For the short term the contracted management responsibility system proved a strong stimulus to any enterprise putting it into practice, increasing both production and profits. But the arbitrary determination of the contracted quotas and lack of scientific basis of the practice provoked expediencies and short-term behaviors of enterprises, causing market disorder and inflation. In an attempt to correct for these effects, the central government decided to call a halt to the system in cities. As an alternative, it began to introduce income tax on state-owned enterprises to replace the old practice of requiring them to hand in all their profits. Still, this adjustment did not go to the extent of obliging enterprises to take full responsibility for their profits and losses, nor giving them management autonomy or promoting fair competition as the government had hoped for.

    At the time the government didn't accept my idea of establishing shareholding companies. Instead, the call for lifting price controls had gained the upper hand. At a forum held in Peking University in late April of 1986, I pressed on, making a speech entitled "The Fundamentals of Reform" in which I advocated that we give priority to the reform of enterprises, that is, give priority to the evolution of shareholding, but certain people had their doubts. In April of 1987, the policy of contracted management responsibility for the state-owned sector regained official blessing and backing. Although people had already seen the problems with this system, it was generally believed they could be overcome. By the end of 1987, 80 percent of the large and medium-sized state-owned enterprises had put the system into effect.

    About that time, a champion for urban industrial reform appeared. Ma Shengli contracted to manage 100 paper mills in more than 20 provinces and municipalities throughout the country, and formed the China Ma Shengli Paper Industry Group. In 1988, due to reckless expansion, the group suffered a collapse of its revenue, and Ma Shengli was forced to leave his post.

    Soon after Deng Xiaoping made his famous remarks during the 1992 inspection tour in South China, encouraging bolder reforms, the central authorities invited me, Wang Jiafu of the Chinese Academy of Social Sciences and Lu Baifu, deputy director of the State Council Development Research Center, to discuss the shareholding system concept. Wang Jiafu gave opinions from the legal angle, I from the perspective of economics, and Lu Baifu from the standpoint of policy research. All three of us held that a shareholding system was both necessary and feasible.

The stock market has become a barometer of China's macroeconomy.         Cnsphoto

    By 1997, the CPC Central Committee's report delivered at the 15th National Congress of the Communist Party of China clarified its position: Establishing a modern corporate system is the focus of enterprise reform. Forms of public ownership can, and should be, diversified. A shareholding system is a form of organizing capital. It is good for the separation of ownership from the right of management, and it optimizes the operational efficiency of enterprises and the use of capital. Capitalism can use this system, so can socialism; the key lies in who is the dominant shareholder.

    For the first time in history, an official document of the CPC Central Committee is committed to an important innovation in state ownership, at the same time making a great ideological breakthrough.

    Removing Barriers to the Securities Market

    Securities markets had appeared in China by the early 1990s but it was 2001 before they were hit by a plague of stock price manipulations. I am speaking of the Fund Scandal and the crash of the Zhongke stocks. These shady stock market deals aroused wide attention. After denouncing the immoral behaviors, I issued warnings on the abnormalities of China's emerging securities market: the gambling mindset of market players, the egregious citizen participation, and the dangerously high price/earning ratio.

    But four economists – Xiao Zhuoji, Dong Fureng, Wu Xiaoqiu and Han Zhi-guo – almost unanimously rose to counter my opinions. They said that rational speculation was what we should encourage, not stamp down. In their views the whole nation swarming into the stock exchange is a good thing, as it shows the orientation of the economic reform, including development of a capital market, is in line with the requirements of social development and the wishes of the general public. Finally, they maintained that considering the fledgling state of the Chinese stock market, the price/earning ratio was not high. In short, they felt it inadvisable to shelve the capital market for the sake of controlling "irregularities." This was the prelude to a nationwide debate on the stock market.

    The stock market needed to be regulated nevertheless, and I began to preside over the drafting of the Securities Law of the People's Republic of China. I set two goals for the statute: first, it should protect the interests of investors by strictly prohibiting irregular behaviors such as stock manipulation. Second, it should promote the development of the national economy by restructuring the securities market. During this period I was a member of the Standing Committee of the National People's Congress (NPC), China's top legislature. This was the period when the legislative body was shifting gradually from lawmaking driven by relevant departments to lawmaking open to weighty participation by specialists. Some professors and scholars from Peking University were on the team drafting the first Securities Law.

    Since the implementation of the Securities Law on July 1, 1999, we can say that the issuance and trade of securities has been effectively regulated and the legitimate rights and interests of investors protected. By extension, it has also maintained social and economic order, safeguarded the public interest, and promoted social and economic development. Besides the Securities Law, I also presided over the drafting of the Law of Securities Investment Fund. It regulates the operations of funds, and brings more sophistication to the securities market.

    By the early 21st century, the shareholding system had really taken root in China. New problems arose of course. A case in point is the restriction on the trade of shares. The early design of the system stipulated that only public, or circulating, shares (making up, by law, only one third of the total), could be traded on the stock market, while state-owned and corporate, which are non-circulating shares (making up two-thirds of the total), could not be traded. Since non-circulating stocks were the bulk of any enterprises' holdings any possibility for change was smothered: under those conditions, shareholders' meetings cannot be convened and two-thirds of the stock cannot move. Boards of directors also share in the inertia, maintaining a unanimous voice, and ultimately, the status quo. For a market to be dynamic and healthy all kinds of shares must circulate on the stock market, so calls for the second reform of China's shareholding system zeroed in on limiting non-tradable shares. By the end of 2006, this barrier had been removed and the Chinese securities market began to move forward, with the stock market becoming a valid barometer of China's macro-economy.

    I Became "Private Enterprise Li"

    Due to the economic reforms of the past 30 years, in tandem with the progress made by state-owned enterprises, the private sector is also growing. China's private economy has experienced three stages. The first stage was launched with China's opening up in 1978. The second opened with Deng Xiaoping's inspection tour in South China and publication of his comments in 1992. And the third period started with the circulation in 2005 of "36 Articles on Non-Public Sectors of the Economy."

    On December 11, 1980 a 19-year-old girl named Zhang Huamei in Wenzhou City, Zhejiang Province, obtained from a local authority a license for a small private business, the first of its kind in China. Not long after that, the phenomenon of the home-based business surged nationwide. Common ones were selling tea drinks in the street, transporting briquettes, repairing bicycles, and mounting paintings and calligraphic works. The "seeds" of the modern Chinese private economy were sown.

    But economic reform has never been smooth sailing. In early 1982, a group of businessmen were arrested on charges of "speculation and profiteering." In Liushi Town, Wenzhou City called the birthplace of small private enterprises, eight private business barons became major targets of a crackdown. Not long after that, amendments to the Constitution were adopted at the Fifth Meeting of the Fifth National People's Congress, designed to establish the legal status of individual enterprises. Quite a number of households running private businesses reported their incomes exceeded RMB 10,000, the benchmark for affluence at the time. Some members were invited by the local government to showcase their success and share their experience with the public. Their chests were decorated with red flowers, a token of honor previously preserved for heroes and model workers only!

    The private sector grew briskly in its second stage. During the years from 1992 to 2005 China's private enterprises expanded in number from 140,000 to 2.435 million, and registered capital increased from RMB 22.1 billion to RMB 2.4756 trillion. The number of employees shot up from 2.32 million to 34.09 million, and the taxes multiplied by a factor of 208. In the reform of the 1990s Zhucheng City in Shandong Province towered over all others. Chen Guang was the secretary of the CPC Zhucheng municipal committee, the top leader of the city. Within two years of assuming leadership, he sold 95 percent of the city's state-owned and collectively owned enterprises, and earned himself the nickname "Sell Off Chen." Zhucheng's actions aroused censure. Many people asked the question: "Is the city practicing privatization?" Higher-ranking government officials investigated and fully affirmed the prudence of Chen's decisions. By promoting a shareholding system and Sino-foreign joint ventures and mergers, and what's more, allowing defunct businesses to go bankrupt, Zhucheng intensified reforms on large and medium-sized state-owned enterprises, achieving remarkable results.