#88-DF-2 "Macroeconomic Development of China: 'Overheating' in 1984-
          1987 and Problems for Reform" 
         (Ryutaro Komiya, December 1988.) 

A WHOLE SENTENCE

ABSTRACT

    After the Chinese Communist Party had embarked on economic reform 
in 1978 China's macroeconomic performance had been quite satisfactory 
until the autumn of 1984, but since then the Chinese economy ran into 
"economic overheating", with rapid inflation and large trade deficits,
which is nothing but a typical case of demand-pull inflation. Its two
major causes are high rates of increase in money supply caused by 
rapidly increasing bank lending and of increase in wage payments, both
accompanied by some mismanagement in the process of economic reform. 
A third cause is too high an increase in government expenditures 
financed by the central bank credit. Chinese leaders seemed to believe
"economic overheating" coming under control in 1986, but it appears 
that appeasement was only temporary and that "overheating" was still 
going on throughout 1987. Through this "economic overheating" in 1984 
through 1987 China's net international assets-liabilities position 
deteriorated severely: by 12.5% of China's GNP in 1986. China's 
present macroeconomic management is deficient in several ways and 
needs to be improved. Money-supply must be firmly controlled through 
a two-tier quota system with quotas set for each quarter, both for 
central bank lending to each of non-central banks and for the latter's
lending to their customers. Both non-central banks and non-financial 
enterprises should be transformed into a full-fledged independent 
enterprise operating on a commercial basis, free from political and 
nepotistical influences. China's present balance of payments 
management also needs to be improved in several ways. Imports should 
be controlled on a centralized basis under a "foreign-exchange budget,
" while the competitive price mechanism should be fully used in 
promoting export and directive planning as well as the complicated 
foreign exchange retention system currently in force should be 
abolished. The dependence on foreign borrowing should be lowered by 
promoting export and restricting import more efficiently. China's 
annual investment, ratio to GNP is still too high, and should be 
lowered, and the efficiency of investment raised.