Determination of Prices

Until the reform period of the late 1970s and 1980s, the prices of most commodities were set by government agencies and changed infrequently. Because prices did not change when production costs or demand for a commodity altered, they often failed to reflect the true values of goodÍÍÍÍs, causing many kinds of goods to be misallocated and producing a price system that the Chinese government itself referred to as "irrational."

The best way to generate the accurate prices required for economic efficiency is through the process of supply and demand, and government policy in the 1980s increasingly advocated the use of prices that were "mutually agreed upon by buyer and seller," that is, determined through the market. The prices of products in the farm produce free markets were determined by supply and demand, and in the summer of 1985 the state store prices of all food items except grain also were allowed to float in response to market conditions. Prices of most goods produced by private and collectively owned enterprises in both rural and urban areas generally were free to float, as were the prices of many items that state-owned enterprises produced outside the plan. Prices of most major goods produced by state-owned enterprises, however, along with the grain purchased from farmers by state commercial departments for retail sales in the cities, still were set or restricted by government agencies and still were not sufficiently accurate.

In 1987 the price structure in China was chaotic. Some prices were determined in the market through the forces of supply and demand, others were set by government agencies, and still others were produced by procedures that were not clearly defined. In many cases, there was more than one price for the same commodity, depending on how it was exchanged, the kind of unit that produced it, or who the buyer was. While the government was not pleased with this situation, it was committed to continued price reform. It was reluctant, however, to release the remaining fixed prices because of potential political and economic disruption. Sudden unpredictable price changes would leave consumers unable to continue buying some goods some previously profitable enterprises under the old price structure would begin to take losses, and others would abruptly become very wealthy.

Data as of July 1987