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Strategy Adopted By China


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In the area of production policies, China began to switch from the order of heavy, light and agriculture industries to agriculture, light, and heavy industries. Prices of agricultural products were raised a number of times beginning in 1979 to stimulate agricultural production. The policy of self reliance in grain production was replaced with a policy that encouraged various economic activities in rural areas such that production choices revealed regional resource advantages and personal skills. In the industrial sector, investments were encouraged in light industries vs. heavy industries. Industrial firm policy changed from emphasizing “completeness” or “comprehensiveness” towards

“specialization. ” Military industries were switched to produce consumer goods.

Open door is one of the most important aspects in China’s macro economic reforms. To

ensure the success of open door policies, Chinese authorities promulgated rules and regulations for foreign investment with favorable terms and conditions. Land has been leased typically for more than 15 years and could be as long as 75 years, implying thereby that open door policies were now going to be the country’s long term economic policies. Foreign trade was decentralized, provinces and localities were allowed to have their own trade corporations4. Some big enterprises were also allowed to engage in direct foreigntrade. As a result, Chinese trade volume doubled every five years since the reform.

From a highly centralized fiscal setup, which fitted the planned economy, the system was transformed such that the central, provincial and local governments have their share of revenues and expenditures. Before 1978, all the tax revenues and profit remittances were deposited with the central government which, in turn, allocated the resources according to the state plan. Since the reforms, the pie has been divided from the source according to certain formulae7, though seemingly the revenue share for the central government went down considerably, to a large extent, the central government’s fiscal responsibilities were shifted to provincial governments. That is why China’s fiscal budget deficit has stayed around 2 percent of her GDP since the reform even though central government’s revenue

has gone down considerably relative to GDP. Also local fiscal revenues and expenditures are linked together so that each jurisdiction has more incentives to control their revenues and expenditures. Yet another major shift in fiscal policy has been that from very beginning of the reforms, the firms and workers have been given higher shares in the profits than before. Such a shift stimulated the incentives, and thus resulted in higher production.

As for tax reforms, the most important step, perhaps, was the transition from the SOE profit remittance system to value-added tax system. Also, the one form has been diversified into many classifications, including business tax, consumption tax, corporate income tax, individual income tax, etc. In 1994, China adopted a unified tax rate for domestic enterprises of 33 percent to create competition on an equal footing. For joint ventures, corporate income tax rate was also fixed at 33 percent. However, joint ventures enjoy preferential income tax rate at only 15 percent in special economic zones (SEZs) and 24 percent in coastal open cities. Between 1978 and 1993, the fiscal revenue increased at an annual average rate

of 23.5 percent. In 1995, during the first ten months it increased by 24.3 percent8.

Financial sector reforms have come a long way with China’s economic development. Before 1978, banking played very limited role in the Chinese economy. In 1978 The People’s Bank of China (PBOC) was the only bank in China. PBOC was an issue bank as well as a commercial bank. As rural reforms progressed, Agriculture Bank of China was re-established in February 1979 to take care of rural deposits, and grants and credits to rural areas9.

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