IN THE LATE 1980s the Chinese economy was a system in transition, moving cautiously away from central planning and gradually adopting some of the institutions and mechanisms of a market economy. The process of economic reform began in earnest in 1979, after Chinese leaders concluded that the Soviet-style system that had been in place since the 1950s was making little progress in improving the standard of living of the Chinese people and also was failing to close the economic gap between China and the industrialized nations.

The first major success of the economic reform program was the introduction of the responsibility system of production in agriculture, a policy that allowed farm families to work a piece of land under contract and to keep whatever profits they earned. By 1984 the responsibility system had dramatically increased food production, and the government had eliminated the people's communes--the hallmark of Chinese socialism for over twenty years. In most other sectors of the economy the role of government was reduced, managers were given more decision-making power, enterprises were encouraged to produce for profit, the role of the private sector increased, and experimentation with new forms of ownership began in the state sector. Constraints on foreign trade were relaxed, and joint ventures with foreign firms were officially encouraged as sources of modern technology and scarce foreign exchange. With rising incomes, greater incentives, and rapid growth in the service and light industrial sectors, the People's Republic of China began to exhibit some of the traits of a consumer society.

Movement toward a market system, however, was complex and difficult, and in 1987 the transition was far from complete. Relaxing restrictions on economic activity quickly alleviated some of China's most pressing economic difficulties, but it also gave rise to a new set of problems. Inflation--the greatest fear of Chinese consumers--became a problem for the first time since the early 1950s, and along with new opportunities to seek profit came growing inequality in income distribution and new temptations for crime, corruption, and Western cultural styles, regarded by many older Chinese people as decadent and "spiritually polluting." The state still owned and controlled the largest nonagricultural enterprises, and the major industries were still primarily guided by the central plan.

Thus, the Chinese economy in the late 1980s was very much a mixed system. It could not be accurately described as either a centrally planned economy or a market economy. The leadership was committed to further expansion of the reform program as a requisite for satisfactory economic growth, but at the same time it was compelled to keep a tight grip on key aspects of the economy- -particularly inflation and grain production--to prevent the emergence of overwhelming political discontent. Under these circumstances, forces in the economic system worked against each other, producing what the Chinese leadership called internal "contradictions." On the one hand, the economy was no longer tightly con 1000 ntrolled by the state plan because of the large and growing market sector. On the other hand, the market could not operate efficiently because many commodities were still under government control and most prices were still set or restricted by government agencies. Under the leadership of Deng Xiaoping, the entire nation was "riding the tiger"--making great progress but not entirely in control--and therefore unable to stop the process without risk.

Despite the burst of progress in the 1980s, the Chinese economy still shared many basic characteristics with the economies of other developing countries. The gross national product per capita in 1986 was -Y849 (for value of the yuan--see Glossary), or about US$228 (at the 1986 exchange rate), reflecting the low average level of labor productivity. As in many countries that did not begin sustained industrialization efforts until the middle of the twentieth century, the majority of the Chinese labor force--over 60 percent--was still employed in agriculture, which produced around 30 percent of the value of national output. Agricultural work still was performed primarily by hand. Modern equipment was in general use in industry but was largely typified by outdated designs and low levels of efficiency.

In other respects China's economy was quite different from those of most developing nations. The most important difference was that the Chinese economy--although in the midst of far-reaching changes--was organized as a socialist system, directed by a central planning structure. The predominance of state and collective ownership, firm central control over the financial system, redistribution of resources among regions, rationing of grain, and subsidized provision of housing resulted in a pattern of income distribution that was much narrower than those in almost all other developing countries. There was relatively little true capitalism in the form of private ownership of productive assets. Agricultural land was farmed under lease by farm households but was formally owned by villages, towns, and townships--the collective units that had replaced the rural commune system.

In the mid-1980s most Chinese were still very poor by American standards, but several important measures indicated that the quality of their lives was considerably better than implied by the level of gross national product (GNP) per capita. According to World Bank data, in 1984 energy consumption per person was 485 kilograms of oil equivalent, higher than that for any other country ranked as a low-income country and greater than the average for lower middle-income countries. In 1983 the daily calorie supply per capita was 2,620--11 percent above the basic requirement and nearly as high as the average for countries classified as upper middle-income countries. Significantly, infant mortality in 1985 was 39 per 1,000, well below the average for upper middle-income countries, and life expectancy at birth was 69 years, higher than the average for upper middle-income countries.

Despite the major economic gains made by China since 1949 and the dramatic advances of the 1980s, serious imbalances and deficiencies have persisted. Contributing to these deficiencies were the political turmoil that disrupted the economy during the Cultural Revolution decade (1966-76), insufficient flexibility in the planning process, and serious inaccuracies in price structures. Power shortages, inadequate transportation and communication networks, shortages of technicians and other highly trained personnel, insufficient foreign exchange for procurement of advanced technology from other countries, and inadequate legal and administrative provisions for both foreign and domestic trade further hindered modernization.

An important by-product of the reform program since the late 1970s has been an enormous increase in the amount of information available on the economy. The government collected and published basic national economic data in the 1950s, but the centralized statistics-kee 813ping sysystem broke down at the end of the 1950s, and very little statistical information was available during the 1960s and early 1970s. It was not until 1979 that the State Statistical Bureau ended the statistical "blackout" with the publication of an economic statistical communique. In subsequent years the State Statistical Bureau published larger and more frequent compendia, including annual almanacs of the economy and annual statistical yearbooks, which became progressively more sophisticated and informative. In addition, most provincial-level units and cities, as well as the major industries and economic sectors, such as coal mining and agriculture, began to produce their own specialized statistical yearbooks. In the early 1980s, numerous new periodicals, many of which specialized in economic data and analysis, started publication. Although Chinese statistical definitions and practices still differed from those in the West in many respects and the accuracy of some figures was called into doubt even by Chinese economists, foreign analysts in 1987 had access to a rich and growing body of data that would support extensive analysis of the Chinese economy.

Data as of July 1987