory. The fixed assets and working capital were basically allocated by the state. While the enterprises had to deliver nearly all their profits to the state, their loss, if any, was also subsidized by government departments.

Under the system, means of production and consumer goods were priced mainly by the state, and the administrative transfer and distribution of means of production were executed at planned prices. Although consumer goods markets did exist, the prices in these markets were not determined by supply and demand. As a result, most prices were unchanged over a long period of time, and rationing would always be instituted if a shortage of basic necessities developed. Clearly, price was then only a tool to formulate plans and make accounts. Prices did not regulate production and circulation. The market mechanism had no bearing on the country's economic activities at that time; they were then totally organized by means of the state plan, which was in turn executed by governments of various levels through administrative measures. This combination of mandatory planning and administrative measures has been called a "command economy" by some Western economists.

Profound historical and social factors explain the evolution of this economic system. The old China was a semifeudal and semicolonial society in which the commodity economy was underdeveloped. The military communism of the revolutionary war years, the Soviet economic

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