1 Inflation, as measured by the retail price index, peaked at 6.0% in 1980, 8.8% in 1985, 18.5% in 1988 and 21.7% in 1994.

2 Hartford, Kathleen, “The political economy behind Beijing Spring,” in Tony, Saich (ed.), The Chinese People's Movement: Perspectives on Spring 1989 (Armonk, NY: M. E. Sharpe, 1990), pp. 50–82.Google Scholar Hartford's reasoned arguments become grotesques in Hornik, Richard, “Bursting China's bubble: the Muddle Kingdom,” Foreign Affairs, Vol. 73, No. 3 (1994), pp. 28–2.CrossRefGoogle Scholar

3 For example Christine Wong argues, “In the 1990s, the tenuous hold of the central government over macroeconomic control is under assault, with traditional administrative restraints … rapidly losing potency, while effective indirect mechanisms are slow in developing. Local governments have led this assault.” “China's economy: the limits of gradualist reform,” in Joseph, William A. (ed.), China Briefing 1994 (Boulder: Westview Press, 1994), p. 50.Google Scholar

4 A recent World Bank report, China: Country Economic Memorandum: Macroeconomic Stability in a Decentralized Economy (26 October 1994), argues that People's Bank of China (PBC) lending represents a hidden budget deficit and attempts to quantify it. PBC lending to state banks has been large since 1988, but soared to 8.5% of GDP in 1993. The World Bank authors guess that 60–80% of this is for “policy loans” (i.e. government ordered spending) and reclassify it as additional deficit spending (see n. 20, below).

5 Naughton, Barry, Growing Out of the Plan: Chinese Economic Reform, 1978–1993 (New York: Cambridge University Press, 1995).CrossRefGoogle Scholar

6 Zhongli, Liu, “Report on the implementation of the state budget for 1994 and on the draft central and local budgets for 1995,” Beijing Review, 3–16 April, 1995, pp. VI–VIII.Google ScholarZhongguo to ngjinianjian 1994 (China Statistical Yearbook 1994) (Beijing: Zhongguo tongji chubanshe, 1994), pp. 213–221; Naughton, Growing Out of the Plan, pp. 337–39.

7 In this sense, Chinese policy-makers are in the same position as American policy-makers or those of most other countries. Very few countries are currently able to use fiscal policy as a flexible element of overall macroeconomic policy.

8 There are numerous issues relating to budgetary data that cannot be discussed here. Real military outlays are substantially greater than budgetary data reveal, both because the military controls revenue off the books, and because some military expenses are “buried” under other headings. In addition, Chinese budgetary data do not cover social security expenditures by SOEs which are significant. There are many types of “extra-budgetary” funds: the majority are best described as enterprise funds, but some are more like fiscal revenues and ought to be included in budgetary accounts.

9 The different evolution of different functional components of expenditures explains some of the changing relation between central and local government. The central government is responsible for most investment and defence, while local governments are responsible for most current expenditures. Thus a decline in investment and defence relative to current outlays implies a decreasing central government share of expenditures, all else constant.

10 It is true that the share of GNP channelled through the budget to education, health and other expenditures should be increased, and that maintenance of the pre-reform share of GNP is inadequate. The point here is simply to argue that, on balance, these outlays have been shielded from the worst effects of eroding budgetary resources.

11 Shu-Ki, Tsang and Yuk-Shing, Cheng, “China's tax reform of 1994: breakthrough or compromise?” Asian Survey, Vol. 34, No. 9 (September 1994), pp. 769–788.CrossRefGoogle Scholar

12 “China shows early signs of missing deficit goal,” Reuter, 13 July 1995, electronically transmitted.

13 Naughton, Growing Out of the Plan, pp. 142–44.

14 Chinese authorities do not publish a breakdown of all industrial output. The data in Figure 2 are calculated by summing the data on independent accounting enterprises and village-run collectives, for which sectoral and ownership breakdowns are available. Zhongguo tongji nianjian 1994, pp. 373,378,388,395. The data shown account for 88% of all industrial output. SOEs account for 48% of this output, compared with the 43% of total output they are known to account for. Of the output excluded from Figure 2, SOEs account for only 10% and non-state firms, mostly small-scale private firms, account for 90%. Compare Garbaccio, Richard F., Reform and Structural Change in the Chinese Economy: A CGE Analysis, Ph.D. dissertation, University of California, Berkeley, May 1994, pp. 102Google Scholar, 106–107.

15 Zhongguo tongji nianjian, 1994, pp. 140–41; China's Latest Economic Statistics (Hong Kong: China Statistics Information Consultancy Service Centre, January 1995). The shares are not directly comparable, since the investment figures include non-industrial investment and also lump joint-venture investment in with the state sector if an SOE is a joint venture partner. A correction to make the data comparable is possible for 1993 and would reduce the state investment share to 61.5%. The trends are quite robust, however.

16 The following discussion defines infrastructure as consisting of (1) electric power; (2) transportation; (3) telecommunications; (4) urban water supply; and (5) rural water conservation. Social sector investment comprises (6) education construction and (7) health and welfare construction.

17 World Bank, World Development Report 1994 (Washington, D.C: International Bank for Reconstruction and Development, 1994).Google Scholar

18 All “state” investment in China is classified according to the level of subordination of the enterprise with the primary responsibility for the investment project, regardless of actual financial participation, which can be more complicated.

19 Central investment is slightly understated since all housing has been deemed local.

20 The disintermediation crisis explanation is superior to the World Bank analysis reported above in n. 4. They interpreted the high level of PBC lending in 1993 as evidence of a chronic, increasing disguised budget deficit. I interpret it as largely a short-term response to a disintermediation crisis. In the following year, 1994, PBC lending dropped almost to zero. This is compatible with the disintermediation crisis explanation, but is either incompatible with the “disguised deficit” interpretation, or else means that the deficit was miraculously closed within a single year.

21 In 1992–93 official recognition of overheating was further delayed by Deng Xiaoping’s “bundling” economic reform and rapid growth into a single package. Opposition to expansionary macroeconomic policy was construed as opposition to reform.

22 Associated Press, “China banks to go commercial?” 20 June 1995, over China News Digest.

23 Keping, Yao, “An analysis of 1994 balance of payments and a projection for 1995,” Zhongguo jinrong, No. 4 (1995), pp. 39–0.Google Scholar

24 Ibid. p. 40.

25 Monetary data from Zhongguo jinrong, No. 3 (1995), pp. 44–45.

26 Zhongguo, jinrong nianjian 1992 (Almanac of China's Finance and Banking 1992) (Beijing: Zhongguo jinrong chubanshe, 1993), p. 296.Google Scholar