4

From Tiananmen onwards: constructing capitalism in the 1990s

国家负亏,银行负债,老板负赢

The nation takes care of losses, the bank takes care of debt, and the boss takes care of profits.

Satirical aphorism from the 1990s1

Looking at today’s financial chaos, I cannot help but admire Comrade Zhu Rongji’s wise foresight.

Lou Jiwei (2018)

Although reform and opening commenced in the late 1970s, the Party line that has undergirded economic policymaking in the reform era emerged with the conceptual and ideological development of the socialist market economy [社会主义市场经济] in 1992. What has been labelled the ‘neoconservative legacy’ (Eaton 2016, 2) was a catalyst for the reassessment of the path of reform that had been adopted during the 1980s prior to the 1989 Tiananmen Square protests. During the 1990s, rather than the CCP becoming detached from administrative hierarchies and institutions of state, the Party was even more tightly integrated into other chains of command. The hierarchical relationships in the government and CCP were ‘more clearly specified, monitored more effectively, and tied more closely to material rewards’ (Naughton and Yang 2004, 8). It was thus in the period 1991–97 that the duality of the financial system began to emerge clearly as a critical feature of China’s political economy, reflecting the two faces of uncertainty. It was the product of a commitment to the active construction of a capitalist political economy under the continued authoritarian rule of the CCP, and thus constituted the roots of a discourse and logic of economic growth as the means by which the goals of governance by the CCP could be achieved (Gruin 2016). The financial system’s utility in the commercialization of real economic sectors began to be better understood and appreciated. At the same time, however, the financial sector remained closely bound to the administrative and political demands of restructuring centre–local relations, thus enabling a hybrid political economy of centralized political control and localized economic dynamism (Brown 2016).

In this chapter I trace the reinvigoration of the discourse of economic growth and its manifestation in the drive to establish a distinctly ‘modern’ financial system that satisfied the increasingly commercial imperatives of economic development, the evolution of a rationalized bureaucratic structure, and the need to retain authority over capital within the existing CCP-dominated political structure. The banking sector lay at the heart of this rationalization and reconsolidation of the CCP’s role within the economy. From the point of his elevation to the Politburo Standing Committee (PSC), Zhu Rongji was determined to assert macroeconomic control, and consolidated personal and Party control over the financial system in order to restrain lending and reduce inflation whilst taking steps to elevate savings and provide a source of capital. This was achieved through institutional reform, but in no way did this actually create market competition within the financial system, but rather simply a more effective system of Party control. He developed and pushed through SOE reform, but the savings that accumulated at the same time as he worked to deflate the monetary base were channelled not into making sure that laid off workers were supported, but that large SOEs were bolstered and were given further growth opportunities. CCP mechanisms of control were essential to the duality of the financial system, even as it began to assume a modern institutional form.

The fallout from Tiananmen: doubling down on development

In the aftermath of Tiananmen, neoconservative concepts came to take a powerful hold on politico-economic thought. This was not simply a matter of reform-averse conservatives holding sway over liberal-minded reformers. Rather, the neoconservative vision was as much characterized by a drive for reform as the liberal vision, but insisted upon maintaining a concerted and realistic appraisal of what development-oriented reform necessitated in a new environment where it was clear that China’s future lay equally with global integration and economic development, but also with CCP-led authoritarianism. For many intellectuals, Tiananmen came to be seen ‘not so much as a case of repression as another instance of romantic radicalism bringing about its own defeat’ (Fewsmith 2008, 102). What goes more unnoticed is the extent to which the events of June 1989, as much a product of economic instability and loss of price control as concerned with direct political liberalization, came to place the CCP leadership in a position whereby not only was its political legitimacy increasingly dependent upon its managerial capacity, but its margin for error in terms of economic governance was increasingly thin. The CCP needed to produce rapid economic growth, and it needed to make sure that this growth was stable and under control at all times. It is this feature of the path of reform in the early 1990s that sets it apart from that of the 1980s. In contrast to the loss of macroeconomic control during the 1980s and the austerity drive of 1989–90 (see Central Committee of the CCP 1990) that catalysed a sharp decrease in growth, the bid to control inflation in 1993 through Party discipline and financial repression was achieved without a corresponding drop in growth. The soft landing following the macroeconomic instability of the mid-1990s was so effectively achieved because the financial repression that was necessary in order to reconcile economic and political priorities in the post-1989 environment involved the strengthening of control over the financial system even as it was subjected to increasing commercialization and rationalization.

In the post-Tiananmen period, the Chinese Party leadership was confronted with a pressing need to reconstruct its interpretation and understanding of ‘reform’. The validity and appropriateness of Deng Xiaoping’s vision of China’s reform path – particularly as it had manifested in Zhao Ziyang’s leadership of the Party – was contested by conservatives as it rendered the CCP vulnerable to a diminishment of control over a process of socio-economic change that was clearly in motion throughout China (Fewsmith 2008). The issue was as deep as having to determine whether the socialist orientation itself would be upheld (Central Committee of the CCP 1998). These questions would be intensely debated and contested for the next two years, revolving around the fundamental issue of whether a market economy was fundamentally capitalist in nature or if it could potentially exist in a socialist economy [市场姓社 还是姓资]. The process of renegotiation of the ideological and politico-economic foundations of China’s now suddenly uncertain development trajectory necessarily addressed two forms of challenge: the political challenge of defining the foundation for the Party’s ruling legitimacy, and the economic challenge of shaping policies and institutions that would enable this foundation to be consolidated and built upon. The financial system resided at the core of both of these issues, as loss of control over the money supply was regarded as one of the greatest risks for social stability,2 whilst the provision of bank credit constituted a crucial component of fuelling the necessary high-speed growth. Following the blow to the CCP’s socialist legitimacy dealt by 1989, the issue of how to engineer the growth necessary for political survival came to be in direct tension with the need to maintain economic stability as a matter of political survival.

The search for legitimacy in the post-Tiananmen era thus produced a reconsolidation of economic growth and development as the new raison d’être for the CCP. The interregnum in reform and opening following 1989 gave rise to a fierce debate over the future direction of Chinese economic development. ‘Anti-reform’ conservatism was seemingly entrenched in Beijing, as conservatives led by Chen Yun took a series of steps to charge Deng’s rapid economic reform efforts with having precipitated the inflationary pressures of the late 1980s. This manifested in two ways: first that a reconsolidation of central planning capacity was necessary for the ongoing sustainability of China’s economic growth,3 and secondly that Party discipline had to be re-established on the traditional terms of Marxist thought.4 It was imperative, therefore, in 1991 and 1992 that Deng Xiaoping should take drastic measures before the Fourteenth Party Congress. Deng’s offensive was a critical point in the ideological reorientation of Chinese society (Hu et al. 2012). Whilst engaged in the Southern tour, Deng’s first priority was thus to end the prolonged ideological and policy debate that had constrained his efforts to accelerate economic growth and development (Zhao 1993). However, this resolution derived from fundamentally different sources from those underlying the liberalizing reforms of the 1980s, and sought to separate the economic from the political in a way that had been anathema to Hu Yaobang and Zhao Ziyang. In targeting the ‘leftist’ tendency to hold fast to orthodox Marxist ideology, he argued that ‘describing reform and opening as the importation and development of capitalism and viewing the main danger of “peaceful evolution” as coming from the economic field are leftist manifestations’ (Hu et al. 2012).5 He further emphasized the Party line of ‘one centre and two basic points’ [一中心 两基点] (Tang 1998). The centre was that economic growth and development of the forces of production was the central task of the Chinese state, whilst the two basic points were the means by which this was to be achieved: (1) centralized political control and the upholding of the ‘Four Cardinal Principles’,6 and (2) insisting upon reform and openness to the outside world.7

The repercussions to Deng’s pre-emptive attack in the south indicate that no side had decisively won the struggle before the Fourteenth Party Congress in October 1992. However by the close of the conference it was evident that Dengist policy circles had thoroughly marginalized the voices of intellectuals from across the political spectrum, insisting that GDP growth was the fundamental means of ameliorating the potential risk of social discontent (Qin 2008). This reflected the demise of what remained of a true egalitarian streak within the leadership, as central planners such as Chen Yun who believed rapid economic growth was inherently destabilizing lost influence, and the younger conservatives including Li Peng and Yao Yilin adopted an ‘indicative planning’ perspective, rooted in the experience of Japan and the newly industrializing economies of East Asia (Heilmann and Shih 2012; see also Xue 1996). As Jiang Zemin gradually sought to establish himself as the ‘core’ of the third generation of leadership, he sought to articulate a coherent vision of socio-economic development, one which would come to revolve around strengthening CCP authority on three bases: development, stability, and national unity (Zheng 2001). Zhu Rongji was elevated to the Standing Committee of the Politburo in 1992 by Deng Xiaoping with the implicit support of Chen Yun, and tasked with the responsibility of bringing his technocratic style to bear on macroeconomic management (Shih 2008). Each of these leaders recognized the imperative of economic growth, and the fact that the CCP’s political future was inextricably tied to it.

The political turmoil of 1989 had now given way to a renewed emphasis upon economic growth, and the economic dimensions of the challenge confronting the CCP in the early 1990s were numerous and varied in nature. Under the conditions of pervasive uncertainty that faced CCP policymakers, financial elites, entrepreneurs, and the managers of SOEs, it was virtually impossible for any of these actors to accurately gauge the potential risks of financial decisions. Rather, it was necessary to draw upon existing social resources and structures in order to manage this uncertainty during the process of reconstructing social order in the aftermath of an existential crisis in 1989. The ideational and institutional change that unfolded in the early 1990s profoundly influenced the path of socio-economic development, underpinning the duality of the banking and financial system as a means of generating economic growth without endangering political authority. This duality of the role of the financial system enabled these tensions to be resolved, reconciling the compromises demanded between the adoption of economic policies for purely economic purposes, and the adoption of economic policies for extra-economic purposes. What emerges is a clear sense of demarcation between these two realms, and the manner in which their reconciliation was a fundamental necessity for maintaining the social foundations not only of economic activity, but also for maintaining the coherence and integrity of the broader social compact that has characterized social, political, and economic relations in China since 1989.

Frames: rectifying the market economy [正名市场经济]

The pressures confronting the CCP during the years following 1989 precipitated a deep-seated reconsideration of the bases for the Party’s legitimacy and policymaking mandate. The attitudes, principles, and ideas that would guide financial reform in the years following did not emerge from an ideological and intellectual vacuum. The ‘rectification’ of the market economy was a process that generated the space for developing positive plans for subsequent reform;8 it lay at the basis of the socialist market economy, and thus as a conceptual heuristic it provided the cognitive frame that would enable actors to reorient their behaviour and action within the political economy towards a different conception of the relationship between the state and the market. It was the CCP that would guide and engineer the evolution of this relationship, by taking this cognitive frame of a socialist market economy and diffusing it through the Party organizations that spanned both market and state. It was not simply a matter that institutions such as universities, think tanks, or professional associations had an effect upon the socialization of discourse and actors within new and evolving cognitive frameworks. Rather, the very foundational institutions of the economy and the socio-economic outcomes that these had produced (economic instability and the imperilling of the CCP’s political and ideological legitimacy) served to motivate a shift in the framing of potential reform trajectories, but also firmly anchored and stabilized cognitive frames and their associated normative orientations.

The entrenchment of the discourse of economic development in the post-Tiananmen era had particular ramifications for the financial system. Doubling down on development also meant doubling down on capital, and it meant that the CCP was compelled to begin to confront the question of how to construct a modern financial system that would not disembed itself from either the real economy or society, and especially not the CCP itself that mediated between the two. The real dimensions of the conundrum facing the Party in the ideological and theoretical debates of the early 1990s is apparent in the following statement by a retired official:

You [the author] ask about the question ‘does the market have a socialist or capitalist surname?’ [市场姓社还是姓资], but I think that in those days, the question was not just about the market. The market was already a reality for China.9 The question for me at the time [the mid-1990s] was really ‘does capital itself have to be capitalist?’ [是否资本一定要属于资本主义]. Deng Xiaoping seemed to believe that the answer was no, and Zhu Rongji seemed to agree with him.10

Deng Xiaoping identified the purpose of reform as being to maintain and strengthen, rather than weaken and relax, CCP leadership (Wang Qinghua 2011, 94). In this way, the consequence of Deng’s successful drive to embed the CCP’s legitimacy within its capacity to generate economic development was to generate a need for transformation of the financial system. Furthermore, it became necessary to do this in a way that ensured that not only the market but also capital itself retained an allegiance to socialist ideology.

Socialism and the market [ 社会主义市场经济]

The foundation for this was the theoretical development of the socialist market economy. The State Commission on Economic System Reform [国家体改委] had been established in 1982 as a top-level body under the State Council to lead thinking on economic reform. From 1990 until 1993 it was headed by Chen Jinhua, who brought forth the line of reasoning that was to find favour amongst Deng Xiaoping and the highest leadership of the CCP at the Fourteenth Party Congress. Chen argued that combining the ‘visible hand’ with the ‘invisible hand’ had begun to become a universal trend for managing and optimizing the global economic system. If capitalist countries were to draw upon planning mechanisms to overcome the drawbacks of the market, it only stood to reason that socialism could also utilize markets in order to raise efficiency and overcome the deficiencies of planning (Chen 2005). It was a matter of embedding the market within a sociocultural context that would retain its socialist ideological values, notwithstanding the new-found significance of monetary exchange relations. During his 1992 Southern tour, Deng (1993, 382–3) had declared that

Setbacks have befallen socialism in some countries and regions, and may appear a diminishing force. However, the experiences we gain and the lessons learnt will propel the development of socialism in more healthy directions. Therefore do not panic, thinking Marxism is going to disappear, become redundant, or is destined for failure. It is no such thing!

Stripping away the ideological hyperbole, this meant that, ‘in Deng’s grand game plan, the predicate “socialist” in China’s “socialist market economy” remained largely a strategic capability to be carefully preserved under the continued rule of the communist Party’ (Gore 2001, 202). As one retired academic said,

In today’s China the idea of ‘socialism’ is not taken very seriously, but in the 1990s when Deng Xiaoping was in charge, there was still a commitment to the socialist identity. Of course, this meant the Party, but isn’t this what socialism has always been about?

He characterized the implications of the idea of the socialist market economy for economic thinking at the time in the following terms:

Yes, of course there were lots of politics involved; Deng Xiaoping was fighting for his legacy. But it was also something more. It was recognition that both the market and the Party were essential for China’s future. The challenge was to make them fit together.11

In November 1993 at the third plenum of the Fourteenth Party Congress, the Central Committee adopted the fifty-point ‘Decision on Some Issues Concerning the Establishment of a Socialist Market Economic System’ (Central Committee of the CCP 1993a). This decision would come to have profound effects upon the understandings of institutional change in the financial sector.

After Deng had ‘rectified’ understandings of what a market economy was and was not for, the next task was to determine how the concept that underpinned the necessary regulation of such a market economy was to be understood, interpreted, and implemented in the context of the newly developed concept of the socialist market economy itself. In his promulgation and support for Deng’s formulation of the socialist market economy Zhu Rongji was profoundly antithetical to the ideological debates surrounding the role of the market. As a task-oriented problem-solver, Zhu interpreted Deng’s southern talks not in terms of the ideological status of the market, but rather purely as a call to ‘seize the moment … and not let it slip by’ (Zhu 2013a, 54). Zhu has been accurately portrayed as a centralizing figure in the course of economic reform, a reformist technocrat who dominated financial policymaking from when Document No. 6 was promulgated in 1993 until the end of his tenure as Premier in 2003.12 Yet this is not to imply that he was in any way apolitical. As a member of the Standing Committee, he not only unsurprisingly played a role in the deal-making and power dynamics that characterize Chinese elite politics, but he was firmly committed to a political vision that conceived of economic growth as both the product and the guarantor of financial stability and social order. As a senior banking executive described it,

Zhu Rongji’s financial and commercial knowledge meant that he understood how signals worked in the financial system. He saw how Deng Xiaoping’s Southern tour was interpreted as a sign that it was now politically acceptable again to embrace the market, but he also saw how that led to inflation and a loss of economic control. But he knew the solution to this was not to return to central planning like some wanted. For him the solution was to signal that markets were good, but that they needed rules and he would be the one setting and enforcing the rules.13

Zhu Rongji’s personal and political style was reflected throughout his tenure. His authority over the government apparatus was characterized by a significant personalization and deinstitutionalization of the policy development process (Naughton 2002).

Jiang Zemin’s interpretation of the socialist market economy was that macroeconomic tools, rather than administrative means, should be the main instruments of control; the plan should be confined to ‘strategic targets’; and the state should endeavour to remove local barriers to an ‘integrated national economy’ (People’s Daily 1993). However, where Zhu Rongji was the technocratic reformer, Jiang Zemin was the consummate politician. Following the 1994 fourth plenum, Jiang Zemin begin to firmly consolidate his position as the ‘core’ of the Party and instigated a movement away from the position held by Deng that economics was to constitute the politics of reform-era China, towards an increasing emphasis upon the ideological requirements of reform and governance. He asserted that the ‘unification of understanding’ between all cadres was essential, above and beyond economic development, and pointedly criticized those cadres who would ‘bury their heads in the sands of economic reform and ignore the work of ideological education’ (Jiang 1996). However, as Wu Guoguang has highlighted, the fundamental cause of the return of ideology in the mid-1990s was rooted in the absence of institutional rebuilding in the political domain that would reflect and be in accordance with China’s socio-economic evolution (Wu 2001). Thus, rather than viewing the re-ideologization of the Chinese political system and broader society in general as conflicting with Deng’s previous emphasis upon matters of practice rather than ideology, the dedication to Party work and strengthening in the post-Deng era should be seen as the entrenchment and reinforcement of Deng’s maxim that the prioritization of the economic should be foremost for the CCP. Further, in this way it constituted a reorientation of CCP ideology itself towards the economic, and an exhortation to carve out moral precepts and norms with which to guide the CCP’s pursuit of economic development. This reflected not only a morally charged approach to the establishment and regulation of markets, but one that began to catalyse and in fact itself constitute ‘the cultural and technical work necessary to produce, to sustain, or – conversely – to constrain the market’ (Fourcade and Healy 2007, 305). For Jiang, the socialism underlying the establishment of a ‘socialist market economy’ was thus about ‘public ownership’ (CCP Research Department 2002, 45), and public ownership was about control and Party leadership (see Dai 2010).

Commercialized control [ 宏观调控]

The two main policy priorities in 1992 and 1993 were ‘rectification’ [整顿] and ‘reform’ [改革]. Zhu Rongji conceived of these as separate but mutually reiterative: ‘The first thing is to rectify and the second is to reform. We use reform as a means to rectify and to speed up reforms on the foundation of rectification’ (Zhu 2011 [1993], 298). Addressing the weaknesses that had emerged in the fiscal and tax systems was part of this effort, building upon the influential arguments of Wang Shaoguang and Hu Angang, who argued that the decline in the central government’s ‘financial extractive capacity’ since the beginning of the reform era was a substantial cause of China’s macroeconomic instability (Wang and Hu 1993). In late June 1993, when the debate concerning the assertion of macroeconomic control over the overheated economy was at its fiercest, Hu Angang and Wang Shaoguang met the Minister of Finance and were informed that ‘the line of thought relating to the reform of the fiscal system that you propose in the report comes very close to the way of thinking on the part of the central leaders’ (Hu 1998, 17). This extended not only to Zhu Rongji, who was the lead architect of the fiscal and financial reforms in the early 1990s, but was ‘entirely in line with General Secretary Jiang Zemin’s line of thinking’ (Official in the Central Policy Research Office, cited in Hu 1998, 18). Wang and Hu’s arguments for the strengthening of the state’s financial capacity formed the basis for the 1994 reforms towards a unified taxation system.

Zhu Rongji had the same desire to consolidate control over and resurrect the financial system as an effective tool for macroeconomic stability.14 In contrast to the fiscal reform that was a ‘way to dig the government out of [its] hole’, the financial reforms were ‘a way of advancing reform through the whole economy and generating future growth’.15 Concomitant with the decline in the central government’s fiscal capacity, monetary policy arose as the necessary basis for macroeconomic control. As Naughton observed,

Previously, only fiscal policy was important; since reform, fiscal policy has been rendered impotent. By contrast, whereas monetary policy used to be fairly trivial, today only monetary policy can really matter for macroeconomic stability. (Naughton 1996, 125)

The loss of monetary control in 1993 precipitated the drive for configuring systems of economic control that preserved the political compromises and understandings that existed as between society and Party (Wu 2012b). This was one of the primary motivations of Zhu Rongji’s drive to establish the central bank as a credible institution that could both implement decisive monetary policy as well as control the banks.

In 1993, despite the fervour of a reignited emphasis on economic development and growth, Zhu Rongji highlighted the numerous problems associated with ill-discipline within the banking system and the volatility of credit growth. As he announced in a March speech,

[M]ost provinces and municipalities don’t have the money, they have red-ink finances, and when they have shortfalls they borrow from the banks. Last year, just to make up for losses in edible grains, they borrowed almost RMB 30 billion from the banks, and in the first quarter of this year they added another RMB 3 billion in loans. That’s why ‘do it big and do it fast’ relies on nothing but an expansion of bank credit, on printing more money. (Zhu 1992, 66)

This exemplifies the shift in policymaking priorities. ‘Do it big, and do it fast’ was originally a positive slogan popularized in the 1980s to exhort officials and entrepreneurs to maximize every possible opportunity to undertake new business and public projects. However, Zhu came to associate it with carelessness in economic decision-making that endangered the sustainability of economic growth and reform of the enterprise structure and financial system (Zhu 1992). Although structural reform of the SOE sector was a pressing challenge facing the CCP in 1992, the immediate concern was to rein in those projects and activities that were fuelling the demand for working capital loans from the banking system. The level of triangular debt swelled to RMB 380 billion by 1991.16 It is common to assign cause for this build-up to competition with the newly emerging township–village enterprises, high interest rates, and their own inherent inefficiency (Fewsmith 2008). Zhu’s conclusion in 1991, however, was that these might have been exacerbating factors, but the primary cause of the triangular debt was that departments, local governments, and enterprises were blindly starting up projects in pursuit of production value and speed (Zhu 1991).

In late 1992, the Party Central Committee sought to consolidate control over the loss of macroeconomic control by issuing ‘Document No. 8’ (PRC State Council 1992a). This emphasized four macroeconomic control measures. First, it placed priority on strengthening control over the scale of fixed-asset investment, whilst also strengthening the management of social fundraising for such investment. All forms of securities were to be issued in accordance with the national plan, whilst it was forbidden to raise money outside the plan by arbitrarily issuing bonds and stocks, or forcing enterprises to pay mandatory contributions. Secondly, control over credit quotas was to be strengthened. As Zhu Rongji stressed in October 1992, Document No. 8 was strict in stipulating that ‘if any bank exceeds [its proportion of the overall RMB 350 billion in credit to be issued nationally], it will be held responsible; if any region exceeds [such a limit], the principal leaders of that region’s Party committee and people’s government will be held responsible’ (Zhu Rongji 1993, 119–20). Thirdly, it was considered necessary to actively organize the ‘recapture’ of money and the placement of funds by strictly enforcing a system of responsibility for government agencies at all levels. Fourthly, increasing the level of forex reserves was regarded as a priority; maintaining reserves at no less than USD 20 billion was seen as a minimum benchmark. The document focused on administrative measures, rather than market-based measures secured through economic principles, in part because the problems of lax macroeconomic controls were largely a product of government maladministration, but more importantly because there was a belief that a socialist market economy was always necessarily to retain a strong element of administrative planning and government control over macroeconomic trends and dynamics (Zhu Rongji 1993, 121).

The extent of overheating in the financial sector by mid-1993 resulted in the Party Central Committee and State Council issuing the ‘Proposal on the Current Economic Situation and on Strengthening Macro-Economic Control’ (‘Document No. 6’) [国务院关于当前经济情况和加强宏观调控的意见] (Central Committee of the CCP 1993b). Its implementation was the most pressing issue confronting the leadership at the time (Chen 2005). Zhu emphasized three principles that were essential for cadres to heed in approaching the implementation of Document No. 6. The first and most important was to ‘unify thinking’:

We must align our thinking and see the entire country as a single chessboard. Because they’re not in the same place, localities may feel differently from the central government, and feelings may differ from one locality to another, or between the coastal areas and the interior. But no matter how you feel, we must all align our thinking; otherwise we won’t be able to solve the present problems. (Zhu 2013 [1993], 134–5)

Secondly, Zhu called for measures ‘not to manage and rectify but to further deepen the reforms… . We must turn the resolution of the most pressing current programs into a force for accelerating the reforms and for building a socialist market economy’ (Zhu 2013 [1993], 135). Thirdly, he argued,

Without powerful organizational tools, without steely disciplinary tools, and without impartial legal tools to complement them, it will be hard even for correct economic tools to be effective. It’s very harmful to view all of these as administrative tools. (Zhu 2013 [1993], 136)

In order to effectively deploy market forces as a mechanism for economic growth and development, it was necessary to develop guidance on the nature of a concept that resided at the core of the debate around the appropriate relationship between the plan and the market, and socialism and capitalism: ‘macro-level control and adjustment’ [宏观调控], reflected in Zhu Rongji’s assertion that

As a socialist country, only with reliable macroeconomic control is it possible for China to effectively guide the direction of a market economy, and to realize the superiority of a socialist system. Accordingly, the construction and development of a socialist market economy must rely upon macroeconomic control; the spontaneous development of the market economy is not capable of bringing about a socialist market economy. (Liu et al. 1997, 2)

In the post-Tiananmen reassessment of China’s path of socio-economic development, there was one constant: the CCP would remain at the heart of the political system. In order to generate the economic development that now more than ever constituted the Party’s basis for socio-political legitimacy, commercialized control and guidance under the leadership of the CCP would come to be regarded as the key to the realization of a socialist market economy and thus the reinvigoration of China’s development. This concept of the socialist market economy was not simply the oxymoronic manifestation of the ideological desperation of China’s political elite, but rather came to serve as a subtle yet crucial cognitive frame that takes the necessarily authoritarian basis for CCP rule and combines it with the belief that the market is a tool for realizing economic aims, rather than a politically significant institution that constitutes a normative end in and of itself.

Institution-building: (in)formalizing ambiguity

The reforms of the 1980s maintained an ‘administrative regulatory system that imposed state supervision over virtually all economic transactions’ (Potter 2001, 250), a characteristic of economic relations that was evident nowhere more clearly than in the financial system. This changed following the reinvigoration of reform in 1992. Establishing the institutions of a ‘modern’ financial system was recognized as an essential component in the construction of a socialist market economy, yet many of the specifics of the necessary reform were not spelled out within the broader ideological debate concerning the market and plan that was unfolding at the time (Wu 2012a). Institutional development in the financial sector in the early and mid-1990s unfolded within two broader trends: first a process of economic growth in which the financial sector played an important role, and secondly a process of reconsolidation of CCP control and authority over the political economy.

The development of the financially repressive urban-biased path of development was a reflection of how the implementation of the concept of macroeconomic control and adjustment was a response to the twin political and economic exigencies of the post-Tiananmen neoconservative era. The banking system channelled savings from the household to the enterprise sector. Between late 1989 and mid-1993 the overall economic policy priority of the leadership evolved from one of controlling inflation to reigniting growth. By the early 1990s, however, the strategy of ‘growing out of the plan’ via dual-track price reform and the transformation of rural enterprise had reached its logical conclusion (Naughton 1995). This meant that the preferential credit policies for state firms, originally designed to shield SOEs from the austerity imposed between 1989 and 1991, quickly turned into conduits for channelling large amounts of bank credit to state firms. In contrast to the 1980s, during which the immediate efficiency gains of price reform had propelled growth, China’s rapid economic growth in the 1990s was based on the rapid accumulation of capital, and particularly physical investment.17 Rapid capital accumulation was the critical component of China’s economic growth, and was the result of ‘economic reform policies making and keeping enterprise investment highly profitable, and of powerful incentives for households, enterprises, and government to save; and that the extremely inefficient financial system did not prove to be a serious obstacle’ (Knight and Ding 2012, 124). The rate of return on capital was high throughout the decade, and despite the rapid rate of capital accumulation, expected profitability was sufficiently high to induce high investment levels. Entrepreneurial expectations of rapid economic growth were crucial for this high investment rate.

Mechanisms of Party control and commercialization emerged and developed in tandem across the institutions necessary for supporting economic activity. China’s policymakers were seeking to accommodate the needs of an increasingly market-oriented and internationally integrated production system by commercializing the financial system. The development of a legal and institutional framework for banking and finance in the early 1990s was thus integral to the national effort to transform and commercialize the financial system. However, neither in conception nor in practice was it part of a strategy to promote the development of financial relationships that would rely upon either a legal and rational state bureaucracy or a secular market in order to maintain their integrity. In other words, financial relationships were placed on a more commercial footing, yet the efficacy of this commercialism remained highly dependent upon the role and utility of the CCP itself.

Through this process, institutional ambiguity constituted the means by which the CCP exercised instrumental control through multivocality, but at the same time this was incompatible with an internally contradictory normative framework. Achieving some degree of ideational (and thus ideological) coherency in this template for action was therefore a necessary prerequisite for preserving an intersubjective faith and confidence in the ‘vision’ of the CCP. The cognitive frames that emerged out of the intense struggle over the meaning of the market [姓社还是姓资] generated this latent basis for reducing uncertainty. Whilst the ‘guerilla policy style’ (Heilmann and Perry 2011, 12–13) certainly provided a crucial underlying basis for the resilience and policymaking versatility of the leadership during this period, just as the revolutionary CCP was itself founded upon the shared ideological foundations of socialist struggle as the path towards rejuvenation of the Chinese nation, China’s capacity to construct a market-led economy came to be underpinned by an ongoing transformation of the shared ideological basis for an ambiguous but essential role for CCP leadership in the flow and management of capital.

Developing a guiding line on financial policy

Institutional change in the central financial policymaking apparatus was built upon the ideas that framed policy debates during and following the 1992 decision to establish a socialist market economy. Both Jiang Zemin and Zhu Rongji (although for different reasons) recognized that a centralization of political power was necessary in order to realize this objective. The interpenetration of Party and state functions and organizations was reinforced through the relationships between think tank researchers and policymakers. As Zhu Xufeng (2013b, 40) has argued, ‘because of China’s special administrative system, its think tanks have relationships that Western think tanks lack, namely, the institutionalized networks attached to the Chinese administrative system’. The position-list system serves not only as an institutionalized mechanism of Party control, but also embodies sets of informal networks that diffuse ideas generated through government think tanks such as the Chinese Academy of Social Sciences (CASS) and the Development Research Center of the State Council. Accordingly, this enables us to view the CCP’s organizational presence across the financial system not as extra-institutional or supplementary, but as a set of integral social structures that integrate the formal institutions of governance with processes of socio-economic reproduction.

In the aftermath of Tiananmen, reconfigured networks of intellectuals and scholar-officials emerged who drew upon Western academic theories as well as their direct experiences of the West in order to advocate for a rational and systematic approach to the reform and liberalization of the economy. This reconfiguration of intellectual and Party networks involved two trends that would guide policymaking. First, they became more closely integrated with the formal policymaking process, and although in practice this meant seeking an audience with and persuading Zhu Rongji, this was increasingly taking place within the institutional structures of the Party-state. Secondly, the ideological divisions in these networks became less acute, as there was a greater coalescence around the intellectual challenge of conceptualizing and advocating market reforms. The areas of institutional reforms seen as necessary in the early 1990s concerned the financial, enterprise, and fiscal systems. The ‘comprehensive reform group’ [整体改革派], led by Wu Jinglian, had argued that the intertwining of all these broad areas meant that it was necessary to undertake reforms concurrently rather than seeking problems in the different areas sequentially (Wu et al. 1995). This group included young officials such as Zhou Xiaochuan, Guo Shuqing, and Lou Jiwei. They would come to represent a network of economic thinkers who would later rise to prominence in leading government positions.18 Wu Jinglian had already been an influential advisor to Zhao Ziyang during the 1980s, but nonetheless his views have always been highly mindful of the destabilizing and regressive effects of inflation (Xiao 1999).

Another influential voice was that of Chen Yuan, the son of Party elder Chen Yun. The younger Chen had become a vice-governor of the PBOC in 1988, and would later take over the helm of China Development Bank (CDB) in 1998. In 1991 he published an article that emphatically argued for the strengthening of macroeconomic control over the economy (Chen 1991). Despite emphasizing the fundamental prerequisite nature of applying market pressure for the reform of the enterprise system, he differentiated such market pressure at a basic level from the principles and institutions of macro-economic control, which constituted a market-active paradigm but one that prevented any separation of growth imperatives from social imperatives. Warning against the ‘hollowing out’ [掏空] of Party control over the economy, Chen advocated the consolidation of market forces under political control and the adoption of a ‘new centralization’ (Chen 1991, 19). This would involve harnessing the power of the state, even as markets were permitted to break through local protectionism and micro-level distortions of enterprise efficiency. A year later Chen (1992) published another article, in which he assessed the thought of both John Maynard Keynes and Milton Friedman. Regarding the former, he approved of the role of government in achieving quantitative macroeconomic regulation and control [宏观调控], but rejected the methods of expansionary fiscal policy in order to achieve it. He also rejected Friedman’s laissez-faire philosophy but approved of setting monetary policy goals. From such writings, it is clear that he was disinclined to develop an ideological preference for emphasizing either government or market, but rather was insistent that ‘western economics can be turned to serve our socialist revolution’ (Chen 1992, 32).

These intellectual networks, however, were dually enmeshed; in addition to advancing their own ideas through intellectual debates, they were deeply embedded in the Party networks that not only secured their careers and provided them with a policy audience, but impressed upon them also the significance of the conditions in which China, and the CCP, found itself increasingly alone in the post-Soviet liberal global order of the 1990s (Wang and Hu 1993). As Bell and Feng (2013, 126) have observed, the ‘vagueness in interpreting the incentives and preferences of senior bureaucrats is also due to their dual identities as government officials as well as Party cadres’. As these intellectuals-cum-officials-cum-cadres rose to leadership positions in the late 1990s and 2000s, the contradictions between their Western-informed economic training and the demands of CCP authority and control would become increasingly apparent. However, in the early 1990s, their role within the policymaking process was to encourage the increasing expertise and concomitant rationalization of economic thinking, coalescing around the idea of ‘macroeconomic control’ [宏观调控] as the fundamental basis upon which to realize a ‘socialist market economy’. At the same time, since Zhu Rongji was emerging as the lynchpin of economic policy, the process of financial restructuring became increasingly dependent upon the personalization of the policy process, and the concomitant personalization of policy credibility.19

One institutional lynchpin that re-emerged for linking financial and economic policy to the political imperatives of the CCP was the Central Finance and Economics Leading Group (CFELG) [中央财经领导小组]. The CFELG is an extra-constitutional policymaking body that links together the highest echelons of the CCP and the formal state bureaucracy. As a leading small group, it possesses tremendous influence (Yang 2000), and moves ‘back and forth between government and Party depending on which leader is taking charge of economic work’ (Shirk 1993, 61–2). However, all members are Party cadres and one of its primary functions, as with other leading small groups, is to provide a mechanism for the CCP General Secretary to reassert authority over economic policymaking whenever it is deemed necessary. The Staff Office of the CFELG is a crucial source of intellectual policy proposals, as it works directly for the highest leadership and draws upon a flexible and wide-ranging network of officials and researchers for ‘document-drafting groups’ [起草组] that frame financial and economic policy (Wu Guoguang 1995).

During the 1980s Zhao Ziyang relied upon the CFELG heavily as a means of resisting the pressure for centralization mounted by the State Planning Commission. Following 4 June 1989 and Zhao’s downfall, the CFELG became practically dormant. It existed merely as a shadowy advisory organ and had no role in day-to-day policymaking until 1993 (Party source, cited in Lam 1995b). Jiang often deferred to Zhu Rongji on financial policymaking, and Zhu’s guiding hand would be highly evident in this area until 2003. Under Jiang’s stewardship, however, the CFELG underwent major expansion and was transformed into a policy-setting and in many ways a policy-implementing and supervisory body.20 This was emblematic of the way in which Jiang Zemin expanded the functions of a number of the leading groups within the Central Committee in the early 1990s. This was a series of moves that ran counter to the principle of increasing separation of the Party and government, and a streamlining of the Party bureaucracy (Lam 1999).

Reshaping the PBOC: centralization without independence

In December 1993 the State Council promulgated the Decision on Reform of the Financial System, identifying the following objectives of financial reform (PRC State Council 1993):

1.Establishment of an independent macroeconomic control mechanism by the PBOC (independent from local governments, but under the control of the State Council);

2.Establishment of policy banks;

3.Transformation of SOCBs into commercial banks;

4.Establishment of unified, open, well-ordered, competitive, and well-managed financial markets,

5.Reform of foreign exchange controls, by unifying rates and moving towards current account convertibility;

6.Issuance of guidance for the development of non-bank financial institutions (NBFIs);

7.Development of a financial services infrastructure and modern financial management system.

The decision on financial reform was intended to transform the system, providing the basis for substantive and far-reaching changes in the institutional structure of the financial sector. The document emerged out of the State Commission on Economic System Reform in the context of the debates of 1993 surrounding the centralization of macroeconomic control (Chen 2005). It reflected a recognition that market-oriented reforms were necessary, yet preserved the ambiguity of implementation of process that has remained a hallmark characteristic of the financial system ever since in several key aspects: lines of regulatory authority and control, delineation of property and ownership rights, and the allocation of both risk and return (Wu 2005). Nevertheless, it marked the beginnings of systemic ‘modernization’ of the financial system as one that would successfully support capital accumulation. The most important component of the round of reform that arose out of the 1993 decision was the establishment of the PBOC as a fully functioning central bank at the heart of a modern central banking system (Wu 2012b). Establishing the goal of central banking as that of ensuring price stability for growth was an essential element in creating expectations of a favourable investment climate. High inflation depresses savings as the real interest rate decreases, and interest rate repression was necessary in order to ensure a flow of cheap capital and spur investment. SOEs were growth-oriented rather than profit-oriented per se, which is what Zhu Rongji desired. Given the necessity and success of price reform, he knew that the CCP needed market forces to drive the real economy, and that it needed to establish a modern central bank in order to allow it to do so.21

The most striking feature of the reforms of the central banking system was centralization without independence. Zhu Rongji (2011, 25) argued that his governorship of the PBOC was irrelevant:

It doesn’t matter whether I’m the governor of the Central Bank. I’m already responsible for finance and for the banking sector. […] In the case of China, no matter how independent the Central Bank is, it can’t be independent of the State Council. The independence of the China’s central bank refers to its independence from local governments and other ministries and commissions under the State Council.

This reflects the fact the PBOC ‘is not a puppet agency, nor is it independent of the central state leadership’ (Bell and Feng 2013, 11). Its establishment was a deliberate rationalization of central banking but a rationalization according to the logic of financial and monetary policy serving a development strategy rather than being committed to a deductive application of market principles. A relationship of mutual dependency evolved between the PBOC and the Party-state following 1993.22 Zhu Rongji replaced Li Guixian as governor of the PBOC in July 1993 in the context of a significant decline in bank deposits in early 1993. His efforts thereafter to reverse that decline were made because he was determined to launch a capital-intensive growth strategy based on the intermediation of household savings through the banking sector.23

The focus of analysis has often been on the capacity of central authorities to maintain macroeconomic stability and achieve a soft landing after the overheated economy and inflation spike of the mid-1990s. Yet during the 1980s the PBOC developed another fundamental function and practice, that of re-lending [再贷款], a role that was contradictory to that of providing macroeconomic stability. Re-lending was a practice by which the central bank redistributed financial resources through the imposition of high reserve ratio requirements. Those funds that were deposited with the central bank could then be re-lent as earmarked policy loans (World Bank 1995). Under the credit plan this practice continued to constitute a primary basis for the ongoing viability of the specialized banks, as they were enfolded within Zhu’s strategy for resolving triangular debt, managing inflationary pressures, and maintaining contributions to SOE working capital needs (Lardy 1998).

On 18 March 1995, the Law of the People’s Republic of China on the People’s Bank of China (Central Bank Law) was passed by the National People’s Congress (National People’s Congress of the People’s Republic of China 1995). One senior official has stated:

The law was passed so that everyone knew that the drive to commercialize was serious. Zhu Rongji had become governor of the PBOC already, but what were people to make of that other than that he was becoming more powerful? The inflation and economic instability of the early 1990s meant that there was no other option but to create a real central bank.24

Legally the central bank formulates an ‘independent monetary policy’ under the leadership of the State Council (Dai 2001, 4). Article 2 of the Central Bank Law explicitly places the identification of policy objectives and goals under the purview of the State Council (National People’s Congress of the People’s Republic of China 1995). The law formally confirmed the PBOC’s status as a central bank, and mandated that it ‘formulate and implement’ monetary policy. This remit was defined in Article 3 as: ‘the aim of monetary policies is to maintain the stability of the value of the currency and thereby promote economic growth’ (Article 3, National People’s Congress of the People’s Republic of China 1995). Although the article’s phrasing indicates that price stability is viewed as a necessary if insufficient condition for economic growth, there is an inherent ambiguity as to the extent to which economic growth is the ultimate objective of central bank policy (He 1998; Wu 2012b). In reality, the PBOC was expected to pursue a comprehensive policy objective, ‘aiming to balance inflation, employment, growth, and balance of payments concerns’ (Bell and Feng 2013, 141). Although, as Bell and Feng argue, the consensus view within the PBOC is that price stability remains the bank’s core contribution to the pursuit of economic growth, its leaders acknowledge the institutional realities that arise out of the tension between the PBOC’s formal status and the reality of its role in China’s political economy. First, they understand the difficulty of pursuing multiple goals simultaneously. Secondly, they accept the extent to which their responsibilities are embedded within a wider set of political and economic priorities, and that their performance is assessed not by reference to fulfilling a formal mandate but by how well they negotiate these priorities.25

Building ‘real banks’: specialized, commercialized, policy, or what?

There was little indication within the pre-1992 banking system that it had undergone significant change from the pre-1978 centrally planned model in terms of how the process of credit allocation was to relate to the broader sphere of production. It remained institutionally incapable of performing the ideal liberal role of financial intermediation in an increasingly market-oriented economy (Dipchand et al. 1994; Tam 1995; Lardy 1998). Yet China’s overall growth rate averaged 11.5 per cent between 1991 and 1997. As recent studies of the impact of China’s financial repression have argued, whilst it is possible that deeper reform and a more liberalized financial sector would have increased this growth rate, it is improbable (Huang and Wang 2011). This militates against a deductive focus upon the banking system’s allocative efficiency. Neither was it purely because of the banking system’s unreformed and developmental nature that growth was so high. The ability of an institutionally underdeveloped banking system to underpin these rates of growth was less the product of a developmental technocratic leadership led by far-sighted pragmatists, but rather emerged as an ad hoc and internally inconsistent product of the conflicting imperatives to secure economic growth at the same time as guaranteeing the primacy of CCP political authority.

The December 1993 ‘Decision on Reform of the Financial System’ (PRC State Council 1993) provided the basis for the transformation of the specialized banks [专业银行] into commercial banks [商业银行]. The reforms in the institutional structure and role of the banking system over the next several years were substantive, yet they did not have the effect that market-oriented liberal reformists would have desired. Rather, they effected an enhancement and realignment of the existing role that the banks had played in the reform process thus far; there was recognition that reform was necessary in order to support a rapidly developing market economy, but this was not necessarily commensurate with reform that would improve commercial allocative efficiency. Rather, the path of reform was consistent with the construction of a commercial environment that prioritized growth and stability over efficiency, in circumstances where both of these priorities were dependent upon satisfying both investors (household depositors) and consumers (enterprise borrowers) that the institutional structure of financial intermediation remained intact and viable.

The process of banking reform therefore cannot be understood except in the context of reform of both the fiscal system and the situation confronting SOEs at the time. Furthermore, even though, as Naughton (1995) admits, it is easier (if not impermissible) to identify ex-post coherence to the reform process, it is necessary to assess the path of reform as part of the broader and significantly contiguous development of the economic and industrial capacity of the Chinese economy since the post-1989 interregnum. In the early 1990s Premier Li Peng was in the midst of implementing the ‘Large Enterprise Strategy’ [大企业集团战略], which arose out of a deep concern on the part of the central government at the time that the decrease in the state’s share of industrial production to 59 per cent was ‘not only an economic but a major political problem’ (Lam 1995a, 55). The ‘grasping the large and letting go of the small’ [抓大放小] policy of consolidating and rationalizing state ownership was at the same time being developed by Zhu Rongji and was first presented at the 1993 third plenum of the Fourteenth Central Committee, before being adopted officially in 1995 at the fifth plenum (Lin 2008). This programme built up the capital of large SOEs at the expense of those loss-making SOEs that were privatized (Institute for Industrial Economics 1998).

The premise of these strategies for reform of SOEs was not to seek to improve enterprise efficiency, but rather to strengthen them as pillars of China’s national industrial capacity. The legacy of this line of thought that took shape in the post-1989 period has been clearly discernible in the evolution of central government policy ever since (Eaton 2016). This reflected the fact that the incentives facing enterprise managers at the time were oriented towards growth, rather than towards profitability (Steinfeld 1998; Knight and Ding 2012). The consolidation of the state-owned sector was underpinned by a commensurate centralization in financial control and repression. The pattern of bank lending was structured around this industrial policy, rather than as a matter of transferring funds to those SOEs and regions which had the largest number of workers made vulnerable as a consequence of the drive towards SOE privatization (cf. Lardy 1998; Shih 2008). A similar logic was evident in Zhu’s solution to the SOE’s triangular debt crisis. He compelled the banks to disburse loans of RMB 80 billion to the most heavily indebted enterprises who were in turn ordered to resolve their outstanding debts to other SOEs. This had the effect of eliminating RMB 380 billion in interfirm debt, but simultaneously created a further raft of bad debt on the balance sheets of the SOCBs (Shih 2008).

The institutional evolution of the state-banking sector also involved the establishment of three policy banks in 1993 to take up the policy-directed lending activities of the state commercial banks. These were the CDB,26 the Export-Import Bank of China (EIBC), and the Agricultural Development Bank of China (ADBC). Each of these policy banks were intended to serve a particular function within a financial landscape that was being reconfigured in accordance with the new-found commitment to a ‘socialist market economy’. 27 The CDB is ostensibly responsible for the financing of major infrastructural projects; the EIBC is to promote foreign trade; and the ADBC finances agricultural and rural development projects. The rationale for their establishment was that economic areas existed in which the commercial banks were either unwilling or unable to extend finance (Chen 2008). Upon establishing the CDB the bank was therefore immediately authorized to issue financial guarantee construction bonds [财政担保建设债券] (PRC State Council 1994).

In the debate surrounding the establishment of the policy banks, it was widely recognized that they would only work if the core functions of the banking system were transformed (Huang 1992). Zhu Mingchun argued at the time that once policy banks were established, the government would be able to desist from having to assume complete responsibility for enterprise and industry (Zhu Mingchun 1993). This would have necessitated the transfer of significant quantities of policy loans from the specialized banks to the policy banks. The decision to retain these non-performing loans (NPLs) on the balance sheets of the existing banks was made on the basis of the absence of a sound plan for recapitalization of the still not yet ‘commercial’ banks.28 This was the case prior to the acceptance of the socialist market economy at the third plenum of the Fourteenth Party Congress, and it was argued that unless the government was prepared to solely utilize interest rates, re-lending, and open market operations to regulate commercial banks, it made little sense to establish separate policy banks (Huang 1992). Following the acceptance and diffusion of the frame of a socialist market economy, attitudes towards policy banks shifted (Zhu Mingchun 1993). One central regulator described it in the following terms:

The banking system was such a mess at the time, because there was no real banking system. The idea of the ‘specialized’ banks was one that didn’t make much sense, especially to reformers such as Wu Jinglian. But he would have been disappointed I think, because the policy banks clearly fit into the strategy of industrial development, but left the other banks behind with a lot of problems.29

Following the establishment of the policy banks, there was little indication that SOCBs began operating on commercial terms. The conventional view of the commercialization of the big four banks in this period was that it was a crucial but partial and failed series of steps on the way to the establishment of a ‘modern enterprise system’ [现代企业制度] (Leng 2009, 2). As Kwong has observed, the role of the big four as government policy agents to finance state projects and SOEs involved processes of capital allocation ‘on the basis of social and political consideration instead of profitability and business criteria’ (Kwong 2011, 164). Throughout the process of financial reform during the 1980s and well into the 1990s, policy lending remained a defining characteristic of the Chinese banking system. One-third of total loans outstanding in 1985 were policy loans, and one-fifth in 1995 (Lardy 1998).

In 1995 the Law of the People’s Republic of China on Commercial Banking (Commercial Banking Law) officially reclassified the existing big four banks as commercial banks, in an effort to increase their independence from the state. Notwithstanding the formal change in naming the SOCBs, the law made it clear that lending behaviour was not to be guided purely by commercial considerations of profit. Article 34 of the Commercial Banking Law stated that ‘A commercial bank shall conduct its loan business in accordance with the need for the development of the national economy and social progress and under the guidance of state industrial policy.’ Further, Article 41 continues, ‘A commercial bank owned solely by the state should provide loans for special projects approved by the state council.’ This closely reflects the process – paradoxical from a Western perspective – of legal rationalization around the prerogatives of national development as they are determined contextually by the CCP. One member of a central government think tank provided the following frank opinion:

Some say that there needs to be responsiveness to ‘market needs’. In corporate governance this means transparency and clear lines of loyalty. But since 1993 the banks are at the center of China’s economic development, and if there is a conflict between what the government needs from the banks, and what the market wants from the banks, why should the market always be right?30

The law stipulated that the banks’ business operations were to be governed by principles of efficiency, safety, and liquidity, and they were to make their own decisions regarding business operations, take responsibility for their own risks, profits, and losses, and exercise appropriate self-restraint in their operations. The banks took a number of immediate steps to reform their organizational structures and behaviour, including the establishment of asset/liability management committees, credit committees, closure of loss-incurring branches, major investments in information technology, and staff training. However as one former SOCB manager turned regulator stated, ‘these things were basically “window-dressing” [装装门面 的] that did not change the basic facts of the banks’ existences’.31 Yet the drive to commercialize and rationalize the banks between 1993 and 1996 did have an effect upon the banks; as the same interviewee somewhat later observed, ‘it seemed like the changes to the banks made them more effective at what they were doing’.

Notwithstanding the shifting legal status of the banks following the passage of the Commercial Bank Law, credit remained controlled almost exclusively through the state credit plan [信用计划], under which the PBOC set credit limits on the state commercial banks, thereby controlling the volume of fresh credit. This was gradually phased out and abolished in January 1998, as credit ceilings on financial institutions other than the specialized state-owned banks were eliminated and replaced with regulations regarding assets and liability and risk management. Whilst the credit plan was still in operation, the central bank had, until 1994, permitted local PBOC branches to adjust their credit ceiling by 7 per cent on either side of this limit. This flexibility in setting credit ceilings was removed in 1994, although local branches were still able to determine the distribution of credit quotas. Although these policies provided the central government with significant and close control over the amount of credit in circulation, local governments and the SOEs associated with them for the purposes of taxation and revenue came to accumulate debt that had very little likelihood of being repaid in full. Acceptance of this situation by the banks generated a self-replicating system, deriving from the ongoing lack of commercial experience on the part of the commercial banks and the familiarity of local government officials with state-planned credit.

NBFIs played an important and often under-appreciated role in the financial landscape of post-Tiananmen China (Table 4.1). Rural credit cooperatives (RCCs) had existed as deposit-taking institutions since the pre-reform era, and continued to be the largest set of NBFIs during the 1990s. RCCs were always conceived of as independent financial institutions that operated according to principles of democratic collective management (China Finance and Banking Society 1991). However, they have historically possessed very little operational autonomy but rather have been run as the lowest rung of the state financial administration, executing much of state policy across rural areas and sectors (Tam 1988). The close connection between RCCs and the state financial system meant that government officials considered their loans to be ‘from the public, to the public’ (Zhu and Jiang 1997). The non-bank financial sector evolved to split in two directions during the 1990s, with RCCs playing a crucial role in the broader intermediation system, whilst trust and investment companies (TICs) were engaged in highly speculative and risky investments with a low level of allocative efficiency (Laurenceson and Chai 2003). After having had their activities curtailed dramatically in the late 1980s, during the early 1990s as the central government’s fiscal capacity declined, and when restrictions upon SOCB lending were implemented through the credit plan, TICs again proliferated until in 1997 there were more than 600 in existence. During the 1980s TICs were largely established by SOCBs in order to promote a greater horizontal flow of funds between financial institutions even though local governments possessed a high degree of direct and indirect control, whereas in the 1990s TICs became very closely associated with local governments and their development objectives (Dipchand et al. 1994).

Table 4.1. Assets, loans, and deposits, by financial institution in 1997 (%)

Source: Almanac of China’s Finance and Banking 1997

Generating space for reform: repressed money markets

From the beginning of reform, the question of interest rate adjustment as a mechanism for the efficient allocation of capital was present. Prior to 1978, the PBOC had directly controlled and targeted more than 100 different rates. The prevailing view had been that maintaining these controls would allow the PBOC to control and reduce any potential volatility in interest rates and thus liquidity during the price-setting experiments of the 1980s.32 The administrative regulation and management of interest rates was a critical institutional foundation for stable investment-led growth. Financial repression was the basis for guaranteeing a cheap and stable source of capital for the fixed-capital investment that was the primary contributor to aggregate output growth between 1990 and 1998.33 This degree of investment was feasible only with a commensurately high level of savings, and as the World Bank (1996, 13) noted, China’s growth-engendering capital accumulation ‘was supported by an extraordinarily high savings rate that has come to depend increasingly on China’s thrifty households’. The importance of financial repression raised the question of how faith in the banking system was to be maintained so as to avoid large-scale deposit withdrawals. In contrast to other transition economies in which households hold most of their hard currency in cash, China’s households were willing to retain vast sums of hard currency in state banks (Lardy 1998).

This issue of how to prevent disintermediation of capital in periods of high inflationary pressures had been faced in the late 1980s and arose again in late 1992 and 1993 when inflation peaked again at 24.3 per cent. The interest rates on sight deposits had been fixed at 2.88 per cent since the mid-1980s, and were raised only to a maximum of 3.15 per cent in July 1993 when inflationary pressure was at its highest (China Finance and Banking Society 1994). The real deposit rate was thus significantly negative. In order to stem deposit leakage from the banking system, when Zhu Rongji assumed the governorship of the PBOC in 1993 he indexed long-term interest rates to inflation, encouraging the public to hold more illiquid savings deposits (Table 4.2).

These moves had the effect at least of stemming the withdrawal in 1992 and 1993 of capital from the banks in the face of inflationary pressures. However, interest rates on sight deposits remained highly negative during the years of high inflation between 1993 and 1995, with real interest rates averaging approximately –16 per cent across these three years. The need to maintain liquidity meant that households continued to hold as much as 35 per cent of their savings in sight deposits, such that the proceeds of this de facto tax on liquidity provided an implicit subsidy to borrowers who benefited from interest rate repression. Nevertheless, despite this financial repression, by 1997, bank deposits had exceeded GDP, overwhelmingly underpinned by household savings (Figure 4.1).

Table 4.2. Long-term interest rates, 1994–95

Source: Wei (1999)

The efforts by the central government to prevent disintermediation of both household and enterprise savings were underpinned by controlling interest rates. This remained a form of control that mediated between the needs of households and enterprises by subjecting the banking system to significant financial pressure. It was only by entrenching the relationship of mutual dependency between the PBOC and the banks that it was possible to avoid both a banking crisis and a ratcheting up of pressure upon financially fragile SOEs, without producing further inflationary pressure. What liberals had hailed as a milestone in 1993 for financial reform was at the same time being actively undermined by the utilization of the banking system as a system for the PBOC to implement monetary policy as well as retain control over industrial policy and financial intermediation.34 The underlying dynamics of the relationship between households, enterprises and China’s rapid industrial development were thus established, with the banking system residing at its core.

Figure 4.1: Savings levels, 1978–96

Source: Almanac of China’s Finance and Banking 1996

New sources of capital: equity markets

Since the commencement of reform, the fundamental channel for the flow of capital throughout the Chinese economy has remained one of bank credit (Wu 2012b). It was nevertheless inevitable that the prospect of establishing financial exchanges as mechanisms for the allocation of capital was one that would have to be grappled with, as the CCP sought to reduce the degree of direct political intervention in the financial system. Deng Xiaoping had resolutely answered the question of the relationship between the market economy and socialism. Financial markets embody acutely its logical extension, ‘does capital itself have to be capitalist?’.35 During his Southern Tour, Deng (1993, 373) had the following to say on the topic of financial markets:

Securities, stock markets, are they good or evil? Are they dangerous or safe? Are they unique to capitalism or also suitable to socialism? Let’s try and see. Let’s try for one or two years; if it goes well we can relax controls, and if it goes badly we can correct or close it. Even if we have to close it, we may do it quickly, or slowly, or partly. What are we afraid of? If we maintain this attitude, then we will not make big mistakes.

The Shanghai (SHSE) and the Shenzhen (SZSE) Stock Exchanges were established in December 1990. By the end of the 1991, the SHSE had eight listed stocks and twenty-five members, whilst the SZSE had six listed stocks and fifteen members (CSRC 2008, 159). Following the ‘August 10 incident’ in 1992, the central government recognized the need to bring the emerging capital markets under a systematic framework of control.36 The CSRC was established in October 1992. This further led to the State Council in December 1992 promulgating the first set of comprehensive regulations for capital markets (PRC State Council 1992b). One of the architects of the CSRC was Gao Xiqing, who has described himself (Duke Law School 2005, 22) as a ‘Lei Feng type – a small cog in a huge Party machine, and wherever they put me I’m happily there’.37 When drafting the initial regulations for the capital markets, Gao says that

[my colleagues and I] tried to copy [the American securities system] in many ways, we also borrowed rules from the British, Taiwanese, Japanese, and German systems, because the American rules of laissez faire just wouldn’t work in China. People wouldn’t agree to it. Even after all these years, we have a system that looks on the surface like others, but when you talk about the enforcement level, and the actual details of the laws, it’s very different. (Duke Law School 2005, 23)

Although the CSRC would emerge during the 1997 National Financial Work Conference as the pre-eminent regulator over the financial markets, the State Council Securities Commission [国务院证券委员会] was established at the same time in October 1992 in order to provide overall macroeconomic management of the emerging securities markets. Further, the Securities Supervision Office of the PBOC had been established in May 1992 (CSRC 2008).

The scope for the development of capital markets that operated according to the ideals of Western principles was limited owing to the weaknesses of the banking system, and the fact that unfettered competition for the banking system was not a prospect that the CCP was willing to countenance (Xie 1994). The fate of the capital markets remained intimately connected to that of the SOCBs. However, this was not of material concern for those policymakers who had provided the original impetus and sanction for the formalization of these markets to begin with, as the objective of establishing and formalizing capital markets was to facilitate the raising of capital, rather than to achieve more efficient financial intermediation and risk management. As one government report phrased it at the time, ‘the purpose of the share system is the share system and not to issue shares to the public’ (Gao and Ye 1990, 81). Some accounts portray the emergence of stock markets as a product of the economic liberalism of the 1980s, an embrace of the concept of private ownership, and an increasing preference for free market thinking (Walter and Howie 2003). Yet notwithstanding the entrepreneurial spirit pervading Shenzhen throughout the decade, the efforts of the ‘comprehensive reform group’ along with other well-connected princelings such as Wang Qishan to advocate for the establishment of stock exchanges crystallized in Yao Yilin’s support of experimenting with such markets as new channels for the raising of capital for SOEs (Li Kehua 2000). Zhu Rongji, at the time Mayor of Shanghai, also viewed the establishment of formal stock exchanges as a useful means of retaining control and majority ownership whilst alleviating the financing burden upon the central government to maintain the investment and working capital of SOEs.

As conceived in the early 1990s, the premise of financial commercialization was to achieve a greater concordance between the flow of capital and the needs of economic development, and one mechanism with which to achieve this was competition. The experimentation with futures markets in 1993 further embodied the difficult trajectory of market development in the nascent stages of China’s acceptance of markets for capital. The extent to which policymakers were concerned with the impact of such markets upon ‘stability’ is well known, yet the contours of how this tension played out through the reform process remain obscure. The experiments with shareholding reform of medium-size SOEs in the 1980s had prompted the nascent but rapid emergence of a market for equity shares. Yet market-led competitive rationalization was not to be the premise for growth-supporting rationalization. Rather, it was the ambiguity and uncertainty embodied within the CCP itself in terms of its role in underpinning competitive economic activity that enabled it not only to remain at the centre of the financial system, but also to remain indispensable. Speaking of the relationship between capital markets and the CCP, one academic stated:

Adam Smith wrote about the invisible hand, and Americans all treat this as the most fundamental part of capitalism. But the CCP does not want an invisible hand. The CCP wants to be the invisible hand itself.38

This was reflected in the identification of the state’s priorities for commercialization and the role of capital markets:

Because the government controls the development of China’s stock markets, the guiding ideology is very important. I want to emphasize that up until today the guiding ideology in developing the stock markets is still to ‘help state enterprises resolve their problems’. (Zhang Weiying, quoted in Wang An 2000, 364–5)

It was thus in the early 1990s that the initial dynamics of the relationship between the banking system and financial markets were established. This was one of the instrumental establishment and utilization of interbank, bond, equity, and foreign exchange markets, all of which were not only minor in quantitative terms relative to the banking system, but also subordinated in role and function to the major financial institutions.

Growth and the origins of the investment binge

Changes in the institutional framework underpinning the relationship between the banking sector and the real economy precipitated a change in the structure of networks that influenced lending decisions in the 1990s. These institutional developments structured the incentives and reconfigured the structural positions of creditors, intermediaries, and debtors within the political economy so as to produce a system of allocation of capital that heavily prioritized the urban over the rural, the coastal over the interior, and produced significant intra-regional income inequality. As savers were incentivized to provide the banking system with a large supply of cheap capital, these funds were channelled across the industrial landscape in such a way as to preserve the twin compacts that existed between the CCP leadership and its major constituencies. Not only the networks of political support that pervaded the basic functional components of the political economy, but also the broader population needed to be reassured that the path of development generated an environment in which continued economic growth was sustainable.

Although the passage of the Commercial Banking Law in 1995 and the establishment of the policy banks was a clear indication to banking cadres that changes were afoot in the role of the newly created ‘commercial’ banks, this was by no means interpreted as commensurate with a wholesale transformation of the relationship between the state-owned industrial sector and the state-owned banking sector.39 Rather, there was a shift towards commercialization, with loan officers beginning to favour lending to more profitable SOEs over less-productive ones (Cull and Xu 2000; 2003).40 During the 1990s, Chinese SOCBs discriminated positively in favour of SOEs, such that those cities with higher SOE shares in total output enjoyed greater access to bank loans. In 1997, privately owned companies received only 5.7 per cent of total loans from SOCBs, notwithstanding their contribution of over 20 per cent to overall industrial output (Wei and Wang 1997).

These lending patterns were heavily concentrated through political networks that permeated all levels of the CCP. It is widely documented that in the mid-1990s it was still the case that commercial banks were disbursing loans based purely on political considerations, with no prerogative to act on the basis of commercial considerations in 90 per cent of loan decisions (PBOC 1996, 34). A variety of problematic loan relationships remained common. ‘Hatted loans’ [带帽下贷], ‘designated loans’ [点贷], and ‘special project loans’ [专项贷款] were all means by which Party officials were able to secure finance for projects both beyond the original credit plan and in order to satisfy growth targets (Li Tao 1994). This would have an adverse impact upon the credibility and viability of the credit plan, but the abolition of the credit plan was a development that was acceptable to cadres both within the bureaucracy and industry as long as they retained confidence in the underlying support of the central government and their ability to obtain the necessary finance.41 It was growth rather than profit that remained the underlying rationale for industrial policy.

This hinged upon maintaining the expectations of a large number of bureaucrats, loan officers, and managers. Just because there was a shift to the market away from central planning did not mean that the bureaucratic apparatus of the old system would simply disappear. As one veteran banker stated,

This was highly problematic of course, but at the same time it was just one of many problems. Zhu Rongji was trying to deal with inflation and inefficiency without destroying growth. But this is not easy.42

It was not easy because the only way to control inflation without destroying growth was to rely upon the existing and highly inefficient networks of lending and borrowing, rather than compelling banks to forge genuinely new and effective networks of credit flow to more commercially viable and efficient enterprises. The goals of simultaneously preserving macroeconomic stability and growth at the same time were prioritized over increasing efficiency, even as the commercialization and rationalization of the political economy were proceeding apace.43

The divergence began to emerge between the ideal of the envisaged allocation of resources [理想资源配置] and the reality of the socialist market economy as the effects of reform began to take hold. The reforms of the 1980s had left much of the urban economic structure virtually untouched. China’s labour structure was thus shifting from an emphasis upon entrepreneurs to one upon labourers as capital-intensive growth came to rapidly increase in significance and prominence. In contrast to the rural reforms of the 1980s, in which local markets and rural entrepreneurship flourished, paid employment came increasingly to be the predominant option for transitioning out of agricultural production.44 Whilst GDP growth remained high during the 1990s, it was unsustainable, concentrated upon heavy urban development, and reliant upon foreign direct investment (FDI) and the extraction of resources from rural areas, rather than indigenously sourced finance and capital. According to Huang, Chinese development in the 1980s was a rags-to-riches growth story, whilst the growth of the 1990s led to sharp income inequalities, a reduction of social opportunities available to the working population, slower income growth, and an investment-heavy growth pattern (Huang 2008). The consequence of reliance upon Party-dominated networks for financial intermediation was to generate modes of exclusion from economic and financial opportunity. In contrast to the reforms of the 1980s, in which ‘rationalizing reforms had consistently failed’ (Naughton 1995, 307), China supposedly demonstrated in the early and mid-1990s that it would ‘not be perpetually stuck in a phase of half-reformed institutions and coexisting incompatible instruments of plan and market’ (Naughton 1995, 307). Naughton was correct that fundamentally significant reform was achieved during this period, but the rationalization of the institutions and networks of economic activity that emerged through these reforms did not unfold in the manner for which he was expectantly hoping. Rather they were rationalized so as to consolidate the effectiveness of the state-owned networks of capital within an increasingly market-driven economic environment. Direct planning was replaced by indirect control, and the formal diktats of a Leninist command system were replaced by the networked edicts of an organization capable of binding together the institutions of state and market in order to generate the immediate incentives underpinning both political order and economic dynamism.

Conclusion

In this chapter I have traced how the concept of a socialist market economy provided a broad contextual frame for the development of a macroeconomic and financial policy revolving around the accumulation and investment of capital as a means of securing economic growth, without the CCP being compelled to endanger its control over these sources of growth and development. This precipitated institutional redesign in order to both stimulate and control economic growth. The institutions to emerge out of and around these policies were central to the stabilizing of expectations, but given their deliberate non-independence from the CCP, the networks between industry, finance, and Party evolved as the foundation of economic growth in the 1990s, even as the institutional framework increasingly resembled a modern financial structure. The combination of framing China’s path of development in terms of realizing a socialist market economy, and the reform and establishment of institutions that emerged as a product of this cognitive orientation, produced a financial environment that structurally produced both high rates of growth and high degrees of inefficiency, but preserved the locus of socio-political control with the CCP. The institutional transformation of the financial sector under Zhu Rongji made possible the financial repression that assured macroeconomic stability as well as a source of capital for industrial restructuring and an investment-biased growth strategy.

It is for this reason that the ‘comprehensive reform’ strategy championed by Wu Jinglian was not realized in the way that models and expectations of liberal market-oriented reform would have expected. Reviewing the turning points of 1993 in the process of reform, it is possible to identify a number of areas in which the ‘new era of comprehensive reform’ [政体改革的新阶段] had arrived, yet financial reform was conspicuous in its absence from this list (Wu 2012a).45 The imperative to maintain control over the flow of capital reflected the limits of the notion that a market economy understood through the lens of liberal Western economic theory was compatible with the continued existence of an authoritarian political system. Minxin Pei has argued that the reforms of the mid-1990s were characterized by a strong and negative influence of the political system: ‘as long as the state remains the owner of China’s largest banks, political decision-making will unavoidably prevail over commercial considerations’ (Pei 1998, 349). However when examined in the broader context of the challenges created by risk and uncertainty facing the CCP coming out of the post-1989 interregnum, and the institutional and socio-economic tools available to the CCP’s leaders, the course of reform more clearly indicates that it was not so much the case that political decision-making was unavoidable, but rather that it was essential and deliberate.

Yet this is not to assert that this consolidation of control over capital effectively rendered it a neutral force for economic and social development. The approach to the role of the market that Deng Xiaoping had framed through the concept of the socialist market economy can be understood as one in which the underlying socio-political foundations of modern Chinese society (i.e. a socialism embodied within CCP authority and rule) would be able to absorb, integrate, and utilize the market without being fundamentally threatened. The premise of Deng’s socialist market economy was that markets are neutral economic tools, capable of being deployed and manipulated in order to advance broader social goals under the direction of an ideologically cohesive Party apparatus. The separation of state and market was only ever conceived of as possible in circumstances where the Party was capable of mediating between administrative and market mechanisms of politico-economic control. However, the cognitive frames that emerged in the aftermath of Tiananmen were not limited to ‘howto’ rules, but also had profound implications on distributional outcomes and ‘orders of worth’ (Boltanski and Thévenot 2006). What Deng Xiaoping failed to appreciate, however, was the way in which markets are ‘explicitly moral projects, saturated with normativity’ (Fourcade and Healy 2007, 299–300). As Beckert notes, ‘ideological innovations might also have unintended side effects that prevent the control of their consequences even by powerful actors’ (Beckert 2010, 617).

The path of reform set in motion during the post-Tiananmen neo-conservative interregnum was successful in neutralizing the volatility of capital, but it served merely to ameliorate rather than eliminate the pressures that accrued from the concentration of profit-making (i.e. rent-seeking) opportunities within a network of firms and individuals that was simultaneously indispensable for securing the stability of the system. 46 This would come to manifest in two primary ways in 1997. The scale and severity of the issue of non-performing domestic loans to SOEs became increasingly apparent in 1997, and the quantity of toxic debt weighing upon their balance sheets was perceived as hindering their prospects of being able to attract capital and compete with foreign banks both domestically and internationally following China’s anticipated accession to the WTO in 2001. Also among the developments that would usher in a new wave of reform in 1998 was the build-up of unsustainable foreign debt. The collapse and aftermath of the Guangdong International Trust and Investment Company (GITIC), and the onset of the Asian financial crisis would have profound impacts upon the future evolution of the financial system’s role in China’s path of development through the late 1990s and 2000s.

China’s leadership was beginning to grapple with the inevitable challenge of integrating China’s financial institutions into the global financial order. Having built what appeared to be an institutionally complete and thus ‘modern’ financial system, its potential to raise and then allocate capital for China’s ongoing CCP-led growth strategy was to become increasingly reliant upon new stakeholders. As Chapter 5 details, they would increasingly recognize that along with the reliance upon capital holders, and especially foreign capital holders, would come an ever-more acute need to manage expectations and maintain broad faith and confidence. The path of reform would involve the increasing commercialization of financial institutions and the rationalization of state administrative functions. Yet the ongoing pursuit and acceleration of economic growth was possible only through a concomitant deepening of the central role of the CCP in managing uncertainty, even as it exploited that uncertainty to preserve political and economic control.

Notes

1Interview, 29 November 2012, Beijing – Deutsche Bank Greater China.

2As Zhu Rongji (Zhu 2011 [1994], 128) unambiguously stated it in 1994 in an address to a symposium of central bank branch presidents in 1994: ‘if prices aren’t stable, people’s hearts won’t be stable, and we won’t be politically stable’.

3This produced the notably unsuccessful period of austerity of late 1989 and 1990. See Naughton (1995, 273–83).

4In the aftermath of 1989, Song Ping, along with Yao Yilin one of the most conservative members of the PSC, promulgated a set of criteria for the career advancement of CCP cadres that stressed ideological purity, contending that ‘in assessing the performance of officials, Marxist morality should come before ability … cadres should have both ability and political integrity with [the latter] being more important]’. Political integrity was further defined by Song (1991) as a cadre’s behaviour during the ‘political disturbance of 1989’.

5‘Peaceful evolution’ was regarded as a process by which subversive elements of bourgeois liberalization and capitalism would gradually and innocuously permeate society, politics, and the economy.

6The four cardinal principles [四项基本原则] are (1) the principle of upholding the socialist path; (2) the principle of upholding the people’s democratic dictatorship; (3) the principle of upholding the leadership of the Communist Party of China; and (4) the principle of upholding Mao Zedong thought and Marxism-Leninism. Twenty years on from Tiananmen, these four principles remain at the heart of CCP orthodoxy for the country’s political direction (China’s Future Direction Editorial Group 2009).

7Deng (1989, 200–1) had first announced this signature epithet in June 1989, only five days after having cleared Tiananmen Square.

8正名 [zhengming – the rectification of names] is a concept deployed in Confucian philosophy, rooted in the principle that order, harmony, and justice in the world are contingent upon social and physical objects being labelled and designated correctly, such that they exist and function in their normatively appropriate position. For example, Xunzi, a later Confucian scholar, exemplified its application to the political realm, arguing for the importance of the maxim ‘Let the ruler be ruler, the subject subject; let the father be father, and the son son’. See Staal (1979, 8).

9This dovetails with Wu Jinglian’s observations at the 1990 conference on economic issues convened by the central party leadership on 5 July, where he argued that ‘the slogan ‘planned economy should be merged together with the market’ was inappropriate, and rather what should be promoted is the concept of the 12th 3rd plenum ‘socialist commodity economy’, which in reality is the same thing as a ‘socialist market economy’. See (Wu 2012a, 120–1)

10Interview 7 April 2013, Beijing – retired party committee member, SOCB.

11Interview 13 July 2013, Beijing – CASS.

12A seminal decision of the CCP dedicated to bringing under control the macroeconomic instability that had developed in the aftermath of Deng’s Southern tour and the Fourteenth Party Congress. See Central Committee of the Communist Party of China (1993b).

13Interview 8 June 2012, Beijing – China Construction Bank.

14Interview 14 April 2014, Beijing – Tsinghua University.

15Interview 14 May 2012, Beijing – Development Research Centre of the State Council.

16Triangular debt was interfirm indebtedness within the SOE sector and a consequent reliance upon extensive working capital loans from the banking sector in order to overcome constant cash and liquidity shortages.

17One comprehensive study of China’s growth also examines the contribution of the accumulation of human capital, which arose out of the liberalization of the labour market. See Knight and Ding (2012).

18Just these three officials would count between them leading positions at the CBRC, CSRC, BOC, CCB, PBOC, MOF, SAFE, NDRC, CIC, and the Shandong Provincial Government, amongst a plethora of other party-related positions.

19Interview 27 May 2012, Beijing – Chinese Academy of Social Sciences; Interview 12 December 2012, Beijing – Development Research Centre of the State Council.

20Departments for macroeconomic analysis, industry, and agriculture were added to the CFELG in the mid-1990s, and Jiang further installed a large number of Shanghai Clique-associated protégés within key leadership positions, such as Zeng Peiyan and Hua Jianmin.

21Interview 14 April 2014, Beijing – Chinese Academy of Social Sciences.

22This arose out of Zhu’s consolidation of control over the central economic bureaucracy, reflected in the appointment of his protégés Dai Xianglong in 1995 and then Zhou Xiaochuan in 2003 to the position of PBOC Governor.

23Interview 21 October 2012, Beijing – People’s Bank of China.

24Interview 21 October 2012, Beijing – People’s Bank of China.

25Interview 10 October 2012, Beijing – People’s Bank of China.

26As a matter of translation, the official name of the bank should be rendered in English as the National Development Bank, but since the CDB itself adopts ‘China’ rather than ‘National’, I do the same.

27The initial first governor of the CDB was Yao Zhenyen, who was entirely unconcerned with the source of funds of CDB projects. Interview 30 May 2012, Beijing – Beijing Normal University.

28Interview 21 October 2012, Beijing – People’s Bank of China.

29Interview 7 April 2013, Beijing – China Banking Regulatory Commission.

30Interview 5 June 2012, Beijing – Chinese Academy of Social Sciences.

31Interview 10 June 2012, Beijing – Chinese Securities Regulatory Commission.

32Interview 10 October 2012, Beijing – People’s Bank of China. The first sign of interest rates becoming more directly responsive to market conditions was the Provisional Regulation on Strengthening Interest Rate Administration, a planning document issued by the PBOC in 1988. However, the basis for this responsiveness was a strengthening of the authority and mediating capacity of the central bank, rather than any relinquishing of authority or influence over the determination of specific interest rates (PBOC 1988).

33Of the 9.5 per cent total output growth over this period, capital accumulation accounted for 6.4 per cent, labour force growth accounted for 0.5 per cent, and total factor productivity growth accounted for 2.6 per cent (Heytens and Zebregs 2003).

34Interview 15 April 2014, Beijing – China Banking Regulatory Commission.

35Interview 7 April 2013, Beijing – China Banking Regulatory Commission.

36On 10 August 1992, upwards of half a million individuals waited for a share subscription that was to be issued by the Shenzhen branch of the People’s Bank of China. When the number of subscription forms distributed was obviously less than had been promised, enraged prospective investors rioted in the streets.

37Lei Feng (1940–62) was a soldier of the People’s Liberation Army, who was characterized by the CCP and China’s leaders as a selfless model citizen devoted to the CCP, Mao Zedong, and the people of China. Following his accidental death he became the subject of a posthumous national propaganda campaign ‘Follow the example of Comrade Lei Feng’ [向雷锋同志学习]. Gao Xiqing’s remarks are further interesting for the fact that as one of the early ‘returnees’ [海龟] he is one of the more ‘Westernized’ financial policymakers and regulators.

38Interview 4 June 2012, Beijing – National School of Development, Peking University.

39Interview 14 June 2012, Beijing – Baoshang Bank; Interview 10 October 2012, Beijing – People’s Bank of China.

40Interview 10 October 2012, Beijing – People’s Bank of China.

41Interview 24 November 2012, Beijing – Tsinghua University.

42Interview 15 April 2014, Beijing – Agricultural Bank of China.

43Interview 20 June 2012, Beijing – Institute of Finance and Banking, Chinese Academy of Social Sciences; Interview 15 April 2014, Beijing – Agricultural Bank of China.

44The drive for capital-intensive growth thus precipitated a profound transformation in the income sources and profiles of rural residents.

45Interview 12 December 2012, Beijing – Development Research Center of the State Council.

46As Riedel et al. (2007, 73) have argued, ‘repairing a repressed financial system necessarily involves more than changing financial policy. It requires nothing less than a fundamental reorientation of development strategy, which inevitably entails heavy economic, political, and social costs.’

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