Prisoner of the State: The Secret Journal of Premier Zhao Ziyang

by Adi Ignatius

  Until that moment, Deng Xiaoping still considered Chen Yun the primary decision maker on economic issues. In his mind, decades of experience had shown that Chen Yun had the deepest understanding of economic issues and was wiser than he. Even though the situation was not to his liking, he expressed support for Chen Yun.

  [Communist Party General Secretary Hu] Yaobang did not say anything at the meeting. In my opinion, he did not entirely concur but found it difficult to express opposition, since two elders had proposed the measure and another had agreed to it. However, after a year had passed, in spring of 1982, when Yaobang visited the provinces for inspection, he said “the 1981 readjustment has caused the economy to take a dip.” Naturally, when this reached Chen Yun’s ears, he was not pleased.

  Even though I was the leader of the Central Economic and Financial Leading Group, I had just joined the central leadership and was not yet familiar with the national economic situation. I genuinely trusted Chen Yun. Even though his opinion differed from my idea of “doubling in ten years,” I had agreed with Comrade Chen Yun’s idea. In hindsight, the further readjustment had been necessary, and the end results were good.

  For a time after the Third Plenum of the 11th Central Committee [1978], our economy was still in a hole. For many years—before and during the Cultural Revolution—we had been lagging in many respects, including urban construction, agriculture, and people’s living standards. To shift to a healthier economic state, we had to go through a process of “re-learning.” In this situation, it was impossible to attain rapid economic development. Nor was it possible to engage in large-scale infrastructure construction.

  For example, in order to revive the rural economy and enhance incentives for farmers, the prices of agricultural goods were raised. The aim was to reduce the urban-rural income gap. I was still in Sichuan when the policy was put forward, and I participated in the discussion. There were two key points. First, prices for agricultural and other rural products had to be raised, or else farmers would not have incentive to produce. Second, even though it was impossible at the time to remove the state monopoly on agricultural and other rural products, the quotas for mandatory procurement had to be reduced, especially in major grain-producing areas. For years, those quotas had been too high. Farmers had to work too hard to meet them.

  After the Third Plenum of the 11th Central Committee, there were good harvests several years in a row: 1979, 1980, 1981, 1982, 1983, and 1984. The rural areas experienced a new prosperity, in large part because we resolved the issue of “those who farm will have land” by implementing a “rural land contract” policy. The old situation, where farmers were employees of a production team, had changed; farmers began to plant for themselves.

  The rural energy that was unleashed in those years was magical, beyond what anyone could have imagined. A problem thought to be unsolvable had worked itself out in just a few years’ time. The food situation that was once so grave had turned into a situation where, by 1984, farmers actually had more grain than they could sell. The state grain storehouses were stacked full from the annual procurement program.

  Two other factors contributed to the change. One was the elevated price of agricultural products. Farmers could make a profit from farming. The other was the reduction in the quotas for mandatory state procurement, which meant taking less food out of the mouths of farmers.

  For more than two decades, farmers had not had enough to eat after handing over the grains they had produced to the state after every harvest. Of course, the reason that we were able to introduce this new policy was because the Third Plenum of the 11th Central Committee had decided that China could import grains. Comrade Chen Yun said the imports were allowed so that industrial crops could be preserved, but in fact, the imports fulfilled urban consumption demands, thereby reducing the rural mandatory procurement quota [purchased in part for urban markets]. The quantity of grain imports was huge in those years, between 10 million and 20 million tons. Major grain-producing regions could sell their surplus at a higher price and make a profit. Together, all of this gave rural areas instant prosperity.

  These policy implementations came at a cost. While the prices of agricultural products had gone up, urban food prices could not be immediately raised, since urban workers had limited purchasing power. Therefore we had to finance additional subsidies for agricultural and other rural products. At the same time, foreign currency was needed to import grains, which affected the import of machinery. Plus, urban housing needed to be expanded. And since factories now had more autonomy, the wages and bonuses of the workers were raised. All of this involved additional expenditure. But these things all were part of the recovery process, which paved the way for the good situation of later years.

  After the Third Plenum of the 11th Central Committee, our country’s financial revenue gradually declined in proportion to the gross national product, while expenditures steadily increased, thus resulting in a deficit. This was the price we had to pay; it was normal and solvable. In 1984, I began proposing a gradual raising of the revenue-to-GNP ratio. To reduce the deficit, we temporarily scaled back infrastructure construction and reduced the pace of economic development. There was no other choice.

  If we had ignored the situation and launched an “all-out fast-paced campaign,” we would have faced seriously high inflation and put greater strains on farmers and workers. The readjustments in 1979 and 1980 and again in 1981 had been necessary. As a result of the 1981 readjustments, the agricultural sector continued to enjoy big harvests, the market continued to prosper, and the nation’s economy showed no negative growth. On the contrary, the economy grew by an annual rate of 4 percent. And as the readjustment deepened in 1981, growth increased. The growth rate in the first quarter was relatively low, the second quarter was better, the third quarter was higher, and the fourth quarter was significantly higher. This proves the readjustment was good and the economy had recovered.

  Here’s how we kept the economy growing: by scaling back infrastructure projects and reducing heavy industry, iron and steel production, and machinery production; by expanding light industries such as consumer products and textiles while allowing and encouraging private businesses; by developing service industries. The cities continued to prosper and living standards continued to rise. Employment rates rose. In the end we achieved a balanced budget and the people were generally more satisfied.

  That said, the policy had its shortcomings. We still hadn’t entirely corrected the traditional way in which the Planning Commission cut back on infrastructure projects, which was to “cut straight across the board.” With the old system still in place, it was hard not to do so, and so we set quotas for each region.

  In order to save projects that really should not be cut, however, I asked the Planning Commission to be flexible with a part of the budget so that we could revive some of these projects. After the general spending reduction, we reviewed which cuts would incur too great a loss, or which projects were so beneficial they should continue. Of course, there could not be a large number of exceptions, but we were able to reduce the negative impact of “cutting straight across the board.”

  Still, in retrospect, the readjustment was too severe. We should have made exceptions for all projects where equipment had already been received or was urgently needed and could be installed and put into production quickly. This would have been more cost effective, particularly if you consider the cost of storage. Even though some of these projects resumed a year later, time and money was wasted. Some of the projects took years to recover.

  The reason we didn’t take more flexible measures was mainly because we lacked sufficient domestic funds to pay for these projects; the deficit needed to be reduced so that a financial balance could be achieved. It was all too mechanical.

  For example, if the deficit had not been eliminated immediately and some of the budget had been spent on worthwhile projects, the investment could have been returned in a year or so. And under the open-door policy, we could have r
esolved the problem by taking out more foreign loans.

  But Chen Yun was concerned and firmly insistent. He was afraid of excessive and overly large projects and insisted on the reductions. At the time, there were things we didn’t clearly understand, since we did not have enough experience.

  3

  Opening Painfully to the World

  Along the coast, China’s leaders set up several Special Economic Zones for free-market experimentation. By limiting such reforms to these few areas, China’s liberals avoid the kind of costly political debates that could have stymied any nationwide effort to adopt these liberal policies.

  When it becomes clear that the SEZs really are becoming capitalist enclaves, however, Chen Yun fights back, launching the “Strike Hard Campaign Against Economic Crimes.” Zhao and Hu Yaobang feel powerless to stop the influential Party elder.

  There are other clashes in the early days of China’s opening up to the outside world. A plan to lease property on Hainan Island to a foreign investor, for example, triggers a major controversy. Many argue that such a deal would compromise China’s sovereignty. In the end Zhao convinces Deng Xiaoping that there is nothing to fear.

  Comrade Chen Yun was deeply concerned about the open-door policy, and his differences with Deng Xiaoping were quite pronounced.

  The Special Economic Zones (SEZs) were proposed by Deng Xiaoping. He gave approvals for Shenzhen and Zhuhai in Guangdong Province and Xiamen in Fujian Province, and would later add others. Chen Yun had always objected to the idea of SEZs. He never set foot in any of them. I’ve heard that he sent envoys to the SEZs who at first returned with negative reports, but later were more positive. But he always had doubts and objections.

  At the December 1981 meeting of provincial and municipal secretaries of Party committees, and in his talk with leaders of the Planning Commission who visited with him during the Spring Festival, Chen Yun emphasized that the primary purpose of the SEZs was experimentation and learning. He added that SEZs could not be expanded any further and that we must make note of their negative aspects.

  Originally, there were to be more SEZs along the coastal regions, including around Shanghai and in Zhejiang Province. But Chen Yun said that those areas were not to establish SEZs. This region, as Chen Yun put it, was famous for its concentration of opportunists who would, with their consummate skills, emerge from their cages if given the slightest chance. The Research Office of the Secretariat directed by Deng Liqun also collected material that attempted to prove that the SEZs would degenerate into “foreign concession zones.” At one point, these criticisms were widespread, a result of the influence of Chen Yun and Deng Liqun.

  On the issue of foreign investments, Chen Yun was completely at odds with [Deng] Xiaoping. Xiaoping believed in bringing in large-scale foreign investments. He believed it was difficult for a developing economy like China’s to take off without foreign investment. Of course, he only dealt with major issues and didn’t intervene much as to how this might be brought about. But he supported all of it: preferential loans, nonpreferential loans, joint ventures. Chen Yun was very cautious about foreign investments. The case file for the Shanghai-Volkswagen joint venture remained in his office for a long time before he finally gave his consent.

  Chen Yun believed that foreign direct investments [FDI] were not the solution for China’s development. He often said that foreign capitalists were not just looking for normal profits, but “surplus profits.” In other words, it would be impossible to gain any benefits from FDI. He often warned Gu Mu, who was in charge of foreign trade and economic affairs, to raise the level of vigilance. He said that preferential loans extended to China by foreign entities were for buying equipment. Though these appeared to be preferential, the purpose was [for foreign companies] to export products and the discount in loans was made up for in the profits made selling the products. When taking such loans, we had no freedom to choose, but were forced to buy designated products. FDI without spending limitations came with very high interest rates, which we could not afford.

  He was also critical of joint ventures. I felt that Chen Yun’s thoughts were stuck in the theoretical expressions of “finance-capital” found in Lenin’s On Imperialism. After reforms had been launched, he read Lenin’s On Imperialism again. He once told me that Lenin’s characterization remained valid, and that we were still in the era of imperialism.

  The “Strike Hard Campaign Against Economic Crimes” began in the coastal regions in January 1982. It started with an urgent notice sent in the name of the Central Committee, and it would have enormous repercussions. At the time I was in Zhejiang. I learned later that the campaign was begun in response to a report about smuggling activities in Guangdong that had been sent to the Central Discipline Inspection Commission.

  On the document Chen Yun wrote a note, calling for “a hard and resolute strike, like a thunderbolt.” Afterward, [Party General Secretary Hu] Yaobang chaired a Secretariat meeting and issued the urgent notice. In March, after my return to Beijing, the Central Committee held a special symposium on Guangdong and Fujian provinces and disseminated a summary nationwide, directing other regions to act in line with the spirit of the document. In April, the Central Committee and the State Council again issued a “Resolution to Strike Hard Against Serious Economic Crimes.”

  In 1981, the reforms were still new. This nationwide campaign, conducted in the coastal regions, brought enormous harm to them. The reforms had revitalized the economy but also led to activities such as smuggling, speculation, bribery, and the theft of state property. But they should have been dealt with on a case-by-case basis.

  Instead, the extent of the problem was overestimated and an inappropriate determination was made. The unavoidable circumstances that accompanied efforts to relax rules in the name of stimulating the economy were characterized as “the important manifestations of class struggle in the new environment” and “the result of sabotage and erosion of our system by class enemies using decayed capitalist thought.”

  It was also stated that “bourgeois lifestyles have been on the rise.” And it was proposed that “from now on, the struggle against the corruption from decayed bourgeois thoughts shall be strengthened. Emphasis is placed on preserving the purity of communism in the process of reform.”

  This kind of labeling and the way in which the campaign was conducted inevitably affected issues that were emerging with reform. The overreaction toward smuggling in Guangdong and other coastal regions had much to do with Comrade Chen Yun’s objections and suspicions of reform and economic stimulation. He believed that these were dangerous policies.

  When the strike against economic crimes was proposed, it was announced that the SEZs must also uphold “planned economy as primary, market adjustments as auxiliary.” This would have rendered the SEZs meaningless. He [Chen Yun] also announced the strengthening of central control over foreign trade: there was to be no trade or economic activities with foreigners except involving companies designated by the state and these had to follow official rules and procedures. As a result, some powers that had already been handed down to the SEZs were taken away. He also set guidelines for increased quotas for mandatory state procurement of agricultural and rural products and a reduction in high-priced procurements. He then proposed limiting workers’ bonuses in the coastal region to a level only slightly higher than those in the inner provinces.

  The strike against economic crimes had turned into a campaign against economic liberalization. It took back some of the power that had been handed down. Permission for Guangdong and Fujian provinces to proceed with special and flexible policies had been stripped down to almost nothing.

  Chen Yun played a major role in causing this situation. The trigger was the report of the Central Discipline Inspection Commission, but without Chen Yun’s directive in response, there would have been no such campaign. Hu Qiaomu [a conservative Politburo member who had once been Mao’s secretary] also played a very harmful role.

  Deng Xiaoping perhaps did
not realize the seriousness of the matter, because he had always tried to manage reform with one hand while curbing economic crimes with the other. He did not seem aware of how seriously this campaign could impact the overall implementation of reform. Both Yaobang and I were caught in a passive position. Even though the urgent notice was issued by a Secretariat meeting chaired by Yaobang, he was merely executing an order.

  Even though the Guangdong and Fujian provinces symposium was held by the two of us and we both spoke at the meeting, we were in a bind. At the meeting, comrades from both provinces expressed deep concerns. They believed that such a campaign would make it difficult to deploy any special policies or flexible measures. On the one hand, both of us had to persuade them to accept the notice passed down by the Central Committee, but on the other hand, we needed to persuade Comrade Chen Yun to protect reform programs as much as possible, to minimize harm to the excellent situation that reforms had brought to the coastal region.

  During the proceedings of the meeting, Comrade Chen Yun proposed removing Ren Zhongyi, the Guangdong Provincial Party Committee secretary. He believed that places such as Guangdong and Fujian should not have leaders like Ren Zhongyi, who were “so clever,” but should be led instead by people who were very principled, or in Chen Yun’s words, “as firm as an unmovable nail.”

  Yaobang and I repeatedly appealed to him, until Chen Yun finally gave up. One reason was that he could not come up with a suitable replacement on short notice. The one person he proposed for the position was suffering from health problems, so he was forced to give up.

  The campaign, which lasted over a year, caused a lot of problems. Some mistakes or shortcomings in people’s work were taken as crimes. There were many instances of convictions without a crime and severe punishments for minor infractions. Situations originally viewed as a benefit of reform were treated as profiteering and embezzlement.