Economic reform in China's urban sector began late, proceeded slowly and, on the whole, has been an erratic affair. Before reform, the state sector accounted for about 79 per cent of total urban employment and 78 per cent of the gross value of industrial output (SSB, various years a). The rest of the economy mainly comprised the collective sector with a virtually non-existent urban private sector. Both the state and urban collective sectors were, more or less, controlled by the centrally planned system. This system not only decided on what was produced, by whom and the uses to which it was put, but also how it was to be produced. The price level of both outputs and inputs were centrally determined. Enterprises could negotiate with central or local planning committees, but their influence was slight. The changes began with the decentralising of production decision-making, introduction of incentive schemes, reduction of centrally controlled output sales and the partial liberalisation of the price system. Firms were gradually granted most of the production decision-making power and the goods market was the first to be operated in a flexible market environment.

While the goods market was progressively liberalised, factor market reform was implemented much later, at a much slower pace and has not been as successful as the reform of product markets. This is particularly true for labour market reform.