The Strategic Choice for China’s Prosperity

The Strategic Choice for China’s Prosperity, the Chinese version, has been around 27 years now since its first publication in 1991. It has now made its way to the English world with the joint efforts of diligently translators and devoted publishers, for which I am more than glad and grateful. I consider the English version of this book as one of the good channels for Chinese an...

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The Strategic Choice for China’s Prosperity, the Chinese version, has been around 27 years now since its first publication in 1991. It has now made its way to the English world with the joint efforts of diligently translators and devoted publishers, for which I am more than glad and grateful. I consider the English version of this book as one of the good channels for Chinese and foreign cultural exchanges, hopefully it will bring a better understand and insight of the progress of China’s reform and opening-up policy to those who have the chance to read in the English world. For this, I herein devote this preface to the English version.

This book was written by me and three of my graduate students. They are Meng Xiaosu, Li Yuanchao and Li Keqiang, amongst whom, Meng Xiaosu and Li Keqiang graduated from Peking University, and Li Yuanchao graduated from Fudan University. They all worked in Beijing after graduating from college. In 1988, after working for a few years, they’ve got the opportunity and were admitted to Peking University to start their course as graduate students. Meng Xiaosu and Li Keqiang were admitted to the School of Economics of Peking University. At that time, the School of Economics of Peking University established a mentor group, of which I was trusted as the head of the group (I was the head of the economic management department of Peking University School of Economics), professor Xiao Zhuoji (professor of economics at Peking University School of Economics), and professor Liu Fangyu (professor of economics at Peking University School of Economics) were the other two members of the group. Therefore, theoretically, Meng Xiaosu and Li Keqiang were under the collaborative tutoring of three but led by me as I headed the tutoring group.

The story of Li Yuanchao is relatively different. I can still recall that, as Li’s letter of admission was sent to professor Ding Shisun, the President of Peking University, I was summoned and told by President Ding, that “ Since Li Yuanchao graduated from the Mathematics Department of Fudan University in Shanghai in 1977, academically I believed that he might possess the potential for interdisciplinary management, why don’t we give it a shot and let him study as a graduate student at our novel Management Science. What do you think of that?” At that time, the director of the Management Science Peking University was served by President Ding, of which me, professor Chen Liangkun and professor Wang Enyong served as the Deputy Director. And amongst us, professor Chen Liangkun was econometrics expert, professor Wang Enyong was an expert in environmental science and human geography. Therefore, as a matter of fact, Li Yuanchao was basically under the joint tutoring by me, professor Chen Liangkun and professor Wang Enyong and of which still me as the main role.

By the time Meng Xiaosu, Li Yuanchao, and Li Keqiang graduated from the master's degree in 1991, Meng Xiaosu and Li Keqiang both obtained a master's degree in economics, and Li Yuanchao received a master's degree in science (management science). Since then, the three of them have worked hard but still study hard. Meng Xiaosu and Li Keqiang eventually obtained a doctorate in economics from Peking University. Both doctoral thesis supervisors were served by me. Li Yuanchao later obtained a doctoral degree from the Graduate School of the Chinese Academy of Social Sciences, and I also have had the opportunity to attend his culture-oriented doctoral thesis defense meeting.

The first chapter “Discussion on economic reform strategy” of this book was based on the master thesis by Meng Xiaosu, chapter five “An approach to the development of business groups” was based on the master thesis by Li Yuanchao, chapter seven “Rural industrialization: selection in

structural transformation” was based on the master thesis by Li Keqiang, and of which the rest chapters was devoted by me.

Here what needs the highlight is the fact that, the acknowledge of the master theses by Meng Xiaosu, Li Yuanchao and Li Keqiang and the publication of this book were rather controversial under the context of China’s political economy in 1991 where, at that time, the market-oriented reform, the reform of the state-owned enterprise shareholding system, and the development of private enterprises were all restricted areas and strictly controlled in the field of ideology. However, since Peking university is an academic field that has consistently bred and encouraged free thought and diversity, the three papers by them was approved without single negation. It’s reassuring that when I sent this book that included some of the rewarding insights by these three hardworking students in their theses to the publisher the Economic Daily Press, without any hindrance they published it at the fastest speed. That was rare as it happened before the Southern Speech by late Mr. Deng Xiaoping the second national leader of PRC of which, at that moment, large amount of Chinese population was still in the midst of ambiguity about whether the reform and opening-up policy should be continued, whether the reform of the shareholding system of state-owned enterprises should be promoted, and whether the development of private sectors should be allowed and expanded. But still, under such circumstance, the publication of this book proved to gratification of one kind.

By the time of the spring in 1992, the Southern Speech by late Mr. Deng Xiaoping the second national lead of PRC was finally published in People’s Daily of China which has been half a year since the publication of this book, the Strategic Choice for China’s Prosperity. Deng’s Southern Speech inspired a lot of people, and most importantly, it delivered faith and hope to Chinese cadres and masses back then. The Southern Speech revealed a fact that if China does not continue to reform and open up, even the relatively developed level will be far beyond our reach, let alone to be paralleled to the developed countries. And as a result of that, China will

have no choice but suffer poverty with no end. Yet poverty is absolutely not what is expected from socialism, China was facing a dilemma of development.

After the publication of Deng Xiaoping’s Southern Speech, the rejoicing of academics, the media, the scientific and business community, and especially the young students as well as the authors of this book, has become a precious memory. The significance of Deng’s Southern Speech has been proved in practice. It’s safe to say that, if the 1980s was an era of exploration, then China’s real path of accelerating development and intensifying reforms began with Deng Xiaoping’s Southern Speech in 1992.

Shortly after the epoch-making 18th National Congress of the Communist Party of PRC was held in 2013, the Economic Daily Press re-published the Strategic Choice of China’s Prosperity. As it’s recalled that when the publisher asked for my opinion whether the book needs any revise or change, my answer was no and insisted that the book should stay the same as it was. I believe that the original of the book is a respect for history as well as precious memory that witnessed the historical course of China’s reform.

This year marks the 40th anniversary of China's reform and opening-up policy, under which the market-oriented reform and construction of China’s economy has entered a new era. I consider that the publication of the English version of this book might serve as a gift for the 40th anniversary of China’s reform and opening-up policy, and also an invitation of the course of China’s reform and opening-up to the readers in English world.

Li Yining

18 Nov, 2018

Guanghua School of Management, Peking University

Chapter I. Discussion on economic reform strategy 1
Part A. The proposal of economic reform strategy issue 1
Ⅰ.The necessity of the study of economic reform strategy: a subject put forward by practical reform 1
Ⅱ.The reality of study of economic reform strategy: thinking about the periodic changes in the economic reform 6
Ⅲ.The meaning of economic reform strategy 8
Part B. The starting model and objective model of economic reform 10
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Chapter I. Discussion on economic reform strategy 1
Part A. The proposal of economic reform strategy issue 1
Ⅰ.The necessity of the study of economic reform strategy: a subject put forward by practical reform 1
Ⅱ.The reality of study of economic reform strategy: thinking about the periodic changes in the economic reform 6
Ⅲ.The meaning of economic reform strategy 8
Part B. The starting model and objective model of economic reform 10
I.Study of the starting-point model 11
II.Study of the objective model 13
Part C. The transition model of economic reform 16
I.Definition of the transition model 16
II.The transition model of reform of economic operation mechanism 17
III.The transition model of enterprise reform 18
IV.A theoretical generalization of the transition model 19
Part D. The interest mechanism of economic reform 21
I.Economic benefits and economic mechanism: impetus and resistance of reform 22
Ⅱ.The main principles of applying the benefit mechanism 25
Part E. The implementation of economic reform 28
Ⅰ.The unity of completeness and gradualness in economic reform 28
II.Determination of overall objective and decomposition of periodic objectives 29
Chapter II. Enterprise reform- the principal line of economic reform 32
Part A. The relationship between enterprise reform and inflation control 32
I.Understanding rising prices in recent years 32
II.Inflation control on demand and supply sides 35
Part B. Fully vitalized enterprises are the prerequisites of price liberalization 42
I. Correct treatment of the experience of Japan’s price reform in the early post-war period 43
II. Quality of entrepreneur and price reform 49
III. The environment for price liberalization and its relationship with enterprise reform 52
Part C. The relationship between enterprise reform and regulatory macro economy 56
I.Fundamental model of regulatory macro economy 57
II.The conditions for the role of regulatory macroeconomy means 59
Chapter III. Transformation from corporate contract system to shareholding system 64
Part A. The corporate contract system’s transitional property 64
I． The basic tasks of corporate reform 64
II. The contract system is just an improvement of the traditional corporate system 66
Part B. Ways for state-runcorporate to realize shareholding system based on public ownership 70
I. The definition of public ownership 70
II. Six ways for state-owned corporate to realize shareholding system based on public ownership 73
III. A variety of stock exchanges and stock markets 81
Part C. Employee stock ownership plan and shareholding cooperative corporate 83
I． The nature of cooperative economy for employee stock ownership plan 83
II. The obligatory rights of the stock of assets or the lease system of the stock of assets and shareholding cooperative economy 85
Part D. Corporate foundation and corporate fund stock 87
I. Corporate stock --- a controversial issue 87
II. The feasibility of stock holding by corporate foundation 88
Chapter Ⅳ. Management of state-owned assets 90
Part A. Discussion on economic reform strategy 90
I. The significance of the study of the management of state-owned assets 90
II. The management system of state-owned assets in the short term 92
III. The management system of state-owned assets in the medium term 96
IV. The management system of state-owned assets in the long term 105
Part B The management of state-owned assets and allocation of resources 110
I. The central core of allocation of resources --- efficiency vs. fairness 110
II. The relationship between the management system of state-owned assets and efficiency and fairness 112
Chapter V. An approach to the development of business groups 116
Part A. A general analysis of business groups 116
I. Enterprise restructuring in China’s economic reform 116
II. Enterprise restructuring in the economic history of capitalism 117
III. Business group is a special title for higher-level enterprise consortium 120
Part B. Present conditions analysis of China’s business group 123
I. The concept, characteristics and internal structure of business group 123
II. Classification of business group 127
III. The ways of business group generation 130
IV. The economic function of business group 131
V. Contradictions in the process of business group developmen 141
Part C. State orientation and policy for business group 145
I. Development orientation for enterprise group 145
II. Policy proposal for supporting business group 154
Chapter VI. Increase investment in science and technology for a prosperous market 160
Part A . Countermeasures to solving the problem of slow-down in the market 160
I. The structural property of slow-down in the market 161
II. Treatment analysis of several countermeasures to slow-down in the market 163
III. The role of initial investment to the development of science and technology 166
Part B. Combine technology development and solving the problem of slow-down in the market 169
I. Pay attention on investment using 169
II. The sustained market prosperity depends on the continually increasing investment in the development of science and technology 175
III. Increase investment in science and technology and establish a technological structure under China’s national conditions 180
Chapter VII. Rural industrialization: selection in structural transformation 184
Part A. New changes in the process of industrialization 184
I. The separate process of industrialization from rural areas 184
II. Objective determination of rural industrialization 187
Part B. Formation of the three-tiered economic structure 190
I. The particularity of China’s dual economic structure 190
II. Selection of structural transformation 194
III. The growth of industrial sector in rural areas 196
Part C . Inter-relationship in three-tiered economic structure 203
I. The relationship between rural industrial sector and agricultural sector 204
II. The relationship between rural industrial sector and urban industrial sector 210
III. A general observation and study of three-tiered economic structure 215
Part D. Selection of countermeasures to the coordinated relationship of three-tiered economic structure 218
I. Push the development of three-tiered economic structure 218
II. Promote the coordinated development of three-tiered economic structure 220
III. Countermeasures to the coordinated relationship between rural industry and agriculture 223
IV. Countermeasures to the coordinated relationship between rural industry and urban industry 225
Chapter VIII. The mixture of planning and market in allocation of resources 236
Part A. China’s disequilibrium economy 236
I. Two types of disequilibrium 236
II. Limitations of market approach in the allocation of resources 238
III. Limitations of planning approach in the allocation of resources 239
Part B. The content of planning work and the relationship between planning and market 240
I. The mixture of planning adjustment and market adjustment 240
II. The three major tasks of planning work 241
III. The necessity of improving the level of planning quota 245
IV. The planning quote under the conditions of slow-down in the market 249
V. The vitalized observation and study of the relationship between planning and market 253
VI. Indirect and direct planning adjustments 257
VII. Two warning lines and the relationship between indirect and direct adjustments 260
Concluding Remarks: Reform is An Irresistible Trend 262
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