CHINA'S ECONOMIC REFORMS: CHARTING A RISKY COURSE

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00310R000300020004-8
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 25
• Document Creation Date: December 21, 2016
• Document Release Date: February 9, 2009
• Sequence Number: 4
• Publication Date: November 1, 1984
• Content Type: REPORT

Directorate of Confidential
Intelligence
Charting a Risky Course
China's Economic Reforms:
Confidential
EA 84-10199
November 1984
Copy 317
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Directorate of Confidential
Intelligence
China's Economic Reforms:
Charting a Risky Course
This paper was prepared by
Office of East Asian Analysis. Comments
and queries are welcome and may be directed to
the Chief, China Division, OEA
Confidential
EA 84-10199
November 1984
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China's Economic Reforms:
Charting a Risky Course 25X1
Key Judgments The Third Plenary Session of the Chinese Communist Party's 12th Central
Information available Committee met 20 October to endorse a comprehensive "Decision on
as ofI November 1984 Reform of the Economic Structure." If.fully implemented, the economic
was used in this report.
system most likely to emerge would rely on free market regulation to a de-
gree unmatched elsewhere in the Communist world, with the possible
exception of Hungary. Nevertheless, the economy will remain essentially
socialist.
The Central Committee's decision gave the party's political affirmation to
structural changes that Chinese economic reformers have been advocating
since late 1978. In principle, the plenum endorsed plans to:
? Reduce the scope of mandatory production plans and increase the role of
guidance plans to enable enterprises to respond to market signals.
? Remove government and party institutions from the day-to-day business
operations.
? Force enterprises formerly run by the state to become independent
economic entities, competing against each other for profits, while main-
taining tight state control over production and distribution of essential
commodities and over most investment decisions.
? Allow enterprise management a greater measure of decisionmaking
authority over hiring and firing, wages and bonuses, and even prices.
? Institute a rational price system to convey market information to
enterprises.
Deng Xiaoping, his heir apparent Hu Yaobang, and Premier Zhao Ziyang
emerged as the clear political winners at the plenum. Ideas that Hu
defended last year in the face of political opposition are the official line of
the party. Party conservatives-such as Chen Yun-seem to have acqui-
esced in decisions that appear as a policy defeat for them. Other
institutional winners and losers will emerge more clearly during the
implementation period next year.
We believe the reformist wing of the party pushed hard to formalize the
commitment to reform while the 80-year-old Deng is still active and at the
peak of his powers. In our view, they probably also were impelled by fears
that if they did not expand reform:
? Strong agricultural performance of the last three years might not be
sustained.
? The technological revolution ongoing in the West might leave China
permanently behind.
? Piecemeal reform would lead to multiple failures.
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November 1984
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The implementation stage will be the first major test of China's reconsti-
tuted bureaucracy. We believe that critics of the reforms will attempt to
slow policy implementation through a wide variety of bureaucratic subter-
fuges. Resistance will come both from leaders threatened by Beijing's call
for younger, more educated managers and from ideologues who view the
entire reform program as heretical and too pro-Western.
Economic problems will also threaten reform. We believe that the leader-
ship's desire to institute rational prices is both the key to the success of the
entire reform program and its greatest threat. The shortage-driven econo-
my is susceptible to potentially destabilizing bouts of panic buying and
bank runs. Shutdowns of noncompetitive enterprises, if not carefully
managed, could also weaken the industrial base and create unemployment.
Beijing clearly recognizes both the potential gains and dangers of price
reform and will move rapidly but deliberately in implementing changes.
Because of the leadership's sensitivity to destabilizing price pressures, we
believe the risk that it will move too slowly, and stall the entire reform
package, is greater than the risk that too rapid an advance will spark
economic instability. Some inflation should be expected as price adjust-
ments work their way through the system, but we do not anticipate any
long-term spiraling in prices.
Even if Beijing manages to weather its inevitable short-term problems,
Deng's death or a combination of other setbacks-such as floods, drought,
a succession of poor harvests, or a rapid rise in undesirable side effects of
economic expansion (double-digit inflation, for example)-could over the
longer term tip the political scales against reform and lead to a retreat. We
believe the party would pay a political price as it sought to reassert its con-
trol down to the local level. Party leadership would again be seen as
vacillating and unconcerned with the common welfare, precisely the image
it seeks to dispel by implementing new policies. There might also be a
prospect for active resistance by disaffected peasants or workers. The
failure of reform would almost certainly presage a protracted period of
political instability, as leaders struggled to fix the blame.
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In our view, China is well positioned economically to survive the problems
that will occur in the course of this most ambitious step in reform. Earlier
policy changes have raised the agricultural sector to new heights in
productivity. China's balance-of-payments position is among the world's
strongest. Moreover, much of the fiscal and monetary framework necessary
to control the more market-oriented system is in place.
Over the long run, we judge that the urban reform package will boost
industrial productivity, albeit at a slower pace than experienced in the
agricultural sector. The party is allowing itself five years to get the
program in place and probably will hail even minor improvements in
efficiency during that period as evidence of success. Nevertheless, the next
year will provide a critical test of Beijing's willingness to accept the
dislocations necessary to carry its plans through.
Successful implementation of the reform package will work to broaden
China's ties with the West, creating new opportunities for investment and
trade. We believe the reforms will have limited short-term effect on
relations with Moscow. The Soviets have taken a cautious public approach
to China's reforms-though they are privately critical-because of the
sensitivity of such issues in Eastern Europe and within the USSR itself.
Failure of the reforms would probably have a negative impact on China's
open-door policy and could present Moscow with an opportunity to press
for improved relations. Even in the face of economic setbacks, however,
China's foreign policy will be dictated primarily by strategic security
considerations.
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China's Economic Reforms:
Charting a Risky Course F
Introduction
The Third Plenary Session of the Chinese Communist
Party's 12th Central Committee convened for a single
day on 20 October to endorse a sweeping "Decision on
Reform of the Economic Structure." The Central
Committee's decision was a comprehensive statement
of China's economic policy that, if implemented as
planned over the next five years, will change the face
of Chinese socialism. The economic system most
likely to emerge will mix free market regulation with
Soviet-style planning in a fashion similar to that of
Communist Hungary, Eastern Europe's pacesetter in
innovative economic reforms.' Although advocates of
reform, led by the 80-year-old Deng Xiaoping, have
won a signal victory in gaining Central Committee
approval of their program, they still face formidable
hurdles-including probable administrative confu-
sion, economic dislocation, and bureaucratic resist-
ance-in implementing their controversial measures.
The plenum was preceded by six days of "preparatory
meetings," at which the Decision was presumably
explained in detail to various constituencies. We do
not believe it was significantly altered during these
meetings. Aside from the Decision on reform, the
brief plenum produced two other documents: a terse
communique that summarized the work of the meet-
ing and a decision to convene a "National Conference
of Party Delegates" in September 1985. The plenum
set a two-item agenda for next year's conference:
discussion and adoption of proposals concerning Chi-
na's Seventh Five-Year Plan (1986-90), and selection
of additional members of the Central Committee plus
"other organizational matters." According to the
communique, all three plenum documents were ap-
proved unanimously.
The Document
The Decision is a bold and risky attempt to come to
grips with fundamental problems of the Chinese
economy. It unquestionably is the strongest affirma-
tion the party has ever made of its support for reform
and is the economic benchmark of the Deng Xiaoping
era. Nevertheless, the plenum document is not-as
implied in the Western press-an unanticipated de-
parture for economic policy nor is it a surprising
announcement of some historic new trend, that is, the
reintroduction of capitalism. Rather, it represents
both an acceleration of the reform drive that began in
December 1978 with the third plenum of the 11th
Central Committee and a deepening of the shift,
introduced at the May 1984 National People's Con-
gress, away from the earlier emphasis on rural policy
and toward urban reform. With the party's endorse-
ment, the reform process will be accelerated and its 25X1
scope will encompass a greater portion of the Chinese
economy.
The document begins by citing four characteristics of
China's Soviet-style economic structure that drained
enterprises of their initiative and vitality:
? The lack of clear distinction between functions of
government and industry.
? "Excessive and rigid" state control.
? An inadequate role for prices and markets.
? The practice of "absolute egalitarianism."
It demands the creation of a "new socialist economic
structure with Chinese characteristics." What Beijing
envisions is an economic structure where major assets
continue to be state owned, but where enterprise
managers are free to respond in a competitive way to
market signals. In the words of the document, the
party seeks to create a system where "ownership can
be duly separated from the power of operation."
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A New Relationship Between Government and Enter-
prise. The structural changes called for in the Deci-
sion are basically intended to remove the state and
party from most day-to-day business decisions. To
accomplish this, the entire national economic plan-
ning apparatus will be revamped. Strict mandatory
plans, which previously dictated production and allo-
cation quotas for most sectors of the economy, will
now be applied only where essential commodities are
involved.' According to the Decision, "other products
and economic activities, which are far more numer-
ous, should either come under guidance plans or be
left entirely to the operation of the market."
Guidance plans are to be "rough and flexible" guide-
lines on how much of each particular good the state
deems desirable. Enterprises will be required to give
first consideration to these plans, but, where local
conditions make implementation of guidance plans
unreasonable-for example, because of energy short-
ages or peculiarities in supply and demand-the firms
will be free to deviate from plan without penalty.
Enforcement of guidance plans will be accomplished
mainly through the use of economic levers such as
interest rates, bank lending policies, and taxes.
Enterprise management responsibilities under the ple-
num plan are to be greatly expanded. Specifically,
most enterprises are expected to become "relatively
independent economic entities," responsible for their
own profits and losses. Not only will they have more
control over what and how much they produce and
over their finances, they will also have authority-
within as yet undefined limits-to hire and fire
workers, to set wages and bonuses, and even to set
product prices.
Although the new program calls for a weakening of
the role played by state bureaucracies, their power
nevertheless remains significant. By any objective
standard, China will remain socialist in its essentials.
In addition to the continued importance of the central
planning apparatus and strict control over products of
national importance, the state will continue to appoint
' China recently published a list of essential commodities, which
included coal, oil and petroleum products, steel, nonferrous metals,
timber, cement, chemicals, electricity, munitions, and other items.
Agricultural products on the list included cereals, cotton, edible
and remove key enterprise managers and hence to
exert a powerful, if indirect, influence on production
decisions. Moreover, when enterprises experience fi-
nancial problems, it is the state that will determine
which firms will be subsidized, and which will be
forced to merge or shut down.
Price Reform-The Key to Success. The plenum
brought to an end the party's unwillingness to come to
grips with China's most serious economic problem,
irrational prices. Until now Chinese leaders have been
reluctant to advocate major price reform for fear of
sparking potentially destabilizing inflation, hoarding,
and speculation. The plenum document explicitly
recommends establishment of a "rational price sys-
tem," calling it the key to reform of the entire
economic structure. The fact that Beijing hopes to
have its now totally irrational price system corrected
in only five years is an indication of the party's
commitment to rapid reform
To carry out its program, Beijing will gradually
reduce the number of items subject to state-set fixed
prices. Most product prices will be allowed to fluctu-
ate-according to changes in supply and demand-
within narrow bands set by the state. Floating prices
will be used for a small number of consumer products
and for most services provided by individual entrepre-
neurs. For essential goods, the state will retain tight
control, but major adjustments are probable even here
as Beijing attempts to bring its raw material and
energy prices into line with the current world econom-
ic situation.'
Recognizing the sensitivity of the local population to
price changes-many Chinese remember the hyperin-
flation of the late 1940s-Beijing's plans for rational-
izing prices are cautious. The plenum document em-
phasizes that price reform will be implemented
"gradually, in a step-by-step" fashion. It promises
that "the real income of urban and rural inhabitants
will not go down as a result of price readjustments."
The document also warns potential entrepreneurs that
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it is "absolutely impermissible for any unit or person
to boost prices at will by taking advantage of the
reform."
Absence of Dogma. The Decision is starkly lacking in
standard Marxist or Maoist points of reference and
will strike some doctrinaire party veterans as very
questionable ideology. In an attempt to undercut such
criticism, the drafters use a combination of argument
and assertion to persuade readers that the new policies
will achieve "socialism with Chinese characteristics."
The document, which is markedly defensive in some
passages, justifies its conclusions ideologically by re-
defining what is socialist. For example, to account for
labor and commodity policies that smack of capital-
ism, the document asserts that, at its current stage of
development, China needs a "socialist commodity
economy." The essence of socialism, the Decision
argues, lies in the public ownership of the means of
production, and not in such things as rigid central
planning or egalitarianism. We believe the weakness
of the Decision's ideological foundation will require
the party to defend it frequently against both internal
and foreign critics. The Chinese are acutely sensitive
to the charge that the reforms constitute a return to
"the capitalist road.'
The Decision also supports other controversial re-
forms on Deng's agenda: China's opening to the West,
the promotion of intellectuals and professionals, and
new standards for performance of party members. By
tying these policies directly to economic reform, Deng
seems to be telling his supporters, some of whom may
disagree on specific points, that the program is all or
nothing
A Matter of Timing
Now or Never. Facing an already ambitious political
and economic agenda, why did Deng and his allies
choose this time to move across so broad a front? We
believe that the urgency behind these latest steps
springs from a perceived need to do as much as
possible while Deng is physically able to remain
personally involved. For all his intentions to emplace a
durable leadership to succeed him, Deng, now 80,
remains the key player in China's leadership. Al-
though Hu Yaobang and Zhao Ziyang, standing at
the pinnacle of the party and state bureaucracies, are
powerful figures in their own right and have been
heavily involved in overall reform policy formulation,
neither commands the loyalty of Deng's following or
enjoys Deng's preponderant authority and prestige.
Reform can proceed without Deng, but the way will
be more hazardous.
The Chinese leadership has been strikingly frank in
assessing the controversial nature of the Decision. For
example, Hu Yaobang, while maintaining that "the
overwhelming majority of our comrades will be elated
and inspired," noted at one of the preparatory meet-
ings that not everyone would agree with the Decision
because of the "varying depth of understanding and
different interests at stake." In our view, Hu's state-
ment is unusually realistic in admitting the role of
interests-personal, institutional, or otherwise-in de-
termining individual opinion
Hu's statement also epitomizes the confidence of
Deng and his allies. They have said publicly that some
cadre may "trail behind" in their understanding of
reform, and that, as long as they did not actually
oppose reform, they would be given time to study and
catch up. It seems evident that Deng and Hu believe
the rectification of party and government leadership
groups-generally complete at the provincial level
and continuing locally-has been successful. Late last
summer Hu told foreign visitors that a million offi-
cials had already retired and by yearend a million
more would go. In our view, this leadership turnover is
a key prerequisite for successfully implementing the
controversial economic reforms.
A Sound Economic Foundation. China is well posi-
tioned economically to survive the problems that
inevitably will arise from the planned overhaul of the
economic structure. Earlier reforms have elevated the
agricultural sector to unprecedented productivity.
Grain output in 1984 should hit record levels for the
third consecutive year. Moreover, China's balance-of-
payments position is one of the strongest worldwide.
International reserves exceed US $20 billion, the debt
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service ratio is under 6 percent, and Beijing has
gradually depreciated its currency to a point that
should discourage enterprises from abusing their new-
found import autonomy.
Moreover, much of the fiscal and monetary frame-
work necessary to control the more market-oriented
system is nearly in place.4 The tax system began a
final stage of overhaul on 1 October. Most enterprises
no longer remit profits to the state, but instead pay a
regular income tax that Beijing can alter to influence
economic behavior. The banking system has also seen
major changes that enable it to better control the
more flexible economic structure. Earlier this month
Beijing announced that the central bank-the Peo-
ple's Bank of China-is now allowing local banks to
retain a larger portion of their own reserves and to
borrow from, or lend to, other banks. Bank loans are
rapidly replacing government allocations as the main
outside source of investment funds for enterprises. In
addition, interest charges are for the first time making
enterprises sensitive to the cost of money. We believe
these reforms put the central bank in a stronger
position to control the nation's money supply
The Economic Imperative. Although the conditions
necessary for change have been improving, the pres-
sure to do so has also been mounting. According to
leading Chinese economists, the immediate rationale
for moving ahead was concern about the drag that the
urban economy is placing on progress in the rural
sector. Recent Chinese press accounts indicate that
grain stocks are building and sometimes rotting in the
countryside because China's commercial and trans-
portation network is incapable of handling the in-
creased output. Peasants reportedly are experiencing
difficulty turning their increased earning power into
consumption because of the inadequate flow of con-
sumer goods from urban to rural areas. Both problems
may already be cutting into peasant willingness to
push for further agricultural gains.
The failure of earlier reforms to generate productivity
gains in industry is also exacerbating China's energy
problems. Chinese economists realize that without
sharp improvements in industrial efficiency the goal
of quadrupling output by the year 2000 is unattain-
able. Power shortages reportedly idle 20 percent of
production capacity, yet Chinese industry continues to
use three and a half times more energy to produce a
unit of industrial output than does the average LDC.
The reformers appear to believe that only by forcing
managers to face a competitive environment with
rising energy prices can efficiency gains be achieved.
The Leadership Picture
The party characteristically sought to convey an
impression of unity at the October meeting. Of the six
members of the Politburo Standing Committee, only
Ye Jianying, who reportedly is very ill, failed to
attend. The remaining five, including Chen Yun in a
rare public appearance, collectively presided over the
meeting. Marshal Nie Rongzhen-85 and ailing-
was the only other member of the Politburo and
Secretariat who failed to turn out.
Although Chen Yun has yet to comment publicly, we
tentatively conclude that the plenum was a policy
defeat for him and other party conservatives. Many of
the Decision's pronouncements on such topics as
economic balance, investment priorities, and control
of inflation bear Chen's imprint, but these are issues
on which there is much agreement in the party. The
Decision goes considerably beyond Chen on the cru-
cial issue of central control and seems to disavow his
insistence on finely detailed planning as the founda-
tion for the macroeconomy. We believe Chen's con-
spicuously low public profile since the waning of the
spiritual pollution campaign gives credence to rumors
that he in some way was linked to mistakes at that
time or that he is no longer well enough to press his
views.
Aside from Deng, Hu is the clear victor in this
political round. In early 1983 Hu strongly endorsed
an acceleration of reform, but his ideas generally were
ignored, even obliquely attacked by other senior lead-
ers, and, in the press of other priorities, reform efforts
stagnated. Later that year, Hu was clearly on the
defensive in the spiritual pollution campaign. Yet,
ideas Hu promoted last year in the face of criticism
have now become the official line and policy of the
Central Committee.
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In January 1984 the political atmosphere did not
appear conducive to the promotion of major structur-
al reforms, despite a People's Daily New Year's
editorial that subordinated all other tasks to eco-
nomic construction. At that time, China was still
awash in the rhetoric of the campaign against spiritu-
al pollution, which Deng had kicked off at the Second
Plenum in October 1983. That drive faded in late
December after Hu, Zhao, and other senior leaders
went to Deng with evidence that the campaign was
being misused by conservative elements in the party
to attack a broad range of policies, including agricul-
tural reforms. It is possible, therefore, that the
party's reformist wing, after containing the spiritual
pollution campaign, decided to forcefully reassert
reformist priorities and press forward with long de-
layed proposals for major structural changes. F_
from socialist orthodoxy by bluntly insisting that "we
must encourage competition (among enterprises) and
The available evidence suggests that party reformists
wanted to formalize their controversial new program
with a central committee resolution. Another party
session, probably in late July or early August, appar-
ently worked on a late, if not final, draft of the
Decision on Economic Reform.a Shortly thereafter, a
diverse collection of national leaders-including Hu,
Zhao, Wan Li, and others-began to tour the prov-
inces, apparently to generate support for the impend-
ing policy changes. Around the same time, Politburo
members openly began to discuss the agenda of the
Third Plenum and the party's decision to convene a
Congress of Delegates (at first misunderstood to be a
During January-March several important events oc-
curred that imparted greater momentum to reform
efj'orts.
? Deng Xiaoping toured and publicly praised China's
Special Economic Zones.
? Hu Yaobang traveled through the southwest and
set off a campaign against local factionalism.
? Economic moderate Chen Yun, an advocate of rural
reform but also of tight central planning, sharply
reduced his public activities, possibly because of
illness.
? The official media intensified their coverage of
rectification and reform topics such as the treat-
ment of intellectuals and the need for price reform.
Several major party and government meetings were
held in the spring. One of the most important was an
expanded Politburo session on 30 April that approved
the opening of 14 port cities to foreign commerce. We
assume these meetings also worked out the themes
and business of the Second Session of the Sixth
National People's Congress (NPC) that convened in
May. Premier Zhao Ziyang's speech to the NPC was
the high water mark of the spring reformist current.
Zhao revived several ideas that had lost some curren-
cy following the onset of the economic readjustment
policy in early 1981, such as the devolution of
decisionmaking responsibility to enterprise managers
and the importance of workers' congresses. He an-
nounced the State Council decision to accelerate
urban reform and foreshadowed the party's departure
party congress) in 1985.
In response to top-level encouragement, provincial
and ministerial leaders began taking bolder steps at
reform. Factories in the city of Chongqing, for exam-
ple, were reported to be experimenting successfully
with a program allowing them to direct their own
production, marketing, hiring, and firing, and to
establish their own managerial systems. In August
and September the State Council ordered several
major state organizations-including the Ministry of
Foreign Economic Relations and Trade, the Ministry
of Machine Building, and the Ministry of Coal
Industry-to relinquish day-to-day conduct of busi-
ness and instead to become formulators of broad
policy guidelines for their respective industries.
Just before the plenum convened, the State Council
published "Provisional Regulations on Improving the
Planning System. " Although we have yet to see a
copy of the regulations, Chinese press accounts sug-
gest that they cover most of the major elements of the
program subsequently approved by the party plenum,
and indeed that they provide even more detail on how
particular industries and products would be affected
by the new program. This unusual public discussion
of the plenum's agenda contributed to the reformist
momentum and made it appear that the plenum was
held simply to legitimize a fait accompli.
a As with the controversial 1981 assessment of the party s history,
the draft of the Decision on Economic Reform was circulated to
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Zhao has also gained through his long and clear
association with many of the ideas expressed in the
Decision. Moreover, Zhao crisscrossed the country
during the months preceding the plenum, apparently
to do advance work for the coming policy changes.
While on the road, he delivered important speeches
that amplified his May address to the NPC and
included fresh ideas on technical renovation in fac-
tories, the velocity of money in circulation, and the
importance of China's opening to the world.
The main institutional winners and losers will emerge
more clearly over the next year as Deng and company
move from policy formulation to implementation, but
we believe certain categories of officials can be rough-
ly assessed now. Aside from the party's reform wing,
other generic winners include the growing group of
relatively young, educated professionals and intellec-
tuals whom the party has courted so assiduously over
the past year. In particular, those alternate members
of the Central Committee who were selected for their
exemplary professional characteristics can look for-
ward to enhanced career prospects in a hospitable
policy context.
The party's planning apparatus will continue to play
an important role within its narrowed confines, but
nonetheless has been divested of many responsibilities.
National foreign trade officials-among them Polit-
buro alternate Chen Muhua, who seems perennially
awaiting demotion-will lose authority to local trade
officials and enterprise managers, who have received
expanded power to strike their own deals with foreign
traders. Whole categories of ministerial-level officials,
accustomed to directly commanding entire sectors of
the economy, must rest content with establishing
broad policy guidelines and overseeing implementa-
tion, while plant managers get on with their profit
seeking.
No Breathing Space
Political Shoals. The leadership recognizes that Cen-
tral Committee endorsement plus reliable personnel
well-placed to oversee execution does not equate to
policy implementation. Until regulations, laws, and
administrative decisions on implementation are pub-
lished and acted on, the Decision is only an enumera-
tion of intentions, a wish list. We expect, therefore,
that the plenum's Decision will be a major test for
China's reconstituted bureaucracy and its ability to
weave disparate policy strands into a coherent fabric
of reforms.
The enthusiasm surrounding the Decision-whether
spontaneous or manufactured-may momentarily
mute voices critical of extensive economic reform. The
longstanding debate over economic policy, however,
cannot be considered resolved. Few such controversies
ever reach satisfactory closure, as the experience of
China's rural reforms-which remained periodically
under fire even after promoting bumper harvests-
amply demonstrates. We believe critics of reform will
seize upon problems during the transition period to
press for policy reversal or modification.
These potential critics are located throughout China,
although generally not in the most important posts.
They have the ability to slow down the process of
policy implementation through a wide variety of
bureaucratic subterfuges. They probably fear that
Deng's current initiative requires removing officials
like themselves, who lack the training, knowledge, or
vigor to promote change. To these party hacks, party
personnel chief Qiao Shi's recent promise to replace
within a year 40 percent of all top managers and 70
percent of all party secretaries in 3,000 key enter-
prises must sound like a war cry. In self-defense, these
cadre can be expected to take every opportunity to
criticize and block the implementation of reforms
Finally, to some within the party, the Decision may
represent the single greatest instance of "spiritual
pollution" in the 35-year history of the People's
Republic. The ideological concerns that gave rise to
last year's drive to eliminate bourgeois influence
remain alive. Indeed, Deng, Hu, and their reformist
allies share a preoccupation with the effect of reforms
on the party's ability to manage Chinese society, and
the issue could possibly be revived under another
slogan. Although we believe that the drafters of the
Decision sought in the text to allay these concerns, we
suspect that older party traditionalists will be moni-
toring developments for signs of "bourgeois deca-
dence," "corrosive ideology," and a chance to exploit
these phenomena once again.
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Economic Problems Ahead. Introducing price reform
into China's shortage-driven economy probably poses
the most immediate threat to the reform program.
The plenum's call for price reform reportedly has
sparked a few bank runs and some panic buying,
despite assurances that prices would be adjusted
slowly and that consumer income would not be al-
lowed to suffer. Further problems can be expected as
Beijing attempts to bring prices for essential goods
such as cereals, industrial raw materials, and coal in
line with costs.
Another economic hurdle that the leadership must
cross in the immediate future is the question of
corporate bankruptcy. Last year, nearly one-fourth of
China's industrial enterprises were unprofitable, and
this year, even after the government exerted strong
pressure for improvement, 16 percent are still operat-
ing in the red. Clearly, Beijing cannot allow a massive
shutdown of such a large portion of its industrial base,
but to continue to subsidize losses reduces pressure on
the enterprises to improve.
Perhaps more important, even if the government
proved willing to accept large-scale shutdowns, it has
no suitable criteria for determining which enterprises
are operating efficiently. Several major industries,
including coal and some textiles, are unprofitable
simply because their output prices have been fixed at
artificially low levels. Until price reform can be
implemented, Beijing must devise some measures for
determining which enterprises should be closed be-
cause they are poorly managed and which should
continue to receive subsidies. In all likelihood, the
government will be cautious and allow a large number
of inefficient firms to operate.
Where firms are forced to close, the accompanying
unemployment problems may be locally destabilizing.
Beijing has historically prohibited the free movement
of the population in order to prevent massive migra-
tion from the countryside to the cities. If major
industries are allowed to fold, certain geographic
areas could face high unemployment rates for long
periods of time. Here, too, we believe Beijing's incli-
nation will be to accept inefficiency rather than
promote serious unemployment.
Unfinished Business: A Critical September Meeting
A New Central Committee? The plenum deferred a
wide variety of personnel moves that apparently will
be taken up at the special party Conference of
Delegates scheduled for next September. According
to both Hu Yaobang and Hu Qili, personnel moves
involving high party offices are among the "other
organizational matters" on the conference agenda.
The "election of additional members to the Central
Committee," the main organizational measure an-
nounced, is generally the province of formal party 25X1
congresses. However, Deng and his political heirs may
be impatient to rejuvenate the committee itself. More-
over, membership on the Central Committee confers
an automatic status in the party that Deng, Hu, and
company may wish to grant intellectuals and techno-
crats as a token of political good faith.' In our view, a
number of aged party veterans will probably be
replaced through the promotion of alternate members
to full membership
Politburo Shifts? The party leadership almost cer- 25X1
tainly could have taken care of personnel questions at
the recent plenum, but perhaps at the risk of tarnish-
ing the highly prized image of stability and unity.
Rumors current in Beijing and Hong Kong last
summer suggested that the six-man Politburo Stand-
ing Committee would take on one or two new mem-
bers. Although Zhao Ziyang recently suggested 25X1
hat the Standing Committee never meets 25X1
and the Politburo seldom does, the most powerful men
in China, nevertheless, sit on these two bodies. Al-
though we believe it has been politically useful to crop
the aged Politburo out of much policymaking-allow-
ing the Secretariat and the State Council to handle
most work-Deng or his successors may eventually
want it to resume a more prominent role in framing
policy guidelines. If so, many of the Politburo's
octogenerian leaders are overdue for replacement
' The conference is to be attended by "about 1,000" delegates,
chosen from the ranks of scientists, technocrats, provincial party
secretaries, soldiers, and current Central Committee members. This
compares with 1,545 delegates who attended the 12th Congress. It
is possible Deng will attempt to "pack" the Central Committee by
careful selection of delegates, all of whom will have the right to vote
25X1
25X1
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Secretariat Additions? Comments Hu Yaobang made
recently to visiting foreign dignitaries indicated that
several members of the party Secretariat would prob-
ably be replaced at the September meeting. We
cannot safely predict who will go, but candidates are
those aged leaders who sit on both the Secretariat and
the Politburo, such as Xi Zhongxun and Yu Qiuli, as
well as those who have hovered near or are currently
in political disgrace, such as Deng Liqun. It is possible
that three or four places will open up (more if the body
expands to accommodate a greater workload). The
obvious candidates for promotion would appear to be
alternate Secretariat members Qiao Shi and Hao
Jianxiu. General Office director Wang Zhaoguo and
International Liaison Department chief Qian Liren
might also be added. Xu Xin, a rapid riser in the
General Staff Department, could conceivably gain the
military seat vacant since the death of Yang Yong.
Rectification Redefined? The most ambitious person-
nel measure of all, the party rectification now in its
second year, received short shrift at the plenary
session. Although the drive to reform, rejuvenate, and
discipline the party has progressed approximately on
schedule and in 1985 will extend into cities, counties,
and enterprises, the plenum issued no progress report
and addressed the campaign only in the final section
of the Decision on Economic Reform.
Although Beijing will continue to purge Cultural
Revolution beneficiaries who were guilty of serious
criminal acts, the line has softened somewhat over the
past year, with far greater emphasis on forgiving and
forgetting. Beijing seems to believe that rectification
should try to break, not perpetuate, the self-destruc-
tive cycle of recrimination and mistrust that has
driven Chinese politics since 1949. It has therefore
stressed the need for lenient treatment of old cases,
while still insisting that younger officials to be pro-
moted must not have been involved in the Cultural
Revolution to any great extent.
In general, however, we do not believe that the party
leadership's commitment to rectification has flagged.
Indeed, bureaucratic restructuring at all levels re-
mains the key to the success of the implementation
phase of reform, and the Decision pointedly links the
two. The document lays down what has become the
new bottom line: one's ability and willingness to
promote reforms is a strong indication of one's con-
tinuing suitability as a party member
The Next Five- Year Plan. The other major piece of
business on the agenda of next year's Conference of
Delegates is the Seventh Five-Year Plan (1986-90).
The formulation of the plan is absolutely critical for
the implementation of the new policies approved by
the plenum. Advance reports in the official media
suggest that Beijing will concentrate on renovating
existing industrial plants, holding the line on capital
construction investment and allowing enough flexibili-
ty for the new reforms to take effect.
Prospects
Whither the Party? The success of Beijing's economic
policies carries both opportunities and risks. Success
would reinforce party legitimacy and help curb the so-
called crisis of confidence in the party's leadership.
Moreover, it would arm the party's reform wing
against its detractors (and their failed policies) and
would strengthen the positions of Hu Yaobang and
Zhao Ziyang in a post-Deng regime. More than any
other leaders, they have staked their political futures
on the outcome of the reforms. Successful reform
would indicate that substantial progress has been
made in reforming China's aging and poorly trained
bureaucracy, presaging greater stability and cohesive-
ness within the party as a whole. It would also
facilitate the continuing admission of managers and
engineers to the membership in order to better enable
the party to meet future political and economic
challenges.
At the same time, by devolving some economic deci-
sion making power and promoting individual entre-
preneurship, the party runs the risks of establishing
spheres of activity that may grow immune to party
tutelage. Successful reform will inch the Chinese
economy closer to the "consumer sovereignty" and
producer responsiveness that characterize capitalist
economies and that are so antithetical to central
planning. Acclimating the populace to make economic
choices freely may lead to corresponding demands for
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political liberalization, as happened in the 1978-80
period. The leadership appears to believe it can
control these political strains, in part because the
party retains its monopoly over the instruments of
coercion. Furthermore, as the performance of Chi-
nese-run economies of Taiwan, Hong Kong, and
Singapore demonstrate, economic vitality is compati-
ble with political docility.
Whither the Economy? Beijing is committed to imme-
diate price adjustment, but it also clearly recognizes
the potential for panic that price reform raises and
will move very deliberately to implement changes. In
fact, we believe the risk that the leadership will move
too slowly with essential price adjustments-and stall
the entire reform package-is greater than the risk
that too rapid an advance will spark economic insta-
bility. Nevertheless, it is safe to assume that price
reform will be somewhat inflationary in the short run.
Most adjustments will probably be upward, and im-
portant products such as coal, oil, and certain food-
stuffs will eventually undergo steep revisions. The
reforms may occasionally spark bouts of panic buying
as consumers draw down savings deposits that are
now at record levels. Beijing is most likely to respond
to these periodic bouts by ordering producers to hold
the line on prices, and by raising interest rates and
taxes to discourage consumption.
We do not believe there is significant risk of serious
long-term inflation. For this to occur the government
would have to be willing to sustain the increases in
consumer demand by printing money. Although some
subsidies or wage increases will be offered in the early
stages of the adjustment process-to help ease con-
cerns about eroding purchasing power-the conserva-
tive government is unlikely to resort to any long-term
use of the printing press to finance consumer spend-
ing
In light of the many problems, we do not expect the
benefits of urban reform to match those experienced
under the agricultural reform program. But neither
does Beijing. The party is allowing itself five years to
get the program in place and probably will hail even
minor improvements in efficiency during that period
as evidence of success. The fact that Beijing is going
into this program with its eyes open increases the
probability that it will be able to resist pressures to
revert to tight central planning when problems arise.
Nevertheless, the next year will provide a critical test
of the government's willingness to accept the disloca-
tions necessary to carry the program through.
If Beijing can resist pressure to back away from
reforms in the face of mounting problems, we believe
long-term productivity will increase and economic
growth will accelerate. Government efforts to encour-
age surplus labor to take up private commerce and
service activities have considerable potential for in-
creasing both agricultural and industrial productivity.
The renewed emphasis on enterprise autonomy also
bodes well for productivity increases, some of which
will go unobserved in Beijing as enterprises attempt to
understate profits to avoid taxes.
A Worst Case Assessment. Deng and his allies have
indicated they expect that the early going will be
rough and are prepared to ride out short-term prob-
lems, such as panic buying and isolated runs on banks.
If those problems persist, or get worse, critics of
reform will almost certainly seize on the dislocations
to call for a return to direct central control, even ?
though this alternative has demonstrably failed to
promote efficiency in the past. Although reform advo-
cates seem to hold the balance in party councils now,
party and military conservatives could coalesce into a 25X1
potentially powerful political bloc if economic prob-
lems became socially destabilizing.
Even if Beijing manages to weather its inevitable
short-term problems, Deng's death or a combination
of setbacks-such as floods, drought, a succession of
poor harvests, a rapid rise in undesirable side effects
of economic expansion such as price gouging, specula-
tion, or graft-could over the longer term tip the
political scales against reform and lead to a retreat.
Retrenchment on reforms would confront the party
with serious political difficulties as it sought to reas-
sert its control down to the local level. At a minimum,
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the party leadership would again be seen as vacillat-
ing and unconcerned with the common welfare, pre-
cisely the image it seeks to dispel by implementing
new policies. At worst, disaffected peasants or work-
ers might engage in active or passive resistance. The
failure of reform would almost certainly bring on a
protracted period of political instability, as leaders
struggle for the right to affix the blame.
Foreign Policy. In our judgment, implementation of
the reforms will both broaden and deepen China's ties
with the United States and the West, but will not, at
least in the short term, have much impact on Sino-
Soviet relations.
The emphasis on technological innovation at the plant
level, foreign capital acquisition, and increased joint
ventures will expand investment and trade opportuni-
ties for US and Western businesses. In addition, we
expect that Chinese enterprise managers will take
advantage of their new flexibility to tap the West for
increased amounts of information, training, and man-
agerial expertise
At the same time, however, the reforms will aggravate
some current problems in US-Chinese relations. It
can be expected that Chinese enterprises will want
access to Western markets to sell their products, so
Beijing's pressure on Washington to lower trade
barriers will increase. Similarly, Beijing will probably
press Washington harder on technology transfer in
response to the demands of its own enterprises. It is
also likely that China will reduce its grain imports
from the West as its agricultural production continues
to improve.
The Soviet reaction thus far has been cautious, and
Soviet media have been only indirectly critical of
Chinese reforms. Pravda, for example, has replayed
Chinese commentary critical of midlevel cadre who
oppose the reforms and US commentary stressing the
radical nature of the change and the disruptions that
the reforms will cause in the economy. Moscow will
continue to treat the issue delicately because of
concern about fueling the debate within Eastern
Europe-as well as domestically-over economic re-
form. The Soviets may try to exploit the reforms by
offering China increased assistance for those factories
originally built with Soviet technology.
Privately, Soviet China watchers have been more
critical. In characteristic fashion, they have said that
the Chinese reform package is cosmetic, unlikely to
last long, a reflection of a power struggle within the
Chinese leadership, and a deviation from Marxism-
Leninism. We do not believe, however, that these
comments will be aired in direct Soviet media com-
mentary any time soon, unless Moscow reverts to the
tough policy of last summer, when it temporarily
lifted its ban on criticism of Chinese domestic devel-
opments.
Failures in the reform program, on the other hand,
will almost certainly have negative consequences for
China's open-door policy, as foreign economic issues
become embroiled in the inevitable infighting within
the leadership. Although the Soviets might hope to
exploit such a situation, and would almost certainly be
reassured at the reemergence of what they would see
as more "orthodox" economic planning, the funda-
mental security issues that divide China and the
USSR would remain. Unless Moscow is prepared to
address Chinese security concerns, even a more con-
servative leadership in Beijing would probably still
look to the United States as a strategic counterweight
to the Soviet Union.
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Appendix
Extracts From the CCPCC Decision on Reform of the Economic
Structure
(Adopted, 20 October 1984)
The Third Plenary Session of the 12th Central Committee ... holds the
consensus view that ... we must go a step further with the policy of
invigorating the domestic economy and opening to the outside world and
accelerate the restructuring of the national economy as a whole, with the
focus on the urban economy, so as to create a new, better situation for our
socialist modernization.
1. Reform Is a Pressing Necessity in the Current Developments in China
... There is an urgent need to unclog the channels of circulation between
town and country, expand the market for the increasing amount of
agricultural products, and satisfy the rising needs of the peasants for
manufactured goods, science and technology, as well as culture and
education. Our successes in rural reform and the demands on the cities by
the growing rural economy provide highly favorable conditions for restruc-
turing China's entire national economy, focusing on the urban economy.
... Defects in the urban economic structure that seriously hinder the
expansion of the forces of production are yet to be eradicated.... Firm,
systematic reform is the only way that the cities will play their due leading
role.
... Emerging on a global scale is a new technological revolution
that presents new opportunities and challenges to our economic
growth.... Reform, therefore, is all the more imperative.
H. Reform Is Aimed at Establishing a Dynamic Socialist
Economic Structure
... The profound changes that have taken place in the 35 years since the
founding of the People's Republic are an initial demonstration of the
superiority of the socialist system. But this superiority ... has yet to be
brought into full play .... A major economic cause for this is a rigid
economic structure that cannot meet the needs of the growing forces of
production. The following are the major defects of this structure: no clear
distinction has been drawn between the functions of the government and
those of the enterprises; barriers exist between different departments or
regions; the state has exercised excessive and rigid control over enterprises;
no adequate importance has been given to commodity production, the law
of value, and the regulatory role of the market; and there is absolute
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equalitarianism in distribution .... The enthusiasm, initiative, and cre-
ativeness of enterprises and workers have, as a result, been seriously
dampened, and the socialist economy is bereft of much of the vitality it
should possess.
To bring about a radical change in the economic structure ... we must
conscientiously sum up China's historical experience and study the con-
crete conditions and requirement for economic growth. In addition, we
must draw on the world's advanced methods of management, including
those of developed capitalist countries, that conform to the laws of modern,
socialized production.
... The essential task of socialism is to develop the forces of production,
create even more wealth, and meet the people's growing material and
cultural needs. Socialism does not mean pauperism, for it aims at the
elimination of poverty.
III. Invigorating Enterprises Is the Key To Restructuring
the National Economy
One of the main reasons that the state exercised excessive and rigid control
over enterprises in the past was to equate the concept of their ownership by
the whole people with the concept of their direct operation by the state in-
stitutions..... Ownership can be duly separated from the power of opera-
tion.... Socialist state institutions must manage, inspect, guide, and
regulate the activities of the enterprises, as is necessary, through planning
and by economic, administrative, and legal means; (the state) must use
taxation and other means to concentrate in its treasury that part of
enterprises' net income that should be used by the state in a unified way; it
must designate, appoint, and remove the principal leading members of the
enterprises or approve their appointment and election; and it must decide
on the establishment of enterprises, their removal to other places, their
switching over to other lines of products, their merger with others,
suspension of operations, or closing down.
... However ... no state institution can know the whole situation fully and
cope with everything in good time. Therefore ... the enterprise has the
power to adopt flexible and diversified forms of operation; plan its
production, supply, and marketing; keep and budget funds it is entitled to
retain; appoint, remove, employ, or elect its own personnel according to
relevant regulations; decide on how to recruit and use its work force, and
on wages and rewards; set the prices of its products within the limits
prescribed by the state; and so on. In short, the enterprise should be truly
made a relatively independent economic entity and should become a
producer and operator of socialist commodity production that is independ-
ent and responsible for its own profit and loss and capable of transforming
and developing itself, and that acts as a legal person with certain rights and
duties.
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(Establishing correct relations between the state and the enterprise)
inevitably calls for reform of every aspect of the entire economic struc-
ture ... (involving) ... a whole range of reforms including planning, pric-
ing, economic management by state institutions, and the labor and wage
system. The Central Committee is of the opinion that these reforms should
be carried out step by step in harmony with the inherent connections
between the various links of the national economy, according to the degree
of ripening of the subjective and objective conditions and in the right order
of importance, urgency, and feasibility, and that they should basically be
accomplished in about five years. Specific plans will be drawn up
separately to this end.
IV. Establish a Planning System Under Which the Law of
Value Is Consciously Applied for Developing a Socialist
Commodity Economy
Socialist society practices a planned economy on the basis of public
ownership of the means of production.... Since the founding of the
People's Republic, we have practiced a planned economy and concentrated
vast financial, material, and human resources on large-scale socialist
economic construction, with tremendous achievements to our credit. At the
same time, historical experience shows that the socialist planning system
should be one that combines uniformity and flexibility. .. .We must realize
that because of China's rather undeveloped commodity production at the
present stage, it is necessary to stimulate commodity production and
exchange.
... If we try to incorporate all economic activities into the plans and
implement them by administrative orders alone in disregard of the
importance of the economic levers and the market, then there will
unavoidably be a discrepancy between the subjective guidelines for plan-
ning and objective conditions, with the plans seriously out of step with
reality.... We must be realistic and admit that, for a considerably long
time to come, our national economic plans on the whole can only be rough
and elastic and that we can do no more than, by striking an overall balance
in planning and through regulation by economic means, exercise effective
control over major issues while allowing flexibility on minor ones.
... It is necessary, first of all, to discard the traditional idea of pitting the
planned economy against the commodity economy. We should clearly
understand that the socialist planned economy is a planned commodity
economy based on public ownership, in which the law of value must be con-
scientiously followed and applied. The full development of a commodity
economy is an indispensable stage in the economic growth of society....
Meanwhile, we must realize that the extensive growth of a socialist
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commodity economy may also lead to certain disorder in production, and
there have to be guidance, regulation, and administrative control through
planning.. . .The difference between socialist and capitalist economy ...
(lies) ... in the difference in ownership, in whether there is an exploiting
class and whether the working people are masters of the state, in the
different purposes of production, in whether the law of value can be
consciously applied throughout society, and in the different scopes of
commodity relations.
... The basic characteristics of our planning system: first, ours is on the
whole a planned economy ... not a market economy.... Second, produc-
tion and exchange completely subject to market regulation are confined
mainly to certain farm and sideline products, small articles of daily use and
labor services.... Third, our planned economy does not necessarily mean
the predominance of mandatory planning, both mandatory and guidance
planning being its specific form. Fourth, guidance plans are fulfilled
mainly by use of economic levers, mandatory plans have to be implement-
ed, but even then the law of value must be observed.... It is necessary
... to reduce the scope of mandatory planning and extend guidance
planning. Mandatory planning will be applied to major products.... Other
products and economic activities which are far more numerous should
either come under guidance planning or be left entirely to the operation of
the market.... The focus of planning will be shifted to medium- and long-
term planning, and annual plans will be appropriately simplified.
V. Establish a Rational Price System and Pay Full Attention
to Economic Levers
... The various aspects of the reform in economic structure, including
planning a wage system, depend to a large extent on reform of the price
system. Pricing is a most effective means to regulation, and rational prices
constitute an important condition for ensuring a dynamic, yet not chaotic,
economy. Therefore, reform of the price system is the key to reform of the
entire economic structure.
The irrational system of pricing is closely related to the irrational system of
price control. In readjusting prices, we must reform the overcentralized
system of price control, gradually reducing the scope of uniform prices set
by the state and appropriately enlarging the scope of floating prices within
certain limits and of free prices.... When the price of some mineral
products and raw and semifinished materials is raised, the processing
enterprises must substantially cut down consumption so that the increased
production cost resulting from the higher price of such products and
materials can be basically offset within the enterprises, with only a small
part of the increase being borne by the state through tax reductions and ex-
emptions. This will avoid a consequent rise in market sales prices.
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... We must adopt effective measures to ensure that the real income of ur-
ban and rural inhabitants does not go down as a result of price readjust-
ments.... The pay of workers and staff members will have to be raised
gradually. It must be widely publicized among the people that... (price
reform) ... will never bring about a general and spiraling price rise.... It
is absolutely impermissible for any unit or person to boost prices at will by
taking advantage of the reform, deliberately generating a tendency toward
a general rise in prices, disrupt the socialist market, and harm the interests
of the state and the consumers.
VI. Separate Government From Enterprise Functions So
That Government Organs Can Properly Perform Their Function
of Managing the Economy
... The functions of government for a long time were not separated from
those of enterprises, which in fact became appendages of administrative
organs, and the central and local governments took responsibility for many
matters which were not really theirs and at the same time did not do well
what they ought to do. This, plus the barriers between different regions and
the practice of endless wrangles, increased the difficulties in running
enterprises.
... Government organs ... should formulate the strategy, plans, principles,
and policies; work out plans for the exploitation of natural resources, for
technological transformation, and for the development of intellectual
resources; coordinate the development plans of localities, departments, or
enterprises and the economic relations among them; arrange for the
construction of key projects ... ; collect and disseminate economic infor-
mation ... ; work out economic regulations and ordinances and supervise
their execution; appoint and remove cadres within a prescribed
scope ... and so forth.
... The central role of cities must be brought into full play and open and
interconnected economic zones of various sizes gradually formed with
support from cities.... It is necessary to call the attention of all leading ur-
ban comrades to the need for the city governments to separate their
functions from those of enterprises and achieve simpler and decentralized
administration.
The relationship between socialist enterprises is first of all one of coopera-
tion and mutual support, but this by no means excludes competition. For a
long time, people used to consider competition peculiar to
capitalism.... Competition between socialist enterprises is fundamentally
different from that under capitalism, where the law of the jungle
prevails ... our enterprises are put to the test of direct judgment by
consumers in the marketplace so that only the best survive.
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VII. Establish Various Forms of Economic Responsibility System and
Conscientiously Implement the Principle of Distribution According to Work
... Enterprises must specify in explicit terms the requirements for each
workpost and the duties of each worker and staff member.... The basic
principles of this system are a combination of responsibility, authority, and
benefit; the unity of the interests of the state, the collective, and the
individuals; and the linking of the income of workers and staff members
with their job performance. In applying rural experiences to urban areas,
we must take into account the characteristics of urban enterprise. It is
neither feasible nor necessary to transplant mechanically the specific
measures of the rural areas.
... It is necessary to establish a unified, authoritative, and highly efficient
system to direct production and conduct operations and management. This
calls for a system of the director or manager assuming full responsibility.
Party organizations in enterprises should actively support directors in
exercising their authority in giving unified direction to production and
operations, guarantee and supervise the implementation of the principles
and policies of the party and the state, strengthen the party's ideological
and organizational work in the enterprises, improve their leadership over
the trade unions and Communist Youth League organizations, and do
effective ideological and political work among workers and staff mem-
bers.... We must (also) improve the system of congresses of workers and
staff members and other systems of democratic management.
... The socialist principle of distribution according to work will be
implemented more fully.... The differences between the wages of various
trades and jobs should be widened, so as to apply fully the principle of re-
warding the diligent and good and punishing the lazy and bad and of giving
more pay for more work and less pay for less work as well as to fully reflect
the differences between mental and manual, complex and simple, skilled
and unskilled, and heavy and light work.
There has long been a misunderstanding about the distribution of goods
under socialism, as if it meant equalitarianism. If some members of society
got higher wages through their labor ... it was considered polarization and
a deviation from socialism. This equalitarian thinking is utterly incompati-
ble with scientific, Marxist views on socialism. History has shown that
equalitarian thinking is a serious obstacle to implementing the principle of
distribution according to work and that if it is unchecked, the forces of pro-
duction will inevitably be undermined.... Common prosperity cannot and
will never mean absolute equalitarianism or that all members of society
become better simultaneously at the same speed.... Such thinking would
lead to common poverty. Only when some regions, enterprises, and
individuals are allowed and encouraged to get better off first through
diligent work can there be a strong attraction and inspiration to the
majority of people.
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VIII. Work To Develop Diverse Economic Forms and
Continue To Expand Foreign and Domestic Economic and
Technological Changes
...The collective economy is an important component of the socialist
economy, and we can give the collectives a free hand in running enterprises
in many areas of production and construction. The individual economy now
found in China is linked with socialist public ownership and differs from
the individual economy linked with capitalist private ownership. It plays an
irreplacable role in expanding production, meeting the people's daily needs,
and providing employment. It is a necessary and valuable adjunct to the so-
cialist economy.
...Although international relations are complex and ridden with contradic-
tions, international economic and technological ties are, generally speak-
ing, very close, and national seclusion cannot lead to moderniza-
tion ....We have taken opening to the outside world to be our long-term,
basic state policy. Practice has already yielded marked results. We must
continue to pursue flexible policies.
As we open to the outside world, we shall open up even more between dif-
ferent areas of China itself.
IX. Promote a New Generation of Cadres and Create a Mighty
Contingent of Managerial Personnel for the Socialist Economy
...Our contingent of managerial personnel falls far short (of our require-
ments). .. .We have a large number of veteran comrades in this contingent
who, in the long period of hard struggle, have made great contributions
... but they are getting up in years, and we can no longer ask them to con-
tinue in arduous leading posts. Our present urgent task is to promote boldy
thousands upon thousands of young and middle-aged managerial personnel
and take steps to train them.
The Central Committee calls for completion of the reshuffling of leader-
ship in enterprises, especially key enterprises, before the end of 1985. In
addition, plans should be drawn up and effective measures taken to train
fairly soon large numbers of directors ...chief engineers ...chief economic
managers ...chief accountants ... and party secretaries.
X. Strengthen Party Leadership To Ensure the Success
of Reforms
... All party comrades should be in the forefront of reform, which
represents the trend of our times.... The vast number of cadres are not
familiar with this work. Leading party and government functionaries at all
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levels have to be sober minded and give meticulous guidance.... Errors
can hardly be avoided, but ... once an error does occur, we must try to dis-
cover it promptly, resolutely correct it, draw the lessons, and continue to go
ahead ....We must not try to accomplish the whole task at one stroke. All
major reforms that affect the whole country will be arranged by the State
Council under a unified plan.... Any reform involving the overall situation
or one that is extensive in scope must first be approved by the State
Council.
Party organizations in numerous localities and enterprises will undergo
consolidation next year. Reform should be closely linked with this. Party
consolidation should promote economic growth, which is an indicator of
how successful it is.... We should actively support cadres and the masses
who are keen on reform. When errors or deviations occur... we should
adopt a policy of persuasion, criticism, and education toward the persons
concerned and must not stick political labels on them .... We must not
divide the cadres and masses by calling some people "reformers" and
others "conservatives." We should have faith in comrades who fall behind
the developing situation for a time, confident that they will understand
things better in the course of reform.
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