CHINA'S URBAN REFORMS AND THE MAN-ON-THE-STREET

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP93T01142R000100240018-8
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 9
• Document Creation Date: December 27, 2016
• Document Release Date: August 22, 2011
• Sequence Number: 18
• Publication Date: March 22, 1985
• Content Type: MISC

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Central Intelligence Agency
DIRECTORATE OF INTELLIGENCE
22 March 1985
China's Urban Reforms and The Man-on-The-Street
Summary
Beijing's decision last fall to extend economic
reforms to urban areas--trying to duplicate the success
achieved in the countryside--has, we believe, created
concern and confusion among urban workers. After decades
of Maoist ideology and industrial policies, which eroded
the Chinese work ethic, Beijing's reforms seem to be
asking the man-on-the-street to work harder, accept
variable wages, forgo automatic bonus payments, and
accept job insecurity, some inflation, and possible
layoffs. Moreover, the government seems intent on
reducing China's elaborate system of urban subsidies,
which may be equivalent to actual per capita urban
incomes. In our view, many urban residents will be
reluctant to support these reforms, and probably view
them as threatening. Beijing, nonetheless, clearly is
banking on the workers being able to reap quick results
to win acceptance of its policies. Tangible results and
a perception of a unified leadership committed to the
policies--which we see lacking now--will be critical in
alleviating the concerns of the urban worker.
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Barriers to Urban Reform
The success of China's rural reforms, which enjoyed strong grassroots
support from peasants, encouraged Beijing last fall to institute similar
changes in the urban economy. We believe, however, that the average urban
dweller, in contrast to the peasants, will be less excited about economic
reforms. Peasant enthusiasm, which ensured the success of agricultural
policy changes, was based upon farmers' perception that they could reap
immediate gain from the new policies. Urban refolicies, however, are
As with agriculture, the urban program aims to raise efficiency by
introducing market incentives, employing so-called "economic levers" such as
prices, taxes, and interest rates, and by forcing enterprises to compete.
The average man-on-the-street appreciates the promised fruits of economic
reforms: more variety and greater availability of foodstuffs, growing
supplies of stylish clothing, better quality bicycles, color television sets,
washing machines, and heretofore unavailable consumer durables, expanded free
markets, and improved services. But the reforms also mean that the average
worker faces potentially serious dislocations--in his workplace, home, and
In the Factories--Concern over Possible Changes
Three decades of Maoist industrial and labor policies have not only
institutionalized the inefficiencies typically associated with Soviet-style
centrally planned economies, but in our view also eroded the traditional
Chinese work ethic. Motivating the urban workforce has always been a key to
achieving the economic goals set by the leadership, but prereform policies
made the task impossible. China's eight-grade wage structure had not changed
significantly since the 1950s; wage differentials were small; bonus payments
in most factories were distributed on a nearly egalitarian basis; and very
few enterprises succeeded in establishing a direct link between work effort
and pay. Moreover, absenteeism was high in most factories and
underemployment rampant. Foreign observers who visited Chinese plants
invariably noted that there seemed to be twice as m kers as jobs and
that many workers did not work very hard, if at all.
The Central Committee Decision on urban reform issued
attacks these problems by linking future worker remuneration to nrnrIi,n*;..;E,
gains.
productivity, in - ?---' part because they were limited to moderate (10 percent) wage
hikes for workers lower end of the wage scale, and avoided structural
wage reform.
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For the average Chinese worker, wage reform will mean working harder for
a wage that may rise or fall depending on the profitability of his work unit,
as well as the loss of "free" bonus payments. Bonuses were originally
intended as a managerial tool to stimulate productivity, but largely because
of the Maoist legacy of egalitarianism, bonus payments became an automatic
and expected source of additional income. Factory managers began paying
bonuses not to reward increased productivity, but to guarantee that workers
put in at least a minimum work effort. By the early 1980s, practically all
of China's factories were distributing bonus payments on a near egalitarian
basis and more often than not, the growth rate of ents far exceeded
the growth rates for either productivity or output.
In short, wage reform will create a more unstable environment for the
average worker. If successfully implemented, noncompetitive enterprises will
close and their workers will have to find new jobs. Skill levels and
education are to be more important for advancement than political ties or
seniority. Wage reform probably will also lead to the development of greater
wage differentials and to income inequality in the cities--changes that most
Chinese wnrkpr7 certainly are not used to, may not understand, and may well
oppose.
Chinese worker apprehensions about what urban reform may bring are not
unreasonable and are illustrated by the case of a celebrated reform-minded
factory manager named Bu Xinsheng. This Zhejiang province shirtmaker became
nationally renowned during 1984 as a competitive, profit-conscious urban
reformer who boldly instituted wage, bonus, and other reforms that resulted
in sharp gains for his factory. Bu quickly became a national model and his
factory was front-page news in national newspapers. According to foreign
visitors to Bu's factory, however, the shirtmaker's reformed operation more
closely resembled a 19th century sweatshop than a reform-oriented model
socialist enterprise. F__1
Bu's wage reform measures were strict. He paid workers low basic wages
with steep piece-work targets for bonuses. In addition, Bu cracked down on
absenteeism and cut welfare.costs by making workers pay for sick leave taken
beyond a couple days per year. If a worker could not measure up to Bu's
demanding standards, the worker was firms losing not only his wages, but
also his housing and his unit ID card.
These reforms earned increased profits and raised the factory's
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At Home: Fears of Rising Prices, Loss of Subsidies
The urban reforms have sparked fears of inflation among Chinese city
dwellers. Urban consumers in some areas of China rushed out immediately
after the program was announced to buy extra food and clothing. Such panic
buying of consumer goods has occurred several times in the past five or six
years, fueled by expectations of imminent price hikes and rumors of impending
wage increases. Inflationary expectations have caused Beijing to go slow on
wage reform and, more important, on price reform.
Beijing's recent decision to reduce the scope of government procurement
of agricultural goods and to permit the prices of certain nonstaple
foodstuffs to float freely in urban markets means Chinese consumers will face
fluctuations of retail prices. Chinese economic policymakers and academic
economists alike have openly predicted short-run price hikes until the market
responds and supplies increase sufficiently to reduce prices again.
Officials believe they can avoid serious or protracted inflation if they
caution-1y implement price reform and restrict growth of the money supply.
Convincing the man-on-the-street, however, will be difficult, especially
for a government that for three decades has proclaimed price stability as one
of its greatest achievements. Urban residents--especially those over the age
of 50--vividly remember the hyperinflation of the late 1940s, which helped
bring down the Nationalist government, and they may find unconvincing
government as at real incomes will not diminish as a result of the
new policies.
The reforms also directly threaten the elaborate system of subsidies, or
as the Chinese call it, the "iron rice bowl," that urban workers have come to
depend on. Subsidies in China's cities are all-pervasive. From the time the
urban residents wake up in the morning (boiling subsidized noodles using
subsidized fuel) until they go to bed at night (in rent-subsidized
apartments), Chinese workers lead the ultimate--next to cadres--in sheltered
living, and not surprisingly have developed a welfare mentality.
The typical Chinese factory provides subsidized housing, child care,
cinemas, schools, medical facilities, and low-cost meals in dining halls.
Visiting a state-owned enterprise is like entering a self-sufficient city
within a city. The reform-minded Chinese leadership refers pejoratively to
factories that strive for such self-sufficiency as "large and complete" or
"small and complete," and evidently has hopes of streamlining them in the
name of improving efficiency through greater specialization. Factory
managers, however, have long used fringe benefits and subsidies as work
incentives. Subsidies, like bonus payments, theoretically stimulate output
or raise productivity--though in most cases ely maintain current work
levels or prevent productivity from falling.
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Previous industrial economic reforms, moreover, have tended to add to the
problem. Since Beijing granted factory managers greater autonomy and the
right to retain a portion of the enterprise's profits--major features of the
urban reform program--factory managers have used a considerable portion of
retained profits to build new housing for employees, to expand dining
facilities, and to increase the size of bonus payments to workers--rather
thing the funds on reinvestment to expand the factory's capital stock.
Some western economists estimate that subsidies to urban residents in
China reach or exceed slightly their average annual money incomes. According
to the Chinese press, per capita subsidies to residents of Beijing during
1983 totalled 168 yuan (US$84.80)--equivalent to more than one fourth of
average per capita incomes in China's capital. Although the Chinese
government does not release statistics on urban subsidies, the available data
on urban consumption patterns illustrate the degree to which the typical
man-on-the-street is insulated from the true cost of living. Chinese
urbanites during 1983, for example, paid only 0.64 yuan ($0.32) per month for
rent, and 0.48 yuan ($0.24) per month for utilities. This total for rent and
utilities--$0.60 or 2.7 percent of average monthly expenditures--is far below
that of comparable less-developed countries. Under the reforms, worker ill
have to assume more of the actual costs of their day-to-day life.
Winning Acceptance
To the Chinese man-on-the-street, urban reforms are a mixed blessing.
Increased efficiency may bring faster economic growth, more and better
consumer goods, improved living standards, and higher wages and bonuses. On
the other hand, urban reforms create an atmosphere of considerable
uncertainty. Beijing is aware of these concerns, and although committed to
moving forward with reform, also seems tent on cushioning the impact of new
policies on the average Chinese.
We expect the Chinese leadership will continue to move cautiously but
steadily, maintaining as much control as possible over price increases, job
layoffs, and wage and bonus payments. We anticipate that there will be some
wage adjustments for urban workers approved before the full effect of price
reform is felt in the cities. The government's principal task may be to
control the size of the increases and prevent overpayments. We believe the
politically conservative government, when forced to choose, will sacrifice
the achievement of productivity gains to avoid worker discontent. As far as
consumer prices are concerned, the government seems to be banking on a rapid
supply response to price adjustments, which will tend to shorten the
dislocation period. The government expects that consumer goods prices
probably will rise in the short term, but will stabilize or even fall as
greater supplies hit the marketplaces. Rent, fuel, and transportatior-~?-et
will rise more slowly, and wage gains will tend to offset these costs.)
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How successful Beijing's policies are will be in part a function of the
average Chinese worker energetically embracing them and making them work.
This, in essence, was the source for success of agricultural reform. The
task is much more complex in the cities, however. We believe two factors
will shape the man-on-the-street's attitude toward urban reforms: he must
see some immediate benefits to offset the real and psychological costs of
compliance; and he must believe the leadership is united and determined to
press forward with policy change. In our view, neither of those conditions
is now present. The leadership appears divided over some of the reform
policies, and clear guidelines on implementation evidently have not been sent
out. In the absence of clear directives, local governments are moving slowly
on urban reform policies, and there seems to be a good deal of uncertainty
and many rumors about what is actually being planned. Until this situation
is resolved, we expect that urban workers will maintain a "wee"
attitude toward the regime's efforts to promote the new reforms.
SECRET
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Subject: China's Urban Reforms and The Man-on-The Street
Distribution
National Security Council
1 - David Laux, Senior Staff Member, East Asia, Room 302, OEOB
Department of State
1 - Donald M. Anderson, Director, Office of Chinese Affairs, Room 4318
1 - Howard H. Lange, Deputy Director for Economic Affairs, Office of
Chinese Affairs, Room 5321
1 - John Danylyck, INR/EC Communist Asia, Room 8662
1 - Chris Clarke, INR/EA, Room 8840
Department of Commerce
1 - Christine Lucyk, Office of PRC and Hong Kong, Room 2317
1 - Nai-Ruenn Chen, International Economist, Room 2317
Department of Treasury
1 - James Griffen, Office of East-West Economic Policy, Room 4450
1 - Robert Harlow, Deputy Director, Office of International Monetary
Affairs, Room 505
1 - Catherine Furlong, Senior Statistician, Council of Economic Advisors,
Room 324 OEOB
1 - Chief, Asia Section, DIA, Attn. DB-4E2
1 - ire suns, Leader, PRC Section, Department of Agriculture, Room 350
1 - James Tsao, International Economist, Research Division, International
Trade Commission, Room 316
1 - Robert Emery, Senior Economist, Federal Reserve, Room B 1266-E
Central Intelligence Agency
1 - DDI (7E12)
1 - Executive Director (7E12)
1 - NIO/EA (7E62)
1 - NIO/Econ (7E48)
1 - D/NIC (7E44)
1 - D/OEA (4F18)
2 - C/OEA/CH (4G32)
1 - OEA Research Director (4G32)
1 - C/OEA/SDS (4G32)
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1 - C/OEA/CH/DEF (4G32)
1 - C/OEA/CH/DEV (4G32)
1 - C/OEA/CH/DOM (11G32)
1 - C/OEA/CH/FOR (4G32)
1 - C/OEA/NA (4G43)
1 - C/OEA/SA (4F38)
1 - PDB Staff (7F30)
5 - CPAS/IMC/CB (7G07)
1 - CPAS/ILS (7G50)
1 - CH/EA/RR (5D10)
1 - C/PES/DDI (7F24)
2 - OCR/ISG (1H19)
1 - OCR/DSD (1E4810)
1 - C/DO/PPS (3D01)
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