During 1979 and 1980, the Chinese government began a vigorous reform program in the state sector. Reforms centered around the twin initiatives of expanding enterprise autonomy and combining plan and market, and they quickly spread to encompass much of the state sector. In the context of economic reorientation, reforms took root rapidly, and along with liberalization of the rural economy discussed in the next chapter, these initiatives mark the beginning of China's reform era. Reform was energetically promoted until the end of 1980, when policy suddenly changed direction. A much more conservative policy emerged in 1981, skeptical about rapid reforms and insisting that planning was necessary. The government then backed away from state sector reforms until the early months of 1984. The 1979–83 period thus emerges as a classical policy cycle, in which a phase of energetic reform policy was followed by a phase of cautious retrenchment.

Actual change in the economic system, though, did not fit so neatly into phases of reform and retrenchment. First, even during the activist reform phase, implementation was extremely unbalanced. Although reformers were quickly able to decentralize and introduce more flexibility into the system, their attempts to rationalize prices and financial relations were largely unsuccessful. The retrenchment beginning in 1981 partially reflected the inability of reformers to develop an overall program of reform that was both coherent and practical. Conversely, the conservative policies post-1981 had a number of unanticipated consequences that had a positive influence on the further development of reform.