The political crisis of 1989 was overcome rapidly because no major social group had suffered substantial economic losses, in spite of inflation and growing income disparities. Even scholarly persons, bearers of the democracy movement, were to some extent compensated in cultural and intellectual means. The aphasia (shiyu 失语) of Chinese intellectuals right after 1989 was ended with the creation of several new scholarly journals and the invitation to intellectuals to participate in discourses on China's problems, globalization, liberalism, postmodernism and "enlightenment" (Wu 2018: 20-21). The restoring of normality and the continuance of the path of growth was manageable because of an overall peaceful domestic and foreign environment. Apart from the Tian'anmen protests in 1989 and minor occurrences, the CPC and China's population enjoyed macroeconomic, social and political stability.
Zhao Ziyang was replaced by the duo Jiang Zemin 江泽民 (b. 1926) as General Secretary (1989-2002) and Zhu Rongji 朱镕基 (1998-2003) as head of the People's Bank of China (1993-1995), then Vice Prime Minister (1993-1998), and finally Prime Minister (1998-2003). The latter intensified reform, but followed a more direct and activist agenda than Zhao had done. Zhu was backed by Deng Xiaoping, who embarked on his famous southern tour (jiu-er nanxun 九二南巡) in 1992, during which he visited Shenzhen and asserted that "development is the only hard truth" (fazhan cai shi que daoli 发展才是确道理), and thus put economic development over all other economic and social aspects.
The new leadership was more active in economic terms than that of the 1980s which had been merely tentative and reactive to the initative of provincial and local administrators. Even if they had managed to have the economy grow beyond the state sector—without downsizing it—the early reforms had neglected the urban population for agriculture, light industry, and the upkeeping of unprofitable state-owned enterprises (SOE). The new leadership changed this agenda. For the first time, the Central Committee of the CPC drafted a kind of blueprint for the intensification of reform, or at least defined the most important aims.
|转换国有企业经营机制，建立现代企业制度||Changing the structures of state-owned enterprises and establishing a modern enterprise system|
|培育和发展市场体系||Fostering and developing a market system|
|转变政府职能，建立健全宏观经济调控体系||Improving the functioning of the government|
|建立合理的个人收入分配和社会保障制度||Creating a reasonable income distribution and a system of social insurance|
|深化农村经济体制改革||Deepening the reform of the economic system in the countryside|
|深化对外经济体制改革，进一步扩大对外开放||Deepening the reform of the foreign trade system and expanding the opening towards the world|
|进一步改革科技体制和教育体制||Further reform of the systems of science and technology and of education|
|加强法律制度建设||Strengthening the building of a legal system|
|加强和改善党的领导，为本世纪末初步建立社会主义市场经济体制而奋斗||Strengthening and improving the leadership of the Party in order to strive for the creation of a socialist market economy at the end of the century|
Source: Communiqué 1993.
Reform was accelerated, formerly closed sectors of the economy were opened to the private economy, and the role of the market was defined as 'basic' in allocating resources. The intended economic growth was based on investments, the increase in capital stock, and export and aimed at raising the overall living standard of the people. Yet it neglected domestic consumption and efficiency and led to overcapacity in certain sectors, rising social inequality, and grave environmental issues until the end of the millennium.
The renewed inflation of the early 1990s with a peak of 24 % in 1994 (Ebbers 2019: 69) was curbed by direct political control via the central bank, but price stability was only achieved in 1997. After the Asian Financial Crisis of 1997, inflation even became negative. It was obvious that China's bank system, with the People's Bank of China (PBoC, Zhongguo Renmin Yinhang 中国人民银行, re-established 1983) at its centre, was wholly inadequate to control finances. The PBoC was given a charter in 1995 (Zhonghua Renmin Gongheguo Zhongguo Renmin Yinhang fa 《中华人民共和国中国人民银行法》), but stood under the guidance of the State Council. In 1998, nine regional branches (fenhang 分行) of the PBoC were introduced.
The PBoC determined the monetary policy. It immediately adopted a policy of austerity and began to tackle the problem of nonperforming loans given to SOEs by creating four asset-management corporations who took over the nonperforming loans in the books of the four big state-owned commercial banks, the Bank of China (Zhongguo Yinhang 中国银行), China Construction Bank (Zhongguo Jianshe Yinhang 中国建设银行), Industrial and Commercial Bank of China (Zhongguo Gongshang Yinhang 中国工商银行), and Agricultural Bank of China (Zhongguo Nongye Yinhang 中国农业银行).
The reform in the fiscal and tax system in 1994 introduced a general value-added tax (zengzhishui 增值税) of 17 per cent applicable to all economic actors.
SOEs were step by step granted more authority over their management and were given responsibility for profits and losses. In this way, the government would save money otherwise spent to subsidy the public enterprises. Forms of ownership and management were fixed in the Company Law (Zhonghua Renmin Gonghehuo gongsi fa 《中华人民共和国公司法》) from 1994 (revised 2005) which reorganized state-owned enterprises into limited-liability corporations (youxian gongsi 有限公司). At the same time, selected SOEs were listed at the newly created stock markets (gupiao shichang 股票市场)—the stock exchanges (zhengquan jiaoyisuo 证券交易所) of Shanghai and Shenzhen, both founded in 1990, and had thus access to new forms of funding. In this new field, the Securities Regulatory Commission (Zhongguo Zhengquan Jiandu Guanli Weiyuanhui 中国证券监督管理委员会) was subjected to the Securities Law (Zhonghua Renmin Gongheguo zhengquan fa 《中华人民共和国证券法》) of 1999.
Zhu Rongji turned around Zhao Ziyang's policy of fiscal decentralization and redirected a larger part of provincial revenues to the central government (25%), which otherwise would have lost its essential functions. In 1995, the central government disposed of funds corresponding to just ten per cent of the GDP (Naughton 2018: 112). After the tax reform and the inauguration of the Budget Law (Zhonghua Renmin Gongheguo yusuan fa 《中华人民共和国预算法》, 1994), there was a clear distinction between national and local taxes, and regular national and local tax agencies were created. A series of fixed tax target figures between national and local administrations was introduced, with budgetary and extra-budgetary accounts, and a nation-wide and general value-added tax of 25% was imposed.
Zhu, master of rapid, personalized decision-making, also shifted the focus of economic policy away from agriculture and industry to finance and regulation. He advocated macroeconomic control by the central government and laid his emphasis on fighting for price stability.
The 1993 agenda stipulated the strengthening of the institutions of a "socialist market economy" (shehuizhuyi shichang jingji 社会主义市场经济), which meant the unification of markets and prices hitherto separated from each other. The dual price system was given up in 1994, and the state sector was more and more downsized. With the disappearance of dual or multiple paths, uniformity was a precondition for just and fair processes in the economy. This means that the legal and regulatory environment had to be clarified.
All these measures unclenched the close ties between the government and SOEs, exposed the latter to market competition, and reduced their access to funding from the state banks. Thereafter, the absolute number of employees in SOEs shrank from nearly 80 million in 1992 to less than 50 million a decade later (Naughton 2018: 116). This decrease was particularly strong in industrial firms. Quite a few of the transitions occurred in the shape of management buy-outs when managers took over the majority of shares in SOEs and transformed them into private enterprises (minyou qiye 民有企业).
The policy of "opening" was intensified by allowing from 1993 on foreign direct investment (FDI, guoji zhijie touzi 国际直接投资) via joint ventures (hezi gongsi 合资公司). Negotiations with the World Trade Organization (WTO, Shijie maoyi zuzhi 世界贸易组织, Shimao zuzhi 世贸组织) began in 1995 with China's formal request to accede. Export rose by 40 % in 1990 alone, and made out 12 % of the GDP as in 1990. These figures are also the result of an artificially low value of the RMB in that year. Export was growing by 6-7 % annually throughout the 1990s (Ebbers 2019: 71-72).
The enormous growth of the Chinese economy after 1990, with a peak of 14 % in 1993 and then slowing down to 7.6 % in 2000 (tradingeconomics.com), was possible because of the excess supply of labour from the countryside which kept wages low and fuelled the export-oriented manufacturing industries, making China "the factory of the world". Quite surprisingly, exports did play only a minor role for the total growth of the GDP. Fixed investment made out 40 % to GDP growth, and grew some percentage points faster than GDP itself (Ebbers 2019: 72).
Source: Tradingeconomics.com, based on National Bureau of Statistics of China.
Another contributor to economic growth were investments financed by the high national savings which allowed the banking sector to grant cheap credits to SOEs of the heavy industry, also to non-profitable ones. The rise in production originated in the mobilisation of labour and capital, and not by technological advancement and innovations, and at the cost of critical distortions in the financial sector, the labour market, and even the real estate market which was the hand of local governments.
Zhu Rongji deviated from Zhao Ziyang's proposition of "reform without losers" and accepted that the privatization of ever more SOEs would result in unemployment and social descent for some people. The government decided to subsidize larger, effient, and critical SOEs, while smaller and less profitable ones were privatized, which means in many cases, allowed to close down. The 15th National Congress of the CPC (Zhonggong di shiwu ci quanguo daibiao dahui 中共第十五次全国代表大会) in September 1997 confirmed this policy and gave it the slogan "retain the large, release the small" (zhua da fang xiao 抓大放小). As a consequence, the urban unemployment rate reached up to 10% (Naughton 2018: 117), or even more (Belsie 2015).
In the late 1990s, the annual growth rate went down to 'just' 8 per cent, but it rebounded to above 10 per cent in the 2000s. After nearly twenty years of reform, the Chinese economy was large and diverse enough to absorb the shocks of released labour force of former SOEs. Moreover, Zhu Rongji's arrangement between the central and local governments had resulted in a balance allowing division of labour in separated fields of macroeconomic policy down to the municipal level.
On the municipal level, a reward system was created by which good economic performance was remunerated by cash awards and chances of promotion for political actors. The incentives resulted in cronyism, but also in innovative concepts to boost the local economy. Some of these concepts were chosen as pilot projects and, if successful, spread to other communities and regions, or even nationwide.
General Secretary and President Jiang Zemin brought forward his concept of the "Three Representations" (san ge daibiao 三个代表), one of which is the representation by the CPC of the "fundamental interests of the large majority of the Chinese people", which also meant 'capitalists'. Jiang invited entrepreneurs to join the Party and participate in the political process.